Logistics: What they are and why they matter

What is Logistics and why do they matter?

The term “logistics” has become ubiquitous in recent years. Be it thrown around in reports or hinted at in news programs, the word can be found in a plethora of sources. Perhaps, it’s even more prevalent now given the impact of the COVID-19 pandemic and the impact it had on global supply chains. In some estimates, as much as 72% of global businesses have reported some form of direct negative impact on their activities—and, as we will soon see, logistics has much to do with this reality.

Impact of the COVID-19 Pandemic on Select Companies

A bar graph showing survey results of how much the COVID-19 pandemic impacted select companies according to EY Research
(Source: EY Research)

In the U.S. alone, companies spent 1.64 trillion USD in activities related to logistics —roughly 8% of the country’s GDP. So why are logistics so important to the modern world and what do they entail?

A creative interpretation of a map of the world combining containers, air, and maritime traffic as a representation of logistics

What is logistics?

In the broadest of terms, we can think of logistics as the efficient allocation and movement of resources for commercial use.

It is deeply tied to the notion of supply chains—the complex links of suppliers employed by a company—and their efficient management. As a discipline, it is concerned with the different products used and produced by a given company, as well as the needed activities to secure them—be it acquisition, transportation, or storage.

In simple terms, it studies what a company needs to create a good and the ultimate transportation or distribution of those same goods—how to get those resources, and where to get them in the first place. 

Given its scope, we can think of logistics as being involved with two primary actions: storing and transporting. Think of it in terms of a company that transforms some raw material into a finalized product. First, the company needs to secure the raw materials and safely transport them to their factories. After creating their goods, they, in turn, must be transported to their final point of commerce. All goods, at some point or another, will need to be moved from a factory to their ultimate selling point, just as raw materials must be brought to the factory in the first place. At times, however, a given seller will only acquire bulk quantities of a good, or a raw material provider might only sell their goods at large. In such cases, the company might want to arrange efficient warehouses to store inputs or finalized goods until they can be transported to their final destination or used on the factory floor.

“In simple terms, logistics studies what a company needs, how to get it, and where to get it”

Some companies might try to integrate all parts of their supply chain into their own processes, assembling key parts needed for their products and even owning the transportation equipment to move goods from one point to another. The electric car giant Tesla, for instance, is famous for producing the batteries and motors used in their cars instead of acquiring them from a third party provider. But such instances of complete integration are rare—and Tesla itself uses an abundance of suppliers to manufacture complex vehicles.

More often, logistics is a fragmented process where a company needs to interact with multiple contractors, service providers, and suppliers. On any given day, logistics operators might interact with dozens of actors from truck drivers, to customs agents, and warehouse management experts. Think of all the components needed to make a car, many of them built in various countries around the world. Each part of a car must be manufactured from raw materials, shipped to a given factory, sort complex customs regulations, and, ultimately, be used in assembling the vehicle. 

McKinsey & Co recently published a study looking at some top level global brands to understand the size of their supply chains and the impact of disruptions. Airplane manufacturer Airbus, for instance, is said to interact with 1,676 suppliers, while tech giant Apple currently has some 638 suppliers. To put this into perspective, if we estimate Airbus has to spend, at least, 10 minutes a month with each supplier to ensure their distribution runs smoothly, the company would have to spend 11 and a half days just in keeping those relations—basically half of a month’s worth of work spent on calls.

Number of Suppliers to Top Companies

A bar graph showing the number os suppliers of logistics and supply chain used by prominent global companies including Airbus, General Motors, Amazon. Volkswagen. Nestlé, Walmart, Apple, and BMW.
(Source:McKinsey & Co)

What are the 4 major types of logistics?

Experts tend to divide business logistics based on the direction in which goods are headed or the relationship to a company. In general, there are three broad categories for logistics which can be further divided based on the needs and complexities of a given sector. 

“In general, the four most popular divisions of logistics are: inbound logistics, outbound logistics, reverse logistics, and third party logistics (3PL)”

What is inbound logistics?

Inbound logistics, as the name would suggest, looks at the arrival of all goods to a given location. It is concerned with the early part of a supply chain of a company. That is, with getting the components needed to put together a finalized product. In simple terms, inbound logistics makes sure a company has all the goods it needs to operate smoothly.

What is outbound logistics?

Similarly to inbound logistics, the focus outbound logistics can be deduced from its name. This is the area of logistics concerned with the transportation of goods from a factory to its end location. That is, the focus is on the finalized good a company creates. If inbound logistics looks at the early part of a supply chain, outbound logistics is mostly concerned with the latter sections of the process. 

