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Logistics.i
THE AGE OF LOGISTICSA mini- reference guide
NEW HAMPSHIRE COLLEGEGraduate School of Business
2500 North River Road, Manchester, NH 03102, USAHome Page: www.nhc.edu
Phone: (603) 644-3102For additional Copies send email to: [email protected]
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PREFACE
History shows that field of transportation and logistics was integrated in the study of economics due to the important role played by transportation in economic growth. The academic study of transportation and logistics is not new; indeed, it goes back to the 1850s (almost 150 years) when Henry Adams, an economist, who was also the president of Yale University, offered a course in the Economics of Transportation. After World War II, trade groups such as the National defense Transportation Association, the American Society of Transportation and Logistics, and the Delta Alpha Transportation Fraternity were established.Special challenges and opportunities confront the marketer who intends to serve the area of logistics and distribution management. A growing number of collegiate schools of business in the United States, Europe, and other parts of the world have added Logistics and Distribution Management to their curricula. In fact, most of them have set up a separate department for Logistics because of its growing importance in the business world today.
The following is a secondary research publication done in the area of logistics and distribution management. This publication will also serve as a ‘supplementary-reference’ for the business teacher and student likewise.This publication concentrates of the following aspects of logistics:
1. Distribution Channels. Particular attention is given to the nature of distribution channels, channel behavior, channel design decision, channel management decisions, and physical distribution.
2. Supply Chain Management. This area covers aspects on building a supply chain, critical likes in the supply chain, supply chain teams, efficiency in the efficiency in the supply chain, transportation in the supply chain, the role of IT in the supply chain, and the benefits of improving the supply chain.
3. Logistics and the Internet. Importance has been given to the effects of ecommerce on logistics, virtual retailing, Internet retailing, and the influences of the web on logistics software.
4. Customer Satisfaction. The relationship between logistics and customer satisfaction and sales.
5. Mass Customization. The varying degrees of product customization and the role played by logistics in the area of mass customization have been discussed.
6. The Corporate Role. The contribution of logistics strategy towards improvement in ROI has been discussed. Emphasis has also been given to the building of a cohesive logistics strategy, Just-in-Time, supply chain strategy, and the role of logistics in increasing shareholders’ value.
Additional copies of this publication may be obtained by sending an email to:[email protected]
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ACKNOWLEDGEMENTS
First, we would like to thank Dr. Nichoas Nugent for carefully reviewing the manuscript at various stages of development and also for providing incisive comments and valuable suggestions that helped in improving this secondary report.
Second, we would like to thank Dr. Philip Vos Fellman, Dr. Bulent C.Aybar, and Prof. Marc A. Rubin for showing a special interest in the making of this publication.
We would also like to thank the Shapiro Library for providing us with excellent materials without which this project wouldn’t have been complete.
Manu RajanHemant GajriaBiju MoopanAugust 1999
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SUMMARY
What is Logistics?
Logistics involves getting the right goods to the right place, at the time, at the right cost, in the right condition, and with due care and attention to the environment. The Institute of Logistics defines logistics as ‘the time related positioning of resources’ within the supply chain. Academics define it as ‘the management of the chain from source of procurement to the final user’
A few other definitions:Logistics is “a sat of distribution-activities,” that make products available to customers when and where they need them.
The council of Logistics Management defines it as:“The process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point-of-orgin to point-of-consumption for the purpose of informing to customer requirements.”
Logistics commonly includes: Transportation Warehousing Inventory/Stock control Communication/Information systems Packaging Manufacturing management
In business, logistics is fundamental to: Retailing Production management & control Forecasting Purchasing & supply Materials management Packaging Installation & servicing Property Quality Order processing Project management Re-use & recycling Information technology Importing & exporting.
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Logistics is also fundamental to: Governments The armed forces Welfare agencies
Logistics is the management of the storage and movement of goods and information. Good logistics cuts costs; speeds work, and improves customer service. Logistics also involves the co-ordinated management of material and information flows throughout your organization.
Supply Chain Management deals with the same issues throughout the chain from your sources to your customers. Its objective is to simplify the supply chain to control total cost, improve total quality, maximize customer service, and increase profit.
Comparing Logistics and Supply Chain ManagementSupply chain management is about getting a smooth and efficient flow from raw material to finished goods in your customer’s hands. It is a concept, which is increasingly replacing traditional fragmented management approaches to buying, storing and moving goods.
Traditionally, the management of material flows has centered on stocks of product: on trains and boats and trucks; in warehouses and stores and factory-floor queues. Managing those stocks meant buying enough goods far enough in advance to ensure that long, steady production runs were seldom jeopardized by shortages of components. Tougher competition has brought shorter product life cycles and made that approach increasingly expensive. Replacing these ‘inventory-driven systems’ are ‘service-driven systems’. This type of system, ‘pulled’ by customer demand rather than ‘pushed’ by a supply system, is long-familiar in retailing and over the last decade has become a necessity in many manufacturing sectors.
What is the supply chain?Traditionally, companies have dealt with moving and storing goods in a disparate way, and under a number of different managers. In manufacturing, transport from supplier to plant was handled by suppliers themselves or by purchasing departments. Transport and storage within the plant was handled by the stores department (in the stores) and by manufacturing operations (within the plant). Transport from plant to customer was handled by purchasing; sales forecasts by marketing and communicated to manufacturing and procurement in a generally one-way information flow.This approach splits functional departments into watertight compartments when, as every manager knows, business isn’t like that. Particularly in this area, where the essence of supply chain Management is managing flows across departments, sites and –often- companies. So a high degree of management integration is needed.Logistics deals with geography, time and value. Many of its concerns are with things in places and transport between the places. In this view logistics deals with everything from
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raw materials through their movement into and between various stores and processes to the customer. It looks at material flows within sites as much as between sites.
Figure: A Traditional Food and Drink Industry Supply Chain
Traditional food and drink industry supply chainCharacteristics:
A large number of participants Many intermediate stages, often involving logistics processes Long lead times – difficult to meet sensible service targets – high costs
Understanding your supply ChainBefore improving your supply chain, you must understand how your system works. This involves collecting information about how you ship, handle and store goods; about how you move information, and about the requirements of your customers and suppliers for the form and timing of goods and information flows. With this information you will
Raw materials suppliers
Processing plant
Packaging suppliers
warehouse warehouse
Manufacture process
Cash ‘n’ carryFinished goods
storageThird party warehouse
Intermediate store
In-storestockroom
retailer
Retail centre warehouse
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understand a lot about how your business works, and can get on with the job of improving it.
Site location Physical distribution Warehousing Materials handling Inventory management Information handling Forecasting Commercial relationships and transactions Who manages improvement?
There are a number of ways of analyzing the supply chain – and managing the operation of it. One of the most useful is the node and link model, which plots links – usually representing movement over distance – and nodes - places where goods are stored or processed.
Customer suppler
Suppler Plant
Plant Customer
Suppler Customer
Figure: Overall Model of Nodes and Links for aSupplier – Plant – Warehouse-Customer System.
This is useful as it provides a model of the overall shape of your Supply Chain which can then be ‘exploded’ into greater detail.
warehouse
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local bulk/long localhauler distance carrier hauler
Figure : Exploding a Link can Reveal New Links and Nodes. The ExplosionProcess can be Repeated Almost Indefinitely.
Put together, all the nodes and links in your system create a ‘logistics channel’ – a way of getting goods, services, and information through to your customers. Every business will have a different logistics channel.
Most will involve: Physical distribution Materials handling Information handling and transactions Commercial relationship and transactions.
Each of these issues can be measured and assessed through information on: Inventory Controllability and Cycle time.
How big is the supply chain?Most businesses are surprised by how complex their supply chain is. A good first task is to discover how many suppliers and how many customers you have, where they are, and how important each is as a percentage of sales or purchases. Clearly, the more complex the system, the harder it is to manage, and this information will be invaluable later when you are improving and then simplifying your systems.
Site locationThe location of existing sites has far-reaching implications for logistics flows and costs, particularly in the single European market. Decisions about new locations for stores and manufacturing sites should be fed with information on customers, suppliers, and transport links.
Unload, handle, reload
Unload, handle, reload
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Physical distributionGoods move a lot during manufacture and distribution: you need to identify at each stage how they are moved – the transport mode – and who does the moving - the transport operator. Inside your site(s) there is likely to be transport, but this shades into materials handling issues, so concentrate on transport between suppliers and your sites, and between your sites and customers or intermediaries such as public warehouses or distributions. Physical distribution is not only a significant cost for most businesses, it has a direct impact on your competitiveness through speed, reliability and its controllability (or otherwise) in getting goods to your customers on time. All customers are becoming more demanding. Producers of intermediate goods are finding that their customers are demanding JIT (Just in Time) Scheduling of deliveries. JIT has been used in retailing for many years. And while specialist transport operators have developed their services to meet these needs, many firms have been slow to adapt.
Transport modeAir, sea, road, rail? Canals…? For most routes, there is a choice. In many companies, the choice is made after rudimentary cost analysis. But all modes have characteristics beyond simple cost per kilogram/kilometer. For each link in the logistics channel particular modes will have particular advantages. Most freight is now carried inside the UK by road, a mode that has advantages of speed, flexibility and cost. Rail transport is obviously suited to trucking bulk loads or very heavy individual items. But even within the road transport mode, there are many choices depending on your circumstances.Transport modes operate between nodes, which have their own characteristics. Is the mode matched to materials handling and storage systems? How flexible is a mode? A shipment system based on delivering full containers to distributors starts to cost serious money if your market changes and a lot of part-loads start to be needed. This is one of several ways in which the demands of your customers dictate your transport modes.
Owning and controlling the means of distributionOwning transport is expensive. Increasingly, companies are looking hard at whether they should own their own transport. As a trip down any motorway will confirm, many have decided that contracting-out their distribution makes economic sense.There are exceptions: distribution-based businesses are obvious examples. The local service company which offers free collection and delivery of clean shirts or typesetting as an important part of its value to customers in another.Apart from total cost, key factors involved in deciding whether or not to own your own transport include:
ControlThe ability to decide what to do with your own transport can be important. Against that, some contract distribution companies offer good control without burdening you with the inflexibility of your own vehicles.
Customer serviceWhatever the ownership patterns, the key characteristic of successful distribution is that it
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delivers the right service to customers. Whatever the relative costs and convenience, if you can’t buy a distribution service that target; you will have to operate your own transport.
FlexibilityUsing your own vehicles commits you to a particular mix of shipping sizes and modes. Common carriers and contract distribution companies allow much faster switching between modes and types of transport within a mode. For some people, the answer could be a mixture of methods, combining a van for small deliveries, a truck which can handle ‘base’ demand at full utilization fates, plus outside operators used to deal with peaks and unusual demands.
Management SkillsUnless your business is managing transport there are strong arguments for using a transport specialist. Large companies can support the fleet sizes needed to justify the management quality and specialist tools by competitive transport operations, but it is among larger companies that the move to contract distribution management has been strongest. If your transport management is weak, you become uncompetitive. If your transport management is strong; you may be diverting valuable talent from the rest of your business.
Recruitment and training Can you afford to hire and train the right people to operate your vehicles? Road transport is the least productive transport mode in terms of tonne-kilometres per person hour, so labor is always a significant cost.
WarehousingBoth the main goals many business operations in the nineties – deliveries direct to production lines or retail stores, and make-to-order within hours – suggest that warehouses are dinosaurs whose time has gone. But warehouses will be with us for a long time. They are often very badly organized – and thus very expensive.They may be needed to store incoming components and raw materials. Perhaps supplier production cycles don’t match your production cycles as with, for instance, a flavoring producer who must buy plants when they are harvested, rather than when it wants to process them.The warehouse must be in the right place. It must to the right size. It must properly protect its contents. And it must be organized to allow:
Efficient delivery and placing. Cost-effective use of its space Adequate access to stored materials
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Security from theft and weather Enough flexibility to deal with the largest (and smallest) items, which will need
storage in the numbers that will be needed.
Within the ware house – and between warehouse and overall inventory management and purchasing systems – there is a need for interlocking mechanical and information systems so that stock is
Put into known order Retrieved quickly and in the right quantity Rotated properly (for example, first-in, first-out)
As with transport (see ‘Owning and controlling the means of distribution’ above) you have the option of owning and/or managing your own storage facilities, or of contracting out management and/or operations.
Materials handling Within a node- a warehouse, a plant, a retail store - goods to be moved between incoming transport, storage, processes, and outgoing transport. The spectrum of available systems ranges from one person with strong arms through arms through the supermarket trolley (in its way revolutionary technology) to fully-automated systems incorporating robot order picking and automated guided vehicles (AGVs). Most handling systems, and the packaging adopted by suppliers, are geared to supplier-warehouse-process transactions. In fact increasing numbers of businesses are moving towards JIT deliveries: once supplier quality is sorted out; incoming goods can go directly into the process, without inspection or spending any time in a store.This can have important implications for handling and packing – for instance, shrink wrapped pallet loads of small parts are unlikely to suit JIT deliveries where the processes are based on assembly stations. A smaller load unit, with no unpacking needed, might be the right answer, at the price of higher-cost machinery to unload from the supplier’s truck into robot carts. Bar coding gives instant recognition of individual items to stock management systems – and to production systems.
Inventory managementFew business consider the total inventory in the supply chain, including stock at suppliers’ premises, stock on trucks and boats, in plant at distribution outlets. Considered throughout the Supply Chain stock can be accumulated at places where it is cheap (that is, before value is added) and/or where it adds value to the customer (for example, at or near the customer rather than at or near your plant
Manage it as a whole systemIn order to manage your stock effectively, you must know how much you have, its value, and where and how it is stored. Some of this about information systems; some is about analyzing the physical storage, which interacts closely with materials handling systems.You must also know what your inventory costs.
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The costs above suggest trade-off between the factors. A few orders mean low purchase costs but high stock cost; many small orders mean low stock costs but high purchase costs. High buffer stocks mean low stock-out costs but high stock carrying costs. You need to strike the right balance between these various factors.
External factorsYou also need to take account of external factors over which you have no control. You could, for instance, buy a year’s supply of an important raw material all at once. If prices rise, or there are shortages, you gain an advantage over your competitors. But apart from the stock costs, prices might fall. In this situation, you will only know what you should have done after you have done it. Avoiding risk is therefore another factor in the quantity equation. You are also constrained on quant to make the goods that you want - their lead-time. If you want to buy small quantities once a week but your supplier takes three weeks from to delivery, you may have problems.
Information handlingGoods can’t flow without information: information allowing, forbidding, and directing physical flows; information checking and confirming; information to provide proof and audit trails for taxes and billing. Because the information flows are so intimately connected with the physical movement of goods, it is sensible to deal with them as part of the same system.
Too often, too much of the wrong information moves too slowly to the wrong people. In many companies, this is the legacy of systems based on nineteenth-century technology, unchanged because by and large the right things happen in the end. Examining your information flows allows you to:
identify important information needs discard flows that don’t add value speed and automatic routine information transactions.
Physical link
Information link(shipping notes, schedules, orders)
Figure: Goods can’t flow without parallel information flows.
ForecastingForecasting is a key information resource. Material networks, even when well managed, are relatively lumbering beasts, and should be driven by forecasts (or better still, by firm
orders) rather than by hope. So sales forecasting is a vital ingredient. If customers insist on being volatile, sellers must adapt. In some businesses, demand can be increased in
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slack periods - the summer sale is a familiar example. In others, output flexibility must be increased.Better forecasting and a more responsive supply chain are the key ingredients in a virthuous circle of improvement in customer service. Good forecasting reduces the need for instantly responsive supply chains: responsive supply chains reduce the need for clairvoyance in forecasts. Together they increase your ability to guarantee levels of service.
Commercial relationships and transactionsParts of your supply chain are within your premises or otherwise under your direct control. But other parts involve links with third parties, incluting:
Customers Suppliers of goods Suppliers of services(e.g. shippers) Regulatory authorities (customs, transport, taxation etc).
Links with these external bodies involve flows of goods and information. Clearly, your processes and links must work with the processes and ‘nodes’ represented by your customers and suppliers.
Who manages improvement?Supply chain management involves a lot of operational areas in your business. So who should be responsible for improvements – for making sure that the logistics function delivers efficiency and profit improvements? Should there be a single senior manager with their own department and authority to impose on other departments? Should there be a less-senior information-oriented manager to co-ordinate the logistics aspects of work among departments? Or can you manage without any full-time logistics professionals, perhaps relying of outside consultants to help solve problems and develop systems? Each approach has its merits for particular businesses, but you will have to find the right approach based on the needs and resources of your business.
Logistics professionals often argue for the ‘logistics supreme’, responsible for all logistics-related activities, including production planning, transport, storage and purchasing. Such appointments are still rare, though they are increasing. And it may not suit your business. More common are two trends:
The gradual coming together and eventual merger of purchasing/ materials management and transport/distribution functions.
The ‘diffusion’ of the process through setting joint targets and objectives between existing functional groups and managers within the business, with project teams tackling individual improvement programs.
Smaller firms in particular may find the second of these approaches useful, perhaps using a consultant to help sort out job descriptions and define projects and objectives.
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TABLE OF CONTENTS
Subject
page
Executive Summary ……………………………………………………… V
Introduction ……………………………………………………………… 1
Distribution Channels and LogisticsOverview ………………………………………………………………….. 4The Nature of Distribution Channels ……………………………………... 6Channel Behavior ………………………………………………………… 8Channel Design Decisions ……………………………………………….. 11Channel Management Decisions …………………………………………. 14Physical Distribution ……………………………………………………… 14
Supply Chain ManagementOverview …………………………………………………………………… 17Building a Supply Chain …………………………………………………… 18The Critical Link in a Supply Chain ……………………………………….. 23Teaming up for Supply Chain Success …………………………………….. 25The Real Supply Chain Test ……………………………………………….. 30Efficiency in the Supply Chain …………………………………………….. 32Transportation in the Supply Chain ………………………………………….. 33 The IT Enabled Supply Chain ……………………………………………….. 41Benefits of Improving Supply Chain management …………………………. 43
Logistics and the InternetOverview …………………………………………………………………….. 51Electronic Commerce and Logistics ………………………………………… 53“Virtual Retailing” and Logistics ……………………………………………. 55Internet Retailing ……………………………………………………………. 57The Web and Logistics Software …………………………………………….. 64The Web as a Gateway to Logistics Data ……………………………………. 66
Logistics Driven Customer ServiceOverview ……………………………………………………………………… 68Logistics and Sales …………………………………………………………… 70
Logistics and Mass Customization …………………………………………… 75
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TABLE OF CONTENTS Continued
The Corporate Role of LogisticsOverview ………………………………………………………………....... 83Building a Cohesive Corporate Logistics Strategy ………………………… 86Just-in-Time and Inventory Investment Reeducation ……………………… 88Supply Chain Strategy ……………………………………………………… 90Evaluating the Supply Strategy ……………………………………………. 92Logistics and Shareholder Value …………………………………………… 93
ConclusionClosure ……………………………………………………………………… 98Logistics in the New Millennium …………………………………………... 102
Bibliography ………………………………………………………………. 104
Quick Pointers ……………………………………………………………… 107
Glossary …………………………………………………………………….. 113
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THE AGE OF LOGISTICS“A Mini- Reference Guide”
Manu Rajan, Hemant Gajria and Biju Moopan
INTRDUCTION TO LOGISTICS
Logistics is set of distribution activities that make products available to customers when
and where they need it. Logistics management has undergone significant change from the
1960s to the 1990s. The logistics function was called ‘traffic management’ during the
1960s with traffic managers managing freight movements after World War II. The 1970s
were fraught with economic problems, which forced traffic managers to help companies
cut costs. The 1980s were marked with the deregulation of the trucking and rail industries
while the 1990s have become the era of logistics.
The ‘90s are shaping up so far as the era of logistics, as corporate America embraces
business strategies based on speed to market and achieving supply-chain efficiencies.
Today, product replenishment must be accomplished promptly and efficiently to avoid
losing a sale. Order-cycle time has been compressed drastically. In the 1960s, the amount
of time needed to convert an order to shipment was 30 days. Now, the average is two or
three days.
To provide faster, continuous replenishment, companies have to join forces to
synchronize product deliveries. Having pared corporate costs as much as possible over
the past decade, CEOs have come to realize that companies in a particular industry must
work together to achieve group saving in the supply chain. In the grocery industry alone,
one estimate hold that wholesalers and suppliers could reap $30 billion in supply-chain
saving by joining forces.
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Supply-chain saving require swift and accurate information on consumer demand. In
theory, consumers will pull the products they want through pipeline and agile
manufacturers will build replacement products to order. Such supply-chain
strategies have different names in different industries – Efficient Consumer Response in
the grocery industry, Quick Response in the retail industry. Whatever the name, the
strategies embody the same idea: Companies in a channel must work together as an
“extended enterprise” to reduce costs and increase profits.
Speed-to-market replenishment strategies wouldn’t be possible without hug leaps in
modern technology. Bar coding makes it possible for retailers to know what’s selling at
the checkout counter. Powerful desktop computers from retailer to manufacturer can
relay that information. Manufacturer’s product then can be tracked from the seller’s to the
buyer’s dock. Orbiting satellites now can keep eye on over-the-road shipments, while
warehousing workers with scanners and radio-frequency technology can update inventor
records instantaneously in real time. Information now can supplant buffer inventory.
