Europw Management @mai Vol. II, No. 2, pp. 258-261, 1993. 0263.2373193 $6.00 + 0.00. Printed in Great Britain. Pergamon Press Ltd.

Logistics and Competitive Strategy

Organisations around the world are facing unprecedented challenges to the maintenance of profitability as they confront recessionary markets and increasingly fierce global competition. It is against this backdrop that logistics has emerged as a vital element in the process of corporate renewal.

This article examines the contribution that logistics can make to the achievement of sustained competitive advantage, particularly through the combined impact of improved customer service and lower costs to serve. The contribution that customer service can make to the building of long-term relationships with customers and hence enhanced customer retention is emphasised.

Introduction Whilst there has been a dramatic surge of interest shown in logistics managenlent in recent years and it is now recognised by many companies to be of critical concern, it has still to be fully embraced as a concept and an organisational philosophy. In practice there has only been slow progress since the early sixties when Peter Drucker, writing in Fortune magazine said: ‘Physical distribution is today’s frontier in business. It is one area where managerial results of great magnitude can be achieved and it is still largely unexplored territory’.’

What Drucker referred to as ‘Physical Distribution’ has gradually enlarged its scope to cover the process of managing the flow of materials through the business to meet customer demand. It is a system-wide concept that links the market place with manufacturing and beyond to suppliers. The current definition of logistics provided by the United States Council of Logistics Management is ‘the process of planning, implementing and control- ling the efficient flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements’.* Elsewhere, this author has summarised the mission of Logistics Management as being to plan and co-ordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible cost.”

The importance of logistics is that it is the process that

delivers customer service and hence it is essentially an integrative concept which cuts across the traditional functions of the business. The organisational implica- tions of implementing logistics strategies are profound and have close parallels with the debate that is now taking place on the need to shift from a ‘vertical’ or functional focus in the firm to a ‘horizontal‘ or process orientation.*

As markets increasingly take on the characteristics of ‘commodity markets’, where customers see little dif- ference between products at a functional or technical level, then customer service can provide a powerful means of differentiation. In markets as different as industrial chemicals or personal computers, the struggle is to find ways to avoid the commodity trap. For many companies the solution to this problem has come through enhanced service performance. Today’s customer is service sensitive, requiring availability of supply at short notice, often operating on a ‘just-in-time’ basis, whether they be a manufacturing business, a retailer or an end user. The era of ‘time-based competition’ has arrived.”

Adding Value Through Logistics Recent years have seen an increased emphasis on the search for marketing strategies that create added value for the customer. This added value can come in many forms but a particularly powerful means of adding value to the basic offer is through the way we service customers. Service, effectively managed, will reduce the customer’s costs of ownership and/or enhance their satisfaction through the provision of time and place utility - ‘the right product in the right place at the right time‘.

The impact of customer service can be enduring, leading to longer term relationships with customers, improved retention rates and, hence, greater profitability. The connection between logistics performance and profit- ability is summarised in Figure 1.

The proposition, and it is supported by a growing body of evidence,’ is that superior service helps build relationships with customers which itself leads to improved rates of customer retention. The work of Bain

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Figure 1 Logistics & Profitability - the Linkages

PROFITABILITY RETENTION RATE

Figure 2 Better Customer Retention Impacts Long-term Profitability

and others has highlighted the impact that customer retention has on profitability. The first critical finding emerging from these studies is that the longer customers stay with us, the more profitable they become. When this relationship is linked to the customer retention rate a powerful profit multiplier emerges. The logic is quite simple:

Customer retention relates directly to the average ‘life’ of a customer, e.g. a 90% retention rate means that we lose 10% of our customer base each year, thus on average we turn our customer base over every ten years. With a 95% retention rate the lifetime doubles to 20 years. The longer a customer stays with us the more they are likely to see us as a preferred supplier, even single sourcing on us. The evidence also suggests that the costs to serve these customers reduce as we establish closer relationships and linkages in the supply chain, similarly the cost of selling to these loyal customers diminishes. The combined effect of a high retention rate and the enhanced profitability of loyal customers can lead not only to higher profit but to a better ‘quality of earnings’ as the customer base is less volatile. A company with lower market share but high customer retention can often be more profit- able than a company with the characteristics.

reverse

Figure 2 models the relationship between mtes, customer lifetime and profitability.

retention

Developing a Service-Driven Logistics System Customer satisfaction at a profit is the goal of any business organisation and the role of the logistics system is to achieve defined service goals in the most cost-

effective way. The establishment of these service goals is a pre-requisite for the development of appropriate logistics strategies and structures. There is now wide- spread acceptance that customer service requirements can only be accurately determined through research and competitive benchmarking.* Research amongst customers may also reveal the presence of significant differences in service preferences between customers, thus pointing towards alternative bases for market seg- mentation based upon service needs.

