7.4 – Logistics and Freight Distribution

Author: Dr. Jean-Paul Rodrigue

Logistics involves a broad 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.

1. The Nature of Logistics

Derived from the Greek term logistikos (to calculate), the word logistics is polysemic. In the 19th century, the military referred to it as the art of combining all means of transport, revictualling, and sheltering of troops. In a contemporary setting, it refers to the set of operations required for goods to be made available on markets or to specific locations. The growth of freight flows has been a fundamental component of contemporary economic systems changes at the global, regional, and local scales, which has made logistics increasingly relevant. These changes are not merely quantitative with more freight in circulation, but also structural and operational. Structural changes mainly involve manufacturing systems with their expanded geography of production, while operational changes mainly concern freight transportation with its geography of distribution, namely intermodal transport systems. 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.

The application of logistics enables 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 thus enables a better managerial level of space-time relations and as such, an important aspect of transport geography. Logistics acts as the material and organizational support of globalization, requiring a complex set of decisions to be made concerning an array of issues such as the location of suppliers, the transport modes to be used, where the freight will be stored, and the timing and sequencing of deliveries.

The distinction between logistics and supply chain management can be subject to contention since the terms are often used interchangeably. Previously, logistics tended to focus on transportation and warehousing aspects, while supply chain management would consider sourcing as well as final distribution. In recent years the meaning of both has converged. Thus, logistics and supply chain management can be considered as similar and interchangeable terms, but the term supply chain management is usually considered to be more comprehensive since it also considers the competitive aspects of distribution. Activities comprising logistics include physical distribution; the derived transport segment, and materials management; the induced transport segment.

Physical distribution is the range of activities involved in the movement of goods from points of production to final points of sale and consumption. It must ensure 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, transshipment and warehousing services, trade, wholesale, and, in principle, retail. Conventionally, all these activities were assumed to be derived from materials management demands.

Materials management considers all the activities involved 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 ensure 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 and reusing discarded goods and commodities. All these activities are assumed to be inducing physical distribution demands.

Logistics is commonly represented as a sequence of activities (also referred to as a supply chain) from suppliers, manufacturers, distributors to retailers, each synchronized by cycles such as customer order, replenishment, manufacturing, and procurement.

The close integration of physical distribution and materials management through logistics is also blurring the reciprocal relationship between the derived transport demand function of physical distribution and the induced transport 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. Warehouses and distribution centers are the main facilities from which logistics are coordinated and have distinct geography.

A warehouse is a facility designed to store goods for longer periods of time. Goods stored in a warehouse have usually not yet been sold and are held in inventory until a buyer is found. A warehouse is driven by the supply of manufacturers and wholesalers.

A distribution center is a 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, which is stored for relatively short periods of time (days or weeks). Goods stored in a distribution center have usually been sold and are in transit to their destination. They can also perform light manufacturing activities such as assembly and labeling. A distribution center tends to focus on the demand of customers.

Since it would be highly impractical to ship directly goods from producers to retailers, distribution centers act as a buffer where products are assembled, sometimes from other distribution centers, and then shipped in batches. Distribution centers are established in part to deal with different forms of asynchronism in freight distribution such as different paces and levels of production and consumption. They 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 (one to many).

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, which can be broken down in terms of transport and inventory costs. However, costs are 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 are 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. The recent evolution of logistics costs reveal that the share of transportation costs is increasing relative to inventory carrying costs, which is indicative of more inventory in circulation as opposed to being held in distribution centers.

The emergence of logistics in contemporary supply chains is based upon continuous improvements in transport and inventory management costs, leading to lower cycle and lead times.

Cycle time. The amount of time required from the receipt of an order to when this order is completed (assembled) and ready for delivery. Often labeled as the completion rate and is mostly linked with the function of production in the manufacturing sector.

Lead time. The time it takes for an order to be fulfilled, which includes preparation, packing, and delivery to a designed location. Often labeled as the arrival rate and is mostly linked with the function of distribution, such as its efficiency and reliability.

Before the emergence of e-commerce, customers were rarely exposed to the concepts of cycle time and lead time since goods were directly purchased at a store. The customer was seeing the outcome of cycle and lead times, but not the process as goods were readily available. An online transaction, particularly if it concerns a complex and customizable good (e.g. a computer) commonly includes the time it takes for the order to be ready for shipment and the delivery time from the distribution center to the customer’s address.