Continuous replenishment, of course, would be all but impossible if the carriers weren’t
able to act – and react – without government approval. But fortunately for carriers, That’s
now the case. The job of deregulation itself – begun a decade earlier – was complete by
the federal government in 1994 when it extended deregulation to the states. Spurred on
by deregulated companies, Washington lawmakers passed legislation pre-empting states
from regulating the routes, prices, or services for motor carriers within state borders.
Freed from their regulatory shackles, Transportation companies have transformed their
service menus to meet the changing needs of shippers and speed-to-market strategies.
Truckers like Roberts Express now act like air-express carriers, moving time-critical
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shipments overnight. Federal Express and UPS have moved away from small packages
and gone after heavier freight. Other asset-based warehouse and transportation companies
have become third-party logistics companies, filling in the gaps left by downsized
logistics department of simply offering outside expertise as companies focus of their core
retailing or manufacturing mission.
During the last few years, logistics managers have started to receive the corporate
recognition they deserve as companies look to the supply chain for profitability. It’s a
safe bet to say that the mangers will continue I the exalted role through the rest of the
decade and the new millennium as companies turn to logistics to bring value to the
consumer.
It’s also time to declare “finis” to the information Age. In fact, it may never have existed.
What we’re really experiencing is the Age of Logistics – a time when we’re learning to
move everything – products, services and money - faster and faster. Information
technology is a facilictator of all that, but it isn’t the only driver of business change. In
fact, our hubris and phobias about IT may have prevented companies from seeing their
real job: changing how the company adapts to the new logistics infrastructure being built.
The infrastructure domain used to belong to the government. It built roads, bridges,
seaports and airports. It built a national banking system and a maze of regulations. It did
pretty much the same for communications, including the nomenclature for the Web. We
still need all of that. But the private sector is building tomorrow’s business
infrastructures. Behamoth is to move products among businesses and between businesses
and consumers.“UPS’s brown trucks are becoming the rolling physical warehouses of the
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American industry. But that “warehouse” is dynamic: It gets products to destinations
when they’re needed. For those who want instantaneous access, the end state could lead
to an updated version of the line from Star Trek: “Beam me up a new PC, Scottie.”
As for the logistics of money, look at bank such as Boston-based State steel Corp. it just
isn’t a bank. Its competency is moving, holding and managing money and securities
around the globe. Its ambition is to do that in ever less time. The Age of Logistics is more
than a change in terminology. It’s a new state of mind.
Logistics has finally become an important issue in the business world as companies
realize its value in providing customer satisfaction. In fact, corporate management is
finally recognizing that logistics is not actually a necessary evil but a useful instrument
for customer service enhancement and cost reduction. In today’s competitive
environment, logistics has to take a fully integrated approach to realize its potential. All
the processes n logistics must therefore function as one, with each involved party more
aware of the complete logistics function. This means that logistics has to address three
requirements: business requirements, customer requirements and logistics requirements.
DISTRIBUTION CHANNELS AND LOGISTICS MANAGEMENT
Overview
Distribution channels, are identified as being a set of independent organization involved
in the process of making a product or service available for use or consumption by the
consumer or business. Making decisions involving distribution channel are among the
most complex and challenging decisions facing the firm. Each channel system (and there
can be several) creates a different level of sales and costs. Unlike flexible elements of the
Logistics 5
marketing mix (price decisions for example), once a distribution channel has been
chosen, the firm must usually stick with their choice for some time. In addition, the
chosen channel strongly affects, and is affected by, the other elements in the marketing
mix.
A strategic planner limits their options if they consider only one channel choice. Each
firm needs to identify alternative ways to reach their market. There are many means
available. Some of the choices include the range of direct selling to multiple intermediary
levels that may involve several distribution relationship. Each of these options has
advantages and disadvantages associated with them. Vertical and horizontal systems are
more sophisticated than the basic channel alternative and each is explained in context
with their contemporary usage.
Channel design begins with assessing customer channel-service needs and company
channel objectives and constraints. The company then identifies the major channel
alternatives in terms of the types of intermediaries, the number of intermediaries, and the
channel responsibilities of each. No system, no matter how well it has been planned, is
without conflict. Managing distribution conflict is a necessity if quality service and low
cost are to be delivered. Since distribution relationships tend to be long-term in nature,
the choice of channel partners is very important and should be taken very seriously,
In today’s global marketplace, selling a product is sometimes easier than getting it to
customers. Therefore, physical distribution and logistics management are receiving
increased attention from strategic planners. The task of physical distribution systems is to
minimize the total cost of providing a desired level of customer services while bringing
those services to the customer with the maximum amount of speed. Major logistics
Logistics 6
functions order processing, warehousing, inventory management and transportation are
discussed and explored.
The Nature of Distribution Channels
A distribution channel (marketing channel) is a set of interdependent organization
involved in the process of making a product or service available for use or consumption
by the consumer or business user. The use of intermediaries results from their greater
efficiency, in making goods available to target markets. Through their contacts,
experience, specialization, and scale of operation, intermediaries usually offer the firm
more than it can achieve on its own. From the economic system’s point of view, the role
of marketing intermediaries is to transform the assortments of products made by
producers into the assortments wanted by consumers.
Intermediaries play an important role in matching supply and demand.
Producers produce narrow assortments, but consumers want broad assortments.
Intermediaries buy large quantities of many producers and break them down into
the smaller quantities preferred by consumers.
A distribution channel moves goods from producers to consumers. It overcomes the
major time, place, and possession gaps that separate goods and services from those who
would use them.
Members of the marketing and distribution
Information gathering and distribution
Promotion
Contact with prospective buyers
Matching – buyers with sellers
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Negotiation so ownership can take place
Others include:
Physical distribution (such as transportation and storage)
Financing
Risk Taking
The question is not if these functions be performed but rather who will perform them. All
of the above functions have three things in common:
1. They use up scare resources.
2. They can often be performed better through specialization.
3. They can be shifted among channel members.
If the channel is functioning the way that it should, the work of the channel should be
divided so that the various functions can be assigned to that channel members who can
perform them most efficiently and effectively to provide satisfactory assortments of
goods to target consumers.
Distribution channel can be described by the number of channel level involved .A
channel level is layer of middleman that perform some work in bringing its product and
its ownership closer to the final buyer.
1) The number of intermediary level indicate the ‘length’ of the channel
2) These channel can be described as being:
a) A direct marketing channel – there are no intermediary level between
manufacture and consumer.
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b) An indirect marketing channel – there can be numerous and variety of
intermediaries involved in bringing the good or service from the
manufacture to the consumer or the business customer.
3) Business marketing channel are similar in their design except the intermediaries
perform function relative to the business market rather than the consumer market
.
Channel behavior and organization
Distribution channels are more than simple collections of firms tied together by various
flows. They are complex multifaceted behavioral systems. A distribution channel consists
of dissimilar firms that have banded together for their common good. Ideally, because
the success of individual channel members depends on overall channel success, all
channel firms should work together smoothly. However, disagreements over goals and
roles generate conflict.
Channel conflict is disagreements among marketing channel members on goals and roles
who should do what and for what rewards.
Horizontal conflict is conflict between firms at the same level of the channel
(retailer to retailer for example).
Vertical conflict is conflict is conflict between different levels of the same channel
(wholesaler to retailer for example).
Some conflict can take the form of healthy competition. Traditionally, distribution
channels have lacked the leadership to assign roles and manage conflict.
Vertical marketing systems
Historically, distribution channel have been loose collections of independent companies,
each showing little concern for overall channel performance. The conventional
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distribution channel (also known as a traditional channel) is a channel consisting of one
or more independent producers, wholesalers, and retailers, each a separate business
seeking to maximize its own profit for the system as a whole. These channels have lacked
strong leadership and have been troubled by damaging conflict and poor performance.
The goals of traditional a channel are as follows:
Manufacturer:
Market Exposure.
Marketing support activities.
Maximum sales volume from each dealer.
Retailer:
Exclusive distribution rights in an area.
Minimum support activities.
Assortment sales/ not sales of a particular manufacturer’s products.
In contrast is the emergence of vertical marketing systems. A vertical marketing system is
a distribution channel structure in which producers, wholesalers, and retailers act as a
unified system – one channel member owns the others, has contracts with them, or has so
much power that they all cooperate. These systems often allow for more efficiently run
operations, and , with self-interest no longer the driving force, it is possible that synergy
may occur. VMSs centralize the power in one place, rather than in traditional channels,
with the individual members competing against one another.
Advantages of a VMS over a traditional channel are:
One management group with a common set of goals.
Logistics 10
Possible to shift marketing activities to appropriate “level” within the channel.
Reduces duplication of marketing activities.
Management has total control over marketing of the product.
The major types of VMS include:
1) In a corporate VMS, coordination and conflict management are attained through
common ownership at different levels of the channel.
2) In a contractual VMS, coordination and conflict management are attained through
contractual agreements among channel members. There are three primary types:
a) Wholesaler-sponsored voluntary chains are systems in which wholesalers
organize voluntary chains of independent retailers to help them compete with
large chain organization
b) Retailer cooperatives are systems in which retailers organize a new, jointly owned
business to carry on wholesaling and possibly production.
c) Franchise operations are contractual vertical marketing systems in which a
channel member, called a franchiser, links several stages in the production-
distribution process. There are several form of franchises:
1. Manufacture-sponsored retailer franchise system (automobile
industry).
II. Manufacture- sponsored wholesaler franchise system (soft-
drink industry).
III. Service-firm-sponsored retailer franchise system (auto-rental
business).
Logistics 11
3)In an administered VMS, leadership is assumed by one or a few dominant channel
members. General Electric, Kraft, and Campbell Soup are examples.
Horizontal Marketing Systems
Horizontal marketing systems are where two or more companies at one level join
together to follow a new marketing opportunity. By working together, they can combine
their capital, production capabilities, or marketing resources to accomplish more than if
they were working alone.
Hybrid Marketing Systems
Hybrid marketing systems are multi-channel distribution systems in which a single firm
sets up two or more marketing channels to reach one or more customer segments. More
and more firms are adopting this concept. With each new channel, the marketer using this
technique expands sales and market coverage and gains opportunities to tailor channels to
the specific needs of diverse consumer segments.
These systems are harder to control.
Many forms of conflict can be eliminated using this form of system.
Channel Design Decisions
In designing marketing channels, manufacturers struggle between what is ideal and what
is practical. The problems can be complex (building a new channel from scratch) or
simple (getting a few intermediaries to carry your line). Channel systems evolve to meet
market opportunities.
Several steps are followed to design channels:
1. Analyzing Customer Service Needs – The first step is to analyze customer service
needs. To design an effective channel, the designer must know the service levels
Logistics 12
desired by customers. The company must balance consumer-service needs against the
feasibility and costs of meeting those needs and consumer price preferences.
Example questions to consider are:
Do they want to buy from nearby or are distant locations all right?
Would they rather buy in person or is some other method such as telephone
acceptable?
Do they want immediate delivery of can they wait?
2. Setting the Channel Objectives and Constraints - The second is to set the channel
objectives and constraints. Channel objectives should be stated in terms of the
desired service level of target consumers. Usually the company can identify
different segments that objectives are influenced by:
Product characteristics (perishable products would need different
arrangement).
Company characteristics (size and financial situation would have an
effect).
Intermediate’s characteristics (find those willing and able to perform
needed tasks).
Competitor’s channels (be near your competition)
Environmental channels (economic and legal constraints have effects).
3. Identifying Major Alternative – The next step is to identify major alternatives
available for concerns are:
The types of middlemen. Look at the company salesforce, manufacturer’s agency,
and industrial distribution to give you option on how to distribute the good or
service.
Logistics 13
The number of middlemen. Alternative strategies are:
Intensive distribution-the product is stocked in as many outlets as possible
(candy, gum, etc).
Exclusive distribution – giving a limited number of dealers the exclusive right to
distribute the company’s products in their territories.
Selective distribution – the use of more than one, but fewer than all of the
intermediaries who are willing to carry the company’s products (television,
furniture, etc.).
Responsibilities of channel members. Each alternative should be evaluated against the
following criteria:
Price policies.
Conditions of sale.
Territorial rights.
Specific services to be performed by each party.
4. Evaluating the Major Alternatives – The final step is to evaluate the major
channel alternatives. Each alternatives – should be evaluated against the following
criteria:
Economic criteria (a company compares the likely profitability of different
channel alternatives).
Control issues (how should control be distributed and to whom)
Adaptive criteria (examine flexibility versus long-term commitment).
5. Designing International Distribution Channels – international marketers face many
additional complexities in designing their channels. Each country may have different
rules and traditions that the firm must be willing to adapt.
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Channel Management Decisions
Once the company has decided on the best channel design, it must make some channel
management decisions.
Selecting Channel Members
The first decision that must be reached is to select the channel members. The fact is that
some manufacturers vary in their ability to attract qualified intermediaries. At the other
extreme is the manufacturer who everyone wants to work with. The best approach is to
determine what characteristics are necessary, and be able to distinguish the better
intermediaries.
Motivating Channel Members
Once selected, intermediaries must be continuously motivated to do their best. They must
not only sell through them but to them as well. Positive and negative measures are
possible – positive is preferred.
Evaluating Channel Members
Finally, the producer must regularly check on the intermediary’s performance against set
standards. Periodic re-qualification is advised. Be sensitive to the needs of dealers and
they will be sensitive to the firm’s needs as well.
Physical Distribution and Logistics Management
Physical distribution (marketing logistics) involves the tasks of planning, implementing,
and controlling the physical flow of materials and final goods from point of use to meet
the needs of customers at a profit.
(PTO)
Logistics 15
There is a greater emphasis on logistics because:
Customer service and satisfaction have become the cornerstones of marketing strategy.
Logistics is a major cost element.
The explosion in product variety has created a need for improved logistics.
Improvements in information technology have created opportunities for major gains in
distribution efficiency.
Goals of the Logistics System
Most companies state their objective as getting the right goods to the right places at the
right time for the least cost. While this objective is noteworthy it is difficult to achieve.
The goal should be to provide a targeted level of customer service at the least cost. To do
this, objectives must be set.
The major logistics decision includes the following:
1) Order Processing – Physical distribution begins with a customer order. Once
received, they must be quickly and accurately processed. Everyone benefits when
this system works well.
2) Warehousing - A storage function is needed because production and consumption
levels rarely match. A company must decide how many and what type of
warehouses it needs, and where they will be located.
a) A storage warehouse stores goods for moderate to long periods.
b) A distribution center is a large and highly automated warehouse designed to receive
goods from various plants and suppliers, take orders, fill them efficiently, and
deliver goods to customers as quickly as possible.
Logistics 16
3) Inventory – Inventory decisions involve knowing when and how much to order.
The goal is to maintain the delicate balance between carrying too much and too
little. When to order and how much to order are questions to be answered. Order-
processing and inventory-carrying costs must be analyzed.
Under a just-in-time system, only a small amount of inventory is carried, but quick
re-order turnaround is essential.
Though sometimes complicated, the JIT system can save needed resources.
4) Transportation – The choice of transportation carriers affects the pricing of products,
delivery performance, and condition of the goods when they arrive.
All of these will affect customer satisfaction. Five basic choices are:
a. Rail
b. Truck
c. Water
d. Pipeline
e. Air
The transportation mode selected depends on several criteria:
a) Speed. (door-to-door delivery time)
b) Dependability. (meeting schedules on time)
c) Capability.(ability to handle various products)
d) Availability.(number of geographic points served)
e) Cost. (per ton-mile)
Containerization puts goods in boxes or trailers that are easy to transfer between two
transportation modes. They are used in multimode systems commonly referred to as
Logistics 17
piggyback (rail and trucks), fishy back (water and trucks), trainship (water and rail), and
airteuck (air and truck).
SYPPLY CHAIN MANAGEMENT AND LOGISTICS
Overview
“Supply-chain management is a collaborative-based strategy to link cross- enterprise
business operations to achieve a shared vision of market opportunity,” says Bowersox,
who has researched and written extensively on the subject. “It is a comprehensive
arrangement that can span from raw-material sourcing to end-consumer purchase.” Now
as to why supply-chain management should matter to any company – The short, and not
necessarily over-simplified answer is that it exerts a powerful near- and long-term impact
on the things that really matter to an enterprise – profits, customers, market share to cite
some of the more prominent examples. Looked at another way, if you’not effectively
managing the supply-chain, you’re losing ground to those competitors who are acting
aggressively in this area.
Implementing supply chain management strategies is important for improving the
competitiveness of logistics service companies. The technique emphasizes cooperation
among the chain of parties responsible for logistics operations. Establishing a supply
chain management program involves forging links within the company and consolidating
these internal link with external business partners. The different technology tools needed
for the management program must also be accessed. Furthermore, implementers of
Logistics 18
supply-chain management always strive to achieve the overall goals and vision of the
program.
Supply Chain Management
Building a Supply-Chain
The process of capitalizing on this potential and initiating the design process begins
internally. Before an organization can design and implement a collaborative supply chain
that embraces the outside partners – the tier 1 and 2 suppliers, the contract manufacturers,
the logistics services the customers – it needs to get its own house in order. Put simply,
‘functional silos’ need to give way to seamless integration of people and processes.
“Functional integration must occur within the organization before integration can occur
throughout the entire supply chain,” says Richard H. Thompson, a partner in the Chicago
Logistics 19
Suppliers
Purchasing
Production
Distribution
Customers
Information Flow
Enhanced Customer ValueInformation-Based Tools
POS dala acquisitionEDI document transmissionJIT materials managementECR/OR replenishment
office of Ernst & Young LLP. Included in that integration effort should be all of the
logistics-related functions such as inbound and outbound transportation, distribution,
warehousing, and fleet management. Supply-management activities like sourcing, vendor
selection, and purchasing are critical elements, too. Manufacturing-related activities such
as production planning, scheduling, and packaging must be part of the integration effort
as well. And don’t forget information technology.
Throughout the internal design process, it’s wise to keep in mind who has the power in
the organization, says Bruce C. Arntzen, president of Global Supply Chain Associates in
Maynard, Mass. “In most companies,” Arntzen explains, “the power lies in
manufacturing or marketing. A lot of attempts by logistics professional to integrate the
supply chain cross-functionally hit a wall because they don’t have the support of these
key functional areas. The biggest challenge is getting these bigger, more powerful
departments to cooperate with you.”
Arntzen suggests a couple of ways to obtain the needed cooperation. One is for logistics
people to present a persuasive argument to these other departments as to why integrated
supply-chain management would benefit the company overall and their function in
particular. “An even better way,” he adds, “is to build a solid rapport with manufacturing
and marketing. In essence, position yourself as being part of their team.”
The internal walls invariably are the toughest to scale. Consultants who have worked on
the problem say that top managements must give their full and visible support to
dismantling the barriers. They can accelerate the process by linking measures and
rewards to overall supply-chain goals, rather than focusing narrowly on individual
functional performance. Money ever remains a powerful motivator.
Logistics 20
The next step in the design process is to integrate the internal organization with the
external partners – the suppliers, customers, and logistics-services providers that will
work with you up and down the pipeline. Forging partnerships does not come easy to
most organizations. The traditional business model is to look out for your own best
interests and let the other guy do the same. But being a partner means sharing…sharing
information about upcoming production plans, promotions, new-product introductions,
and even certain financial data.
That need to share is particularly important in the relationship between a company and its
logistics-services providers. Jumes P. Fields, vice president of business development at
Menlo Logistics, explains: “For the partnership between the customer and the logistics-
services provider to reach its full potential, customers must openly share accurate
information on their business, hteir customers, their suppliers, and any other relevant
information about the operating environment. This helps the service provider build a
supply-chain strategy that supports the business strategy.”
Partnershipping also means sharing the risks and rewards. Now, sharing the risks doesn’t
pose much of a problem for most companies. But sharing the rewards demands a leap of
faith that many companies still find difficult to make.
James E. Morehouse, vice president of A.T.Kearney, believes that enlisting partners in
the supply chain effectively creates a “partnership paradigm” that closely resembles a
good marriage. “It means that we are going to share common values,” Morehouse wrote
in a recent issue of Supply Chain Management Review. “We are going to intermix our
people and processes. We are going to openly share costs and other information. We are
going to conduct business not as combatants, but rather as partners who actually talk to
Logistics 21
one another.” For most companies, the Kearney consultant concludes, this represents
breakthrough thinking.
In More houses’ opinion, a winning supply chain incorporates a number of core
components. It embraces all of the partners in an overlapping manner, free from the rigid
gaps that traditionally have separated parties in the business transaction. Goods move
seamlessly from sources from sources to consumers. Information flows immediately and
openly up and down the chain. Activity in the funds conduit is triggered when the
consumer actually purchases the product
No discussion of supply-chain design can be complete without focusing on the
information-technology component. As Bowersox of Michigan State University has
pointed out, “Technology serves as the primary enabler to facilitate supply-chain-wide
integration while simultaneously allowing key business relationships to be conducted on
an exclusive enterprise-to-enterprise basis. Tending from advanced internet to more
traditional EDI and hardwired communication, such cross-enterprise technology linkage
provides the backbone of successful supply-chain strategy,”
Technology requirements- both current and future – need to be factored into the supply
chain design equation, According to AMR, a Boston-asked market-analysis firm that
specializes in supply-chain technology, options in the supply-chain space abound. By the
end of 1997, the supply-chain management software market alone had hit $2 billion in
revenue. And it’s projected to increase exponentially as the year 2000 approaches.
