International Journal of Physical DistributionPlanning the Distribution System: an operational approachDAVID WALTERS

Article information:To cite this document:DAVID WALTERS, (1972),"Planning the Distribution System", International Journal of Physical Distribution, Vol. 3 Iss 2 pp.108 - 149Permanent link to this document:http://dx.doi.org/10.1108/eb014274

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International Journal of Physical Distribution Monograph Series Autumn 1972

Volume Three . Number Two

Planning the Distribution System

an operational approach by DAVID WALTERS

Cranfield School of Management Marketing Logistics Systems Research Unit

Abstract: This monograph considers recent developments in management techniques and proposes their use in physical distribution system planning. The recent developments in physical distribution management are reviewed and the author considers how such techniques as missions analysis and systems thinking may be combined into a useful planning model with which the prob-lems of physical distribution system design may be analysed and solved. The monograph is not specific in that it does not offer management "ten easy steps to system design". It takes a broad view of the problems involved and is con-cerned with an approach to system planning rather than specific problem solutions.

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Recent years have seen an increasing amount of attention given to physical distribution management. On both sides of the Atlantic managements have focussed attention on physical distribution not only within their corporate organisations but in professional bodies devoted to the disci-pline. In the U.S. the National Council of Physical Distribution Manage-ment is well established and is contributing annually to the body of knowledge rapidly accumulating there.

More recently, in the U.K. the Centre for Physical Distribution Manage-ment was established under the wing of the British Institute of Manage-ment. Already the Centre has made its mark and although there is much to do and a long way to go the Centre is capable of offering both leader-ship and a vehicle for the development of physical distribution philosophy and technology.

This monograph intends looking at the planning of physical distribution systems in the context of emerging concepts, not only of physical distribu-tion but also in the fields of systems theory and planning.

THE DEVELOPMENT OF THE PHYSICAL DISTRIBUTION CONCEPT It is useful to establish clearly what is meant by physical distribution. Of the available definitions the following is chosen:

"By 'physical distribution' we mean the inter-relationship of all the factors which affect the flow of both information and goods necessary to fill orders. This flow starts when a customer decides to place an order and ends when the order is delivered to the customer. Physical distri-bution includes not only the action necessary to fill a particular order but also the action necessary to prepare oneself to meet customer needs". (1) This is particularly suitable for a discussion on distribution planning

because it recognises —both goods and information flows —the customer as being the important factor —all activities involved in customer satisfaction. The development of physical distribution is of interest from the

planning point of view. Bowersox (2) suggests two major factors for "the neglect and subsequent late development of physical distribution":

—Prior to the development of computers and before analytical techniques were generally available to business, there was no reason to believe that extensive analysis of physical distribution activity would achieve improved performance.

—The prevailing economic climate in the U.S. during the 1950's created a situation in which operating economies, if found, often made the difference between profit and loss.

Arbury et al (1) emphasise these and specifically refer to the facts that total distribution costs in the U.S. were estimated at some $100 billion

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and varied between 25 and 40 per cent. of the sales dollar among indus-tries. Also a general upward drift of interest rates boosted the effective cost of capital Invested in inventory.

Arbury also considers developments in transportation, unitisation, and warehousing and handling, in addition to developments in com-puters and decision theory in business operations. The authors point to the fact that until the late 1960's, little concerted attempt was made to evaluate the effectiveness of distribution expenditures.

Two other items considered important by Arbury are: the prolifera-tion of products and product differentiation and changing patterns of retailing, and the greater emphasis place on customer service by com-panies as competition becomes more intense. The situation is succinctly summarised by Arbury:

". . . changing technology and previous lack of attention make physical distribution an area in which significant 'dollar' decisions can be made. Internal and external cost and profit pressures have added impetus to the need for improvement in the area of physical distribution. Finally, the increasing demand for service (speed and reliability of delivery, for example) has caused management to look for economic criteria to help determine service policies". Thus far we have Isolated those factors which prompt formalised

planning: 1. The availability of techniques 2. The need to analyse and reduce costs 3. Increasing competition 4. A demand for service If we add to this list the fact that the operational environment is con-

stantly changing there can be no doubt that planning is an essential ingredient for success in any business operation.

Bowersox (2) suggests four developments considered as responsible for the eventual crystalisation of the physical distribution concept: 1. The notion of total cost: highlighted by a 1956 study of air freight

economics in which the authors Illustrated that high freight rates required for air transport could be more than offset by trade-offs in the form of reduced Inventory holding and warehousing costs (3).

2. Application of the systems concept: the basic belief that integrated system performance can produce an end result greater than that possible from unco-ordinated performance, aimed toward the accomplishment of pre-determined goals, rapidly found acceptance in physical distribution analysis.

3. Beyond cost: a shift of emphasis suggested by Drucker (4), Laxer (5), Steward (6) towards appraising the effects on profits by improved service resulted in physical distribution representing a balanced effort between product delivery capabilities and related system altern-atives. Thus, given a programmed level of service, several alternative systems might be capable of accomplishing the stated goals but with varying levels of total cost.

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4. Emphasis upon temporal relations and physical commitments in a channel context: the dynamics of channel management were high-lighted by Forrester (7), who in terms of physical product flow, illustrated the impact of Information dynamics upon fluctuations in inventory accumulations. Consideration was also given to cost impli-cations at the interfaces of individual firms' physical distribution systems and also to costs of physical distribution between firms linked together in co-operative vertical marketing systems.,

So here we have a background to the development of physical distribu-tion as a discipline and it would seem logical to extend this into physical distribution system planning, thereby capitalising on experience which is available and thinking in terms which, although new, are not totally unfamiliar.

Three of these topics are of particular relevance in the planning context and will be developed in the subsequent section. They are: 1. Systems thinking in planning 2. The notion of total cost 3. The "beyond costs" considerations in planning—the demand for

service. In the following sections each of these aspects will be discussed, first in

terms of the total operation of the company and secondly in terms of their application to physical distribution planning.

DEVELOPMENTS IN PLANNING An often asked question is—why plan? This was answered by Holden et al as long ago as 1941—which in terms of management thinking is quite some time ago. However, this work did offer a number of valid reasons and answered the question "why plan?" with, "There is nothing about an organisation more important than its future".(8)

There is no level within the business organisation that can consider itself as having no need for planning its future. Indeed planning should be an integrated activity throughout the company. Top management is responsible for setting objectives which should be communicated down through the organisation and which act as the basis for functional and departmental planning purposes.