Tailoring customer service strategies to meet the precise needs of customers can be a powerful means of differentiation leading to enduring competitive advantage - service segmentation is a key means to achieving this end.

Understanding customers’ service preferences is the starting point for re-engineering logistics processes to ensure greater cost-effectiveness, thus customers’ service preferences should be the starting point for the development of logistics and supply chain strategies. The challenge to the organisation then becomes one of how to re-engineer processes and to re-structure con- ventional, functional systems to achieve these service goals at least cost.

Companies as diverse as Xerox and Unilever are now transforming their organisations to become market- driven and to shift the locus of power from functions to core processes; in effect turning the organisation chart through 90”. Figure 3 highlights the fundamental change in orientation that such a strategy requires.

The achievement of this transformation must begin by the recognition that logistics is essentially a planning

orientation, in other words the logistics management process entails the linking of production plans with materials requirements plans in one direction and distribution requirements plans in the other. The aim of any organisation should be to ensure that produc- tion produces only what the market place requires whilst purchasing supplies production with what it needs to meet its immediate requirements. How can this fairly obvious idea be converted into reality?

The key lies in the recognition that the order and its associated information flows should be at the heart of the business. It may be a truism but the only rationale for any commercial organisation is to generate orders and to fulfil those orders. Everything the company does should be directly linked to facilitating this process and the process must itself be reflected in the organisational design and in its planning and control systems. All of this leads to the conclusion that the order fulfilment process should be designed as an integrated activity of the company with the conventional functions of the business supporting that process. To assist this transition the development of a customer order management system is a vital pre-requisite.

A customer order management system is the planning

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Traditional, functional organization

Input focused, budget-driven

(a) Vertical organizational focus

Market-facing organization 0 f UO

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(b) Horizontal organizational focus

Figure 3 The Shift from Functions to Processes

framework that links the information system with the physical flow of materials required to fulfil demand. To achieve this requires the central management of fore- casts, requirements plans, material and production control and purchasing.

A number of practical steps for improving customer order management processes are suggested below.

Eliminate the ‘Non-Value-Added’ Activities In reviewing the existing order processing system each element and each link in the chain should be critically examined to identify the value that it creates and the cost that it adds. ‘Value’ in this context refers to customer value, meaning a benefit that will contribute to the total utility of the product or offer in the eyes of the customer - and hence their willingness to pay.

In many service processes it is the case that a large Schonberger’ gives a number of examples of how the proportion of the time spent is non-value-added time. concept of a manufacturing ‘cell’ - where linked actions For example, delays in paperwork, time that is are performed in parallel by multi-functional teams - ‘consumed‘ whilst a product sits as inventory in a ware- can work just as effectively in order processing. One of house, time spent on checking and re-checking and so the cases he quotes, Ahlstrom, a Finnish company, has

forth. The target should be to eliminate all non-value- added activities.

The order processing system is a fabulous hunting ground to seek out and remove non-value-added activities. So often we find that no one has ever questioned the way in which paperwork is managed, or the sequence in which activities take place or indeed why those activities take place at all! Where possible the goal should be to look for opportunities to combine steps in the processes, to integrate separate groups of people performing adjacent tasks and to simplify processes by reducing paperwork and reports. It should always be remembered that a major part of the time consumed in meeting customer requirements is actually redundant and its elimination will improve the consistency and reliability of the delivered service thus embracing its ‘value’ in the eyes of the customer.

Order Fulfilment Groups Given that from a systems viewpoint the process of managing orders can be refined along the lines described above, what scope exists for improving the ‘people architecture’?