Available software now covers virtually all aspects of the supply-chain management
process, says AMR, enabling all of the participants to communicate mote effectively and
to make better-informed management decisions.
Logistics 22
Main categories of supply-chain management software include advanced planning
systems (APS), demand management and forecasting software, enterprise resource
planning applications with supply-chain functionality, warehouse management software
(WMS), transportation management systems (TMS), and electronic commerce, which
includes the internet, intranet, and EDI. The latest offering in this space, AMR repots, is
customer asset management (CAM) software, which helps companies attract and retain a
customer base.
Throughout the process of designing a supply-chain strategy, managers need to keep one
overarching consideration in mind: the company’s overall strategy and direction.
Logistics and supply-chain decision cannot be made that don’t support – or worse yet,
run counter to – the bread business objectives.
“The supply-chain strategy must be in synch with the business strategy, “insists Timothy
C. Brown, director of Andersen Consulting’s supply chain design grout. “You can’t make
decisions aimed at cutting transportation costs and paring down the number of
warehouses, for example, if the key business driver is not to cut costs, but rather to
enhance customer service.”
The supply-chain design should not proceed in a vacuum, Brown continues. It needs to
take full account of the company’s position with regard to assets, mergers, and growth
plans. “You don’t want to build a TajMahal of a warehouse if the business strategy is to
reduce the asset base and outsource warehousing because it is not a core competency.”
That supply-chain strategy developed in support of the business strategy will have to be
implemented – an activity even more challenging than the design itself. Veteran
management consultants recommend that the implementation process – like the design
Logistics 23
Itself – utilize cross-functional teams. When individuals feel that they have a proprietary
interest in making supply-chain management work, the experts say, they’re more
committed to affecting a positive outcome.
Importantly, as the strategy’s implementation proceeds, the supply-chain team must keep
management aware of the progress being made. As James Fields of Menlo Logistics
explains, “It’s important to be able to document improves, or ‘wines,’ in terms of what’s
important to the company. “This means drawing attention to specific benefits like better
returns, lower operating costs, or higher market share.
The longer-term payback of deigning and implementing a world-class supply chain can
be profound. In fact, it can lead to market leadership. One need only look at the supply
chain leaders like Wal-mart, Procter & Gamble, Xerox, and sun Microsystems for proof.
As for the near-term impact, how much can successful supply-chain management bring to
the bottom line? Well, it depends of course, on any number of competitive factors. But
according to Timothy brown of Andersen Consulting’s Supply chain Design Group, the
payback is coming a lot faster these days, thanks in large part to the new technology
available. And it can be quite substantial. “We know of cases, “Brown notes, “Where
supply-chain redesign has saved an organization close to $100 million/”
The Critical Link in a supply-chain
The success integrated supply chains within organizations lies in the logistics manager.
Since a supply chain approach I essentially a shift in focus to the customer, the logistics
department as that aspect of operation which deals more directly with customers should
lead supply-chain efforts. Specifically, integrated supply-chains require a focus on what
customers want and the best way to provide it. Logistics professionals should thus orient
Logistics 24
All other department on the re-emphasis on customers and be at the forefront of activities
toward supply-chain integration.
The quest for speed, value, efficiency, quality, and reliability has brought the world’s
business to the brink of the supply-chain revolution. To my mind, the only question is,
what looks everyone so long? After all, we’re not talking about rocket science. We’re
talking about a re-emphasis on the same basic tenet of business success that has existed
since the birth of commerce. When you get right down to it, a supply-chain approach to
business is simply a refocusing on what’s important, the customer.
As a logistics professional, you’ve no doubt been waiting quite some time for this day to
come. No aspect of a business’s operation deals more directly – or regularly – with its
customers than its logistics department. It’s only logical that as supply-chain initiatives
force a clearer focus on what the customers want and how best to deliver it, logistics
professionals will lead the charge.
You know this makes sense, but don’t expect everyone else in your company to see it.
For some of your colleagues, moving form a focus on spreadsheets to a focus on the
customer is a revolutionary change. It will be tempting to cast a cynical eye on these co-
workers as they burst onto the scene with a briefcase (or laptop pc) full of what they think
are original ideas. They’ll talk about heightened levels of customer service. They’ll talk
about using logistics operations to add value for customer. They’ll exclaim that the
company will be able to operate with virtually no inventory.
Be kind. Don’t burst their bubble. Just let them enjoy their revelation, even though it’s no
revelation to you. Don’t be sarcastic. Don’t tell them that this could have happened a long
time ago if the company had focused on growing business rather than cutting costs.
Logistics 25
Just smile, nod, and then get to work. As a key player in your company’s logistics
operations, you will assume the critical role in making integrated supply-chain initiatives
a success. The notion of integrated approaches within a company is fine, but without
logistics to drive and support that integration, it’s just not going to happen. Supply-chain
initiatives aren’t just an invitation to the party for logistics executives; they’re an
invitation to be the life of the party.
Teaming up for supply-chain success
Most carrier companies are developing supply-chain teams that would help and assist
them in terms of decision-making process within the organization. The members of the
teams are expected to communicate, coordinate and cooperate extensively to achieve
satisfactory business results. Top companies such as Nike, IBM, Wal-Mart, Proctor and
Gamble, Xerox and Gillette considered a supply-chain team as a indispensable part of
their business success.
When it comes to moving product to market, integrated teams are far more effective than
individuals. For logistics professionals, the days of rugged individualism are long gone…
or should be. No longer will the transportation department make a carrier-selection
decision without first coordinating with customer service. No more will the warehouse
supervisor implement a stock-location strategy independent of the production-planning
people. And never again will purchasing or sourcing decisions be affected without a
sound knowledge of how much and when that commodity will move upstream.
In place of this rugged individualism-so characteristic of the decision-making process
within the “silos” of most organizations – successful companies are developing supply-
chain teams. These teams cut across organizational boundaries, embracing all of the
Logistics 26
parties who participate in moving product to market. The best of these also extend
beyond the organization to include the external participants in the supply chain. The
members of these leading-edge teams communicate, coordinate, and cooperate
extensively.
When working at peak efficiency unfettered by the functional turf protection that inhibits
progress – supply- chain teams can achieve some remarkable business results. For proof,
consider market leaders such as Nike, IBM, Wal-Mart, Procter & Gamble, Xerox, and
Gillette. Each and every one of these companies can point to a supply-chain item as an
integral part of its overall business success.
Moving from a highly segmented functional approach to a cross-functional team
orientation can be a challenging task because of people’s natural resistance to change.
But as the industry leaders have demonstrated, its well worth the effort in terms of cost
reduction, operational efficiency, and customer satisfaction.
In tacking this assignment, one of the first questions companies ask is, who should be on
the team? According to one industry expert, certain core members always should be
represented, with additional members added depending on the business situation. “More
and more companies are working to develop a team-based approach to managing their
supply chains,” confirms David M. Bovet, a vice precedent with mercer management
consulting in Lexington, mass. “Yet industries and organizations vary so widely in terms
of their traditional practices, that it’s difficult to prescribe a single model for all
situations.”
Bovet and others who have helped companies build supply-chain teams do say, however,
that a number of key functions must be represented on any team. These include logistics
Logistics 27
(Inbound and outbound transportation, distribution, and warehousing); supply-
management functions such as sourcing, vendor-evaluation, and purchasing; and
manufacturing-related activities such as production planning, scheduling, and packaging.
Inventory management and customer service must be represented on the team, too. Most
successful teams also count information systems as a core member, underscoring the
notion that information technology is a key enabler for achieving the desired
communication, coordination, and cooperation.
Depending on the industry and the individual company, however, other members of the
organization should be included on the supply-chain team. In a heavily promotion-
oriented industry, for example, the sales and marketing people should be represented
R&D should be considered for inclusion in new-technology-intensive industries like
medical equipment or computers.
Yet while it’s important to have all relevant areas represented on the supply-chain team,
there’s a danger of getting too many people involved. “Be careful no to include too many
functional areas on the supply-chain team,” advises David G. Frentzel, a partner with
Northeast Logistics, a consulting company based in Sherborn, mass. “The problem is that
the ream begins to mirror the entire organization, which can shift the focus away from the
real supply-chain issues.”
In his work with clients, Frentzel has observed certain characteristics that lead to team
success. He’s also seen obstacles to team building that can derail a team effort unless
squarely addressed and overcome. To achieve any measure of success, the supply-chain
team-like any organization-must set specific goals and objectives. It must clearly
articulate what needs to be accomplished in key areas such as order –cycle time, fill rates,
Logistics 28
inventory turns, on-time delivery performance, and so forth. Are there major purchasing
or sourcing objectives to be met and what role will each of the team members play in
helping achieve them? How about plans to reduce the amount of paperwork transmitted
both within the organization and between the supply-chain partners?
Setting and achieving these kinds of objectives demands a strategy and implementation
plan. Performance measures also must be put in place. And the team needs a quantifiable
means of measuring progress against the supply-chain objectives set. The accompanying
sidebar offers a practical action plan for designing and implementing team strategy.
Developed by professors Robert M. Monczka and Robert J. Trent, this comprehensive
plan helps users cover all of the necessary bases. Though the potential risks. Applying a
cross functional team approach to streaming the flow of product to market represents a
radical change for most companies. Not surprisingly, a change of this magnitude usually
encounters resistance. In the typical organization, functional barriers have built up over
the years. These barriers made of brisk and not of straw, are hard to bring down.
The main reason why functional silos persevere, says consultant Frentzel, relates to the
rewards system. Specifically, managers traditionally have been measured and rewarded
on what they have achieved – be it cost cutting or savings realized – within their
department or functional area. The notion of sub-optimizing their numbers for some
larger goal is an unwelcome one.
“The first step in breaking down these barriers,” says Frentzel, “is for management
leadership to make people understand that they may have to make decisions that may not
be optimal for their particular functional area, but are advantageous from the stand-point
Logistics 29
of the company’s overall supply chain.” This process can be facilitated, he adds, by
linking objectives and incentives to overall supply-chain goals. (The sidebar included
here gives six specific recommendations for bringing down the organizational barriers.)
Everyone agrees on the need to assemble the right team and set the proper objectives and
implementation plan within the organization. But to realize the supply chain’s full
competitive and market potential, the experts say, companies have to do more. They need
to link their organization with external participants of the supply chain, crating an
extended team. These “partners” include suppliers, vendors, distributes and customers.
One of the most vocal proponents of the extended supply-chain concept is A.T Kearney
Vice president James E. Morehouse, who has spoken and written extensively on the
topic. “In the 21st century, we’re no longer going to have competition between
companies,” Morehouse writes in the fall 1997 issue of Supply chain Management
Review. “We are going to have a group of partners working together to serve the
consumer better. And this group will be trying to outdo the other group.”
Given the extended supply chain’s collaborative nature, it becomes crucial to pick your
partners with the greatest of care. You want companies that not only are tops in terms of
the product or service provided, but also have staying power. The partner relationship in
the extended supply chain should be viewed as a long-term arrangement, Morehouse
says, not unlike a marriage.
Importantly, the successful extended supply chain needs an information conduit that
connects that connects all of the participants. “Most companies have the requisite
technology in place to extend the enterprise,” Morehouse observes. “The problem is they
are not using it property.”
Logistics 30
Ideally, information that becomes available at the most critical point of the chain – that is,
when the consumer makes the purchase – should be immediately shared upstream with
all of the other participants. This means carries, distributors, manufactures, component
vendors, raw- materials suppliers and anyone else involved. Providing real-time visibility
over point-of-purchase information helps everyone manage more closely to actual market
demand, Morehouse says. And this, in turn, takes costly excess inventory out of the
pipeline.
Organizations that have successfully created a cross-functional supply chain- particularly
one that extends to the outside partners – consistently enjoy a competitive edge,
according to the authorities in this area. “ There is definitely a strong correlation between
integrated supply-chain management and business success,” concludes Bovet of Mercer
Management Consulting, “and related to the size of the company, either. Any
organization of any size can benefit.”
The Real Supply-Chain Test
The efficiency of logistics service companies in managing in managing the unstable
conditions of their supply-chain is important in attaining optimum supply chain
performance. Managing the chain should be preceded by applying the principles of the
operations excellence and should be followed by a planned reaction to the increase and
decline of demand. Executives should also identify the causes of preventable surges and
shortages of demand while crating flexible management solutions to resolve these trends.
Many companies have focused on enhancing their supply-chain performance though
“operations excellence.” They have been able to achieve efficient and effective
manufacturing by employing by employing a number of operational strategies, including
cellular
Logistics 31
operations; quick setup/changeover and just-in-time (JIT) principles; efficient
distribution operations that are thoughtfully designed and effectively managed; effective
buying, scheduling and management of transportation; and developing the best process
and technologies for demand planning and inventory management. Operations excellence
embraces considerations that are necessary – but are not sufficient–for achieving superior
supply-chain performance.
Although operations excellence is important, the real determinant of supply-chain
performance is how companies manage “surge and uncertainty” – that is, how they
respond to any unplanned rise and fall in demand. These situations generally arise from
circumstances outside of the supply-chain organization. Resolving them, therefore,
requires collaboration across the full management team.
The most splendidly designed and managed supply chain will perform poorly if surge and
uncertainty are not managed. That is because surge and uncertainty create unnecessary
(and costly) capacity requirements, unnecessary inventory, and unnecessarily complex
and therefore inefficient operations.
Some causes of unnecessary surge and uncertainty include:
Quarter-end, month-end, and year-end loading, which cause capacity constraints
and “peek” management issues at every point in the supply chain;
Poorly planned trade promotions;
Long planning or processing-cycle times;
Limited visibility into channel usage inventory levels;
Poorly designed forecasting and demand-planning process; and
Logistics 32
Poor cross-functional communication and collaboration.
These issues generally are beyond the control of logistics and supply-chain managers. To
achieve superior supply-chain performance, therefore, companies must establish cross-
functional management processes that allow their managers to address these broad-based
issues. Otherwise, their investments in building superior supply-chain capabilities will
not be fully exploited.
Efficiency in the supply-chain
If supply chain solutions and identified and properly implemented, companies’ overall
logistics costs can be reduced by more than 20% in many cases, according to john
McKay, a partner with ProAction LLC, a Chicago-based global consulting firm.
Too many top executives are still looking at downsizing and reducing labor expenses as a
means of cutting business costs rather than at more effective, long-term operational-based
supply chain solutions, claims McKay. “One of the unfortunate facts associated with
corporate downsizing is that top most manufacture companies represent 5-15% of the
overall cost of doing business, as opposed to the 50-75% of costs that relate to the
purchase of materials and distribution of finished goods. It is in these areas of operations
that senior executives should be looking to build long-term cost and service efficiencies
into their strategic business plans. Executives can find a quick fix by lying off employees,
but that’s all it is. The real, long-term cost reductions are achieved though improved
efficiencies in logistics and supply chin management,” says McKay.
He adds that in today’s complex, global business environment, often with extended
supply chains, the need for cross-functional understanding and communications of
Logistics 33
Strategic goals are critical to achieving customer-focused purchasing and distribution
solutions which provide competitive advantages.
“Functions such as distribution cannot operate in a vacuum. If true cost saving are to be
achieved, it is essential that all business functions – such as finance, marketing,
purchasing, logistics and top management – work together. There must be a though
understanding of company strategies and risk management by all functions within the
organization,” says McKay.
While cutting costs through increased long-term logistics solutions requires more in-
depth strategic planning than downsizing, the result of integrated supply chain
management can be significant, according to McKay.
“When we work with clients to help them define their best areas for cost-cutting and
increased productivity, we focus on purchasing and distribution,” he says. “Then we help
implement cross-functional agreements and alliances with third-party carries and
vendors. Improved efficiencies in logistics and visibility throughout the supply chain
typically result in reduced cycle times, improved quality, cost reductions and
improvements are achieved through a close study of overall supply chain needs,
beginning with the customer and extending back throughout the supply chain.
Transportation in the Supply-chain
Companies can realize significant cost savings in their supply chains by accommodating
transportation concerns which represent a critical part of business strategies and logistics
managements programs. Logistics programs should be enhanced to further improve
supply
Logistics 34
chains that influence manufacturing operations and inventory levels. Information
technology can be utilized to automate systems and to produce real-time data that
supports inventory management tasks. It can also be used to accommodate various
business processes designed to meet customer requirements from a logistics perspective.
Moreover, information technology can be utilized to meet shipping compliance standards,
reduce transportation costs and integrate pertinent business information.
“Transportation is one of the last areas in the supply chain where business is focusing on
reducing the cost of the goods,” says John Foster, transportation vice president for the
summit group, a Mishawaka Indiana-based systems integrator and developer of logistics
software. As a key developer in his company’s transportation management software,
foster has watched this age-old industry grow up before his eyes. Where once the
transportation process was seen as a lost cause – something that had to be done – it is
now viewed as an important business strategy. Today, in fact, when coupled with
business strategy warehousing, the distribution process commands respect under its
working title of “logistics management.”
Logistics management is a movement business can’t ignore. College business schools
now support departments - and even institutes – dedicated to training people in logistics
management. On the other end, we have all witnessed parcel carrier’s drive to maintain a
competitive edge, which has created phenomenal logistics networks in the name of
“getting it there on time.” Companies such as UPS and Federal Express have gone from
quoting an average delivery time of five days to having it to your door by 10:30 a.m. the
next day – whether your business is in Atlanta or Amsterdam.
Logistics 35
When U.S Department of Commerce reports that nearly 60% of all fortune 500
companies logistics costs are spent on transporting products, executives begin to realize
there is money to be saved in this area. The global marketplace can’t be overlooked for
its contribution to transportation’s new status, according to Philip Evers, Ph.D., an
assistant professor of logistics management at the University of Maryland in college
Park. “Transportation is more important than ever in the sense that firms’ supply chains
are becoming more and more global,” says Evers. “Thus it is more important to be able to
move product from overseas points to domestic points and vice versa.”
With total supply chain management, the manufacture is challenged to study and then
forecast the entire operation: who ordered what from where and when? Based on that,
what do you need to make, and when? And based on that, who do you need to buy from,
and when? Business must examine their logistics supply chain to answer those questions
accurately. Transportation is critical because it offers a variable- a window of time that is
built into manufacturing‘s link to the forecast of orders.
“And so, in this ‘90s practice of total supply chain management, transportation is now –
rather suddenly – a critical piece,” says Ducat.
For Evers, the working reality of total supply chain management is information
technology. “Information is a substitute for inventory,” he says. “The better the
information we have, the fewer inventories we need.” In today’s world, that necessary
information is achieved through automated systems and the real-time data that are
generated. Evers says that means firms are striving to manage their inventories through
automation – in other words, reducing their inventories by implementing information
technologies.
Logistics 36
From simply the transportation aspect alone, the pressure to have the right information at
the right time increases with every customer. As one industry veteran puts it, “There is
not much you can predict about transportation except for three things: it will be better,
faster, and cheaper.” In the current environment, shippers may revel in carrier service
options, information abundance, and reduced inventories, yet at the same time struggle to
meet carrier compliance standards and customer needs.
“The business process of meeting customer requirements from a logistics side has
become much more complex. As everyone’s critical piece of the supply chain,
transportation has become completely a customer service issue on the outbound side,”
Ducat says. When it comes to keeping inventories down, for example, if manufacturing
falters, logistics has to make it right.
With “lean logistics” (similar to just-in-time manufacturing), customers put pressure on
the vendor to have product available and get it to them when promised. Large firms have
added to the pressure by enforcing rules as to how, when, and with whom a supplier is to
ship.
From Fortune 500 companies to mom-and-pop operations, the process has gone beyond
manual handling. “With all the requirements order patterns, supply patterns, information
requirements, customer rules, export documentation, and bar coding a business may well
lose its competitive edge if it does not move toward some form of electronic data
interchange or information integration,” Ducat says.
While large companies have their own logistical puzzles to solve, automated industry
seems most insensitive to the small shipper. Naturally, smaller companies don’t have the
budgets or perhaps even the need for the more robust, full-function software packages,
Logistics37
not to mention the additional $10,000-plus needed for a radio frequency system device
and printer.
Evers emphasis that all roads leading to “lean logistics” follow the information
technology. Whether by in-house operations or by outsource vendors, automating the
transportation process cuts the costs, conquers shipping compliance rules, and meets
customer requirements.
Currently, for example, the major carriers offer rate terminals-stand-alone PC-based
terminals that give customers access to the carries’ shipping rates. These, however,
clearly restrict the advantage of weighing different carrier costs. Stand-alone terminals
also require manually transferring the day’s shipping data into the business system, a
labor expense businesses find more and more difficult to justify.
Major carriers are marking the trail with their drive toward information integration. “In
the future, we all need to be electronically connected,” says Teri Darnell, marketing
project manager for UPS.
In March, the worldwide carrier sent letters to customers using vendor-shipping systems
stating that, as of July 1, 1998, all new installations had to be connected electronically.