This in practice, however, is not the general case. Many companies do not set objectives, many perhaps assuming that they are implicit in their (top managements') actions and as such need no further expansion or communication. Many others prefer the status quo to obtain.

In this way they assume that the future will take care of itself and no action (or reaction) is required of them.

But this clearly is not the case. The business operates in an environ-ment comprising a number of institutions (e.g. social, legal, political, and economic) all of which interact with each other. This worthwhile planning must take cognizance of these factors and consider the interactions and interdependencies that exist.

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Systems Thinking in Planning This leads into a recent innovation in management techniques—systems thinking. Systems thinking is not only a computer based technique; it can be (and is) applied to all types of management problems.

Seymour Tilles suggests: "The basic notion of a system is simply that it is a set of interrelated parts".(9)

Tilles in discussing the manager's job points to the lack of an overall approach in deciding just what a manager is supposed to do. He suggests that the firm is not just a "social system" nor is it a "data processing system and decision network"; nor does, "The firm is really a sytem of funds flows" answer the problem. He continues to ask: "How do we go about fusing all of these separate theories into a meaningful and integrated concept of the manager's job?" He finds his own answer:" In my opinion the most promising approach to such a synthesis stems from the emerging field of systems theory".

Tilles then suggests that viewed from a systems point of view the manager's job divides into four basic tasks: 1. Defining the company as a system 2. Establishing system objectives, which can be further broken down to:

(a) Identifying other systems (b) Setting performance criteria

3. Creating formal sub-systems 4. Systemic integration

This confirms the previous suggestion that the firm is part of a large system: it is in fact a sub-system within the larger system. At the same time the firm itself comprises sub-systems. Thus we have the firm interacting as a sub-system within the environment and functions within the firm (marketing, production, finance, etc.) each operating as sub-systems within a system. We can view these from both micro and macro aspects.

It is not always possible for each of the functions to be in balance. Figure 1 represents a series of hypothetical situations which illustrate how the firm may in fact be operating at a sub-optimal level due to the fact that inter-functional conflict exists and is not resolved. Clearly these are reversible (i.e. in the first situation the finance and logistics managers would consider small purchase volumes ideal but the purchasing manager would not because he would lose out on bulk discounts, and from in-creased handling and ordering costs).

These conflicts can be resolved but it is not easy. In the first situation, it is possible mathematically to calculate an economic order quantity which will compromise the costs and other interests of all parties. In the last situation it may well be possible to adjust quantity discounts in order that an economic purchasing size may be offered to customers.

This example serves to make the point that the systems approach is the simple recognition that any organisation is a system made up of segments, each of which has its own goals. The manager must be aware that, if he is to achieve the overall goals of the organisation, he can do so only by viewing the entire system and seeking to understand and measure the

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Figure 1. Situations which cam give rise to Inter-Departmental Conflict* Micro Subsystems

Subsystems Goal

Bulk purchases of materials

Long production runs

Broad product range

Tighter credit control

4 day delivery (from seven days)

Unit loads

Purchasing

Advantage: Larger discounts

Disadvantage: Discounts small on low volume purchases

Production

Advantage: Low costs

Disadvantage: Short, high cost runs

Advantage: Lower operating costs

Finance

Disadvantage: Working capital tied up

Disadvantage: Working capital tied up

Disadvantage: Finished goods stocks high

Advantage: Greater use of working capital

Disadvantage: Higher operating costs

Disadvantage: Loss ofsales to small customers

Marketing

Disadvantage: Narrow product range

Advantage: More sales through wider customer appeal

Disadvantage: Possible loss of sales

Advantage: More sales because of better service

Logistics

Disadvantage: Warehousing costs Increased

Disadvantage: Warehousing costs Increased

Disadvantage: Higher costs through more administration and more warehousing space

Disadvantage: System costs increased in order to meet service requirements

Advantage: System costs can be lowered by eliminating uneconomic calls

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interrelationships; and then to integrate them in a manner which enables the organisation efficiently to pursue its goals.

Clearly this means that some functional unit within the organisation may not achieve its own objectives, for what is considered best for the whole is not necessarily best for each component. Subsequently it will be shown that this obtains for sub-system components and that often the resultant solution requires trade-offs to be made such that operating inefficiencies (high costs) in one activity, will be more than offset by greater efficiencies (lower costs) in another activity, resulting in a lower-ing of total costs.

The point has already been made that business operates within the total environment and thus is a sub-system within a much larger system. These are macro considerations.

It is clear, therefore, that the business executive must be concerned with how the parts of the business system relate with the environmental system. This concern extends to system relationships between those parts comprising the firm and relationships with a variety of extra organisa-tional agencies all of which exert an influence on the firm. There is a wide variety of these, e.g. competitors, customers, government, the financial Institutions, labour unions and suppliers. Each has an influence on the firm, each is influenced by the firm. Thus the planning function must not only consider internal relationships (Figure 1) but must also be aware of, and attempt to optimise, the sub-system goals of each of the external factors. Indeed, a similar situation can be seen to exist and Figure 2 illustrates some of the possible conflict situations which may occur.

Again we can see that the interests of each of the institutions can differ. in the first instance what, at first consideration, may seem to offer benefits all round can, in fact, be a source of serious problems for many of the interested component sub-systems. Similarly, the second case may also be considered beneficial but an examination of all interests exposes disadvantages for some.

Suppose the second example had been reversed. The problems then created would have been even more serious. Now customers may be faced with increased costs because of a decrease in service. Suppliers may have their costs increased and sales and profits decreased. Competitors may enjoy increases in sales but may also look for reasons why the plant was closed—the answers revealing problems for them too. The financial institutions may lose some profits at best; the worst may be loss of some or all of their investment. The government and unions each will have their own problems.

This illustrates (albeit a simplified illustration) that the firm does not operate in a vacuum, but rather it is a sub-system in a total system which is the society in which we operate. Nor can the extent of the system be left at national borders. Multi-national business now means that a firm's activities may have far reaching effects. This is particularly relevant to the United Kingdom where E.E.C. membership will not only increase the size of the "total system" but will bring major changes in intra-system relationships.