What is reverse logistics?

Reverse logistics, focuses on the few instances in which the traditional direction of a supply chain is inverted. That is, the moment in which a consumer returns a product to its manufacturer for any given reason. Most often, this implies some form of problem with the good itself—be it a factory defect or an error from the consumer at the moment of purchase. It could also be that a company provides a life-long insurance policy for a product, for which it must manage the shipment of broken goods, the repairing process, and the eventual shipment back to the customer.

Reverse logistics also focuses on the various recycling processes a company can create to reduce its impact on the environment. Through these programs, a client can send a product back to its original factory for the strategic reuse of a fragment of its parts or raw materials. Clients often receive some advantage in the form of a discount for recycling their products—think of Apple’s trade in program, which gives consumers a credit to use in store after exchanging their old products.

An image of a diagram with some of the key terms of logistics

What is 3PL logistics?

More than a subtype of logistics, third-party logistics (commonly referred to as 3PL), refers to the act of hiring a third-party contractor to manage logistics for a company. These subcontractors, in turn, will take care of all the complexities of logistics, from transportation routes, to dealing with customs. Since logistics can quickly become an all-consuming endeavor, it makes sense to at least consider hiring experts to ensure a company’s supply chains run smoothly.

It is also worth noting that companies don’t need to subcontract the entirety of their logistics process. Many focus on hiring talented personnel and providing them with logistics management software capable of visualizing important trends while outlining the current state of a company’s supply chain. We at Auba focus on providing the key insights to understand your logistics and how to improve them.

How are logistics measured?

Given the importance of logistics, it is surprising that there is no standard measurement for the industry. In great part, this is due to its fragmented nature and how different companies in similar industries can have completely opposed approaches to managing their supplies and deliveries. But despite the seemingly large amounts of noise in the sector, there are some initial alternatives to understand the current size and state of the logistics industry.

To start, one could look at the goods themselves a company uses and try to measure their size. Such was the approach of AT Kearney which, in  their most recent Logistics report, tried to measure the total size of Freight Under Management (FUM) by a subsector of third party logistics providers (3PLs). In their study, they looked at 3PLs that controlled all aspects of a company’s logistics, going beyond just transportation—a term which they called 4PL. In turn, they were able to determine this subset of companies currently controls 80 billion USD in FUM, giving an initial term to understand the logistics sector.

Kearney’s approach, however, requires companies to publicly disclose the amount of goods they currently manage, making it difficult to gain a snapshot of the current state of the overall economy. As such, one could instead look at GDP breakdowns on specific sectors. While logistics, on its own, is not a category most developed economies measure, some of its core components are easily measured. Most notoriously, the majority of countries report the fragment of their GDP dedicated to the transportation sector which, as we have previously discussed, is a key element of logistics. We can thus look at the change in GDP size dedicated to transportation as a metric of increased or reduced interest in logistics.

Change in GDP dedicated to Transportation by Country

A bar graph showing the change in GDP dedicated to transportation by country
(Source: Trading Economics)

GDP, however, is rarely reported on a real time basis. In the best case, data comes on a monthly basis; in the worst, it could be reported yearly. If you want to understand more time sensitive trends in the sector, a useful alternative is to look at a number of metrics related with the world of trade. As logistics is primarily concerned with transportation and storage of goods, the costs of shipping containers could serve as a direct metric for the state of the industry. Amongst existing metrics, the Drewry World Container Index (WCI) is often held as a gold standard in measuring the average size of standard shipping containers.

Drewry World Container Index (WCI) Value Over Time

A line graph showing the change of the World Container Index over time from the start of 2022 to the beginning of 2024.
(Source:Drewry & Freightender)

How can Auba improve your logistics?

Our goal at Auba is to bring you and your company to the future of logistics. Using cutting edge Artificial Intelligence tools, we understand the entirety of your logistical processes and provide the needed visibility to expand its capabilities. Using your existing communications tools, we can understand the status of your shipments, flag potential errors, and provide meaningful insights for your particular case. All without requiring complex and lengthy integrations.

“At Auba, we work closely with our clients to bring logistics to the next level”

What does logistics mean?

Broadly speaking, the term logistics is concerned with the vast array of processes needed to ensure a company both gets all the inputs to produce a good, and eventually transports those goods to their end retailer. It is a complex process that focuses on managing relationships, understanding global trends, and leading large teams of multiple suppliers, transportation specialists, and advisors.