The move further emphasizes the industry’s conviction that integrated information saves
time and money for all parties involved.
The UPS OnLine Compatible vendor program assists all shippers in making the move
toward the more extensive automating software programs. These third-party vendors
provide UPS-certified shipping solutions that electronically connect with UPS by
providing access to all of UPS’ tracking services from the shipper’s PC. In addition to in
house integrating and automating benefits, shared features for shipper and carrier include
Logistics 38
shipments tracked with the shipper’s own reference numbers generated from its inventory
or billing system, elimination of the paper trial, streamlined shipping procedures, reduced
labor costs, and alternative billing options.
Today, almost all shippers accept electronic transmissions, which give businesses the
advantage of immediate information on the location of a package or shipment.
Furthermore, the demographic information gained from an automated system is the first
step in offsetting costs and gaining customer service prowess.
What would any growth industry be without the boon of a new service to sell? Third
party logistics provides – known as “3PLs” – are business that handles transportation
management functions for shippers. The business may turn over all or only selected
portions of the process. Typically 3PLs take the finished goods and complete the label
and manifestation process of shipping. They are responsible for the personnel, the
building, and, in most cases, the automating software.
“This industry has grown dramatically through the ‘90s,” says Evers, who speculates that
the growth rate will only continue. While many of the large carries now offer third-party
logistics management services, there is also a growing number of smaller independent
operations. In response to the growing industry, Mercer Management Consulting has
conducted an annual survey of third-party logistics practices since 1991. The 1997 survey
indicates that, after starting conservatively, fortune 500 users buy a wide variety of third
party logistics services. The logistics functions most frequently outsourced are shipment
consolidation, warehouse management/operations, logistics information systems, carrier
selection, and rate negotiation.
Logistics 39
The survey’s response from third-party logistics provider CEOs shows continued growth
rates for the industry of between 20 percent and 30 percent. The trend that began with
fortune 500 companies will continue to trickle down. “A lot of what has been done in the
way of 3PLs has been by these larger companies because it is a way to get around some
of the fixed costs of their operations,” says Evers.
“Yes, I see the use [of 3PLs] as probably most important for small companies that do not
have the transportation and shipping expertise.” If you outsource, do you loss control?
“Not necessarily,” says Ducat. “if you 3PL is good, it becomes a vendor to you. It is
critical, however, that your 3PL has the same service guidelines as your business.”
Furthermore, Ducat emphasizes the importance of the data to be maintained. If the data
are valuable to you – and they should be – integration between your business system and
the 3PL’s is essential.
Handing over transportation – and frequency, warehousing – functions to a third-party
provider can be very appealing to a shipper of any size, but the prospect of losing control
is daunting. According to the Mercer survey, “Reservations concerning the possible use
of third-party services continue to focus on uncertainties about the ability of the 3PL to
deliver the services at the agreed-upon price, loss of control issues, and uncertainties
about the third-party provider’s ability to meet service requirements.”
For many companies, the rig solution takes a little innovation. For example, one national
manufacture of retail goods has found a way to take advantage of third-party
transportation and warehousing services while retaining control of the all-important data
issue. Although the third-party’s distribution site and the manufacture’s head quarters are
in different states, the transportation software erases the geographic distance.
Logistics 40
From its headquarters, the manufacture manages the input of different customer and
carrier rules, rates, and requirements into the system. At the distribution end, the third
party executes the labeling, documenting, rating, and shipping functions of the system.
The end result is a jointly managed system in which the manufacturer maintains control
and integration with its systems while still outsourcing the cost of managing the facility.
“More and more this company will move the transportation function down to the
distribution site,” Ducat says. “Yet eventually what they really will have done is move
the control of the transportation function completely to the software. Ultimately, the
system itself, though joint rule creation, will manage distribution for them.”
As industry steels toward the millennium, transportation will continue to demand its right
of way within the supply chain. It is no surprise, for example, that the internet is going to
become an integral transmission pipe for transportation management. Carries already on
the internet with rate information and routing and delivery schedules have made it that
much easier for customers to reach them.
“There is no doubt that agility is going to be impotent in the future,” Evers said. “Firms
will need to be even more flexible to handle all sorts of customer demands, managing one
truckload or a thousand at a time.”
Ducat says that the vice precedent of distribution who spends time figuring out how to
get jobs done today will soon fall behind competitive counterparts who spend their days
figuring out how to do jobs better. “A business’ goal is to build its logic into its systems
and hardware so that the focus can be on improving, versus managing the mundane tasks
of everyday execution,” he says.
Logistics 41
With the right system in place – whether it is an in-house information integration system,
an outsourcing system, or a combination, or a combination – distribution personnel can
tackle questions they previously never had time for: how to be more productive, how to
save costs, and how to build leverage with both customers and carries. And keep in mind
that while the systems in place afford them the time to question, it is the information that
is generated that reveals the answers.
The IT-Enabled supply chain
Several features should be integrated in information technology-based logistics supply
chain program. The supply chain program should integrate an enterprise resource
planning software with finance, distribution and materials management features. It should
also support channel integration software that promotes electronic data interchange and
forecasting applications. Moreover, the logistics supply
Chain program should accommodate decision support software with manufacturing,
Network analysis and transportation scheduling capabilities.
IT developments over the past eight years have enabled companies to achieve a quantum
leap in their supply-chain performance. Those that do not have robust “IT- enabled
supply-chain” capability, by contrast, simply can not compete effectively in today’s
business environment. An IT-enabled supply chain requires the following elements:
Enterprise Resource Planning (ERP) software, which links functions such as
finance, sales distribution, materials management, and production planning in an
integrated way with a common database. ERP is particularly valuable for linking
global operations and providing a current and common view of a corporation’
operational
Logistics 42
status, such as current sales by customer or geographic area, inventory status, and so
forth.
Decision Support software, including supply-chain optimization and demand-
planning software. These programs, which include such capabilities as
forecasting, Distribution Resource Planning, manufacturing, scheduling, network
analysis, operations planning/optimization, and transportation scheduling, often
are very important for effective supply-chain management. These capabilities are
being integrated with ERP software as ERP vendors expand their software’s
functionality and conclude alliances and formal product-integration programs
with decision-support software developers. This convergence is one of the most
powerful developments affecting the potential of supply-chain management.
Manufacturing and Logistics Execution software, which manages shop-floor
control, costs, documents, warehouse-management systems, transportation, etc.
The integration of this software with the types of operating software mentioned
above is contributing to enhanced supply-chain performance. The emergence of
real-time inventory-development software, moreover, provides companies with
entirely new tools for logistics, management.
Channel Integration software, such as electronic data interchange (EDI) and new
approaches such as collaborative planning, forecasting, and replenishment
(CPFR) and other Internet-based application. The emergence of these software
packages is allowing companies to manage the extended supply chain more
effectively and efficiently.
Logistics43
To develop distinctive supply-chain capabilities, companies still will need to make the
most of their supply-chain infrastructure, operating processes, and organizational design
in addition to fully using IT support. Nevertheless, with advances in application software,
network linkages, and the ability to integrate more types of software, an IT-enabled
supply chain will be at the core of differentiated supply-chain strategies in the new e new
millennium.
Benefits of Improving Supply Chain Management
Supply chain management enables businesses to reduce costs related to the movement of
finished products from the production line to consumers. The product reaches the
consumers in the most efficient way possible through the coordination of activities
among suppliers, distributors, carriers and the customers. Studies of companies who
participated in supply chain management initiatives reveal that costs in inventory
management, transportation and warehousing are minimized. Furthermore, customer
satisfaction is enhanced through timely deliveries and accurate responses to custom
orders.
Supply-chain management is on everybody’s mind these days. Articles in the trade press
and business publications like Fortune are heralding it as the next source of strategic
competitive advantage. Leading authors such as re-engineering guru Michael Hammer
and retail-marketing maven Roger Blackwell are spotlighting the supply chain in their
latest work. At industry conferences, too, supply-chain topics have moved front and
center on the agenda.
Why the instance, widespread interest in this emerging management technique? The
answer is simple: Companies increasingly recognize the tremendous payoff potential in
Logistics 44
Successful supply – chain management. They read about Wal – mart’s leveraging of the
chain to achieve a dominant position in the retail market place. They hear of companies
like Dell computer reconfiguring the supply chain to respond almost immediately to
customized orders. They’re intrigued by the bold measures taken by M&M Mars to
virtually eliminate standing inventory from the pipeline.
The supply – chain payoff can come in many forms. It might be a reduction in transaction
costs through eliminating unnecessary steps in moving product to market. It could be
enhanced customer service that comes from closer coordination among sources and
vendors upstream – and carries, distributors, and customers downstream. Or maybe it is
the improved market share that flows from better customer service or lower costs.
In any case, successful supply–chain management brings compelling bottom–line
benefits. All you have to do is look at supply – chain leaders like Xerox, IBM, Chrysler,
Nabisco, Procter & Gamble and Becton – Dickinson, says David M. Bovet, a vice
president of Mercer Management Consulting. “There is definitely a strong correlation
between companies that are paying attention to the integrated supply – chain and business
success,” Boyer observes.
The research and consulting firm of Pittiglio Rabin Todd & McGrath (PRTM) has
attempted to quantify this correlation. Through its comprehensive integrated Supply
Chain bench marking study, PRTM found that best – practice supply –chain management
companies enjoyed a 45 – percent total supply – chain cost advantage over their median
competitors. Specifically, their supply – chain costs as a percentage of revenues were
anywhere from 3 to 7 percent less than the median depending on the industry.
Logistics 45
Though there’s general agreement that coordinating and integrating the flow of goods to
market makes eminent business sense, mast companies have a tough time assigning a
quantitative payback figure to this exercise and yet as any professional who has ever tried
to advance a project know, top management wants to here about the return expected from
the investment it is being asked to make. Put another way, it’s “Show me the money”.
Part of quantification challenge lies with the nature of the term itself. For one thing, far
too many executives still fail to grasp the basic components and processes – much less
the strategic potential–of successful supply – chain management. A common frame work
of understanding is, in fact, a prerequisite to the quantification process.
One of the best definitions of supply – chain management offered to date comes from
Bernard J. (Bud) LaLonde, Professor Emeritus of logistics at Ohio State University.
LaLonde defends supply – chain management as follows: The delivery of enhanced
customer and economic value through synchronized management of the flow of physical
goods and associated information from sourcing to consumption.
Within the organization the supply – chain embraces a wide range of functional areas.
These include logistics – related activities such as inbound and outbound transportation,
warehousing and inventory control. Sourcing, procurement and supply management fall
under the supply – chain umbrella, too. Forecasting production planning and scheduling
order processing r and customer service are all part of the process as well.
As the “from sousing to consumption” part of our definition suggests, though, achieving
the real potential of supply – chain management requires integration – not only of these
entities within the organization, but also of the external partners. The latter include the
Logistics 46
Suppliers, distributors, carriers, customers and even the ultimate consumers. All are
central players in what James E. Morehouse of A.T. Kearney calls the extended supply
chain. “The goal of the extended enterprise is to do a better job of serving the ultimate
consumer” Morehouse explains. Superior service, he continuous leads to increased
market share. Increased share, in turn, brings with it competitive advantages such as
lower warehousing and transportation costs, reduced inventory levels less waste and
lower transaction costs.
The customer is the key to both quantifying and communication the supply chains value
confirms Shrawan Singh, wise precedent of integrated supply – chain management at
Xerox. “If you can start measuring customer satisfaction associated with what a supply
chain can do for a customer and also link customer satisfaction in terms of profit or
revenue growth,” Singh explains “then you can attach customer values to P&L and to the
balance sheet.”
Given the broad scope of supply chain management activities – and particularly
considering the extensive integration of outside partners involved – quantification of the
pay back may not be easy. “This is really one of the biggest challenges facing supply –
chain professionals today,” says Peter J. Metz, deputy director of the Center for
Transportation Studies at the Massachusetts Institute of Technology. “And yet that need
this kind of quantification to get management to invest in the development of supply –
chain resources.”
Based of his experience with companies participating in MIT’s Integrated Supply chain
management program, Metz has found that the most commonly reported bottom – line
benefits sender on reduced costs in such areas as inventory management, transportation.
Logistics 47
And warehousing, and packaging; improved service through techniques like time – based
delivery and make – to – order; and enhanced revenues, which result from such supply-
chain–related achievements as higher product availability and more customized products.
The companies studied by Metz have recorded a number of impressive supply chain
accomplishments, including:
A 50-percent inventory reduction.
A 40-percent increase in on – time deliveries.
A 27-percent decrease in cumulative cycle time.
A doubling of inventory turns coupled with a nine-fold reduction in out–of stock
rates.
A 17-percent revenue increase.
On a broader scale, research conducted by Mercer Management Consulting Reveals that
organizations with the best supply chain typically excel in certain pivotal performance
areas. Specifically, they outperform their counterparts along such key metrics as reducing
operating codes, improving asset productivity, and compressing order – cycle time. In a
separate study Mercer found that close to half of all senior executives survived had
specific supply chain improvement projects among their top ten corporate initiatives.
This is a resounding affirmation at the highest levels of supply chain management’s
competitive potential.
A study by the management – consulting firm of A.T Kearney has come at the supply
chain pay back from another angle – the costs of not paying careful attention to the
supply chain process. The Kearney consultancy found that supply chain inefficiencies
could waste as much as 25 percent of company’s operating costs. Thus assuming even a
Logistics 48
Relatively low profit margin of 3to4 percent, a 5-percent reduction in supply-chain waste
could double a company’s profitability.
Finally, the PRTM study cited earlier documented the powerful advantages of supply-
chain management across a range of critical measures. The leading companies, for
example, enjoyed a cash-to-order cycle time that was fully one-half of the median
companies’. Similarly, their inventory days of supply turned out to be 50 percent less
than the median. The best-in-class companies, moreover, met their promised delivery
dates 17 percent more often than the rest of the pack.
These are some of the big-picture numbers. Most companies, though, find it more
meaningful to focus on the payback potential of specific activities within the total supply-
chain process. The following examples illustrate the kinds of benefits that can be
realized. Individually, these improvements can bring important cost savings and service
enhancements, collectively; they can lead to dramatic breakthroughs in profitability and
market share.
Distribution network optimization. Optimizing the distribution network- that is
determining the best location for each facility, setting the proper system
configuration, and selecting the right carries–brings immediate cost advantages of
20 to 30%. That’s the figure determined by IBM’s Wholesale Distribution
Industry Segment, based on consulting engagements in a wide range of industries.
“This typically breaks down into transportation savings of 15 to 25 present and
improvements in inventory- carrying cost of 10 to 15 percent, “says Mark
Wheeler, national solutions manager for the IBM consulting unit.
Logistics 49
Shipment consolidation. A proven, though often overlooked, supply-chain lever
lies in shipment consolidation. Nabisco offers an instructive example in this
regard. For one retail customer, the company had been delivering product from
multiple plants via six different LTL deliveries. Through the use of a third-party
logistics provider, it was able to consolidate these multi-vendor loads into two
truckloads. By strategically consolidating the shipments, reports Rick D. Blasgen,
senior director of product supply, Nabisco cut its transportation costs by half. On
top of that, it reduced inventory levels, increased inventory turns, cut lead-time,
improved on-time delivery, and enchased case-fill rates.
Cross-docking. Another supply-chain technique with proven payback potential is
cross docking. This is the practice of receiving and processing goods for
reshipping in the shortest time possible and with minimum handling and no
storage. According to Maurice Trebuchon of coopers & Lybrand’s SysteCon
division, cross docking can yield savings of 25% or more over conventional
warehousing. Speaking at this year’s annual CLM meeting, Trebuchon cited one
manufacture that used cross docking to achieve a net savings of $0.84 per ton of
fright processed. The savings came from the elimination of costs related to put
away and picking and storage.
Supplier management. Research from McKinsey & Co. demonstrates the
substantial improvements possible through aggressive supply management. An
article by McKinsey consultants in the winter 1998 issue of supply chain
management review mentions a client in the automotive industry that had
successfully integrated vendors into its product-development process. On one
particular team, the integration paid dividends in triplicate: the parts count
dropped by 30 percent, the number of
Logistics 50
assembly steps and material specifications was reduced by half, and development
time shrank from years to months.
Supplier integration. The abundant advantages of supplier integration were again
evident in a two-year study conducted by the Global Procurement and Supply
Chain initiative at Michigan State University. Drawing on responses received
from around the globe, the study showed that companies that involved suppliers
earlier on in the product-design and -development process consistently
outperformed those that did not. This was true across a range of supply-
management metrics. The comparative improvement in purchased material costs
alone was 15 percent.
The examples given above merely illustrate the kinds of competitive advantages that can
be captured through aggressive supply-chain management. In actually, opportunities for
cost savings and enhanced service abound at all points in the chain-from initial sourcing
all the way to the point-of-sale business transaction.
For those companies that act quickly and decisively to capitalize on supply-chain
opportunities, the long-term, bottom-line benefits are there for the taking. Just look at the
acknowledged supply-chain leaders-from Wal-Mart on down.
As for those organizations that choose the business-as-usual approach to moving goods to
market…well, OK. But keep in mind this admonition from Damon Runyon: the race does
not always go to swiftest or the strongest, but that’s the way to bet.
Logistics 51
LOGISTICS AND THE INTERNET
Overview
The Internet. Only a few short years ago, the word was part of the argot of academic and
government specialists. Now, it is the most talked-about application of technology since
Alexander Graham Bell made the first phone call to Mr. Watson. It is touted as the
shopping mall of the future, something that will change the way that consumers and
corporations alike do business.
Widespread access to the internet, largely via the World Wide Web – a graphical
interface that makes the internet user friendly- is having a profound effect on the way
goods and services are sold worldwide. But exactly what will those effects be? What does
it mean for logistics managers? Is the internet ready for prime time? Is it really the
pathway to commerce? All that still is largely guesswork.
Logistics managers increasingly recognize the impact that the internet will have on
business in the next few years. However, logistics professionals are bound to encounter
unfamiliar concepts and catch phrases as they join the information superhighway. These
buzzwords include ASC X12 or Accredited Standards committee X12, commerce server,
electronic commerce, electronic data interchange, MIME or Multipurpose Internet Mail
Extensions, the RSA or Rivest-Shmir-Adleman cryptography method, transaction set
and value-added network.
Sorting the buzzwords from the balderdash remains a difficult task. Let’s take a look at
those concepts and catch phrases that will surface time and time again as you make
decisions about your electronic future.
Logistics 52
ASC X12: Accredited standards committee X12 is responsible for developing the most
common set of electronic data interchange (EDI) standards in the United States. Its
administrative arm is data interchange standards association Inc. A standard called
Tradacoms is common in Europe. Both will likely be blended into EDI-FACT (Electronic
Data Interchange For Administration commerce and transport), a worldwide EDI
standard championed by the international standards organization.
Commerce server: A transaction-capable network server. Often integrated with a regular
web page and set up to interface with other business applications to verify a consumer’s
credit-card information or query and update databases.
Electronic commerce: A very broad term. It’s when one company’s computer conducts a
business transaction with another company’s computer. But for logistics professional EC
can include everything from collecting data via barcode scanners to tracking shipments
via the web.
Electronic Data interchange: The technology that makes electronic commerce possible.
It features standardized transaction sets that feed information to purchase orders, shipping
documents, and so forth. EDI software translates data extracted from a database into a
standard format that can be transmitted by communications software. Some businesses
have been slow to adopt EDI because the transaction sets don’t fit their current business
process.
MIME: Who says electronic commerce has in to involves database and Web interfaces?
Multipurpose internet main extensions allow binary files to be sent over the internet. You
can attach shipping manifests and purchase orders to e-mail messages. Your system must
support SMTP, the internet protocol governing electronic mail transmissions.
Logistics 53
RSA: This is the Rivest-Shmir-Adleman highly secure cryptography method developed
by RSA data security Inc. It’s built into many commerce servers. RSA uses a two-part
key. The owner keeps the private key. The public key is available to others. The public
key is used to encrypt and send messages to you that only you can open with your private
key. Some people use RSA to crate a simple digital signature that travels with a
message. The sender’s public key is used to authenticate the signature.
Transaction set: In simple terms, it’s a collection of transactions in a standardized format.
Your W-2 tax form is a transaction set with fields that represent your name, address,
income, etc. Any field can be updated separately, but information is usually transmitted
as a full set.
Value-added network : In general, it’s a data-switching network that assists with other
functions that a business needs, from translating data to fit specific transaction sets to
storing and forwarding business data at set times.
Electronic commerce and Logistics
The emergence of electronic commerce is expected to affect business in general and
logistics activities in particular. It will facilitate a direct connection to consumers and
enable companies to bypass channel partners, such as wholesalers and retailers, to create
a new cost structure. As for logistics, electronic commerce is anticipated to significantly
alter forecasting, order management and inventory planning. These changes should
compel logistics managers to learn about electronic commerce.
We are seeing the beginnings of a revelation in the marketplace, brought on by the rapid
evolution of electronic commerce or “e Commerce.” The rapid development and adoption
of the internet as a marketing tool over the past two years have brought the concept of
Logistics 54
electronic commerce to life. The internet has created a new marketing channel that will
have profound implications for how companies do business – and for their logistics
activities.