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Figure 2. Situations giving rise to Inter-Institutional Conflict—Macro Systems

Sub-system Goal

1. To introduce an entirely new product with new components, assembly tech-niques. Increase capital content at half current price

2. Open a new plant in an investment area

Customers

Advantage: Increases profits

Advantage: May Improve service and thus Increase profits

Suppliers

Disadvantage: Decreases profits. Some may find their position becomes vulnerable and could lead to business failure

Disadvantage: Likely to increase distribution and administration costs

Competitors

Disadvantage: May attempt to undercut prices. Result is lower market prices and profits for all firms

Disadvantage: May reduce sales and profits. In any event current market shares are likely to be rearranged

Government

Disadvantage: Increases welfare payments and may make an acute unemployment problem worse

Advantage: Will ease unemployment problems

Financial Institutions

Advantage: Better return on investment is likely, more profit

Advantage: Will increase demand for capital and ultimately profits

Trade Unions

Disadvantage: Members unemployed

Advantage: Increases employment

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Hence the basic notion of the firm as a system must be expanded and planning must include procedures and policies defining the company as a system and long-range planning as the process by which the system adapts its resources to dynamic external and internal conditions. Thus it can be said:

"The value of the systems concept to the management of an enterprise can be seen in two elements of the manager's job. First, he desires to achieve overall effectiveness of his organisation—not to have the parochial Interests of one organisational element distort the overall performance. Second, he must do this in an organisational environ-ment which invariably involves conflicting organisational objectives"

This overall system can be illustrated as in Figure 3.

To consider the firm as a system is but one step. What is also necessary is a formal approach to systems analysis. This follows because it is clear that each sub-system may have open to it a number of alternatives by which it can achieve its objectives, all of which produce the desired end result—but at different levels of cost.

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The RAND Corporation has pioneered work in the systems analysis field. One of their researchers, E. S. Quade, published in 1966 a contribu-tion to systems analysis method (11). Quade suggests the process of analysis has five elements: 1. The objective. Systems analysis is undertaken primarily to help choose

a policy or course of action. The first and most important task is to discover what the decision maker's objectives are (or should be) and then how to measure the extent to which these objectives are, in fact, attained by various choices. This done, strategies, policies, or possible actions can be examined, compared and recommended on the basis of how well and how cheaply they can accomplish these objectives.

2. The alternatives are the means by which it is hoped the objectives can be attained. They may be policies or strategies or specific actions and they need not be obvious substitutes for each other or perform the same specific function. This point will be expanded subsequently in terms of its application to physical distribution.

3. The costs. The choice of a particular alternative for accomplishing the objectives implies that certain specific resources can no longer be used for other purposes. While these can be measured in money they are, in fact, opportunity costs, i.e. the benefits that could have been obtained if they had been utilised elsewhere.

4. Models represent, in a simplified manner, the cause and effect relation-ships essential to the question studied. Models may be: verbal, graphical, mathematical, or mechanical. In systems analysis, the pur-pose of a model is to estimate for each alternative the costs that would be incurred and the extent to which the objectives would be attained.

5. A criterion is a rule or standard against which the alternatives may be ranked in order of desirability. It provides a means for weighing cost against effectiveness.

The process of analysis takes place in three over-lapping stages. In the first, the formulation stage, issues are clarified, the extent of the inquiry limited, and elements identified. In the second, the search stage, informa-tion is gathered and alternatives generated. The third stage is analysis.

To start the process of evaluation, the various alternatives are examined by means of the model(s). The model(s) tells us what consequences or outcomes can be expected from each alternative, i.e. what the costs are and to what extent each objective is attained. A criterion is then used to weigh the costs against effectiveness and thereby enable the alternatives to be ranked.

To imagine the process to be as simple as this would be foolhardy. In point of fact, things are seldom tidy. Often, objectives are multiple, conflicting, and obscure, and alternatives insufficient to attain the ob-jectives. The measures of effectiveness may not really measure the extent to which the objectives are attained; and predictions from the model(s) are full of uncertainties. Often other criteria chosen may lead to a different order of preference. When this occurs it is necessary to try another approach.

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A technique implicit in the systems approach is cost-effectiveness analysis. This has been defined as:

". . . a technique for choosing among given alternative courses of action in terms of their cost and their effectiveness in the attainment of specified objectives".(12) For meaningful analysis the analyst needs: —a specific statement of objectives —a complete list of alternatives to be considered —acceptable measures of effectiveness in meeting objectives —acceptable measures of cost data. Cost-effectiveness analysis is based on micro-economic theory and,

specifically, the "Law of Diminishing Returns", which concludes that, generally, increases in some inputs relative to other fixed inputs will eventually increase the total output less than proportionally to the increase in inputs.

Thus additional OUTPUT derived from a given INPUT diminishes. This is, in fact, a daily problem for business. Figure 4 illustrates this principle. The graph typically follows a logistics curve: thus, up to point L the measure has negligible value in the vicinity of the Inflexion. Beyond L, the marginal value added per unit begins to decrease, but the average value per unit increases up to T. Beyond T it decreases and from some point H on, the marginal returns decrease rapidly so as to make further investment not worthwhile.

Again, as with the entire systems analysis procedure, it is not a simple world and there are a number of problems:

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Definition of Objectives. There is a clear need to define objectives as explicitly as is possible. Careless selection and specification can lead to solution of the wrong problem. For instance, the objective of increasing the rate of inventory turnover, is very different from reducing inventory levels. In both cases a greater return on capital employed results but the ramifications subsequently are very different. It may also happen that the objective is wrong. A four-day delivery objective may not be feasible because of constraints imposed by salesmen's call cycles, etc. Moreover, it may be that customers are more interested in reliability than speed and the objective is totally wrong.

Identification of Alternatives. There is a major problem here in terms of the degree of depth to which each alternative should be defined. Alternatives are in fact competing sub-systems for accomplishing objec-tives and comprise both policy and resources. Thus if there is too little definition there will occur a large variance in system effectiveness and cost. While designing candidate system alternatives in detail would defeat both the purpose and value of the cost-effectiveness evaluation, it follows that great care must be exercised and alternatives must be chosen to that depth which lends confidence to the answers.

Selection of Effectiveness Measures: Choosing appropriate measures of effectiveness is probably the most difficult aspect of cost effectiveness analysis. The two characteristics which are appropriate to the analysis are often in conflict. First of all, and most important, it should be relevant. Secondly, it should be measurable. The conflict occurs because the most relevant are often very difficult to measure and vice versa.

