Logistics and Freight Distribution

Authors: Dr. Jean-Paul Rodrigue and Dr. Markus Hesse

1. The Nature of Logistics

The growing flows of freight have been a fundamental component of contemporary changes in economic systems at the global, regional and local scales. These changes are not merely quantitative with more freight in circulation, but structural and operational. Structural changes mainly involve manufacturing systems with their geography of production, while operational changes mainly concern freight transportation with its geography of distribution. As such, the fundamental question does not necessarily reside in the nature, origins and destinations of freight movements, but how this freight is moving. New modes of production are concomitant with new modes of distribution, which brings forward the realm of logistics; the science of physical distribution.

Logistics involves a wide set of activities dedicated to the transformation and distribution of goods, from raw material sourcing to final market distribution as well as the related information flows. Derived from Greek logistikos (to reason logically), the word is polysemic. In the Nineteenth century the military referred to it as the art of combining all means of transport, revictualling and sheltering of troops. Today it refers to the set of operations required for goods to be made available on markets or to specific locations.

The application of logistics enables a greater efficiency of movements with an appropriate choice of modes, terminals, routes and scheduling. The implied purpose of logistics is to make available goods, raw materials and commodities, fulfilling four major requirements related to order, delivery, quality and cost fulfillment. Logistics is thus a multidimensional value added activity including production, location, time and control of elements of the supply chain. It represents the material and organizational support of globalization. Activities comprising logistics include physical distribution; the derived transport segment, and materials management; the induced transport segment.

Physical distribution is the collective term for the range of activities involved in the movement of goods from points of production to final points of sale and consumption. It must insure that the mobility requirements of supply chains are entirely met. Physical distribution includes all the functions of movement and handling of goods, particularly transportation services (trucking, freight rail, air freight, inland waterways, marine shipping, and pipelines), transshipment and warehousing services (e.g. consignment, storage, inventory management), trade, wholesale and, in principle, retail. Conventionally, all these activities are assumed to be derived from materials management demands.

Materials management considers all the activities related in the manufacturing of commodities in all their stages of production along a supply chain. It includes production and marketing activities such as production planning, demand forecasting, purchasing and inventory management. Materials management must insure that the requirements of supply chains are met by dealing with a wide array of parts for assembly and raw materials, including packaging (for transport and retailing) and, ultimately, recycling discarded commodities. All these activities are assumed to be inducing physical distribution demands.

The close integration of physical distribution and materials management through logistics is blurring the reciprocal relationship between the derived transport demand function of physical distribution and the induced demand function of materials management. This implies that distribution, as always, is derived from materials management activities (namely production), but also, that these activities are coordinated within distribution capabilities. The functions of production, distribution and consumption are difficult to consider separately, thus recognizing the integrated transport demand role of logistics. Distribution centers are the main facilities from which logistics are coordinated.

Distribution Center. Facility or a group of facilities that perform consolidation, warehousing, packaging, decomposition and other functions linked with handling freight. Their main purpose is to provide value-added services to freight. DCs are often in proximity to major transport routes or terminals. They can also perform light manufacturing activities such as assembly and labeling.

Since it would be highly impractical to ship directly goods from producers to retailers, distribution centers essentially act as a buffer where products are assembled, sometimes from other distribution centers, and then shipped in batches. Distribution centers commonly have a market area in which they offer a service window defined by delivery frequency and response time to order. This structure looks much like a hub-and-spoke network.

The wide array of activities involved in logistics, from transportation to warehousing and management, have respective costs. Once compiled, they express the burden that logistics impose on distribution systems and the economies they support, which is known as the total logistics costs. Costs are however not the only consideration in supply chain management since supply chains can also be differentiated by time, reliability and risk level. The nature and efficiency of distribution systems is strongly related to the nature of the economy in which they operate. Worldwide logistics expenditures represent about 10-15% of the total world GDP. In economies dependent on the extraction of raw materials, logistical costs are comparatively higher than for service economies since transport costs account for a larger share of the total added value of goods. For the transport of commodities, logistics costs are commonly in the range of 20 to 50% of their total costs.