The “e commerce” revolution has the potential to significantly change how companies
operate. For example, e commerce will provide a direct link to customers, allowing
companies to mine a wealth of information about their customers and then target their
marketing efforts based on the information they gather.
In addition, e commerce will create opportunities for “disintermediation” in all sectors of
industry. That is because it will create not only direct access to customers but also a cost
structure that may make it feasible to bypass channel partners (such as wholesalers and
retailers) – thereby changing whole industry structures. In some cases, e commerce will
eliminate barriers to entry and allow new entrants and smaller companies to reach
customers worldwide without building a global sales and distribution system.
E commerce certainly will affect logistics. It has the potential to radically change
forecasting, order management, and inventory planning. We see evidence of such change
already: Wal-Mart, for example, is trying to create an industry standard by using the
internet to share sales and channel-inventory information with its suppliers. In addition,
the added flexibility offered by e commerce linkages will promote more make-to-order,
configure-to-order, and postponement strategies. Finally, as disintermediation becomes
more common, shippers will face new transportation requirements that generally will
mean shipping smaller, more frequent orders.
Logistics managers should become familiar with the internet and begin to explore and
think creatively about e commerce applications. They will be here sooner than you think.
Logistics 55
“Virtual Retailing” and Logistics
The concept of consumer direct and virtual relating is becoming poplar in the world.
The two major requirements of the concept are order-management interface and
merchandising systems and efficient delivery mechanisms. There are three possible
approaches to developing efficient delivery mechanisms. These include the peapod
approach where ordered items are assembled then delivered; the value-added pickup
point approach which entails a designation of distribution warehouses were the item can
be picked up for delivery and the in-home delivery system which entails the assembly of
orders for delivery to customers who have facilities to store them.
More and more consumers are ordering well on-line – a development that has profound
implications for logistics. Technology is beginning to penetrate everyone’s life. One only
is people being exposed to technology at an earlier age, but they also are becoming
more comfortable using technology. One need only visit a bank to see tellers sitting
unoccupied while long lines queue up at the ATM machines to realize that technology is
rapidly being accepted by people in all walks of life. In addition, more and more homes
have (and are using) personal computers. As a result, on-line services are growing at
astronomical rates.
One trend that is motivated by these two forces – known as “consumer direct” or
“virtual retailing” – is beginning to take hold. In a nutshell, it involves consumers’
selecting and ordering goods on-line, rather than by visiting a retail establishment. The
goods then are either delivered direct to the consumer’s home or are made available for
pickup. Though consumer direct unlikely to ever dominate the retail scene, most
Logistics 56
analysts believe it will be a significant (and profitable) industry segment. Some estimates
show it gaining as much as 15 to 20% of grocery sales in the next seven years.
Consumer directs requires two key capabilities. The first is a virtual shopping and order-
management interface. This can be as simple as a catalog and a fax or as sophisticated as
a “virtual” supermarket with aisles displayed on a personal computer.
Shoppers can “walk” the aisles, select merchandise, obtain nutrition or other information
about the product, and place and pay for their order on-line. At companies like peapod in
Chicago, thousands of customers are using such computerized ordering and product-
display interfaces today.
The second capability that is required for consumer direct service is an efficient delivery
mechanism. There are several approaches that are considered feasible:
The peapod approach, where a third party walks the supermarket aisles,
assembling the order and then delivering it directly to a consumer’s home.
The” value-added pickup point” approach, in which a distributor establishes an
item picking capability in its warehouse, picks an order, and then delivers it to a
pickup point (such as a gas station ), where consumers can drive in and pick up
the groceries on their way home from work.
The “in-home delivery” approach used by streamline of Boston, which assembles
grocery orders in its distribution centered for delivery to consumers who have a
tree-temperature unit (shelves, refrigerator, and freezer) at home. Streamline now
has broadened its services to include laundry, film processing, and video rentals.
Although the efficiency and desirability of consumer direct still must be proved, this
development will have profound implication for logistics managers. It will be their
Logistics 57
responsibility to understand emerging consumer preferences and needs, and then to
develop new channels as well as new handling and delivery capabilities geared toward
serving the individual consumer.
Internet Retailing
Logistics plays a critical role in the success of internet retailing. As electronic shopping
continues to proliferate, the pressure for retailers to be able to deliver products right at the
customer’s doorstep has intensified. Carries and third party logistics providers that can
handle the order fulfillment an distribution of internet-marketed products fill this need.
Among carries, federal express has taken the lead with its service called business link,
which involves on-line ordering and worldwide delivery.
Logistics just might turn out to be the crucial element that separates the successful
internet retailer form all the others. Consumers surfing the internet’s World Wide Web
now have dozens of places to spend money. Retailers have opened virtual storefronts to
peddle ties, books, perfume, and computers – almost anything found in the shops at the
local brick-and-mortar mail.
Although information-technology providers have worked out most of the bugs in internet
commerce, the question remains: Have retailers mastered the logistics of delivering
products direct to the costumer’s doorstep? After all, consumers accustomed to ordering
products with the click of a mouse will expect instant delivery of their purchases, intact
and damage-free. “It’s totally against the culture of the internet to wait six days for
delivery,” says Michael James, vice president of marketing for FedEx’s Logistics,
electronic commerce and catalog division.
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Electronic shopping provides a new world of opportunities for carries and third-party
logistics companies that can handle the fulfillment and distribution for internet sales. At
the moment, though only FedEx has announced definite plans for seizing the ‘Net.
“Logistics is the most neglected element of the core services in the [on-line retail] value
chain. The front end had gotten all hype,” says Benn konsynski, a professor at Atlanta’s
Emory University who studies electronic commerce.
Despite the rush to build electronic storefronts, web retailing can only be described as in
its infancy. Konsynski says sales over the internet in 1995 amounted to less than a billion
dollars, and most of those transactions involved computer hardware and software. Still,
the promise it there. “It will rapidly move forward,” he says. “The mechanisms of the
market are just moving into place that builds trust in all dimensions of commerce–the on-
line shopping, payment and order fulfillment, and after-the-sale service systems.”
One of the first companies to seize the ‘net in a big way is Wal-mart stores Inc. of
Bentonville, Ark. The retail giant developed its own internet retail software and opened a
cyber store on the web last July. Products ordered online are shipped either form a Wal-
Mart holding warehouse located in Cearci, Ark, or shipped direct from the manufacture’s
distribution center. All orders are sent to U.S buyers via UPS 2-day ground delivery, says
Wal-Mart spokeswoman Stacey Webb. At press time, the nation’s largest retailer was
looking into ways of shipping orders overseas.
But on-line retailing isn’t the sole province of retail giants like Wal-Mart. The nation’s
biggest software companies are spending millions to convince mom-and-pop merchants
of the great opportunity awaiting those who invest in the requisite computer hardware
and software.
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Microsoft corp. of Redmond, Wash., for instance, bought a California company called
Eshop, which had developed software for internet retailing. Microsoft used Eshop’s code
base to develop Microsoft Merchant Server, which it hopes to market to internet access
providers, companies that sell individual and businesses a gateway to the information
super-highway. The access providers could, in turn, sell their own value-added services,
such as creating and managing web store sites for merchants in their service areas.
Microsoft’s archrival, Netscape communications corp. based in Mountain View, calif,
also sells software that helps business set up “virtual malls.” A Netscape representative
said about 300 merchants are using Netscape’s software to sell products over the internet.
One of those merchants is J.C Penney. The Dallas-based chain and catalog retailer used
Netscape software to provide secure on-line transactions and Netscape software tools to
help design an electronic store site established last year.
J.C Penny officials report that web retailing didn’t pose a distribution problem because
they employ the same system used for their catalog sales operation. Six distribution
centers across the country handle fulfillment for web orders just as they do for mail
orders. Once an order is received, the merchandise is shipped to the store closest to the
customer for pickup or sent via UPS. “The fulfillment is the easy part, quite frankly,”
says Marisha Konkonwski, Penney’s electronic retailing manager. She adds that linking
databases on existing computer systems to the web retail site posed more challenges to
her company than distribution has.
Other companies such as IBM in White Plains, N.Y., and AT&T Easy Commerce
services in Parsippany, NJ, provide hosting services that help merchants peddle products
on the web. At press time, AT&T had just announced its “Secure buy service” for
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businesses internet retailing. The service allows merchant to accept and track orders and
track orders and process credit-card purchases. However, AT&T is leaving it to the
individual merchants to arrange for product delivery.
IBM, for its part, has established an on-line shopping mall; “world avenue,” on which
retailers can lease “cyberspace” to set up shop. IBM’s world Avenue mall takes
advantage of the new standard for on-line payments known as secure Electronic
transactions, developed by IBM in cooperation with other financial-service and
technology companies. Although IBM will provide participating merchants with special
software to gather marketing statistics on online customers, it too is letting the stores
handle their own distribution for the time being.
Take Robert Waxman camera as a case in point. The Denver, Colo.-based company sells
cameras and phographic supplies through a cyber store set up last summer on IBM’s
world avenue mall. Waxman Camera processes orders on some 7,000 SKUs within 24
hours of receipt and ships products from its Denver Warehouse. It offers three levels of
shipping service. Most goods distributed in the United States are sent via UPS and
delivered in two days. For those who can’t wait, Waxman camera also offers next-day
delivery via FedEx at an additional charge. DHL handles international orders.
Although several technology providers can help merchants develop web sites that accept
orders on line, only one company at the moment offers ‘Net retailing services plus
distribution. FedEx has started a service called Business link that integrates on-line
ordering with worldwide delivery. Launched in October 1996, business link gives
merchants software to create their own on-line catalogs housed on the express carrier’s
server.
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FedEx itself actually developed the publishing tool that creates the electronic catalog,
although the carrier does use a Netscape server in order to take advantage of Netscape’s
on-line security features.
When a consumer places an order on line, FedEx electronically transmits it to a second
server at the merchant’s location for fulfillment. FedEx then sends a driver to pick up the
merchandise, put the item in the carrier’s distribution system, and delivers it to the
customer’s door. “We facilitate the electronic ordering on the front end,” says Janes.
“And we facilitate the shipping and link everything to the FedEx tracking system. A
merchant then can have real-time access [to order information].”
To handle catalog changes, FedEx established a non-internet direct line between the
merchant’s server and the FedEx business Link server. That way, a merchant has access
to the catalog to update items sold. “He can run specials or take inventory off,” says
Janes.
Insight Direct, which sells computer products and peripherals like monitors and printers,
tested a prototype of Business link last year. As of December, the Tempe, Ariz.based
mail-order Company was processing about 1,000 orders a month via business link.
Insight directs offers some 24,000 SKUs form its web store. It ships orders either from its
Tempe warehouse or direct forms its supplier’s facilities. “We transmit [orders] to our
vendors via EDI so we don’t have to handle them,” says Denny Chit tick, Insight Directs
senior vice president of information systems. “But this process is transparent to our
customers.”
Although no other carrier has yet to offer the same combination of Web-store creation
and delivery services that FedEx does, it’s safe to say that many transportation providers
Logistics 62
Are keeping a close eye on the developments in internet retailing. “Most carriers are
looking at ways to deliver products sold over the ‘Net,” says Art Mesher, a research
director at the Garther Group in Stamford, Conn. “FedEx is offering to build web sites.
FedEx is trying to be proactive in bringing its customer base into selling products over
the internet.”
FedEx rival UPS says it has plans for a much larger electronic commerce strategy.
Officials say they are looking at a broader supply-chain strategy that involves the
business transactions between suppliers that precede the consumer sale. Company
spokeswoman Jennifer Jiles says UPS is reviewing plans to become active in the total
electronic commerce supply chain, not just the tail end, where the goods are handed off to
the consumer. “We’re probably one of the few [companies] that has the infrastructure to
deliver to every address in the United States and to some 200 countries, both on the
ground and in the air,” says Jiles. “And we’ll continue to be a major player in terms of
the actual delivery of goods and service. [But] we’re looking to be involved in the total
supply chain rather than focusing on the retailer-to-consumer [segment].”
International small-package carrier DHL worldwide Express in Redwood City, Calif.,
still is formulating its strategy for supporting internet retailing. Alan Boehme, DHL’s
director of customer access and logistics marketing, worries that a role similar to FedEx’s
could damage existing business relationships, especially if a carrier helps a manufacturer
or retailer engage in internet selling that “disinter mediates” or eliminates the
middleman’s role. “We’re trying to work through this issue,” says Boehme. “What
happens to those people in the middle? You’re creating a new channel. If I was person in
the middle and I
Logistics 63
saw a shipping company doing this to me; would I want to do business with them?” He
adds that his company expects to announce its strategy early this year.
Of course, disintermediation will only become a concern if American consumers embrace
on-line shopping. Before that happens, retailers will have to convince shoppers to
purchase merchandise at a virtual store rather than the one at the mall.
How important then will the ability to handle home delivery be to the success of internet
retailing? Some, like John Browne, Microsoft’s Internet commerce product manager,
don’t believe that logistics services will offer the defining difference for retailers on the
‘Net. “Shipping is hardly the acid test of any retailing problem,” he argues. “There are a
lot of shipping vendors available. Basically, from a logistics standpoint, shipping is fairly
straightforward. It’s the same as any cataloger. There are [tough] problems [with] selling
on the web, but shipping is not one of them.”
But other industry experts take the opposite view. They contend that building electronic
storefronts is the easy aspect of internet retailing, whereas prompt, accurate order
fulfillment and fast delivery are the most difficult part. “The logistics challenge is the
higher velocity and higher volume with its [small] order-size lots,” says Konsynski of
Emory University.
Mesher, for one, argues that logistics will quickly become the mechanism that
distinguishes successful web retailer’s form the also-rans. “It’s not hard to build a web
page and put your catalog out there. There’s nothing strategic about it,” he says. “What
does matter is service, training, warranty, and installation… and it will only accelerate
how quickly firms [realize the] need to use logistics as a differentiation.”
Logistics 64
In fact, Konsynski believes that the big winners in web retailing will be the companies
that rethink their logistics structures to offer new services and products that go beyond
what’s found in the electronic catalogs now being posted on the internet. “The change in
logistics opportunity alters the whole spectrum of services [offered on the ‘Net],” he says.
“That’s why big carries still have to be a critical part of this future.”
Clearly, cyber stores have the potential to crate a huge new sales channel in the 21 st
century. Although retailers will look to their mail-order experience for insight into how to
manage home delivery, distribution will play a role as crucial as the information
technology in getting customers to try and stick with on-line shopping. Although not as
sexy as the software, the home-delivery aspect will surely provide new opportunities for
transportation and third-party logistics providers, especially if web retailers discover that
customer service – not glitz – matters most to consumers.
The Web and Logistics Software
It may be easy to cross internationally barriers to buy something online, but the web
hasn’t made delivering the package any easier. So software that can help automate all the
intricacies of shipping products overseas is quickly becoming a must-have item for the
big package delivery companies. Many big manufactures are already well-versed in the
completive of selling and shipping overseas, said Michael Comstock, senior vice
president of e-commerce and planning at DHL worldwide express in redwood city, calif.
But e-commerce” opens this up to more and more people,” he said. “You’re dealing in
many cases with buyers and sellers that are unsophisticated.”
Now, DHL and rivals FDX corp. and United Parcel Service of America Inc. are rushing
to evaluate packaged logistics applications that were designed with international trade in
Logistics 65
mind. Calculating the cost of tariffs and duties that will be owed on shipments is one
priority for the package carries. Automating the process of vetting foreign buyers for
compliance with export regulations is also high on their wish lists. Those capabilities are
becoming competitive necessities, said Risk Sponholz, global e-commerce product
manager at Atlanta-based UPS.
But things are just starting to take shape. For example, FDK – the Memphis-based parent
company of federal Express Corp. and several other packages carries – has invested in
Vastera Inc. and is expected to use the Dulles, Va., vendor’s software to do export
compliance checks. Stacie McCullough, an analyst at Forrester Research Inc. in
Cambridge, Mass., said she expects that soon FDX will announce specific plans for
helping customers with global logistics. But FDX officials wouldn’t comment on that last
week.
UPS plans to start automating compliance checks by October, using software from
NextLinx Corp. in Silver spring, Md. But at first, that will involve only the company’s
own customer’s brokers at its shipment hub in Louisville, KY. UPS has also begun to
evaluate the ability of NextLinx, Vastera and New York-based Syntra Inc. to calculate
overseas delivery costs.
DHL is examining the same software for potential use internally and at customer sites.
Calculating shipment cost is its top priority, but export compliance issues checks and
calculating the full cost of foreign shipments is no easy matter because government
regulations and tariff schedules from around the world need to be tracked and updated
every day, said John Fontanella, an analyst at AMR Research Inc. in Boston.
Logistics 66
The Web as a Gateway to Logistics Data
A Web-based logistics system developed by the U.S Transportations Command has only
been in operation for a year, but it has already changed the way the Defense Department
tracks and moves troops, equipment and supplies around the world
The Global transportation Network, headquartered at Scott Air Force Base, I11.
Integrates command and control, transportation and logistics data so commanders can
track the identity, status and location of cargo and passengers. The network also gives
commanders airlift, air refueling and sealift schedules to coordinate the movement of
personnel and materiel.
GTN collects data from more than a dozen transportation systems, run by the services
and Defense Logistics Agency and combines it into a single 60G database that supports
5,000 users worldwide.
GTN will link to more than 20 commercial Data system, including Federal Express corp.
of Memphis, Tenn., and CSX corp. of Richmond, Va., and other companies that ship
cargo for DOD. Commercial carriers provide more than half of DOD’s strategic airlift
capability.
“It is a short leap from seeing what’s coming and when it will arrive to using this
knowledge to be ready to receive it, plan for its onward movement and integration into
the force,” said Lt. Gen . Roger Thompson, USTRANSCOM deputy commander. He
described the system improvements at the recent Military Traffic Management Command
Commanders’ Conference in San Antonio.
Logistics 67
GTN is so efficient, Thompson said, “Trucks and buses arrive on ramp as plane hits the
runway ... and unit equipment drivers arrive on the pier as the rolling stock comes down
ship ramps.”
GTN users can run simple queries of the database anywhere in the world through a secure
Web site that provides up-to-the-minute data about shipment locations and delivery
times. The system currently processes more than 1 million transactions daily, with a goal
of 3 million transactions per day by 2000. The system can also prioritize urgently needed
material and, if necessary, divert or reroute military supplies to the appropriate
destinations – the cornerstone of just-in-time logistics.
GTN reduces the problem of over- and under-stockpiling inventories, which occurred in
1991 during the Gulf War. To prevent such inefficiencies, the system identifies
transportation bottlenecks before they lead to supply shortages or poor use of recourses.
“The importance of information management is growing,” Thompson said. “We sense
that we are transitioning from pushing GTN to having awakening customers pulling it to
move faster. The pace of that shift is accelerating.”
“GTN was envisioned as a command and control system for us, and an in-transit
visibility system for the customer,” he said. “But we are seeing—it really bloomed during
the last surge to the Gulf—a growing realization that GTN is a command and control tool
for the customer as well.”
Lt. Gen. Tommy Franks, the joint Task Force commander in Kuwait, spoke highly of
GTN and the in-transit visibility of personnel, materiel and military forces it provided
during the buildup of forces in the Persian Gulf as part of Operation Desert Thunder
earlier this year, Thompson said.
Logistics 68
GTN is an invaluable source of information for commanders who plan, direct and control
logistics operations, Thompson said.
LOGISTICS DRIVEN CUSTOMER SERVICE
Logistics plays a significant role in meeting customer demands. Once an order has been
placed y a customer, logistics personnel strive to fulfilled it. Companies that have
successfully link their logistics and customer service programs include Chicago, IL-based
Magid Glove and Safety, North Olmsted, OH-based Moen Incorporated, and wheeling,
IL-based Orval Kent Food Company Inc.
If you don’t have a first-rate logistics operation, you’re missing a huge customer-service
opportunity. Every year, the logistics industry’s most prominent educational conference
includes more than a dozen seminars and workshops devoted to customer service. If that
strikes you as odd, it shouldn’t. Logistics and customer service are really two sides of the
same coin. In many companies, the two are so entwined that customer service reports to a
vice-president of logistics. In others, a top manager may have a title like director of
logistics and customer service.
Why marry the two? If you try to define logistics excellence, the answer becomes clear.
In Achieving Customer Satisfaction Breakthroughs, authors Patrick M. Byrne and
William J. Markham of consulting Firm A.T. Kearney Inc. Define quality in logistics as
“meeting agreed-to customer requirements and expectations, including the following:
Ease of inquiry, order placement, and order transmission;
Timely, reliable order delivery and communications;
Accurate, complete, undamaged orders and error-free paperwork;
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Timely and responsive post-sales support;
Accurate, Timely generation and transmission of information among the functions
of the business and with external parties to support the planning, management,
and execution of the above activities.”
Every item on this list of “quality logistics” activities could just as easily describe
“quality customer service.” The need to meet customers’ expectations, in fact, drives
almost every aspect of a logistics strategy, including the selection of warehouse locations,
delivery routes, and carries, to name just a few.