Some of the criteria developed and which have an application were determined by Kazanowski (13), after a lengthy study of military and space cost-effectiveness evaluation exercises conducted on behalf of the U.S. Government. These include:

cost of savings per cent. cost advantage margin of return over costs expected profit cumulative profit, per cent of investment accomplishment, mission objectives rate of mission accomplishment probability of mission success

Selection of Fixed Cost or Fixed Effectiveness. The choice between fixed cost and fixed effectiveness is necessary in virtually all cost-effective-ness analysis and is, in general, a vital decision. Each approach has merits and limitations. The fixed effectiveness approach is often preferred because of a closer reflection of real world constraints. There are many instances in which the requirements to be fulfilled are well established and are relatively inflexible. Such is the case in the selection between logistics systems where the performance requirements are known. In this, and similar instances, cost minimisation will be a dominant criteria.

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As a basis for choice it may be said that: —If inflexible constraints are imposed on the resources available, use of the fixed cost approach is indicated. —If Inflexible constraints are imposed on the effectiveness required use of the fixed effectiveness is indicated.

Development of Cost Estimates. Systems cost analysis is considered as apart from other forms of cost analysis by McCullough, also of the RAND Corporation (14). These are particularly interesting in terms of planning distribution systems. They comprise the following characteristics:

End product orientation. It is a basic principle of systems cost analysis that requirements for diverse resources be identified and associated with end products. Decisions between alternatives are made on the basis of com-parisons of total costs, i.e. development, set up, and operational costs; not just the capital equipment that is involved.

Extended time horizon is an important consideration from two aspects. First of all the amount of time necessary to develop systems may be pro-tracted and may introduce uncertainty. Secondly it may involve the cost-ing of equipment, materials and techniques never before attempted. The result is that costing is difficult and the resulting estimates uncertain. Hatry (15) describes how the U.S. Department of Defence uses statistical regression analysis to develop C.E.R's (cost estimating relationships). Past programmes are analysed to develop equations which relate the cost of the new item to selected physical and performance characteristics of the item.

Incremental costing. The concept of marginal analysis is extremely useful here. Systems cost analysis should move from a base which represents the existing capability and existing resource base. The problem is to deter-mine how much additional resources are needed to acquire some specified additional capability, or alternatively, how much additional capability would result from some additional expenditure. The best example of this problem concerns service levels. It is known that an exponential relation-ship links service and costs, thus at differing levels of service the marginal cost increases (additional inventory) to improve service vary, increasing at high levels of service. Other problems involved are sunk costs, which are costs expended in the past and irrelevant for future investment decisions, and equally important, Inheritance. Only the requirements beyond system capabilities that can be inherited are changed to a new system. Often inheritance is the only distinguishing characteristic between alternatives (16). The difference between the two can be established thus:

Sunk cost items are those which cannot be utilised in an alternative system in any way and must, therefore, be considered as past expendi-tures. Inherited items are those which can usefully be incorporated and must be taken into account when the system is costed.

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Life cycle costs. These are derived from the premises of total costing, i.e. the costs necessary to undertake a particular course of action taking into account its total cost pattern over time, i.e. research and development, investment, operations. By approaching system costing in this way we are able to develop systems without necessarily being committed to procure and operate them. Figure 5 illustrates cost category patterns over the life cycle of an alternative system arrangements. It can be seen from the example that System A has the advantage of both lower R + D and investment costs than System B. However, System B has the advantage of lower operation costs, a larger service life and a shorter R + D time which enables it to be in service sooner than System A.

Other considerations are suggested by Seiler (16): Level of use. From a cost standpoint the levels of system use are cumulative and at one particular level there will be included the costs for that level plus those costs from levels below.

Time effects. The use of D.C.F. techniques is essential in systems costing and the techniques themselves are sufficiently well known to make it unnecessary for their inclusion here. However, the problems of obtain-ability often exist. Seiler (16) suggests that some consideration be made by penalising those alternatives having later obtainability dates, raising their costs by using the same compounding technique as used in dis-counting. We therefore have:

Where: Ctp = Total penalised costs C1 = Sum of costs during ith period r = Discount rate n = Period of years, I . . . n

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Seiler proposes the use of negative interest, the rationale being based on the dispropensity to wait for the additional performance and the lower cost obtainable from those systems with the later obtainability dates. By waiting, additional losses and/or costs might be incurred; this proposal recognises these effects and attempts to quantify them. The major con-ceptual problem is: what value should be assigned to r? The current cost of capital, i.e. debt and equity, may only end up as a compensating factor to normal discounting. The answer is possibly to estimate an oppor-tunity cost value for the next most attractive investment available to the company, thereby taking account of waiting to employ the funds.

Selection of Decision Criteria. The decision criterion is the standard by which all alternatives are evaluated in terms of cost and effectiveness. The problem is greatest when comparisons are made between alternative systems that perform a desired function by widely diverse means, because often the means of implementation have inherent unique criteria in themselves. There are many issues to be resolved:

One or many criteria? One criterion may well exclude other significent criteria and result in an invalid evaluation. At the other extreme, multiple criteria may result in the most unlikely alternatives excelling in some criterion again making evaluation difficult if not impossible.

The weighting fallacy. One person weighting the various crieria and meet-ing no objections indicates that there was no need for weighting in the first place. Alternatively, the committee approach invariably has per-sonality problems. Actual application presents problems. It can be shown that criteria weights can be multiplied or added to give entirely different outcomes. These are only a few of the problems. Clearly an acceptable weighting system can be extremely useful in system selection. One possible approach is to agree with customers the relative importance of service characteristics and for management to agree the relative im-portance of performance characteristics. This topic will be discussed in terms of logistics systems in a later section.