2. Driving Forces in Supply Chain Management

The emergence of logistics in contemporary supply chains is based upon continuous improvements in transport and inventory management costs, which commonly results in lower lead times; the time it takes for an order to be fulfilled. Lean supply chains, as a managerial concept, is often labeled as seminal in the emergence of modern supply chains where inventory levels are kept at a minimum and where a large share of the inventory is in constant circulation. During the 1980s, the application of flow control permitted to reduce inventories in time-sensitive manufacturing activities from several days' worth to several hours. Much of these efforts initially took place within the factory, while supply and output flowed as batches from suppliers and to distributors. In the 1990s, with the convergence of logistics and information an communication technologies (ICT), this principle was increasingly applied to the whole supply chain, particularly to the function of distribution.

Another important requirement was containerization, which conferred substantial flexibility to production systems in addition to the container being its own storage unit. The expansion of standard transport infrastructure such as highways, terminals and airports was also essential for the development of modern logistics. Logistics and integrated transport systems are therefore related, particularly because of the container which has concomitantly become a unit of load (transport), production and distribution. Thus, the physical as well as the ICT elements of technological change are being underlined as it helps strengthen the level of control distributors have over the supply chain. The technological dimension of logistics can thus be considered from five perspectives:

• Transportation modes. Modes have been the object of very limited technological changes in recent decades. In some cases, modes have adapted to handle containerized operations such as road and rail (e.g. doublestacking). It is maritime shipping that has experienced the most significant technological change, which required the construction of an entirely new class of ships and the application of economies of scale to maritime container shipping. In this context, a global network of maritime shipping servicing large gateways has emerged.
• Transportation terminals. The technological changes have been very significant with the construction of new terminal facilities operating on a high turnover basis. Better handling equipment lead to improvements in the velocity of freight at the terminals, which are among the most significant technological changes brought by logistics in materials movements. In such a context, the port has become one of the most significant terminals supporting global logistics. Port facilities are increasingly been supported by an array of inland terminals connected by high capacity corridors.
• Distribution centers and distribution clusters. Technological changes impacted over the location, design and operation of distribution centers; the facilities handling the requirements of modern distribution. They serve different purposes depending the combination of fabrication, storage and distribution functions they perform within their supply chains. Modern distribution centers tend to consume more space, both from the site they occupy and the building area. From a locational standpoint, distribution centers mainly rely on trucking, implying a preference for suburban locations with good road accessibility supporting a constant traffic. They service regional markets with a 48 hours service window on average, implying that replenishment orders from their customers are met within that time period. They have become one floor facilities designed more for throughput than for warehousing with specialized loading and unloading bays and sorting equipment. Cross-docking distribution centers represent one of the foremost expressions of a facility that handles freight in a time sensitive manner. Another tendency has been the setting of freight distribution clusters where an array of distribution activities agglomerate to take advantage of shared infrastructures and accessibility. This tends to expand the added-value performed by logistics.
• Load units. Since logistics involves improving the efficiency of flows, load units have become particularly important. They are the basic physical management unit in freight distribution and take the form of pallets, swap bodies, semi-trailers and containers. Containers are the privileged load unit for long distance trade, but the growing complexity of logistics required a more specific level of load management. The use of bar codes and increasingly of RFID (Radio Frequency Identification Device) enables a high level of control of the load units in circulation.
• E-commerce. Consider the vast array of information processing changes brought by logistics. The commodity chain is linked with physical flows as well as with information flows, notably through Electronic Data Interchange. Producers, distributors and consumers are embedded in a web of reciprocal transactions. These transactions mostly take place virtually and their outcomes are physical flows. E-commerce offers advantages for the whole commodity chain, from consumers being exposed to better product information to manufacturers and distributors being able to adapt quickly to changes in the demand. The outcome is often more efficient production and distribution planning with the additional convenience of tracking shipments and inventories.