2. Driving Forces in Supply Chain Management

Logistics is a fundamental component of efficiency improvements in a market economy. Supply chain management is the outcome of an evolution integrating technical, technological, and managerial improvements. 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 and communication technologies, this principle was increasingly applied to the whole supply chain, particularly to the function of distribution. The recent years have seen renewed efforts towards the automation of logistics, which includes automated warehouses.

a. Inventory management

Maintaining inventory is always a cost factor for logistics since it has to be carried until sold to customers. Lean supply chains, as a managerial concept, are often labeled as seminal in the emergence of modern supply chains where inventory levels are kept at a minimum and where a share of the inventory is kept in constant circulation. Typically, the manufacturing sector has 6 to 8 inventory turnovers per year, implying that it takes, on average, about 50 to 60 days to sell what is being produced. In the electronics sector, this can even be more frequent, with 10 to 20 inventory turnovers per year. Better inventory management enables to reduce the inventory and its related costs and increase the number of inventory turns.

Freight distribution is within a paradigm shift from inventory-based logistics (push) to replenishment-based logistics (pull). Demand, particularly in the retailing sector, is challenging to anticipate accurately and is prone to cycles. Closer integration between supply and demand enables a more efficient production system with fewer wastes in terms of unsold inventory and time spent managing processes. Standardization is also an important aspect with parts that can be used, when possible, for several lines of products, thus reducing the overall inventory footprint.

b. Modes and terminals

Since logistics involves improving the efficiency of flows, load units have become particularly important. They are the basic physical management units in freight distribution and take the form of pallets, swap bodies, semi-trailers, and containers. Another important requirement was containerization, which conferred substantial flexibility to production systems in addition to the container being its own storage unit. Containers are the privileged load unit for long-distance trade, but the growing complexity of logistics required a more specific level of load management. A whole array of logistics activities have emerged to support the organization and management of containerized flows. The use of bar codes and RFID (Radio Frequency Identification Device) enables a high level of control of the load units in circulation.

The expansion of standard transport infrastructures 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 the container has become a load (transport), production, and distribution unit.

Transport modes have been the object of 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. This massification of container flows has also brought unique logistical challenges, namely the repositioning of empty containers because of imbalanced trade flows.

The technological changes have been very significant with the construction of new terminal facilities operating on a high turnover basis. Better handling equipment, particularly through automation, lead to improvements in the velocity of freight at the terminals, which are among the most significant technological changes brought by logistics in materials mobility. In such a context, the port has become one of the most significant terminals supporting global logistics. Port facilities are increasingly being supported by an array of inland terminals connected by high capacity corridors.

c. Distribution centers and distribution clusters

Technological changes impacted the location, design, and operation of distribution centers; the facilities handling the requirements of modern distribution. They serve different purposes depending on 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. They try to service regional markets with a 48 hours service window (lead time) 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, with the emergence of large consolidation and deconsolidation facilities. Automation is also pushing forward the productivity level of distribution centers. For instance, it is possible to fully automate the sorting, storing, and palletizing processes in a distribution center so that the efficiency, customization level, and throughput can be improved, such as for groceries or retail goods. Another trend has been the setting of freight distribution clusters where distribution activities agglomerate to take advantage of shared infrastructures and accessibility. This tends to expand the added value performed by logistics.

d. Information technologies

The vast array of information processing changes brought by logistics requires the extensive use of information technologies. Value chains are linked with physical flows, as well as information flows. Producers, distributors, and consumers are embedded in a web of reciprocal transactions. While these transactions mostly take place virtually, their outcomes are physical flows. The commercial diffusion of Global Positioning Systems (GPS) is allowing for the identification and routing of vehicles and, therefore, better utilization of these assets. The outcome is often more efficient production and distribution planning with the added convenience of tracking modes, shipments, and inventories and thus giving greater visibility for customers. Recently, the emergence of distributed electronic ledgers, called ‘blockchains’, is transforming logistics management with increased reliability, tracking, and record-keeping. This is crucial since logistics generates numerous transactions, and organizing these transactions provides benefits.

The standardization provided by the Internet in terms of communication protocols enabled corporations to establish interfaces with a large customer base, which permitted new forms of retailing. E-commerce offers advantages for the whole commodity chain, from consumers being exposed to a broader range of products to manufacturers and distributors being able to adapt quickly to changes in the demand. It is, therefore, a key driver of change for freight distribution. E-commerce generates parcel movements for home deliveries that are carried by conventional postal services as well as specialized parcel carriers.

In the United States, about half of all home deliveries are made by the US Postal Services, while the remaining is carried by private parcel companies. Fulfillment (warehousing, packaging) costs account for 10 to 12% of the revenue of e-commerce, while shipping and delivery costs added up another 10%. E-commerce is also inciting shifts in retail freight distribution with the setting of new fulfillment and sortation centers. Online retailers such as Amazon have extensively developed distribution centers to support their activities. Because of its more effective cost structure, e-commerce is able to offer goods 10 to 15% cheaper than retail. As retail sales are partially replaced by online sales, the need for conventional retail space declines while the footprint occupied by distribution center increases. There are also revised expectations in terms of the performance of e-commerce. The more efficient and reliable freight distribution is, the higher the expectations of the customers, which creates a feedback loop to improve efficiency. While just a decade ago, expectations for home deliveries were within two weeks, this has shifted to less than five days with some online retailers able to deliver within 48 hours for a selected range of products.