Creation of models relating cost and effectiveness. With the problems of measures for costs, effectiveness and actual criteria to be used solved there remains the need to formulate the analytical relationships between cost and effectiveness. Cost models attempt to describe relationships between alternative system characteristics and their costs, thereby estimating the cost of each alternative. Effectiveness models attempt to describe relationships between an alternative's characteristics and its effectiveness, resulting in an estimate of the effectiveness of each alterna-tive. In addition the model should provide trade-off relationships between system costs and characteristics and system effectiveness and character-istics. A cost-effectiveness model provides relationships between cost and effectiveness for alternatives and aids in answering such problems as the results of an increased expenditure on various alternatives in terms of the effectiveness of the output and vice versa, i.e. the likely cost of increased levels of effectiveness,

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Systems Engineering. It follows that any philosophical approach must develop a discipline. This has happened with systems thinking and a process of systems engineering has been developed. It has been defined:

"Systems engineering is the process by which people develop the specifications for an optimal system in response to unfulfilled human needs . . . Systems engineering is problem solving which involves the quantitative application of technology in order to identify and describe a solution" (17) The stages of systems engineering represent progress from the initial

formulation and evaluation of alternative system concepts in response to the recognition of unfulfilled needs; deriving, through selection, the definition of a best system; to the design stages whose output is the system model representing the solution to the design problem. Two important facets are: The System Life Cycle: A system's life cycle may be originated in one of two ways: as a direct means to meeting a new need, or as an iteration of a previous system whose life cycle is nearing completion. Between the beginning and end of a system life cycle there are a number of stages. Basically, these can be considered as falling into two distinct periods—the acquisition period and the use period. The acquisition period includes all those steps necessary to define the need, design, test and evaluate the system, and to produce and install it. The use period comprises those activities required to operate and maintain the system, including periodic updating or improvement to prolong its life and to meet changing re-quirements. Associated with each period are the costs of acquisition and the costs of ownership. These two periods are capable of division into a number of phases and the whole system life cycle appears as Figure 6. Further discussion on system life cycles will be continued in a later section.

Figure 6. The System Life Cycle (17)

Period

Acquisition

Use

Phase

Systems Engineering

Planning

Design

Production

Installation

Operation

Stage

Concept

Formulation

Preliminary Design

Engineering Development

Detail Design

Production Design

Production

Operation

Training

Operation

Maintenance

Modification

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System Design. When considering system design many aspects need to be considered. Besides the familiar requirements of performance, packaging, and environment, there are the less familiar requirements of operability, safety, reliability, maintainability, and producibility. Each of these con-tribute to the measure of a system's worth and utilisation. These exist within a background of time and cost requirements which must be satisfied during the acquisition and use periods. Figure 7 illustrates this.

Effective design requires that these requirements are both quantita-tively and qualitatively handled, then optimisation will consist of cost-effectiveness trade-offs among these parameters.

Kline and Lifson (17) propose this as a basic model, generally applicable throughout all phases of system design and for each design parameter (I.e. performance, reliability, maintainability, etc.).

It can be seen that the input to the process is information—Information about the need for the system, about the system environment, about constraints, about system design and use, and any other pertinent information.

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The steps follow what is now a familiar path. The first step, formulation of a model (often known as "defining the problem"), involves gathering and organising the information and establishing system constraints and objectives. Most important, it involves the formulation of the criterion of system work (value model) by which the system alternatives are to be evaluated. Without this system optimisation is not possible.

Once the need (problem) has been defined, and the system criterion established, alternative means of satisfying the system requirements may be synthesized. These may then be analysed and the results of such analysis evaluated against the established criterion.

A decision is then made on design suitability. If the design is unsuitable then iteration (optimisation) is needed. Because it is rare for a design to be correct at the first attempt this process is known as the "optimisation loop".

Once the design is acceptable it is frozen and is then communicated to others for implementation. This will take the form of specifications, reports, installation and support information, operating and maintenance instructions, training information and so on.

This has served to introduce and discuss systems engineering briefly. Logistics systems engineering has been explored in some depth by Martin Christopher (18) and his work will be introduced in a subsequent section.

The Notion of Total Cost The notion of total cost is implicit in the systems approach. In fact, the systems approach is a Total Approach because it considers both the internal and external environments of the firm.

"Essentially... the total approach to operations management generally sees the whole business operation as one system within which are a series of sub-systems" (18) Thus while the conventional view of business operations is that it

takes place in several clearly delineated centres (often defined as cost centres for budgeting purposes), the total operation based upon a system approach offers a more efficient alternative to overall operations manage-ment. For, while there are numerous techniques and methods by which each of the functional centres may operate efficiently, they are sub-optimal unless they consider the interaction of the areas with one another. Thus if the company wishes to minimise total operating costs and to maximise revenue, a correct balance between centres must be found. The total approach recognises that an increase in costs of one area may be traded-off for a reduction in costs (or increase in revenue) in another area and thereby Increase total profitability. This, simply, is the Total Approach.

Therefore, returning to Figures 1 and 2 gives an opportunity to examine the situations hypothesized for possible optimisation. In the first instance, bulk purchasing, the possible use of E.O.Q's (Economic ordering quantities) established mathematically was discussed. The other situa-

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tions may not have such clear cut possibilities for resolution, neverthe-less they can be resolved in a similarly rational way. For example, the problem of long production runs can be solved by measuring the relative economies and diseconomies in terms of overall costs and again an optimal solution can be reached. In all instances the rationale is the same—that by deliberately increasing cost in one area the overall cost position (or profit position) is improved.

The macro situations are not so easy to resolve. The problems here of course are lack of information on sub-system costs, and the difficulty of ensuring that all sub-systems can see each other's problems sympathetic-ally. Each problem differs in intensity according to the relationships between sub-systems, for example, a more open relationship might be expected to exist between supplier and customer than between com-petitors, similarly more problems may be expected to be encountered between government and industry. However, the principle remains the same even if the costs are calculated somewhat differently and trade-offs occur between, for example, profits and social costs.

Physical Distribution System Activity Centres It has already been established that a system comprises ". . . a set of interrelated parts". (9) A physical distribution system has five major components (50):

Facility locations Transportation capability inventory allocations Communication networks Unitisation

Facility Locations. In general companies have two things in common; they compete and they sell in a geographical market place. It follows that companies cannot neglect the impact of the location of facilities on their competitiveness and their costs. Marketing impact and the selection of a superior locations network can ensure speedy delivery at minimum cost and therefore relates to, and limits, physical distribution system efficiency.

Transport Capability. Companies must have the capability to move materials and finished inventories between facilities. There are three factors of primary importance in establishing the transport capability (19):

Cost of service. i.e. the actual payment for movement between two points plus the expense of inventory committed to transit. System design should aim to minimise the transport cost; this does not imply that the cheapest method of movement between two facility points should always be aimed for. Speed of service. Speed and cost often relate in two ways, first, it is usually found that transport companies offering fast service charge higher rates and second, the slower the service the longer the interval that materials and inventories are 'locked up'.