To understand why logistics and customer service are so closely tied to one another, it’s
important to first understand the value of customer service to any company. The goal of
every business is to sustain profitable growth. The key to consistently attaining that goal
is to attract and retain customers. In general, however, companies are not very successful
at keeping their customers: Mark D. Rubin, director in the management consulting
business of Arthur D. Little Inc., estimates that the average customer turnover for all U.S.
businesses is between 10 and 30 percent annually.
Such high turnover costs money, Rubin says. “Reducing customer turnover by just 5
percent can mean a 60- to 95- percent improvement annually to a company’s bottom
line.” Given this statistic, its clear why successful companies base their operations – from
product design all the way through to final delivery – on that need to keep their
customers satisfied and coming back for more.
How does company achieve customer satisfaction? Pamela W. McNamara, director of
Arthur D.Little’s supply-chain management practice, replies that the key is for the entire
“customer experience” – that is, all interactions between customer and supplier –to be
Logistics 70
orchestrated though what she calls a “high-performance order- management system.” The
goal of this system is to satisfy the primary “Stakeholders” of the company’s business.
Stakeholders include customers, company owners, and employees.
To satisfy those stakeholders, McNamara says, a company must improve critical process
and align its resources and organization ho allows it to achieve that goal. That means
taking a long, hard look at every function within the business and how it affects customer
relations throughout the life cycle of an order. And if there are few, if any–activities
within any organization that don’t affect the” customers experience.”
Warehousing and inventory control, shipping, load tracking, and consolidation are the
obvious logistics activities. But some companies also bring areas such as order
processing, order expending, and production planning under logistics’ purview. The
nature of logistics as a multifaceted function with an overview of many company
activities often places it in the role of coordinator, problem-solver, and mediator with
other functions, even when there is no clear line of responsibility.
Regardless of how your company is organized, it simply can’t achieve high levels of
customer satisfaction without logistics’ full participation. What follows are examples of
how some successful companies link logistics and customer service to keep customers
happy.
Logistics and sales
Sales can be increased though excellent logistics performance rather than mere cost-
cutting measures. For example, Wyle Electronics customizes and delivers orders within
48 hours by means of its accurate inventory and order data. Thomas & Betts, an electrical
Logistics 71
components maker, teamed up with Lease way Logistics to run its ‘Signature Service’
program that guarantees delivery of orders in a single shipment at regular schedule.
More companies are realizing that outstanding logistics performance is less about cost
containment than about increasing sales. Suppose you’re a supplier of a particular
product that has a limited shelf life. For that reason, it is not practical for your customers
to keep a lot of stock on hand. When they need your product, they need it fast and in
perfect condition. But suppose also that your inventory-control system is in disarray, your
customer-service department is slow to process orders, and once your warehouse gets
those orders, it takes several days to fill them.
What’s the result? The product’s shelf life becomes even shorter. It may even expire
before your customer can sell it. That leaves your customer stuck with expensive,
unusable inventory. It won’t take long before your customers realize that they are wasting
money by buying from your company, and they will seek another supplier. This may
sound like an extreme case, but it’s not unheard of .By virtue of its impact on order
processing, storage, distribution, and delivery, logistics plays a key role in meeting
customers’ expectations. Poor performance in any of these areas certainly can result in
lost sales.
But the reverse also is true: Outstanding logistics performance has the ability to increase
sales. In many industries, service is what differentiates one supplier from another. If you
can get it there faster, in the right condition, and in compliance with your customers’
specific requirements- but your competitor cannot – then you are likely to see increased
sales at that competitor’s expense.
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A 1995 study conducted by Professors Robert A. Novak of Pennsylvania State
University, Lioyd M. Rinehart of Michigan State University, and C. john Langley Jr. of
the University of Tennessee examined how senior corporate executives and logistics
executives perceived the value of logistics. Among the many questions they asked both
groups was weather logistics service levels affected customer satisfaction and weather
logistics service affected how much customers buy from their companies.
Both groups agreed that high levels of logistics service have a significant impact on
customer satisfaction – and on sales. For example, senior executives gave the statement
“customers reduce their business with us when logistics service levels are below their
expectations”. An average rating of 5.09 out of a possible seven. Logistics executives
rated that statement at 4.86. The two groups were closer together in their assessment of
how logistics quality.
Ultimately, what corporate executives care about is growth and profit, says James E.
Morehouse, a vice precedent of Chicago’s A.T. Kearney consulting firm. “A typical
logistics person comes in [looking at] cost cutting. What’s going to excite [a CEO ] is not
cost cutting, it’s ‘if we do this, then we can get the customer to buy more,’” he says.
“Good logistics people are executive who get out of that cost- containment mode and into
a revenue- enhancement mode.”
Some logistics managers have indeed been successful in proving that outstanding
logistics capabilities can boost sales and retain customers. Here are a few examples of
companies that use logistics as a selling tool:
Wyle Electronics, a large electronics distributor, has a slogan on all of its sales
materials: “We’re customer Specific.” By that, Wyle means that it will customize
Logistics 73
orders and still get them out the door with in 48 hours. The distributor can do that
because the company practices “postponement of final assembly,” in which it programs
chips and performs assembly functions after an order has been received. To keep that
system running like clockwork, Wyle must have absolutely accurate inventory and order
information. And because it offers such quick delivery, the distributor also must ship a
study stream of orders each day. “An interesting point is that Wyle’s hall marketing
message is based upon capabilities that were created by the logistics and distribution
operations,” Observes Boris Reznick, CEO of OPTUM software, which provides
warehouse-management software for the manufacturer. By providing customization,
Wyle’s Sales pitch goes, the distributor make it possible for customers to get their own
new products to market faster than their competitors.
Thomas & Betts is a manufacture of electrical component s that has been able to
differentiate itself from its competitors and increase market share by offering a
unique delivery option. Five years ago, Thomas & Betts initiated its “Signature
Service” for some customers. The program guarantees delivery of a customer’s
total order in a single shipment at a regularly scheduled time. As many as 24
products manufactured at 13 plants can be consolidated for delivery. Customers
also receive a single invoice. Thomas & Betts decide to use a private fleet to
ensure service quality. Rather than start one from scratch, the company teamed up
with Lease way Logistics, which provides equipment, drivers and management
personnel. Both shipper and carrier have worked with their customers to make
sure the program runs smoothly. For example, some customers did not have
appropriate receiving areas for rods that are up to 20 feet long, notes Dwain
Becton, the company’s private-fleet manager. The
Logistics 74
solution was for Lease way to provide curtain-sided trailers that can be unloaded from
either side, making it possible to deliver the extra–long items together with the rest of an
order. Thomas & Betts is aiming to make it easier, faster, and more convenient for its
customers to receive its products. And customers have indeed responded: Demand for the
specialized delivery service has been growing in double digits each year.
Both units corp., the information- systems giant, and Becton Dickinson , a
multinational manufacturer of medical products and equipment, have perhaps
gone a step farther than anyone else when it comes to using logistics are a sales
tool. These two companies have produced brochures that detail how their logistics
capabilities benefit customers. In Becton Dickinson’s case, its Supply Chain
Services centralizes many functions that at one time where handled separately by
each product division. The group provides a single point of contact for all orders,
invoices, shipments and payments. The efficiencies and cost savings a centralized
system affords both buyer and sellers are obvious. But its Supply Chain Services
goes even further. The brochure promotes its capabilities in the areas of
distribution strategy and management, information management, order
fulfillment, and finished goods fulfillment, explaining the direct benefits they
bring to customers. Top – notch, customized logistics capabilities are presented as
a reason to buy the companies products. In similar fashion, Unisys’ brochure
informs potential customers about the many customized services the organization
can perform. In effect, Unisys Logistics Services (ULS) acts a consultant to help
customers solve problems and improve
Logistics 75
their own operations. Among the many areas in which ULS offers expertise are logistics
strategy designs, inventory management, and import/export services.
All these examples show how logistics operations can support and increase sales and
customer retention. Even companies that have no problems to speak of are looking at
how they can use logistics capabilities to boost sales.
Hebert G. Johnson, vice president of logistics for CVS, a national drugstore chain, says
his company has launched an initiative that will perfect warehouse operations, product
fulfillment rates, and information availability. "The place where we make or break
business is not in merchandising,” he believes. “Merchandising can build sales, but if we
can’t deliver the products, then [that effort] is for naught.”
Johnson reports that at his company, “the importance of logistics to sales is not implied it
is known. “But not every company is so progressive when it comes to logistics issues. It’s
the logistics managers’ daunting task to convince top executives that the key to success is
to leverage the relationship of logistics to sales and profitability. Without first class
logistics performance, it’s doubtful a company will see sustained improvements in the
other two areas.
LOGISTICS AND MASS CUSTOMIZATION
Mass customization is a logistics framework that can be adapted to specific market needs
to support order management, manufacturing and distribution concerns in the offering of
tailor-made mass-manufactured products. It promotes a number of approaches to
accommodate customer needs, including pure customization, segmented, customized,
tailored, and pure standardizations. Mass customization also supports flexible
Logistics 76
manufacturing processes, modular product designs, complex order management and
integrated information systems.
In this “Age of customer service,” buyers are returning to our pre industrial roots,
demanding customized products and pricing once again. But customization in the 20 th
century differs in two important respects from the way out ancestors conducted business:
today’s buyers want customized products in enormous quantities, and they want them as
quickly as they receive standardized products.
That would have seemed impossible just a few years ago. But many companies today are,
in fact, able to provide customized products in short order. They do so by practicing a
manufacturing strategy known as mass customization. Mass customization is an
outgrowth of the customer –service revolution; it involves careful coordination of order
management, manufacturing, and distribution to provide customers with mass
manufactured products that are made to their exact specifications. What makes that all
possible? A look at how mass customization works reveals that logistics is the glue that
holds it all together.
The very term “mass customization,” with its seemingly contradictory components,
indicates that it is not simply a matter of choosing pure customization or purely
standardized production. Rather, there are five different approaches to fulfilled customer
needs, say Joseph Lampel and Henry Mintzberg in their article, “Customizing
Customization” in the Sloan management Review (Fall 1996). These five variations,
which the business-school professors have organized as a “continuum” of production
strategies, are based on varying degrees of customization and standardization.
Logistics 77
Pure standardization represents stereotypical assembly-line production of
identical items using standard parts and uniform manufacturing procedures.
Products are designed to appeal to the greatest number of buyers, and those
buyers have no influence over design, production, or distribution. Some examples
include pencils, paper clips, and Henry Ford’s Model T automobiles.
Segmented Standardization produces a few variations on a basic product that are
targeted to the preferences of a particular group of consumers. The number of
choice increases and manufactures might customize distribution, but customers
still do not exert any direct influence on product design or production. Examples
include such items as bread (whole wheat, white, and rye) and shoes (high heels,
flats, and mid-hell styles).
Customized standardization makes products to order from standard, mass-
produced components. Often the choices are limited to adding components to a
single, Buyers, therefore, may affect how the product is assembled and
distributed, basic unit. but not the design and production of those parts. A familiar
example is the process of buying a car: Customers may choose paint and
upholstery and select original equipment to add to a uniform chassis and body
design.
Tailored Customization customizes fabrication, assembly, and distribution. The
manufacture retains control over the design, offering the buyer various options,
including different kinds of materials. Depending on the product, the
manufacturer may be willing to modify the design to meet the customer’s need.
Common examples of tailored customization include selecting and printing
wedding invitations and having a suit custom-made.
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Pure customization. At the opposite end of the spectrum from purely standardized
products are those that are customized in every aspect of design, fabrication,
assembly, and distribution require buyer and seller to collaborate as partners in
developing the product. An example is the relationship between an architect and
homeowner when designing and constructing a custom-built house.
Because they can be adapted to specific market needs, mass-customization strategies are
being applied to a wide variety of products. Among the many companies practicing mass
customization today are Hewlett-Packard, Dell, and Gateway 2000 (computers); Titlist
and foot-joy Worldwide (golf clubs and shoes); Black & Decker (small appliances);
Motorola (pagers); and Andersen Corp (windows).
How are these manufactures able to customize products on a large scale and at high
speeds? Many factors come into play, but experts say the most important keys to success
are having modular product design, flexible manufacturing processes, sophisticated order
management, integrated information systems, and postponement of assembly.
Without modular product design, product customization would be time consuming, slow,
and very closely. Products should be designed to enable, rather than inhibit, any type of
customization, says Jeff C. Kimbell, vice president of CNA Consulting & Engineering in
Bellevue, Wash. He cities the example of the Boeing Co., Which classifies thousands of
parts, components, options, and documentation for its aircraft as standardized, configured
to a finite set of options, or customized. This system has greatly streamlined ordering,
engineering, and manufacturing while still giving customers exactly what they want. Dell
Logistics 79
Computers and gateway 2000 also depend on modular product design to allow them to
assemble computers from compactable parts and components purchased from a variety of
domestic and international sources.
John Deere Harvester Works has found that flexible manufacturing processes allow it to
produce multiple versions of its agricultural equipment with a single assembly line. The
company manufactures parts for row crop planters to order in manufacturing “cells”
adjacent to the assembly area. The planters are assembled from a combination of
customized and standardized components, some of which are manufactured in the cells
and some of which are purchased from outside suppliers and delivered directly to the
assembly line. Finished planters then are shipped from the end of the production line.
“The improvement in factory production volume, finished – product inventory cost, and
delivery time has justified the cost of changing production methods,” says Bill Fulkerson,
a technology and information systems analyst at Deere & Co.
Another important enabler of mass – customization strategies is a sophisticated order
management system. “Today’s Manufacturers need [Order – management systems ] that
provide deep and detailed customer profiles, handle the sheer volume and breadth of
numerous customers and customer orders, and retain and easily access every nuance of
each order,” says Henry Bruce , vice president , marketing of supply – chain software
developer IMI Americas . “The system has to be able to handle all different types of
rules” related to the order itself as well as to customer preferences, he adds. An order
management system in a mass- customization environment also must integrate with other
functions, since the high degree of customer involvement in product configuration means
Logistics 80
That sales, marketing, manufacturing, and distribution also may need access to accurate
customer information, Bruce explains.
The value of integrated information systems in a mass –customization program can’t be
underestimated, agrees Art Brown, director of supply-chain markets for software vendor
Synquest. That’s because the hallmark of customization is uncertainty, he says: “You
don’t know what you’re going to ship until you get an order.” Because customized
production is so dynamic and lead times from order to shipping are so short, real-time
data about inventory and production and the ability to respond immediately to problems
become a necessity, Brown says. “You’re not able to look very far out… you have to
synchronize schedules. You have to be looking at what you’re shipping now, and at the
same time look ahead to what’s coming from components.” To manage that kind of
minute-to-minute decision making, particularly when using parts from multiple sources, a
decision- support system that integrates information from the entire range of participants
in a mass-customization program is absolutely necessary, he adds.
Postponement of assembly offers some of mass customizations most important; benefits:
lower overhead and inventory, shorter product-development cycles, reduced stock
obsolescence, postponed costs until ready to bill, and the ability to respond quickly to
changing customer needs. The electronics industry, with its fast-changing technologies
and short product life cycles is particularly suited for this kind of manufacturing says
Paul Wimer, an associate partner in manufacturing strategy with Andersen Consul ting’s
global supply-chain practice. Postponement helped Hewlett-Packard drastically reduce
the incidence of stock obsolescence in its Asian production facilities, for example.
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No mass – customization program can succeed if a manufacturer does not have efficient
logistics operations and information systems in place. Logistics is, in effect, the glue that
holds the system together.
For example, precise management of transportation and delivery of inbound material is
essential in mass customization, says Paul Wimer. That is immediately apparent in the
case of computer assemblers such as Dell and Gateway 2000. The only way to implement
mass customization of computers is to put together what the customer wants out of a
large number of possible permutations in a very short time – all while minimizing
inventory, he says. “Customized computers are highly depended on logistics’ relationship
with carries … If the order says you need five of something, you have to have the truck
there to deliver them exactly when required.”
That is especially difficult when so many parties are involved. Including parts
manufactures, sub – assemblers, and master assemblers, Wimer notes. “The sub –
assembler may have all the right stuff ready, but if the logistics piece isn’t properly lined
up, it won’t work and you won’t be able to meat your commitments to your customers.”
Companies that practice manufacturing postponement often use outside logistics provides
to customize packaging and distribute product to final customer. Warehouses and
distribution centers run by third parties offer flexibility and proximity to the final
customer without all the costs of fixed assets, Wimer says. That’s a real advantage for a
company dealing with mass customization’s uncertain product flows, he adds. For
outsourcing to meet customization’s exacting standards, through it’s essential to integrate
the third party’s information system with those of the manufacturer, cautions
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Brown. “You have to treat warehouses and distribution centers as if they were your own,
regardless of who owns them,” he says.
The complexity of mass customization demands coordination across the entire supply
chain, and logistics is the logical choice to play that role, says Henry Bruce. “When I take
your order, it’s not just a matter of how quickly I can get it to you. It’s not just a stock
item; it’s that item with a whole host of special requests. How can I do that task with
lower handling costs, yet still meet or exceed delivery expectations?”
Only logistics has the scope and skills to take that on, agrees Art Brown. In mass
customization environment, he says, “logistics is like an air – traffic controller, making
sure everything is synchronized up and down the supply chain.”
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THE CORPORATE ROLE OF LOGISTICS
Those companies that recognize the contribution that a logistics strategy can make to
both achievements of corporate strategic goal and financial performance often see
dramatic improvements in their Return on Investment (ROI). This is achieved by
improvements in market share as well as reduced costs on a lower asset base. ROI is a
measure of how effective a company is, at using its fixed and current assets to create
profit. These are the components of ROI:
One way of improving ROI is by reducing inventory – a current asset. Inventory costs are
generally high, and can cost 25% of the value of that inventory just to hold it for one
year. By reducing inventory levels, carrying costs are reduced, as is the total capital
employed in the business – a double boost to ROI.
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Sales Revenue
Cost of Goods Sold
Inventory
Accounts Receivable
Cash
Fixed Assets
Profit
Capital Employed
Return on Investment
Changes in logistics policy will affect financial performance, contributing positively to
the long-term viability of the company. The logistics strategy should therefore constantly
be under review, and assets examined to ensure their effective utilization. Examples
might be: warehouse space utilization, plant and depot location policy, or efficiency of
vehicle routing (computerized routing can potentially reduce the number of vehicles by
20% and fuel costs by 15%).
The following formula is worthily of some analysis:
Return Investment (ROI) = Profit/Sales X Sales/Capital
Or,
ROI = Margin X Capital turnover
Since margins have been squeezed throughout the recession, it often falls upon capital
turnover to ensure an adequate ROI. Effective logistics management is one way of
improving the use of assets and thus improving capital turnover.
Many companies are rationalizing the number of product lines being inventoried in order
to reduce investment. Similarly, an examination of the customer base might indicate the
true cost of servicing a customer and, as a result, influence sales and marketing policy.
From an inventory standpoint, an ‘ABC<analysis will indicate items, which need to be
given the highest and lowest priorities, in service terms. Any such decision, however,
need to be taken carefully, so as not to eliminate opportunity costs created by slower
moving items. In marketing terms, it may be possible to trade-off a reduced product
range against a substantially cheaper popular product.
Many companies which, up to recently, owned their own fleet of vehicles and distribution
centers, are reducing their investment in fixed assets by employing outside, or third party
Logistics 85
Companies to mange their distribution. Although there is certain risk of loss of control
over service, experience in Europe indicates that service level is excellent and cost saving
and ROI are much improved. These professional distributors benefit from their
specialization and economies of scale, to offer clients an excellent and cost effective
service.
Other companies are able to consolidate inventory locations – a measure, which is
directly related to inventory investment. Fewer locations mean less total inventory in the
distributor’s chain. In fact this relationship appears to follow the square root rule of the
number of locations at which a product is stocked. For example, by reducing the number
of warehouses from 9 to 4, the inventory is reduced by one- third (i.e., from 9 to root4,or
from 3 to 2).
Finally inventory can be reduced though the two principles of postponement. The first
simply states that changes to a product’s form and identity (which makes it unique to a
particular customer) should be delayed to the last possible point in a distribution chain,
keeping the product as generic as possible. And secondary, changes to inventory location
should be postponed to the last possible moment to minimize total inventory in the
system and to maximize its availability. The introduction of flexible manufacturing
systems (FMS) in many areas will encourage companies to be creative in the way they
manufacture and distribute products.
It can be seen from the above that by bringing logistics into the arena of corporate
strategy, many opportunities for a strengthened market position can be grasped through
initiatives in customer service. Companies are never powerless to influence the market,
nor their relative position within it.
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Building a Cohesive Corporate Logistics Strategy
Establishing a logistics function requires the unflinching support of the precedent and the
entire team of directories and vice-precedents. It also requires the logistics professional to
be capable of creating policies of his own, as well as influencing the policy of other
departments.
In order to create a strategic plan for the logistics function, the corporate strategy must
first be understood. Not only must the marketing and production strategy be studied, but
the organization’s entire value systems must consider. Take for example, an organization
whose system of values states that expertise will be developed, primarily from within,
with a minimum of outside hiring. The time-frame for developing adequate experience in
the MIS or systems support areas, may require an implementation of EDI over a longer
period.
