Evolution of Business Logistics Management

Before the 1950s, logistics was thought of in military terms. It had to do with procurement, maintenance, and transportation of military facilities, materiel, and personnel. The organization within the typical business firm around the activities currently associated with logistics was fragmented.

Physical distribution begins to emerge as  LaLonde and Dawson (LaLonde and Dawson, 1969) trace the early history and note that Arch Shaw in 1912 began to see the two sides of marketing, where one deals with demand creation (promotion) and the other with physical supply, and Fred Clark in 1922 identified the nature of physical distribution and pointed out how it was different from the demand-creating nature of marketing. Scholars did include distribution as a primary activity in the marketing mix. But distribution discussed in marketing seemed to be defined more in terms of marketing (transaction) channel activities than physical distribution ones. Paul Converse (Converse, 1954), a noted marketing professor, said in 1954 that businesses had not been paying  attention to physical distribution.

The research that  laid  the foundations for physical distribution was a study by Lewis et al. (Lewis et al., 1956).  The study pointed out that it is necessary to view shipping from a total cost perspective and not from just a transportation cost one. Although air freight cost may be high, air freight’s faster and more reliable service can lead to lower inventory carrying costs on both ends of the shipment and might prove less costly for some items. This led to more illustrations of  the total cost concept for transportation decisions.

The first college course (Michigan State University) and textbook (Smykay et al., 1961) appeared around 1960. Within the context of the total cost approach, activities such as transportation, inventory control, warehousing, and facility location were discussed. The emphasis was on a firm’s outbound movement of goods and dealt little with inbound movements.

 In 1964, the scope of physical distribution was expanded (Heskett et al., 1964) to include physical supply and was called business logistics. The  descriptive name of business logistics  distinguished the name from military logistics and also focused on logistics activities that took place within the business firm.  On the other hand, there was a similar movement by those interested in the purchasing activity.

The study and practice of physical distribution and logistics emerged in the 1960s and 1970s. Logistics costs were high. On a national level, it was estimated that logistics cost in the U.S. accounted for 15 percent of the gross national product (Heskett et al., 1973). Similarly, physical distribution costs of other nations were found to be high as well. For example, in the United Kingdom, they were 16 percent of sales (Murphy, 1972), in Japan they were 26.5 percent of sales (Kobayashi, 1973), in Australia they were 14.1 percent of sales (Stephenson, 1975), and as of 1991 in China they were 24 percent of GDP (Wang, 2006). In certain firms,  they were  as high as 32 percent of sales (LaLonde and Zinszer, 1976). Peter Drucker, said that physical distribution as one of “the most sadly neglected, most promising areas of American business” (Drucker, 1962). Physical distribution and logistics became a focus area for managerial attention.

Physical distribution with its outbound orientation was first to emerge, since it represents about two thirds of logistics costs and it was considered a component of the marketing mix (product, place or physical distribution, promotion, and price) of essential elements.

For physical distribution and logistics  the definition in 1962 offered by Smykay et al. (Smykay et al., 1962) was:

“Physical distribution can be broadly defined as that area of business management responsible for the movement of raw materials and finished products and the development of movement systems.”

Although physical distribution is usually associated with outbound product movements from a firm, this definition indicates a broader concept that includes both inbound and outbound movements. Heskett et al. (Heskett et al., 1964) described business logistics in terms of both physical supply and physical distribution, but they also recognized that logistics takes place throughout the supply channel, from producer to end consumer.

In the early definitions  the focus was on coordinating among the activities within the function, with little emphasis on coordinating among the other functions within the firm or among external channel members. This limited application of a much broader scope probably had to do with technological limitations of information systems at the time and the difficultly of managing across areas of responsibility.

The evolution and future of logistics and supply chain management
Ronald H. Ballou
Case Western Reserve University
Prod. vol.16 no.3 São Paulo Sept./Dec. 2006