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Consistency of service. The measured performance over a range of transfers between facilities indicates dependability of the method of transfer. For most companies consistency is of more importance than speed; if a movement takes two days one time and six the next, serious bottlenecks can occur in the system.

It is clear then that a balance must be reached between transfer cost and speed of service, with the ultimate objective of both regulating and integrating speed of transfer into the total system at a cost acceptable to management. Inventory Allocation. The basic objective of inventory integration into the physical distribution system is to employ the minimum quantities consistent with a desired service level and total cost. Therefore, inventory allocation should be initiated with the idea of the minimum practical commitment. Bowersox et el (19) suggests selectivity is the answer and highlights four factors:

Customer qualities. All firms sell to a variety of customers in terms of profit opportunities, some good, some poor. It makes sound business sense to know which customers are the good ones and to design inventory allocations to protect these with good physical distribution service. Product qualities. Much the same relationship exists for product ranges. It follows then that inventory allocation policy should take this fact into account and differentiate between items carrying fast moving high profit items in all locations and slow moving items in central depots. Transport integration. Transport policy should be flexible such that in certain instances use be made of the fact that by stocking a larger volume than necessary at a specific location larger volume shipments at lower (worthwhile) unit rates can be made, offsetting inventory costs. Competitor performance. Firms compete, and competitive advantage may be obtained by a deliberate policy of maintaining high inventory levels. Additional profits can more than offset the additional costs.

Communication Networks. Distribution communications have a two-fold impact on the flow of goods through the system (19); quality of information—in terms of prediction of events, and speed of information flow—which must be related to Its integration with facilities, transport capability and inventory allocations. There is little sense (and no profit) in using a low cost method of order transmission if by doing so it requires the use of air freight to meet delivery times. There are two tasks pertain-ing to communications flows: customer order processing, a critical item because orders are the prime input of the total system, and order adminis­tration, shipment being insufficient in itself—it must be received as promised with respect to time, quality, and quantity.

Unitisation. It has been suggested (19) that unitisation is not a specific activity centre because unitisation occurs throughout the system. Against this it could be agreed that certain aspects are specific and sufficiently important to warrant treatment as an activity centre. Examples of this

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are the use of containerisation as a sales aid in terms of pricing and storage benefits. Another example of the specific nature of unitisation is in the case of packaging design which has handling, protective and point of sale benefits. For purposes of this exercise unitisation is defined as "that activity centre concerned with the cube utilisation economics of pack-aging, palletisation, all aspects of containerisation, warehousing, and transportation".

The Benefits of Total Distribution It is apparent that the total approach can be applied to physical distribu-tion. It is possible to identify trade-off possibilities among the activity centres which can lead to lower total system costs and/or increased profits by accepting cost increases in one or more of the activity centres. For example, use of air freight to service Continental European markets may eliminate (or drastically reduce) the need for field inventory in market centre locations.

Business Week (20) reported a number of successful implementations of the total distribution concept. An example was the case of the Norge Division of Borg Warner Corporation in which a total approach permitted the company to increase profits and reduce inventories. The problem was one of increasing costs (these doubled the price of the appliance between the end of the production line and the consumer). Six cost conscious departments acted in splendid isolation, none caring (or realising) that increase in costs of one of the departments might lower the total costs. Business forecasts were modified to become sales forecasts, which in turn were modified to become plant schedules to suit plant convenience (i.e. long runs of a fixed model at a fixed rate). Due to the lack of integrated planning the result was that transportation became a " . . . matter of expedience of the moment . . ." while warehouse cube was either over or under utilised.

This situation led to unprofitable "loading programmes", whereby surplus stocks are pushed off on to dealers with special discount con-cessions. Complaints were received from both the parent company and customers with monotonous regularity.

Norge found a solution by combining forecasting, production schedul-ing, warehousing, order processing and shipping into one department headed by a director of physical distribution. Much of the duplication has been eliminated and the total process accelerated. User service require-ments and competitors' service performances were determined through a research programme.

The initial results were: cessation of loading programmes; reductions in both plant and distributor inventories; and a reduction in accounts receivable. These brought about a reduction in overall investment and an increase in profitability. One specific step was to open a regional ware-house in Utah for Norge's West Coast distributors, thereby enabling a previous delivery cycle of 20 days to be reduced to 4 or 5 days and with a 50% reduction in dealer Inventories and accounts receivable. Thus paradoxically Norge increased profits by increasing costs.

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A further example is the case of Gillette when faced with using expen-sive air freight upon introducing stainless steel blades into a rapidly changing market. This added to costs enormously and consequently its effects on profits were unacceptable. By revamping paperwork it was possible to cut down the number of days taken to process an order and this enabled the company to return to low-cost surface freight for routine shipments but at the same time maintaining delivery schedules.

Johnson and Johnson also found that faster order handling was a solu-tion to its problems. This enabled the company to bulk ship and to take advantage of full truck load rates as against the costlier L.T.L. (less than truckload) charges.

Xerox examined its policy of holding copier supplies in branch loca-tions. The examination revealed that 80% of the items were slow moving and many could be held at one location and air freighted as required. Formerly it worked out of 40 sales branches. In the end the study group found that 92% of the company's customers could be serviced adequately from just seven distribution centres in the U.S. and Canada. It was esti-mated that the new distribution organisation has added $9 million to net profit in three years.

Development of transportation hardware has brought changes to dis-tribution methods and to basic business ways. The Armour Company found that new, larger capacity freight-cars offered large savings—some $1000 per car. To take full advantage of the saving Armour and other meat packers have had to change their operations. Stockyards and slaughterhouses are steadily being moved away from consuming areas and closer to growing areas. Savings are two-fold. Not only can they ship more meat for less money and have it arrive in better condition but they have to ship the unusable parts of the animals less for.

There is not an abundance of reported applications of the Total Distri-bution concept by British companies. Probably the best known company is the Unilever subsidiary, S.P.D. (21), while the more recent attempt to offer total service by Cory has also been featured (22), (23). The need for appraisal of the physical distribution function was one of the reasons leading to the formation of a separate company by Tesco—Tesco Manage-ment Services Limited (24).

Each of these examples has resulted in an increased profit position subsequent to a re-appraisal of the physical distribution system along the lines of a total approach. In each instance the company concerned has started with an objective and from the objective has examined the alternative methods available to achieve it. This suggests that each company is switching its emphasis from INPUTS to OUTPUTS. In other words they are establishing what needs to be done and are then planning, and budgeting, to meet the objective. This leads us into a discussion of another recent management innovation—the missions approach.

