Value-Added Role of Logistics

Form Utility. It refers to the value added to goods through a manufacturing, production or assembling process. For example, form utility results when raw materials are combined in some predetermined manner to make a finished product. This is the case, for instance, when a bottling company adds together syrup, water and carbonation to make a soft drink. The simple process of adding the raw materials together to produce the soft drink represents a change in product form that adds value to the product.

In today's economic environment, certain logistics activities can also provide form utility. For example, breaking bulk and product mixing, which typically take place at distribution centres, change a product's form by changing its shipment size and packaging characteristics. Thus, unpacking a pallet of breakfast cereal into individual customer size boxes form utility to the product. However, the two principal methods in which logistics adds value are in place and time utility.

Place Utility. Logistics provides place utility by moving goods from production surplus points to points where demand exists. Logistics extends the physical boundaries of the market area, thus adding economic value to the goods. This addition to the economic value of goods and services known as place utility.

Logistics creates place utility primarily through transportation. For example, moving farm produce by rail or truck from farm areas to markets where customers need this produce creates place utility. the same is also true when steel is moved to a plant where the steel is used to make another product. The market boundary extension added by place utility increases competition, which usually leads to lower prices and increased productivity.

Time Utility. Not only must goods or services be available whenever consumers need them, but they must also be at that point when customers demand them. This is called time utility or the economic value added to a good or service by having it at a demand point at a specific time. Logistics creates time utility through proper inventory maintenance and the strategic location of goods and services. For example, logistics creates time utility by having heavily advertised products and sales merchandise available in retain stores at precisely the time promised in the advertising effort.

To some extent, transportation may create time utility by moving something more quickly to a point of demand. For instance, substituting air transportation for warehousing adds time utility. Time utility is much more important today because of the emphasis upon reducing lead time and minimising inventory levels through logistics related strategies such as Just In TIme (JIT) inventory control.

Possession Utility. It is primarily created through the basic marketing activities related to the promotion of products or services. We may define promotion as the effort, through direct and indirect contact with the customer, to increase the desire to possess a good or to benefit from a service. The role of logistics in the economy depends upon the existence of possession utility, for time or place utility make sense only if demand for the product or service exists.

It is also true that marketing depends upon logistics, since possession utility cannot be acted upon unless time and place utility are provided. Order fulfilment is the critical and other final step for meeting customer requirements.