The logistics manager will initially assess other departmental strategies to ensure that
their aims are capable of supporting, and do not conflict with the logistics strategy as it
relates to the overall corporate plan. The president or managing Director must be
prepared to step into disputes that might develop. After all, the development of an
entirely new function will necessarily encroach on other departmental boundaries and
cause questions to be raise regarding pet projects. A truly successful logistics
professional will be able to create synergy across departments, as well as cost saving.
Having created a functional strategy and ensured that it can be supported, given the
overall company and individual departmental aims, it is important to sell this strategy
within the organization. This is a major test – phase for logistics as a concept. It is
possible, one must ask, to create the kind of saving, across the organization, from
inventory
Logistics 87
CorporateStrategy
Logistics Strategy
Inventory Control
Purchasing Strat.Distrb’n Alliances
Information Systems
Warehousing Systems
CustomerService
Inventory Tracking
EDI toSuppliersBarcodeSystems
Hand-heldTerminalsLogistics cost control
LAN Network Warehouse Automation
EDI to CustomerMaterialsHandling
Service QuallMonitor
Marketing Strategy
Product Selection
Product Development
reductions and transportation savings, to site rationalization and effective strategic
alliances with suppliers that justifies the establishment of a logistics function?
Experience tells us it is. But how can we be sure? The first step in this process is to
accurately measure existing logistics costs and to use this data as a means of comparing
progress. This step cannot be emphasized strongly enough. In order to make progress in
logistics, current performance must be measured.
Experience also tells us that the kind of savings that are being anticipated can only be
delivered through the application of new technology.
A typical logistics strategy will likely require the creation of EDI (Electronic Data
Interchange) with all major supplies and customers.
Inventory reduction will require investment in inventory control systems capable
of tracking inventory movements and orders, on a real-time basis.
Data capture and order tracking using in-house bar-codes will likely require
handheld or truck –mounted radio frequency terminals.
A just-in-time manufacturing system will need to be developed, using MRP II
software systems and interfacing with materials management and, particularly,
purchasing departments.
Strategic alliances will need to be established with important supplies of raw
materials and transportation services. EDI will again be important in improving
the lines of communication. More importantly, however, it is essential to
communicate clearly and therefore project through these alliances, the corporate
values that make the company unique in the eyes of the customer.
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The process of developing an effective logistics function may take from three to five
years, depending upon knowledge and experience within the corporation. The desire for
change and improvement must also be present – and the need for change must be
recognized and supported by top management.
The benefits can be enormous. A company perfuming in a mediocre manner requires
drastic change to dramatically improve performance. Incremental change will result in
incremental improvements.
Just-in-time and Inventory Investment Reduction
Just-in-Time (JIT) is a system designed to eliminate waste, improve quality, reduce cycle
times, and lower inventory levels. It is based on the principle that all activities which do
not add value to a product during the manufacturing process should be reduced or
Logistics 89
eliminated. This rationalization results in a well-balanced operation, with production
geared to the capacity of the processing bottleneck, which otherwise would slow the
process or cause work – in progress inventories to increase.
The effect on inventory levels can be quite dramatic; with reductions in inventory
investment of up to 90% with more commonly experienced reductions of 20-40%. The
typical JIT production system is somewhat analogous to a stream, flowing over rocks
(problems). Materials entering the process emerge as a finished product, set for
immediate delivery.
With JIT in place, the stream flows more quickly, inventory levels of all materials drop,
and the return on investment rises substantially.
Problems in the manufacturing process can be seen as rocks in the stream. By reducing
the safely stock and other inventories, it is suddenly essential to address these problems
Logistics 90
or the entire process will fail. With an excess of inventory, it might never have come to
management’s attention that, for example, equipments downtime, or absenteeism, was a
real problem coasting the company dearly.
In this way, problems are addressed, and the balanced operation reacts to customer orders
by pulling the required materials into the process at just the right rate. JIT is an invaluable
tool in rationalizing production operations and improving profitability.
Supply Chain strategy
Logistics theory recommends a total systems approach to the flow of both materials and
information. In this article, we examine the routes that these flows take, and in particular,
highlight their strategic importance where they relate to marketing strategy. The rapid
rate of charge within the marketplace coupled with a lack of vertical integration faced by
most organizations (few have both and upstream manufacturing plant and a downstream
retail chain), results in the distributor having a limited amount of control over the entire
supply chain.
Different processors within the supply chain, such as the manufacture, distributor and
retailer will have conflicting goals. Where the manufacture seeks brand loyalty, the
retailer aims to provide the widest selection of items possible; and where the distributor
whishes to maximize the size of each retail shipment, the retailer refuses to use expensive
retail space for storing merchandise. The basic problem here is known as the ‘zero sum
game,’ i.e., for one party to win, another must lose. The buyer and seller relationship, to
be a long term one, must be a win-win situation, and in order to achieve this, improved
logistics connections are essential. Intermediaries exist in any supply chain due to various
types of gapes. These gapes include – time gaps (high volume production runs versus
Logistics 91
continues or seasonal purchasing), space gaps (major cities cars and they are purchased
all over the country), quantity gapes (produce in large lots and buy in smaller buy a wide
variety of produce in a single shopping trip), and finally, communication/information
gaps (the consumer cannot source the item, and the supplier is not sure where the
potential purchaser is located). These gaps can be bridged by either the existing parties
themselves or by an intermediary, and the choice of solution id determined often by cost.
In the figure below, the effect of an intermediary in the supply chain, where 25
transaction links are reduced to 10, is obvious.
PRODUCERS PRODUCERS
INTERMEDIARY
CUSTOMERS CUSTOMERS
Cost, however, is not the only consideration with such problems. The marketing
effectiveness of a supplier, for example, can be seriously compromised if an intermediary
does not share his objectives or value system. The intermediary may also act as a
distributor rot other supplies, and as a result have divided loyalties. These considerations
Logistics 92
must be balanced against cost. Factors such as customer convenience, product range,
lower selling cost, loss of margin, and loss of marketing control, must be weighed and
carefully considered before supply chain decisions with far-reaching implications are
made.
The impacts of supply side factors on profit are often underestimated. In most companies,
50-60% of the value of sales is spend on supplies. As a result, even marginal savings can
result in significant bottom-line improvements. The effect of a vendor on a company’s
performance cannot be understated either. Some suppliers hold a virtual monopoly on
certain items (for example , south Africa and Zimbabwe together hold 97% of known
chromium recourses) and as a result there can be major questions regarding the reliability
of supply. In response, some companies have been investing in backward integration: by
purchasing interest in vendors to ensure supply. A less radical solution is to develop long
term, stable relationships with suppliers, with an aim of mutual profitability and growth.
This might include agreeing upon quality levels with the distributor or the retailer
monitoring production quality at source with their own staff on the vendor’s premises.
The advantage partnering with established suppliers is that this approach tends to be more
flexible than backward integration.
Evaluating the Supply Chain
If the supply chain involves intermediaries then it stands to reason that they themselves
must be monitored in order to assess the effectiveness of the entire channel. Surprisingly,
very few companies for quality and reliability of service. Key measurements should
include:
Sales performance and the cost of sales for each of the retail members of the
channel.
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Inventory maintenance, where inventory is minimized and is replaced by better
information and a more flexible distribution system.
Marketing capability, where some intermediaries will take on certain marketing
responsibilities perhaps though their own sales people who might also promote
these products.
Motivation of channel members, without which adversial relationships may
develop where the “mutual beneficial “nature of the relationship is not clear.
Competition in channel, either between intermediaries where more than one
retailer handles the same product, or between suppliers where a single retailer has
competing brands in inventory. This latter from of competition can be countered
through agreements where the retailer does not carry a competitor’s product, and
enjoys preferred pricing and other incentives.
Volvo’s Supply Strategy
Nearly 75% every Volvo is made outside of Sweden. This fact poses considerable
logistical challenges and it is not surprising that very sophisticated logistics systems exist
linking Volvo to its suppliers. Nor is it surprising to learn that stringent demands are
placed on suppliers to produce to a well-defined production plan. Additionally, and
significantly, all parts are purchased FOB vendor shipping dock. This means the cost of
transportation and the control over transportation is in the hands of a company directly
contracted by Volvo. Their close relationship with an international transportation
organization means that the amount of influence and the required level of performance
can be defined and the delivery guaranteed. All inventory from UK producers, for
example, are collected and taken to a central UK warehouse that catties about 4 weeks
Logistics 94
inventory on hand. Volvo pays for this inventory only when the item is shipped from the
central warehouse to a production plant. Crates and pallets are standardized as well to
minimize handling costs and maximize efficiency. In return for this high level of
responsibility placed on the supplier, Volvo produces short- (6 week firm order),
medium-, and long-term projections of part requirements, which allow suppliers to plan
production in the most efficient manner possible, thus reducing costs. As a result of this
strategy, real costs in production and logistics have dropped significantly. It is worth
noting that the most significant difference between this and more traditional supply chain
strategies is information sharing.
In the same way that the environment has changer for the supplier, the marketing
environment for many companies has now radically altered. Aside from a proliferation of
new retail sectors (for example, home computers, video etc) there has been a move
towards high volume chain store outlets such as Costco, price Club and Wal-mart. The
scale of operation is such that these relaters are able to dictate terms to suppliers such as
price, delivery frequency, method of delivery, and even pallet type and size. The rate of
change is so rapid that many manufactures have been caught unprepared for such
definitive requirements, with the result that many are currently scrambling to upgrade
their systems and internal processes.
It is appropriate to identify the factors to be taken into account when developing a
marketing channel strategy. Overall marketing objectives first need to be set and the
company is well advised to know the marketplace well. What do potential customers
want? Value for money? Convenience? Style? Availability? After this knowledge has
Logistics 95
Been gathered, the strategy can then be developed. Supply-chain strategy many be
viewed in two ways – by length and by breath.
Channel Length: the length is a trade-off between controlling the channel (direct
sales to customers, or using intermediaries). There are various choices within this
range of options: the company might buy –out a retail company, or it could
establish franchises which sell only those products produced by the manufacture.
The third alternative is to establish relationship with subsidiaries and work on a
partnership basis where the degree of attachment can range from complete
symbiosis (where their survival depends on each other working together
effectively) down to a casual and occasional transactional arrangement. The
advantage of establishing long-term relationships with intermediaries is not the
flexibility motioned before but also the specialization of knowledge and skill that
represents a company’s unique competitive advantage. By concentrating on doing
more of what it does best, or “striking to their knitting,” a company can contribute
more effectively within a supply chain. This recognition has lead to the
development of contract logistics, where companies can take over the
transportation or distribution arms of established manufactures or retailers and,
because their specialist knowledge allows them to operate more efficiently,
reducing the operating costs significantly.
Channel Breadth: Some products require a wide market availability and visibility
such as the need for confectionery to be available at every gas station and grocery
store in the country, to ensure sales. Other products can be selectively marketed
and require fairly narrow channels, such as specialized automobiles, for example.
The
Logistics 96
Choice of breadth is influenced by the products’ own characteristics, buyer behavior, the
degree of control over the supply chain, and the overall marketing strategy.
Logistics and Shareholder Value
Logistics managers should understand the ways by which logistics can create shareholder
value, the maximization of which has become the main goal of top executives. in fact, the
ability to explain logistics- improvement programs in terms of their effect on shareholder
values can result in greater credibility and influence for logistics managers. Logistics
initiatives such as inventory management, customer service, costs control, facility
utilization and outsourcing are guaranteed to improve overall value and share price.
For top executives, the principle goal is to maximize shareholder value. Because it is a
top priority for their chief executives, companies have become more sophisticated in how
they analyze and measure shareholder value. Over the last decade, therefore, a variety of
approaches to shareholder values analysis (SVA) have evolutes. These include
discounted cash flow (DCF), Economic value added (EVA, trademarked by stem
Stewart), and return on invested Capital (ROIC).
These approaches are based on the idea that projecting the future “free cash flows “that a
company’s value. Furthermore, dividing that value by the number of shares of stock
outstanding can provide an estimate of future stock prices.
Most of these approaches are based on the following relationships:
Shareholder values creation= Cash – (Invested Capital x Cost of Capital)
“Cash” can be measured by NOPAT (Net Operating Profit after Tax).
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“Invested capital” is the net working capital plus net property/plant/equipment
plus any deferred charges.
“Cost of Capital” is measured as the weighted average cost of equity and debt
(today, generally between 9 and 14 percent for most companies).
The critical focus is on cash, rather than simply on profits. One must give explicit
consideration to the capital required to generate any profits. The idea is that values
are based on generating cash in excess of one’s capital charges.
It’s critical that logistics managers understand what drives these determinants of
shareholder value. Cash is driven by revenues, costs, and depreciation and other non-
cash expenses. Invested capital depends on current assets, current liabilities, net
property/plat/equipment/ and deferred charges.
In particular, it is important to understand the ways that logistics can create
shareholder value. Logistics managers can gain greater credibility and influence if
they frame their explanations of logistics-improvement initiatives in terms of theist
impact on shareholder value. Here are a few ways that logistics initiatives may affect
overall value and share price:
Inventory management. Effective inventory management lowers both the
invested capital as well as elements costs (specifically interest costs and
carrying cost) in the shareholder-value creation framework. Inventory
reduction often has a powerful impact on value creation.
Customer service. Enhanced customer service can increase revenues, which
improve NOPAT.
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Cost management. Reducing logistics costs (purchased goods, transportation,
warehousing, and inventory carrying) obviously has a direct impact on NOPAT.
Facility utilization. Enchasing the effective capacity utilization of warehouse or
transportation provides can lower costs and/or improve customer service (and
thus revenues), but it also can affect invested capital.
By becoming conversant in the emerging language of finance and shareholder value,
logistics managers can have greater influence in their companies. Can communicate
more effectively with top management, and can be more effective in securing support
for logistics initiatives.
CONCLUSION
Companies have observed to be consolidating their logistics function to increase their
profits, decrease costs and improve their strategic prospers. This third diverges from the
traditional practice of maintaining logistics centers in widely scattered areas. Together
with the centralization trend comes outsourcing, which has also become a highly popular
means of reducing costs.
The competitive environment of the 1990s is profoundly changing logistics (the business
of procuring, transporting, and distributing products). In the past, most companies
managed the inbound transportation of raw materials and the outbound transportation of
finished products as two separate functions, and typically each business unit controlled its
own logistics activities. This arranged was thought to promote flexibility.
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But globalization, rising oil prices, advanced technology, and downsizing put new
pressures on logistics people in the areas of cost and managerial control. The result: an
increasing number of sophisticated companies started moving logistics from the field to
the main office. To the complete surprise of some people who held to the belief that a
decentralized logistics department is better, this change actually has been very
beneficial.” With a central group managing all shipping and distribution and establishing
uniform operating standards across the organization, companies can manage complex,
large-scale systems more effectively.
An organization needs to build even stronger core-logistics competency at headquarters
to effectively orchestrate and manage the ever-widening network of external relationships
required in the global supply chains.” Companies that have the most centralized logistics
departments repot the greatest satisfaction with their ability to reduce costs and perform
with flexibility. Information technology also has a key role in the transformation of the
logistics function at leading-edge companies, allowing small centralized staffs to keep on
top of a lot of data from many sources.
A council of logistics management study showed that world-class logistics companies
possess four core competencies, namely, positioning, interrelation, agility involves the
about to respond to customer and market demands while measurement is the development
of internal and external performance monitoring systems.
These days, many companies believe that excellence in logistics is required to implement
a supply-chain strategy, the synchronization of product flow across all vendors in a
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channel to the ultimate consumer. World-class logistics has become a hallmark of
corporate success for companies adapting the supply-chain approach to product
replenishment in a global market.
In a supply-chain strategy, however, customer service is not an isolated function. Rather,
producers, middlemen, and retailers all work together in partnership to ensure high levels
of customer service. Such partnerships encourage the integrated movement of products
and information though the distribution channel.
No matter how productive a company may be, measurement systems are necessary to
ensure that logistics operations are indeed the most efficient they can be. “You need a
measurement system to make sure that the execution I s ahead of the competition’s,” says
consultant Jim stone, president of stone management in Chicago.
The four competencies that are necessary to achieve world-class logistics are as follows:
Positioning refers to the strategic and structural approaches that guide a
company’s logistics operation. Positioning can help a company make its logistics
operation a cornerstone of its overall business strategy. For example, an office-
supplies company used its logistics capabilities to respond to the emergence of
office superstores. By offering overnight delivery of exact quantities direct to
customers, the company was able to complete with the superstores on customer
service.
Integration is the internal achievement of logistical excellence and the
development of supply-chain relationships. It requires partners in the supply chain
to work together across corporate boundaries. The sharing of sales and
replenishment data between supplier and manufacture typifies this king of
integration. a retailer, for example, might share its sales information on a real-
time basis with a manufacture so that the
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supplier can determine the best time to deliver specific quantities of product to
distribution centers or stores.
Agility relates to a firm’s ability to respond to its customers need and to changing
market conditions. An “agile” company can seize unexpected opportunities by
identifying a customers problems and creating solution. For example, a medical-
supplies distributor saw a need to improve the way hospitals order and receive
supplies. His company created a service that took over storage, inventory control,
and delivery of supplies for several area hospitals. Now, the distributor stores
products in an off-site warehouse. An electronic link allows the hospital’s staff to
request delivery of specific items at specified times during the day.
Measurement requires the creation of internal and external monitoring system to
ensure that objectives are met. Not only do world-class companies use internal
standards to measure their performance against corporate goals, but they also
compare their performance to that of competitors and other excellent companies.
They often involve their customers in the process by asking them to rate how well
they achieve logistics-related objectives such ad on-time delivery and accurate
order entry.
Many logistics professionals believe that a world-class logistics operation can help
companies achieve their business goals, including increasing market share, improving
productivity, and boosting profitability. Although all companies have room for
improvement, the potential exist for word-class logistics to become a global force for
business change.
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Companies should realize the impact of logistics costs on their overall financial
performance. President logistics problems can hamper productivity and could adversely
affect a company’s corporate image. To accurately gauge the impact of logistics on long
term profitability, senior executives should strive to include logistics costs in the
formulation of the regular financial reports.
It’s painfully clear how much logistics performance can affect any company’s bottom
line. In most cases, however, it falls to logistics managers to educate top executives about
logistics contributions to company performance. To do that, they first must identify and
quantify logistics contribution – and that’s no easy task.
Logistics in the New Millennium
The coming millennium may very will see a host of scientific and technological
advancement that pose enormous challenges in the field of logistics. Foremost among
these is the challenge of maintaining supply and keeping abreast of deliveries in an
electronically linked international community.
When a panel of top logistics professionals looks a decade into the future, they see
accelerating demands on their supply chains to deliver better products faster and cheaper
and in diverse global markets.
Picture the world a decade form now in the United States, the first wave of baby boomers
begins to retire.
On the other side of the world, China and India have developed into economic
powerhouses. Consumers in developed countries are comfortable shopping around the
world electronically for most of their basic requirements and venture out to shops largely
for pleasure. Often, new products--software, programming for “smart” appliances--are
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delivered electronically as well. Most trade barriers have eased, making the flow of goods
around the world simpler and faster. That’s good, because all those consumers ordering
over the internet or its successor expect products delivered overnight, configured to their
specific requirements, and at a competitive price.
That vision of what the future holds, like any other, is not likely to be entirely accurate,
but it suggests that logistics and supply chain managers face enormous challenges in the
next 10 years. They must help their companies manage their supply chains in ways that
allow them to deliver better products reliably, faster, and cheaper; do it profitably; and do
it everywhere. And they will have to do it in an environment of rapid change--changing
technology, changing channels of distribution, changing government, shifting
demographics.
Much of the ability to meet the demands of consumers worldwide and the demands for
speed will be enabled by technology. Yet, the current state of logistics and business
information technology still leaves something missing, in the minds of many.
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QUICK POINTERS
The role of Logistics in the value chain A. Without logistics, marketers could not organize the flow of products through the
value chain.1. Logistics Management is the process of managing the movement of raw
materials, parts, and finished products through the value chain.2. Every aspect of logistics management is geared toward providing the customer
with: a. The right product.b. At the right time and the right place.c. In the right condition.d. At the right price.B. How logistics moves Products and Information 1. Logistics management ties together upstream and downstream activities.a. Inbound logistics, also known as material s management, is the inflow of raw
materials; equipment, services, and information needed to make the product.b. Outbound logistics, known as physical distribution, is the outflow of finished
products and information to the customer to complete a marketing exchange.2. Six logistical activities occur in the flow of products through the value chain:
transportation, warehousing, materials handling, inventory management, order processing, and reverse logistics.
3. Not every marketer places the same emphasis on each of these activities.4. The cost of moving products and information through the value chain in the U.S
is nearly 11% of the nation’s gross domestic product.C. How Logistics Management adds Value and Builds Relationships1. As a marketer, you can apply logistics management to directly create time, place,
information, and service utility for customers.2. Indirectly, Logistics Management supports both form utility and possession
utility. 3. By providing all six utilities, you can satisfy your customer’s requirements and
generate profits.4. When you don’t apply logistics management to crate the value your customers
require, however you may lose their business.5. Marketers are continuously improving their logistics management systems to
offer extra value that gives them a competitive edge.D. Ways of handling the logistic Function1. Some marketers prefer to handle the entire logistics function themselves and
centralize logistics management at headquarters for better control2. Other marketers prefer to use outsourcing, leaving logistics details to specialists.E. Competing through Logistics Leadership1. Information plays a vital role in the integration of activities for logistics
leadership.2. The vital value chain uses information to add value to activities throughout the
value chain. 3. Quick response depends on gathering, organizing, selection, analyzing, and
distributing information to enhance logistics activities.F. How Logistics supports International marketing 1. The logistics of Marketing in other countries is complicated and expensive.a. You can’t control some of the environmental elements that affect your ability to
obtain supplies
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b. You can develop logistics management strategies to overcome the unique challenges in each country.