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The Missions Approach What is a mission? A mission is:

". . . the fundamental purposes that the organisation is trying to achieve". (25) This definition serves to illustrate just how basic and essential the

missions concept is insofar as the business planning function is concerned. The basic tenet of the missions approach is the attempt to ask and to

answer the question: What business are we in? Levitt (26) suggests that if the U.S. railroads had thought to ask themselves this question some years ago and had answered themselves with "the transportation business", there would not have been the succession of financial crises that they have found themselves facing.

Other similar examples can be cited. The Hollywood film business took some time to come round to realising that they were in the entertain-ment business in the broadest sense, eventually making films for the "arch enemy", television. One of the large data processing firms is re-ported as saying that it is in the "business efficiency" business.

Immediately a problem can be seen. The company may define its busi-ness either too broadly or too narrowly. Clearly if the U.S. railroads defined their missions as the transportation business they would imply that future growth areas may include small taxi services as potential acquisitions. In all likelihood this would prove disastrous because the management expertise required to run a large railroad is not guaranteed success when transferred to other such areas.

One way of tackling the problem comes from PeterWard (27), who suggests that it is:

"convenient to sub-divide a company's overall identity into several such continuing areas of interest or dynamic product areas . . . Essen-tially a dynamic area defines a class of activities or products in functional or general terms. It should be broad enough to embrace a great number of product ideas including many that have not yet been conceived, but specific enough to be readily communicated and to focus a continuing review of product search". Ward considers the word 'dynamic' is useful because it refers to

technological dynamic equilibrium: "As something leaves (becomes obsolete or uncompetitive), something else enters (is introduced) to take its place. Continuous product success (or expansion) is, therefore, possible within an area". This suggests two things. First, dynamic product areas, or missions,

should as far as possible be timeless so that a company's activities may be capable of indefinite regeneration. Secondly, it implies that missions should only span a manageable width.

Ward continues with an example of mission definition: ". . . an enormous range of products: pumps, compressors, auxiliary

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plant for ships and power stations, evaporators, valves and even houses. Within this range I discovered there were de-oilers and de-aerators . . . de-salination plant . . . arising from the company's flash evaporator work; water treatment plant, and an experimental pressure filter . . . The simple concept that embraced this miscellaneous collection of activities was 'equipment for materials separation'" (27)

Thus the mission should bear relationship with the company's existing knowledge of technology, manufacturing facilities and market outlets. But it also needs the power to prompt new, relevant ideas, including those not yet invented or conceived. The mission, therefore, is based in the present but is future orientated.

The concept of a mission owes its development to Robert McNamara who as Secretary of Defence in the U.S. Administration developed a system of budgeting designated Planning-Programming-Budgeting-System as a means of evaluating complex defence systems (28). The United King-dom Government has adopted it for some departments. For example, the Home Office is implementing this system of accounting into police forces. One item which caused surprise was the 'total' cost of police dogs. When all relevant costs are considered (i.e. wages of trainers and handlers and the cost of running dog vans, etc.) the result was startling. Under the conventional accounting system, the cost of police dogs was put at £1,600 by one force. The following year with the new accounting method, the cost in programme terms was shown to be £37,900 ! !

The principle of P-P-B-S (or Output Budgeting) is that rather than budgets being determined functionally or departmentally they are set by first determining objectives for major missions; thus the emphasis is switched from INPUTS to OUTPUTS. The organisation determines its major missions and then its desired results in each mission.

If we use the suggestions of Levitt and Ward we find that what in fact the company is doing is to analyse its activities to isolate those with a com-mon thread. This may be in terms of technology, customer type, or some other common denominator.

Thus a food-grocery manufacturer may delineate the following missions: —We sell to the public through a number of retail-wholesale institu-tions: we are, therefore, in the consumer service business. —Some sales are made to hospitals and similar institutions requiring specific products and service; we are, therefore, in the institutional service business. —We also sell to hotels, restaurants and canteens; we are, therefore, in the catering business. —We produce to individual customer product and packaging speci-fications; we are, therefore, in the own label business.

These missions cut across conventional functional organisation charts. Figure 8 illustrates this principle.

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The company will then set itself objectives for each mission and publish these to the remainder of the organisation. Functional managers will then be expected to assess their own participation in terms of the mission objectives and will consider alternative methods available to them by which they can achieve their own objectives. With this done the func-tional managers are then able to allocate resources to each mission and thus budgets are arrived at by a mission orientation. Figure 9 demon-strates.

Business has successfully applied McNamara's P-P-B-S. Smalter and Ruggles (29) give an account of the International Minerals and Chemicals Corporation installation. I.M.C. identified some nine missions and the

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approach led I.M.C. management to conclude that its business must be orientated to the service of customers and that long-term expansion must be directed more to the market environment and less to internal structure and skills.

The problem of mission width as discussed by Ward was dealt with by I.M.C. by categorising "market missions" into three distinct groupings: agricultural, industrial and consumer. These groups were then further segmented, e.g. a foundry supplies mission was delineated within the industrial category. Other missions included plant nutrition; animal health and nutrition; oil well services; flavour enhancers and so on. I.M.C. found this perspective helped senior management to do a better job of sizing up possibilities for future growth. Thus the missions were defined with the need to bear a relationship with the company's existing knowledge of technology, manfacturing facilities, market outlets, etc.

I.M.C. use an annual profit plan combined with a five year programme plan. It was found that a complete resource and programme balance is difficult to attain, but that the missions approach identified areas of strength and areas of weakness. Possibly the greatest advantage which can be obtained is the facility of being able to match outputs and inputs against each other. The fact that I.M.C. were not able to obtain a complete balance of resources/programmes is a minor disadvantage.

How to Use a Missions Approach Having discussed the missions concept and reviewed examples of sucess-ful implementation it remains to examine how they can be implemented. Smalter and Ruggles suggest:

"In examining the existing product-line missions of a company, man-agement can do a more adequate job of planning goals, allocating resources and programming expenditures if it does as follows: 1. Defines the scope of the missions as well as the broad objectives to be

fulfilled. It must be decided what proprietary directions for growth are desirable, what unique market niche is sought, what pioneering aims are worthwhile and what synergisms with other missions can be developed.

2. Conducts an audit to illuminate the enterprise's basic position. What is its scope of participation in the industry structure? Where are its greatest profit margins? What is the product life cycle status of each product? What market share do the products possess? How well are existing capacities being utilised?

