Business Glossary

What is Logistics?

This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.

What is logistics?

Business logistics generally refers to the process of acquiring, storing and transporting goods from one place to another. It can also refer to moving people from one place to another and maybe arranging transportation and accommodation for them. Effective logistics management is hugely important for almost all businesses.

Example of logistics

Logistics management is generally broken down into three main logistics functions: procurement logistics, production logistics and sales logistics.

Procurement logistics covers sourcing whatever a business needs to create its goods or perform its services. For example, this could be raw materials, equipment or consumables (e.g. fuel). This area of logistics is also known as inbound logistics or supply-chain management since it covers choosing and managing suppliers.

Production logistics covers the management of supplies during the production operation. It ends when products are delivered to a warehouse or services are ready to be delivered to the customer. Sales logistics covers the end-to-end delivery of the product or service to the purchaser. This area of logistics is also known as distribution.

Additionally, businesses also often need to manage human logistics. This covers the movement of employees while engaged in company business. Larger companies may have dedicated staff for this, or an outsourced partner. In SMEs, it’s more likely to be handled either by the employees themselves or incorporated into part of other roles e.g. line management or HR.

Approaches to logistics

Traditionally, the general approach to logistics management was summarised as ‘be prepared’. Companies of all sizes tried to maintain a consistent level of inventory of supplies and finished goods. This meant that, barring exceptional circumstances, they never ran out of stock. It also, however, meant that there was inevitably some level of waste.

In an attempt to reduce waste and become more efficient in general, many businesses started to move towards a just-in-time supply-chain model, meaning that they tried to maintain a constant flow of supplies and goods services rather than warehousing inventory. This flow could be scaled up or down according to customer demand, and therefore relied on effective demand planning.

This approach did indeed reduce waste. It was always vulnerable to supply-chain disruption but prior to COVID-19, this was generally a fairly minor issue. During the pandemic, however, supply-chain management went into a tailspin. Factories closed, freight transportation was halted and the global supply chain snapped into multiple pieces. This created massive problems for many businesses (and their customers.

As a result, there has been a move back towards a more traditional approach to logistics management. Businesses are starting to (re)build distribution networks so they have distribution centres near their production operations and their customers. Inventory is increasingly seen as a genuine asset rather than just being marked as an asset on a balance sheet by accountants.

Changes in distribution systems

While inventory is now recognised as a genuine asset, it can still be challenging to store and distribute it. Firstly, you need some kind of storage facility. If you’re handling finished goods in any sort of volume, then that means a warehouse. Secondly, you need the time, tools and materials to fulfil customer orders promptly. Both of these can be major challenges for SMEs and extremely difficult for micropreneurs and freelancers.

This has led to many businesses, especially smaller ones, moving to alternative distribution systems. The two main ones are fulfilment centres and dropshipping. With fulfilment centres, you source goods from your own suppliers or create them yourself. You then arrange for those goods to be transported to the fulfilment centre’s warehouse. Your partner then takes care of storing your goods securely and arranging delivery to your end customers.

With dropshipping, you work with suppliers, often manufacturers, who handle your sales logistics for you. In general, this means that you make a bulk purchase of goods. The manufacturer then warehouses them for you and ships them in individual deliveries as orders come in. For higher-value items, manufacturers may agree to do this for low purchase volumes but this is unusual.

Find out more about dropshipping.

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