For logistics, ICT is particularly a time and embeddedness issue. Because of ICT, freight distribution is within a paradigm shift from inventory-based logistics to replenishment-based logistics. The shift from a push to pull logistics is particularly important in a market economy. Demand, particularly in the retailing sector, is very difficult to anticipate accurately. A closer integration (embeddedness) between supply and demand enables a more efficient production system with less wastes in terms of unsold inventory. Logistics is thus a fundamental component of a market economy.

3. Distribution Systems

In a broader sense distribution systems are embedded in a changing macro- and microeconomic framework, which can be roughly characterized by the terms of flexibilization and globalization:

• Flexibilization implies a highly differentiated, strongly market and customer driven mode of creating added-value. Contemporary production and distribution is no longer subject to single-firm activity, but increasingly practiced in networks of suppliers and subcontractors. The supply chain bundles together all this by information, communication, cooperation, and, last but not least, by physical distribution.
• Globalization means that the spatial frame for the entire economy has been expanded, implying the spatial expansion of the economy, more complex global economic integration, and an intricate network of global flows and hubs.

The flow-oriented mode affects almost every single activity within the entire process of value creation. The core component of materials management is the supply chain, the time- and space-related arrangement of the whole goods flow between supply, manufacturing, distribution and consumption. Its major parts are the supplier, the producer, the distributor (e.g. a wholesaler, a freight forwarder, a carrier), the retailer, the end consumer, all of whom represent particular interests. Compared with traditional freight transport systems, the evolution of supply chain management and the emergence of the logistics industry are mainly characterized by three features:

• Integration. A fundamental restructuring of goods merchandising by establishing integrated supply chains with integrated freight transport demand. According to macro-economic changes, demand-side oriented activities are becoming predominant. While traditional delivery was primarily managed by the supply side, current supply chains are increasingly managed by the demand.
• Time mitigation. Whereas transport was traditionally regarded as a tool for overcoming space, logistics is concerned with mitigating time. Due to the requirements of modern distribution, the issue of time is becoming increasingly important in the management of commodity chains. Time is a major issue for freight shipping as it imposes inventory holding and depreciation costs, which becomes sensitive for tightly integrated supply chains.
• Specialization. This was achieved by shifts towards vertical integration, namely subcontracting and outsourcing, including the logistical function itself. Logistics services are becoming complex and time-sensitive to the point that many firms are now sub-contracting parts of their supply chain management to what can be called third-party logistics providers (3PL; asset based). More recently, a new category of providers, called fourth-party logistics providers (4PL; non asset based) have emerged.

While many manufacturing corporations may have in-house transportation departments, increasingly the complex needs of the supply chain are being contracted out to third parties. Third party logistics providers (3PL) have emerged from traditional intermediaries such as the forwarders, or from the transport providers such as FEDEX or Maersk. Both groups have been at the forefront of the intermodal revolution that is now assuming more complex organizational forms and importance. In offering door to door services, the customer is no longer aware or necessarily concerned with how the shipment gets to its destination. The modes used, and the routing selected are no longer of immediate concern. The pre-occupation is with cost, reliability and level of service. This produces a paradox, that for the customer of intermodal services geographic space becomes meaningless; but for the intermodal providers routing, costs and service frequencies have significant geographical constraints. The effectiveness of intermodal transport systems is thus masking the importance of transportation to its users.

Logistics is thus concomitantly concerned by distribution costs and time. In addition, many dimensions are added to the function of distribution. While in the past it was a simple matter of delivering an intact good at a specific destination within a reasonable time frame, several components have become linked with distribution:

• Distribution time, notably the possibility to set a very specific ETA for deliveries and a low tolerance for delays.
• The reliability of distribution measured in terms of the availability of the ordered goods and the frequency at which orders are correctly serviced in terms of quantity and time.
• The flexibility of distribution in terms of possible adjustments due to changes in the quantity, the location or the delivery time.
• The quality of distribution concerns the condition of delivered goods and if the specified quantity was delivered.