2. In some countries, marketers have to start from scratch to build logistical links.3. International customers not only expect the same quality service as domestic
customers but also have concerns about buying from distant marketers.
II. Building Customer Relationships Trough Logistics A. The purpose of logistics managements is to satisfy customer requirements.1. Remember that quality is defined by customers, and service gaps are major considerations.2. On-time response is a basic logistical component of service quality.B. Delivering Quality Customer Service1. Quality customer service is the goal of all your logistics activities.2. customer Service Expectationsa. Accurate and timely communication about products, orders and deliveries.(1) Information is critical to quality customer service.b. Availability of products and information.(1) Customers want products and information available when and where needed.(2) You risk damaging customer relationships when you deliver a damaged product.c. Short, reliable order cycles.(1) Most organizations want to reduce the time between ordering and receiving products.(2) Keeping less inventory on hand also slashes costs.(3) Receiving goods soon after ordering is an important measure of quality service.d. Convenient, cost-effective delivery.(1) Your customers will want delivery on their schedules and at prices they can afford.e. Complete, correct orders.(1) Many retailers say accuracy is their top priority when placing orders with supplies. (2) Marketers need to pay close attention to packaging, shipping, and handling.(3) some marketers have reduced the amount of materials used and incorporate recycled materials into their products.g. Appropriate billing and after-sale support.(1) Customers need after-sale support for installation, repairs, and so on.(2) If you can’t handle these services, you can established alliances or use outsourcing.3. Customer service standardsa. Knowing what your customers expect is the first step toward developing a set of standards in delivering quality customer service.(1) You’ll want to look at cost considerations as well as at how your competitors manage their logistics.(2) Pay careful attention to areas in which service gaps can damage a customer’s assessment of your service quantityb. Decide on specific customer service standard service standards, i.e., percent orders filled correctly. c. Regularly check your performance and pinpoint for improvement.4. Seamless Customer Service
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a. Customers care about the overall quality of customer service, not about the activities in individual departments.b. Some markets are adding customers to their project teams, involving customer in every aspects of logistics management.C. Providing Timely Response 1. Time is an important element in quality customer service.a. Speed is important in product development as well as in the order cycle.b. Timely response includes the ability to react to shifts in customer requirements and to changes in suppliers needs2. Next-day and same-day delivery is now routine.3. Information technology is critical to timely response.a. Electronic data interchange is a way of exchanging information about products, pricing, orders and delivery via computer – to – computer links.b. EDI expedites communication with suppliers.4. Many nonfood retailers are applying information technology to implement quick response.5. In grocery retailing, efficient consumer response (ECR) improves logistics by electronically sending data about consumer purchases upstream members of the value chain.D. Achieving Cost Efficiencies.1. One of the goals of logistics management is to achieve cost efficiencies so that consumers get mare value of their money.2. Sub optimization is the lowering of logistics costs in one area while increasing them elsewhere, resulting in damage to overall cost – efficiency. 3. You can use the total cost concept to balance the overall costs of logistics management for optimal efficiency.a. You analyze the combined cost of activities.b. Each activity is connected to the next, so a change in one will cause a change in one or more other parts.E. Applying Tailored Logistics.1. You can customize your logistics for individual customers.2. When you apply tailored logistics, you customize your logistics activities to better satisfy the specific requirements of a customer.a. Some customers prefer fewer services and lower prices, while others are willing to pay more for some services.b. You can design a program and a price to meet the specific needs of customers. 3. Small businesses can also use tailored logistics to strengthen customer relationships.
III. inside Logistics ManagementA. The ideal overall logistics management strategy balances optimal costs with optimal
results.B. Transportation
1. Transportation is moving raw materials and part from point of supply to point of production,
a. You can choose among five basic modes of transportation.b. In making your selection, take into account six criteria:(1) Speed(2) Frequency (3) Dependability
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(4) Capacity(5) Availability
(6) Costc. Government restrictions on competition, pricing, and operations of the U.S transportation industry have been relaxed.d. Companies such as FedEx have altered the competitive environment in two ways:(1) They offer a variety of speedy, dependable delivery options for marketers.(2) They are capable of taking over some or all of a customer’s logistics activities though outsourcing.2. Transportation by rail.a. Rail is the most commonly used mode of transportation for freight shipped in the U.Sb. It is also the number one mode in china, Russian, and many others countries.c. Rail can reach nearly every urban area in the world.d. Manufactures rely on rail transportation when moving heavy materials long distances.e. Modernization of tracks in many developing countries has led to more efficient shipping.f. Railroads now run unit trains dedicated to transporting one type of commodity from the source to the market destination.3. Transportation by Trucka. Truck transportation is a good choice for shippers using door-to-door pickup and delivery.b. Trucks are able to carry a Variety of products.c. Seventy-five percent of all U.S agriculture products travel by truck.d. Truckers have the flexibility to adjust their schedules to fit their customers needs.4. Transportation by aira. When you need speed, and can pay for it, choose air transportation.b. The high cost of shipping by air may be offset by the benefits of the result.c. Air cargo within the U.S is dominated by FedEx and UPS, which together log more ton-miles than the next six largest air carriers.d. Passenger airlines have cleared more space in their jets for cargo and are developing better technology to track packages.5. Transportations by water a. If you are moving heavy, bulky, low-value goods that are not time sensitive, you can use water transportation.b. Shipping by barge freighter of tanker is a slow but inexpensive bay to transport raw materials, parts or finished products.c. Many products are Containerized, or stored for water transportation in contains that are sealed for protection against damage.6. Transportation by Pipelinea. Gas, oil and petroleum products, water and chemicals can be shipped through pipelines.b. Pipeline speeds are slow, and pipelines aren’t available everywhere.7. International Transportation and freight forwardinga. Intermodal transportation is the use of more than one mode of transportation to complete a single movement of products.b. This allows you to choose the modes of transportation that offer the best combination of service and cost (1) Using piggyback transportation, products are packed in special containers so shipments can be transferred between trucks, ships, or railroad cars without unpacking.
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(2) Piggybacking on ships is called fish backing.c. Smaller marketers can use freight forwarders, companies that put many smaller shipments together to create a single, large shipment that can be transported more cost-efficiently to the final designation.(1) Freight forwarders act as wholesalers of transportation services.(2) Some offer warehousing, customs assistance, and other services.C. Warehousing1. Warehouses are a vital link in the value chain, holding raw materials, parts, or finished products until needed.a. You may same money by buying goods in quantity, then warehousing them until you can break the lots into smaller lots.b. You may need to warehouse smaller lots until you accumulate enough for a large shipment.2. There are two types of warehouse:a. Storage warehouses are repositories for parts, raw materials, or products that need to be stored for weeks or months before being moved to a factory or a customer’s site.b. Distribution centers are warehouses in which products are briefly stored before being moved to wholesale, retail or customer locations.3. Warehousing operations have been transformed by computerized applications that can quickly and accurately receive products.4. Some marketers minimize the time products spend in distribution centers using cross-docking, receiving incoming products and immediately transferring them to trucks for delivery. D. Materials Handling1. Materials handling is the movement of products, parts, and raw materials within and between warehouse and manufacturing facilities.2. Moving goods or parts can be costly and can lead to damage, theft, or waste.3. Good materials-handling practices can help maintain a uniform flow of goods throughout the production process.4. Automatic guided vehicle systems (AGVS) are electronically controlled vehicles that transport products within a facility follow a preset route.5. In some plants computerized robots are used to stack, load, and unload products and containers.E. Inventory Management1. For many marketers, inventory is a major investment.a. Marketers have traditionally used inventory:(1) As a buffer against mismatches in supply and demand.(2) As a guard against shortages when supplies can’t be delivered(3) As a means of quickly filling orders. (4) As a means to accommodate extra quantities brought in at bargain prices.(5) As a way to support efficient production and shipping schedules.b. If you have too little inventory, you tie up your money for longer than necessary.c. If you have too little inventory, you risk disrupting customer and channel relationships.2. Inventory Costsa. Many marketers can’t gauge the true inventory costs because costs are spread over many departments and facilities.b. there are four types of inventory costs: capital costs, inventory service costs, storage costs, and risk costs.
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c. Your inventory level affects profitability.
3. Just –in-Time and stockless inventory Managementa. Marketers have developed methods for streaming inventory management.b. One method is just-in-time (JIT) inventory management, an approach in which inventory is kept at a very low level to meet immediate production demands, and additional supplies are delivered as they are needed.(1) Marketers carry little inventory and have lower storage costs.(2) TO make this work, marketers need strong value-chain relationships with suppliers(3) There is no extra inventory to fall back on, so a late delivery will delay production.c. The step beyond JIT is stockless inventory, in which suppliers make daily deliveries directly to the locations that require parts.4. Vendor-Managed inventorya. Some retailers have turned over responsibility for maintaining inventories to suppliers, known as vendor-managed inventory.b. Information about customer purchasing patterns and inventory levels is shared with suppliers, who schedule production and delivery.c. When inventory drops to a predetermined level, supplies rush replacements to the retailer’s distribution center.d. With vendor-managed inventory, the store relies on its suppliers to analyze consumer purchasing data and keep shelves full.F. Order Processing 1. Order Processing may be a logistics activity, but it is essential to customer satisfaction.2. Every step in order processing has the potential to delight or disappoint your customer.3. You have to anticipate what customers need so you can plan production and have channel partners lined up to help.4. Order cycle time, also known as lead-time, is the period between the placement of an order and its receipt.G. Reverse Logistics1. Reverse logistics is the process of managing the return flow of products form customer.2. This logistical activity has become more urgent to protect the environment.3. Marketers can use reverse logistics to retrieve products for servicing, replacement, recycling, or disposal.4. When you design reverse logistics systems; take into account your customer’s behavior patterns as well as your organizational needs and goals.
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GLOSSARY
Activity-Based Costing (ABC) – An accounting system that measures that measures the cost and performance specific activities performed in an organization.
Advanced Shipment Notice (ASN) – Detailed shipment information transmitted to a customer or consignee in advance of delivery, designating the contents and nature of the shipment. May also include expected time of arrival.
Average Inventory – The average inventory level over a period of time.
Back Order – Product ordered but out of stock and promised to ship when the product becomes available.
Backhaul – The return movement of a vehicle from its original destination to its original point of origin, especially when carrying goods back over all or part of the same route.
Bar code – A symbol consisting of a series of printed bars representing values. A system of optical character reading, scanning, and tracking of units by reading a series of printed bars for translation into a numeric of alphanumeric identification code.
Benchmarking – The process of comparing performance against the practices of other leading companies for the purpose of improving performance. Companies also benchmark internally by tracking and comparing current performance with past performance.
Best Practice – State-of-industry performance or application.
Bill of Landing – A transportation document that is the contract of carriage containing the terms and conditions between the shipper and carrier.
Break-Bulk – The separation of a single consolidated bulk load into smaller individual shipments for delivery to the ultimate consignees.
Carrier – A firm which transports goods or people.
Common Carrier – A for-hire carrier that holds itself out to transport goods and serve the general public at reasonable rates and without discrimination.
Consignee – The party to whom goods are shipped and delivered. The receiver of a freight shipment.
Consignor – The party who originates a shipment of goods (shipper). The sender of a freight shipment, usually the seller.
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Consolidation – Combining two or more shipments in order to realize lower transportation rates. Inbound consolidation from vendors is called make-bulk consolidation; outbound consolidation to customers is called break-bulk consolidation.
Continues Replenishment Planning (CRP) – A program that triggers the manufacturing and movement of product through the supply chain when the identical product is purchased by an end user.
Core competency – One of a company’s primary functions, which is considered essential to its success.
Cost of capital – The cost to borrow or invest capital.
Cross-docking – The direct flow of merchandise from the receiving function to the shipping function, eliminating any additional steps in between, including the need for storage.
Cycle time – The amount of time it takes to complete a business process.
Dedicated Contract Carriage – A third-party service that dedicates equipment (vehicles) and drivers to a single customer for its exclusive use on a contractual basis.
Demand Chain – Another name for the supply chain, with emphasis on customer or end user demand pulling materials and product through the chain.
Distribution – Outbound logistics, from the end of the production line to the end user.
Distribution Center – A post-production warehouse for finished goods.
Distribution requirements planning (DRP) – A system of determining demands for inventory at distribution centers and consolidating demand information in reverse as input to the production and materials system
Electronic Order Quantity (EOQ) - An inventory model that determines how much to order by determining the amount that will meet customer service levels while minimizing total ordering and holding costs.
Economic Value Added (EVA) – A measurement of shareholder value as a company’s operating profits after tax, less an appropriate charge for the capital used in creating the profits.
EDI (Electronic Data Interchange) – The paperless exchange of standard business transactions of information by electronic computer-to-computer transfer, generally requiring little or no human intervention.
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Efficient Consumer Response (ECR) – A demand driven replenishment system designed to link all parties in the logistics channel to create a massive flow –through distribution network. Replenishment is based upon consumer demand and point of sale information.
Fill Rate – The percentage of order items that the picking operation actually fills within a given period of time.
Finished Goods Inventory (FGI) – Products completely manufactured, packaged, stored, and ready for distribution.
Fixed Costs – costs which do not fluctuate with business volume in the short run.
FOB (Free on Board) – Contractual terms between a buyer and a seller which define where title transfer takes place.
FOB Destination – Title passes at destination, and seller has total responsibility until shipment is delivered
FOB Origin – Title passes at origin, and buyers has total responsibility over the goods while in shipment.
Foreign Trade Zone (FTZ) – An area or zone set aside at or near a port or airport, under the control of the U.S customers Service, for holding goods duty-free pending customers clearance.
Full-Service Leasing – An equipment-leasing arrangement that includes a variety of services to support lease equipment (i.e., motor carrier tractors).
Globalization – The process of marketing something worldwide in scope or application.
Handling costs – The cost involved in moving, transferring, preparing, and otherwise handling inventory.
Hazardous Material – A substance or material which the department of transportation has determinant to be capable of posing a risk to health, safely, and property when stored or transported in commerce.
Hundredweight (cwt) – A pricing unit used in transportation (equal to 100 pounds).
Inbound Logistics – The movement of materials form suppliers and vendors into production process or storage facilities.
INCOTERMS – International terms of sale developed by the international chamber of commerce of define sellers and buyers responsibilities.
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Integrated Logistics – A comprehensive, system-wide view of the entire supply chain as a single process, from raw materials supply though finished goods distribution. All functions that make up the supply chain are managed as a single entity, rather than managing individual functions separately.
Intermodal Transportation - Transporting freight by using two or more transportation modes.
Inventory – Raw materials, work in process, finished goods and supplies required for creation of a company’s goods and services.
Inventory Carrying Costs - A financial measurement that calculates all the costs associated with holding goods in storage, usually expressed as a percentage of the inventory value. It includes inventory-in-storage, warehousing, obsolescence, deterioration or spoilage, insurance, taxes, depreciation, and handling costs.
Inventory Deployment – A technique for strategically positioning inventory to meet customer service levels while minimizing inventory and storage levels. Excess inventory is replaced with information derived through monitoring supply, demand and inventory at rest as well as in motion
Inventory management – The process of ensuring the availability of products through inventory administration.
Inventory Turns – The cost of goods sold divided by the average level of inventory on hand. This ratio measures how many times a company’s inventory has been sold during a period of time. Operationally, inventory turns are measured as total throughput divided by average level of inventory for a given period.
Inventory Velocity - The speed with which inventory moves through a defined cycle, i.e. form receiving to shipping.
Just-In-Time (JIT) – An inventory control system that controls material flow into assembly and manufacturing plants by coordinating demand and supply to the point where desired materials arrive just in time for use.
Kitting - Light assembly of components or parts into defined units.
Less-Than-Truckload (LTL) Carries – Trucking companies that consolidate and transport smaller (less than truckload) shipments of by utilizing a network of terminals and relay points.
Logistics – According to the council of logistics Management (CLM), logistics is the process of planning, implementing, and controlling, and controlling the efficient, effective flow and
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Storage of goods, services, and related information form point of origin to point of origin to point of consumption for the purpose of conforming to customer requirements.
Marginal Cost - The cost produce one additional unit of output. The change in total variable cost resulting form a one-unit change in output.
Materials Handling – The physical handling of products and materials between procurement and shipping.
Material Managements – Inbound logistics from suppliers through the production process. The movement and management of materials and products from procurement through production.
Materials Requirements Planning (MRP) – A decision –making methodology used to determine the timing and quintiles of materials to purchase.
N.M.F.C. (National motor Freight Classification) – A tariff which contain descriptions and classifications of commodities and rules for domestic movement by motor carries in the U.S.
Optimization – The process of making something as good or as effective as possible with given resource and constraints.
Order Cycle – The time and process involved form the placement of an order to the receipt of the shipment.
Order Processing – Activities associated with filling customer orders.
Outbound Consolidation (Break-Bulk) - Consolidation of a number of small shipments for various customers into a larger load. Shipped to a location near the customers; then the small shipments are distributed to the customers.
Outbound Logistics – The process related to the movement and storage of products form the end of the production line to the end user.
Outsource – To utilize a third party provider to provide services previously performed in house
Pick/Pack – Picking of product from inventory and packing into shipment containers.
Point of sale information – Price and quality data from retail locations as sales transactions occur.
Postponement – The delay of final activities (i.e., assembly, production, packaging, etc.) until the latest possible time.
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Prepaid – A freight term which indicates that charges are to be paid by the shipper.
Present Value – Today’s value of future cash flows, discounted at an appropriate rate.
Process Improvement - Designs or activities that improve quality or reduce costs, often through the elimination of waste or non-value-added tasks.
Proof of Delivery (P.O.D.) – Information supplied by the carrier containing the name of the person who signed for the shipment, the time and date of delivery, and other shipment delivery related information.)
Quick Response (P.O.D) – A business strategy for reducing inventory in the pipeline and shortening the pipeline and shortening the cycle time for a product to be made, distributed and sold. Point of sale information is electronically transmitted back to the store supplier, who is responsible for adequate supply at the store.
Reengineering – A fundamental rethinking and radical redesign of business process to achieve dramatic improvements in performance.
Replenishment - The process of moving or respelling inventory form a reserve storage location to a primary picking location, or to another mode of storage in which picking is performed.
Reverse Logistics – A specialized segment of logistics focusing on the movement and management of products and resources after the sale and after delivery to the customer.
Safely Stock - The inventory a company holds above normal needs as a buffer against delays in receipt of supply or changes in customer demand.
Shipper- The party which tenders good for transportation.
Stock keeping Unit (SKU) - Numbering system which makes a product or item distinguishable from all others.
Sub – Optimization – Decisions or activities in a part made at the expense of the whole.
Supply Chain – The physical, financial and information networks, which involve the movement of material, funds, and related information through the full logistics process, form the acquisition of raw materials to delivery of finished products to the end user. The supply chain includes all vendors, service providers, customers, and intermediaries.
Supply Chain Management (SCM) – The management and control of all materials, funds and related information in the logistics process from the acquisition of raw materials to the delivery of finished products to the end user.
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Supply warehouse – A warehouse that stores raw materials or components. Goods from different suppliers are picked, sorted, staged, or sequenced at the warehouse to assemble plant orders.
Tariff – A tax assessed by a government on goods entering or leaving a country. The team is also used in transportation in reference to the fees and rules applied by a carrier for its services.
Third Party Logistics – Transportation, warehousing and other logistic related services provided by companies employed to assume tasks that were previously performed in house by the client.
Throughput – A measure of warehousing output volume (weight, number of units). Also the total amount of units received plus the total amount of units shipped, divided by two.
Time-Definite Services – Delivery is guaranteed on a specific day or at a certain time of the day.
TOFC – Trailer-on-flat car (Piggyback).
Total Average Inventory – A decision-marketing approach that considers minimization of total costs and recognizes the interrelationship among system variables such as transportation, warehousing, inventory, and customer service.
Tracking and Tracing –Monitoring and recording shipment movements from origin to destination.
Traffic Management – The management and controlling of transportation modes, carriers and services.
Transit Time - The total time which elapses between a shipment’s pickup and delivery.
Truckload Carriers (TL) – Trucking companies which move full truckloads of freight directly from the point of origin to destination.
Unit cost – The cost associated with a single unit of product. The total cost of producing a product or service divided by the total number of units.
Value Added – Increases or improved value, worth, functionality or usefulness.
Variable cost – A cost that volume or activity level of business.
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Visibility – The ability to access or vies pertinent data or information as it relates to logistics and the supply chain
Warehousing- The storage (holding) of goods.
Works-in-process (WIP) – parts and subassemblies in the process of becoming completed finished goods.
