What is Logistics and what is Supply Chain? Many people use the two terms interchangeably. Many are aware that there is a difference between the two, but don’t know exactly what the difference is.
At an industry conference last year, a question was even asked backstage:
“Can you finally explain to me the difference between logistics and supply chain…?”
In this article I introduce what Logistics does and what Supply Chain does. How they most often work together in the structure of an organization, and why the distinction in nomenclature matters.
I published the first version of this article on Linked In. The version you are reading has been updated with additional information and photos illustrating the concepts presented.
WHAT LOGISTICS DOES?
Logistics is the management of the flow of goods from supplier to customer (or vice versa for returns). It encompasses processes from ordering, receiving, warehousing, picking and packing, and product release and transportation.
Logistics focuses on performing, and controlling the operational and cost effectiveness of, the physical processes involved in delivering a company’s goods or services.
Logistics management thus boils down to answering the question:
How to deliver the required product at the right time to the right customer?
to achieve the proverbial: Right Product in the Right Place at the Right Time.
The overriding goal that a Logistics professional pursues is to meet the demand that is known. From the perspective of working in Logistics, the most important thing is to fulfill the order in the best possible way at the least possible cost at the same time.
If you are wondering what “as little as possible” cost means when it comes to Logistics then read the following article – What should Logistics Costs be? Soon I will share there data collected from 7 different industries and my knowledge from over a dozen years of professional work.
WHAT SUPPLY CHAIN DOES?
Supply Chain involves sourcing suppliers, planning production, procurement, and managing the flow and inventory levels within an organization. Often the Supply Chain also includes demand planning.
Supply Chain Management comes down to answering the question:
What will the customer need and when, and what should be done to meet that demand?
to achieve: The Right Product in the Right Place at the Right Time.
That’s why some people say that Supply Chain Management is all about Sales & Operations Planning (S&OP). However, this is an oversimplification.
I wrote why the S&OP process is important some time ago on the pages of Puls Biznesu. The republication of this article will be soon on the blog entry – How to increase profits through Sales & Operations Planning?
However, Supply Chain Management is a broader and more complex area that also includes supplier relationships as well as processes for managing the risk of material and finished product availability.
As a result, the overarching goal that Supply Chain Management pursues is identical to that of Logistics. However, the accents in both functions are distributed differently.
It can be said that the supply chain emerged as a result of the evolution of logistics functions. When the question “how” ceased to be the basis for satisfying the customer’s expectations. Instead the question “what” came to the foreground as the customer’s expectations.
Therefore, as the role of Supply Chain Management grew, information systems became more important. If you want to better understand why then I recommend the post – How to choose a supply chain planning system?
In it I discuss why choosing an IT system can change the face of Supply Chain in any organization that manufactures or sells physical products.
HOW DO LOGISTICS AND SUPPLY CHAIN FUNCTION WITHIN A COMPANY?
Theoretically, Logistics Management is part of Supply Chain Management and Operations Management in a broader sense.
However, if you look at the practical side of things, it can be different. Reading the above book explanation a Logistician may have think he has been speaking in a prose all his professional life. He managed Supply Chain and not Logistics and this may be true in some business environments.
The term Supply Chain appeared in the 1980s and caught on in the 1990s. Modern management practices came from the west. Primarily with expansion of American companies.
In many organization the name of the function has not changed although the Logistics team has expanded its competence. They simply have a department dealing with the whole range of “modern” responsibilities described earlier.
Some companies, however, transformed Logistics into a Supply Chain function with standard logistics components: Warehouse, or Distribution Center, Transportation, and Customer Service. Even though they don’t take responsibility for supply chain planning.
Organizations that have decided to outsource logistics functions have often an internal Supply Chain department that cooperates with an operator who performs the duties of “classic” Logistics.
In some companies, also separate Logistics and Supply Chain teams have been created. This type of distinction within a company makes sense if the organization has reached such a large scale of operations that it is profitable to create its own extensive distribution network.
In that case, Logistics management requires increasingly specialized knowledge and large operating budgets. This type of framework works in Zalando, Coca Cola, L’Oreal and many others from Fortune 500 lists.
SO WHAT DOES IT MATTER HOW WE CALL IT?
If everything in your company is running smoothly and everyone is happy with their Logistics department then frankly it doesn’t matter what name you use.
However, if there are problems in cooperation with suppliers and customers. If your inventory and therefore working capital is growing dangerously. If the quantities planned for production and distribution are not sufficient to meet demand. It’s time to reorganize.
Time to create a new Supply Chain function or expand the Logistics function into Supply Chain.
The models for implementing change in an organization are many. However, each of them emphasizes the need to reinforce and promote new behaviors. One method is to clearly name the new way of working.
To realize the impact that changing the words we use to describe what we do and who we are can have, I offer a brief story.
An old sad man is sitting on the sidewalk. Next to him stands a can and a sign that reads: I am blind. Please help me.
There are many people on the street. But not many throw any coin into the can. A woman walks past the man, comes back, takes the plate, and adds something. Coins begin to fall into the can in bulk.
The beggar asks: “What did you do?” She replies, “I wrote the same thing, only in different words.” On the plate are the words: Today is such a beautiful day, and I can’t see it.
This is the story of the “Words change the world” campaign (originally “Words change the World”). You can find the video used in the campaign on Youtube.
What do you need?
Logistics or Supply Chain? If you still have doubts after reading this post then you will find more information in the article – 6 things every CEO should know about Supply Chain.
I will summarize my thoughts on managing Supply Chain and Logistics in an organization with over 300 million EUR turnover yearly.
I also encourage you to sign up for the Logistics Simply newsletter. You will always be up to date with what I am doing. You will also receive a set of materials dedicated to planning your own development as well as the development of your team in the area of Logistics and Supply Chain Management.
In the meantime, hang on to the next post! I post regularly on the blog on Saturdays.