Several companies have experimented with the idea of a cross-functional, cross-departmental team to take responsibility for the management of orders. This team has been termed an ‘Order Fulfilmenf Group’ by Digital, the computer company. The idea behind such a group is that rather than having an organisational structure for order management where every activity is separated with responsibility for each activity fragmented around the organisation, instead these activities should be grouped together both organisationally and physically. In other words instead of seeing each step in the process as a discrete activity we cluster them together and bring the people involved together as well - ideally in a single open-plan office. Thus the order fulfilment group might comprise commercial or sales office people, credit control and accounts, production scheduler and trans- port scheduler - indeed anyone involved in the crucial business process of converting an order info cash.

The effect that such groups can have is often dramatic. Because all the key people in the order fulfilment process are brought together and linked around a common entity - the order - they are better able to sort out problems and eliminate bottle-necks. Order cycle times can be dramatically reduced as team-work prevails over inter-departmental rivalry. New ways of dealing with problems emerge, more non-value-added activities are eliminated and customer service problems - when they arise - can quickly be resolved, since all the key people are in close connection with each other.

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reduced lead-times in order processing from one week to one day, and variation in lead-time has dropped from up to six weeks to one week. Another case was that of Nashua Corporation in North America, where order entry lead-time has been reduced from eight days to one hour, with a 40% reduction in space and a 70% reduction in customer claims.

Logistics as the Vehicle for Change As markets, technologies and competitive forces change ‘1 t ever-increasing rates the imperative for organisational change becomes more pressing. The paradox is that because organisational structures are rigid, even ossified, they do not have the ability to change at anything like the same rate as the environment in which they exist.

The trend towards globalization of industry, involving as it does the co-ordination of complex flows of materials and information from a multitude of off-shore sourcing and manufacturing points to a diversity of markets has sharply highlighted the inappropriateness of existing structures. What we are discovering is that the driving force for organisational change is logistics.

To compete and survive in these global markets requires a logistics-oriented organisation. There has to be nothing less than a shift from a functional focus to a process focus. Such a radical change entails a re-grouping within the organisation so that the key tasks become the management of cross-functional work flows. Hewlett- Packard is an example of a company that has restruc- tured its organisation around market-facing processes, rather than functions. Order fulfilment has been recognised as a core process and so, on a global scale, there is one order management system architecture that links order entry, order management and factory order/shipment processing. This core process is supported by a common information system that provides ‘end to end‘ visibility of the logistics pipeline from order through to delivery.

Companies like Hewlett-Packard are demonstrating that even in tough market conditions innovative products, when supported by responsive logistics systems, can maintain their differentiation and continue to be seen b!z customers as value-adding suppliers.

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Drucker, P., The Economy’s Dark Continent Fortune Magazine, April 1962. Council of Logistics Management, Oak Brook, Illinois, U.S.A. Christopher, M., Logistics and Supply Chain Management, Pitman, 1992. Ostroff, F. and Smith, D., The Horizontal Organization, McKinsey Quarterly, 1992, No. 1. Stalk, G. and Hout, D., Competing Against Time, The Free Press, 1990. Christopher, M., Payne, A., and Ballantyne, D., Relationship Marketing, Butterworth Heinemann, 1991. Reichheld, F. and Sasser, E., Zero Defections: Quality Comes to Services, Harvard Business Review, September- October, 1990. Albrecht, K. and Bradford, L.J., The Seruice Advantage, Dow Jones-Irwin, 1990. Schonberger, R.J., Building a Chain of Customers, The Free Press, 1990.

MARTIN CHRISTOPHER, Cranfield School of Management, Cranfield Institute of Technology, Cranfield, Bedford, MK43 OAL, UK

Martin Christopher is Professor of Marketing and Logistics Systems at Cranfield School of

Management, where he is Head of the Marketing and Logistics Faculty and Chairman of the Cranfield Centre for Logistics and Transportation. His interests in marketing and logistics strategy are reflected in his consultancy and management development activities. In this connection Martin Christopher has worked for major international companies in North America, Europe, the Far East and Australia. In addition, he is a non-executive Director of a number of companies. Martin Christopher has held appointments as Visiting Professor at the University of British Columbia, Canada, the University of New South Wales, Australia, and the University of South Florida, USA.

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