4. Geography of Freight Distribution

Logistics has a distinct geographical dimension, which is expressed in terms of flows, nodes and networks within the supply chain. Space / time convergence, a well known concept in transport geography where time was simply considered as the amount of space that could be traded with a specific amount of time, including travel and transshipment, is being transformed by logistics. Activities that were not previously considered fully in space / time relationships, such as distribution, are being integrated. This implies an organization and synchronization of flows through nodes and network strategies:

• Flows. The traditional arrangement of goods flow included the processing of raw materials to manufacturers, with a storage function usually acting as a buffer. The flow continued via wholesaler and/or shipper to retailer, ending at the final customer. Delays were very common on all segments of this chain and accumulated as inventories in warehouses. There was a limited flow of information from the consumer to the supply chain, implying the producers were not well informed (often involving a time lag) about the extent of consumption of their outputs. This procedure is now changing, mainly by eliminating one or more of the costly operations in the supply chain organization. Reverse flows are also part of the supply chain, namely for recycling and product returns. An important physical outcome of supply chain management is the concentration of storage or warehousing in one facility, instead of several. This facility is increasingly being designed as a flow- and throughput-oriented distribution center, instead of a warehouse holding cost intensive large inventories.
• Nodes and Locations. Due to new corporate strategies, a concentration of logistics functions in certain facilities at strategic locations is prevalent. Many improvements in freight flows are achieved at terminals. Facilities are much larger than before, the locations being characterized by a particular connection of regional and long-distance relations. Traditionally, freight distribution has been located at major places of production, for instance in the manufacturing belt at the North American east coast and in the Midwest, or in the old industrialized regions of England and continental Europe. Today, particularly the large-scale goods flows are directed through major gateways and hubs, mainly large ports and major airports, also highway intersections with access to a regional market. The changing geography of manufacturing and industrial production has been accompanied by a changing geography of freight distribution taking advantages of intermediary locations.
• Networks. The spatial structure of contemporary transportation networks is the expression of the spatial structure of distribution. The setting of networks leads to a shift towards larger distribution centers, often serving significant trans-national catchments. However, this does not mean the demise of national or regional distribution centers, with some goods still requiring a three-tier distribution system, with regional, national and international distribution centers. The structure of networks has also adapted to fulfill the requirements of an integrated freight transport demand, which can take many forms and operate at different scales. Most freight distribution networks, particularly in retailing, are facing the challenge of the "Last Mile" which is the final leg of a distribution sequence, commonly linking a distribution center and a customer (store).

Since cities are at the same time zones of production, distribution and consumption, the realm of city logistics is of growing importance. This issue is made even more complex by a growing dislocation between production, distribution and consumption, brought by globalization, global production networks, and efficient freight transport systems and logistics. This dislocation has incited a growing emphasis on issues related to supply chain integration so that in spite of acute geographical separation physical and managerial processes have minimal friction. How challenging individual countries are perceived to be in the setting and management of supply chains can be assessed, as done by the Logistic Performance Index. It underlines that logistical costs in developing countries tend to be higher, which undermines economic development for the main following reasons:

• The regulatory complexity of distributing goods in developing countries involves higher logistic costs and is inciting distributors to maintain higher inventory levels to cope with uncertainty. Custom regulations are complex and prone to delays and road transportation can be subject to arbitrary tolls and inspections. This is reflected in higher final goods or component prices that are assumed directly or indirectly by consumers.
• Labor and infrastructure productivity in developing countries tend to be lower, which in many cases doubles logistics costs. The advantages of cheap labor can often be counterbalanced by lower levels of productivity. This also impacts the reliability of freight distribution with unreliable lead times and deliveries.
• Modal and intermodal capacity is inconsistent. While several terminal facilities, particularly ports, are modern with capacity on par with global standards, hinterland transportation can be problematic with road segments unable to effectively handle trucks of standard capacity.

In such a context, reforms have been advocated to promote the effectiveness of logistics services and therefore break a vicious cycle in which several developing countries are entangled in. This involves a series of reform, pending the capacity to overcome political constraints and the inertia (and commonly rent seeking behavior) of established stakeholders, concerning service providers, infrastructure investment as well as the administrative and regulatory environment.