3. Distribution Systems

A distribution system involves all the processes, equipment, and facilities supporting the mobility of freight along value chains. They are embedded in a framework that can be roughly characterized by their flexibility and globalization:

  • Flexibility implies a highly differentiated, market, and customer-driven mode of creating added value. Contemporary production and distribution are no longer subject to single-firm activity, but increasingly take the form of networks of suppliers and subcontractors. The supply chain bundles together all this by information, communication, cooperation, and, finally, 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 value chain. The core component of materials management is the supply chain, the time and space-related arrangement of freight mobility between supply, manufacturing, distribution, and consumption. Its major components 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 conventional 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. Demand-side oriented activities are becoming predominant. While traditional deliveries were primarily driven by supply, current supply chains are increasingly driven by 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 distribution 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. There are layers of logistics services that 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. They offer a wide range of services such as production planning and real-time monitoring.

Logistics is thus concomitantly concerned by distribution costs and time., concepts to which additional dimensions are considered. 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 expanded the concept of distribution:

  • Distribution time, notably the possibility to set a very specific estimated time of arrival 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, location, or delivery time.
  • The quality of distribution concerns the condition of delivered goods and if the specified quantity was delivered.

While many manufacturers may have their own account transportation, increasingly, the complex needs of the supply chain are being contracted out to third parties. Depending on the strategy and costs, corporations can outsource their transport and supply chain operations. Third-party logistics providers have emerged from traditional intermediaries such as the forwarders, or established 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 core competencies. In offering door to door services, the customer is no longer aware or necessarily concerned with how the shipment gets to its destination, namely the modes used, and the routing selected. The preoccupation is with cost, reliability, and level of service. This produces a paradox where 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.

The growth in the geographical and functional complexity of supply chains relies on effective management and information processing. Information technologies have helped improve the efficiency of supply chains as the vast majority of the tasks are digitally recorded and transferred. This has incited a growing emphasis on issues related to supply chain integration so that despite acute geographical separation, physical and managerial processes have minimal friction. The emerging trend concerns the full digitization of supply chains using electronic ledgers (blockchain technology).

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.

The conventional 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 a wholesaler and shipper to a retailer, ending at the final customer. Delays were 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 has evolved, 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.

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 with locations being characterized by a particular connection of regional and long-distance relations. Traditionally, freight distribution was located at major production centers, 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. 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 changing geography of freight distribution taking advantage of intermediary locations where connectivity is an important location factor.

The spatial structure of contemporary transportation networks is the expression of the spatial structure of distribution. Since logistics lead and response times are important to service factors, locations near main highways are of importance for distribution centers. Logistics is particularly sensitive to connectivity and accessibility. 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 network structure 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).

Another important geographical trend concerns the location and clustering of warehousing activity to suburban locations, also known as ‘logistics sprawl’. Technological changes in inventory management, lower transportation costs, and global supply chain management have converged to incite the demand of large-scale facilities in proximity to terminal facilities such as ports and airports and having access to a regional market. However, urban cores became increasingly expensive, congested, and regulated areas. Under such circumstances, peripheral areas became increasingly attractive for distribution centers with their capacity to offer low-cost real estate and access to major highways.

The impacts of e-commerce on the geography of logistics allow for some trends to be observed. As e-commerce becomes more common, it is changing the spatial characteristics of physical distribution systems:

  • The conventional retailing supply chain, based on economies of scale (larger stores; shopping malls), is being challenged by a new paradigm. It relies on large distribution centers (e-fulfillment centers) located outside metropolitan areas from where a vast number of small parcels are shipped by vans and trucks to separate online buyers. This spatially disaggregates retailing distribution and reverses the trend towards consolidation that had characterized retailing (larger stores and larger distribution centers). Still, when online shopping reaches a large volume, parcel delivery companies can create economies through the consolidation of loads, which unfolded as e-commerce became mainstream.
  • In the conventional retailing system, the shopper was bearing the costs of moving the goods from the store to home. Still, with e-commerce, this segment of the supply chain must be integrated into the freight distribution process. The result potentially involves more packaging and more tons-km of freight transported. Traditional distribution systems are thus ill-fitted to answer the logistical needs of e-commerce, especially in urban areas.

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. 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 economies tend to be higher, which undermines economic development for the following reasons:

  • The regulatory complexity of distributing goods in developing economies 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 economies tend to be lower, which in many cases doubles logistics costs. Lower levels of productivity can often counterbalance the advantages of cheap labor. This also impacts the reliability of freight distribution with fluctuations in 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 handle trucks of standard capacity effectively.

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

Related Topics

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