3. Analyses the relevant environment. It is vital that management should look outward to be aware of the rapidly changing world in which the company exists. What is the market demand outlook for the product line? What are the present distribution channels and the possibility of advantageously altering those channels? What impact is changing technology going to have? How will competitive changes affect the company's problems, needs, threats and opportunities? What are the most important challenges?

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4. Establishes the momentum that the company is likely to achieve. Is the product line going to have continued growth, or is some major product Iikely to become obsolete? What are the premises or assumptions behind this projection? A profit-and-loss summary based on these

answers must be assembled on a year by year basis. 5. Formulates an aggressive business and sales development programme.

What goals will the organisation be striving to accomplish above and beyond this point? Where will momentum carry it? How will the enterprise respond to the challenges that have been Identified? What marketing strategies should be employed? Most important, how will limited resources be manipulated for maximum return? What capital investments should be made and where? Which should have priority? What degree of raw material insurance is desirable? What are the financing demands from this total programme?

6. Sets the level of technical expenditure justified. What projects appear desirable for product line support and for Innovative products? What programme balance is desirable?

7. Defines the organisational needs. What training must be undertaken? What are the recruiting requirements?

8. Determines performance levels. What are the goals for sales and profits? What return on investment or return on sales is anticipated?

In review, the manager should ask himself: Is the analysis complete? Is the programme-package soundly conceived? How well is the organisation prepared to execute these plans?" (29)

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Not all of these topics are directly relevant to physical distribution. But it is necessary for them all to be considered in system design because of their obvious influence. It will be necessary to return to them later and derive an approach for establishing distribution missions.

The Relationship Between Service and Demand "The objective of a physical distribution system should be to maximise profits, not sales. Once the effect of service on demand is established, management must still determine the costs of providing various levels of service". (30) It is becoming a fact of life that service means profits but unfortunately

so many companies choose to ignore these facts. In some industries there is no escape. In the grocery industry, for example, retailers are so large and, therefore, represent such a large source of revenue that their demands for service cannot easily be ignored.

However, it is also true that increased service in many cases means increased profits. Hutchinson and Stolle found that:

"Intelligent investments in customer service can pay off handsomely, as the following testimonials indicate: 1. Supplier to the oil industry—'we attribute a 5% increase in sales

directly to the improved delivery service and reduced number of stock shortages we achieved several months ago'.

2. Tool manufacturer—'The use of air freight gave us the distribution 'plus' we needed to successfully enter the consumer market'.

3. Food manufacturer—'Determination of our customers' real service requirements led to the redesign of our entire distribution system at a savings of $2 million annually'.

"While each of these companies obviously has taken a different tack in the management of customer service, all three have pursued courses with certain characteristics in common. Each has made a quantitative evaluation of service. Each has considered service from the customer's view point. Each has evaluated the service provided by competition". (31) In some cases specific service aspects are of paramount importance.

Arbury (30) reports the case of a paper mill which stores its pulp inventory sufficient for only one and one-half days production—in freight cars out-side the plant. It is important for this manufacturer that delivery is exactly on time; neither too early, nor too late. If any supplier delivers too soon, the controlled pattern of freight car movements both in and out of the mills rail siding is disrupted enough to cause many logistics problems.

Thus it can justifiably be said that service cannot only be regarded merely as a means of satisfying present customer needs; superior service may open entirely new markets and will possibly result in increased purchases by established customers.

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Clearly service is more critical for some companies than for others and it should be the first task to determine whether service is an important factor influencing demand. While each industry (and each company within that industry) has individual service requirements there are some com-mon factors which indicate whether or not the industry is sensitive in its response to service: Product substitutability. If a customer has no particular brand loyalty and willingly accepts a competitive product offered by a retailer it is clear that minimisation of stock outs at the retail level is essential. Product dependability. For some industrial concerns the cost of a stock out can be enormous, e.g. the motor industry assembly lines can be stopped because of the lack of an assembly part. In such an instance delivery reliability is absolutely essential. Complementary products. There are some products the absence of which on outlets shelves will restrict the sale of a complementary product. In both cases the combined sales may represent a considerable proportion of the outlets revenue. In this case service is essential. The cost of customer enquiries. If these represent an unacceptable propor-tion of salesmen's and sales administration's time there is a clear indica-tion that service is of concern to the enquiring companies.

Once a company or industry is found to be "service-sensitive" what steps can be taken to provide improvements? Arbury suggests:

". . . we believe that the manufacturer should adopt the viewpoint of his customer. He should try to determine why customers need, or think they need, certain levels of service. Recognising these needs he can now estimate how much his sales will increase if he provides service which better meets the customer's requirements". (30)

It follows that if a company assumes the place of their customers and evaluates the effects on their customers' business of changes in their service policy, they are in a better position to understand more clearly the ramifications of "good" and "bad" service. Arbury (30) cites an example of a company, Rayonier Incorporated, which uses this customer orientation in developing physical distribution service plans. Rayonier determines how much business it will need from each of its large cus-tomers if it is to achieve a profitable level of sales. The company then estimates the level of better service required to meet these customer quotas. In some cases, providing better service has increased a customer's purchases from 50 to 100 per cent.

In general the benefits of improved service between manufacturer and retailer can be determined as being for the retailer: 1. A lowering of inventory holding costs: improved delivery reliability

allows the retailer to reduce his safety stocks 2. Fewer lost sales due to retailer stock outs: if a product is not on the shelf

there are three possibilities open to the purchaser:

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He goes elsewhere—in which case the retailer loses a sale He buys a competitive product—in which case the manufacturer loses the sale He forgoes purchase—in which case both the retailer and the manufacturer lose the sale

3. Better production planning: the customer is himself able to avoid line shut downs and improve his own delivery times and reliability, which means a double benefit of cost savings and increased sales.

4. Less effort, and peace of mind: the customer can devote time to solving profit generatng problems if he is not concerned with materials delivery problems.

5. Competitive advantages specific to certain industries or companies: better service may invoke particular responses from individual firms and large industries, e.g. if a competitor cannot meet a customer's demand to fill an order within a certain period, the customer may turn to another one not normally dealt with to obtain the necessary items. Thus a faster order cycle time allows the second manufacturer to make a sale where normally the competitor has advantages that would otherwise prevail.

Clearly there are benefits to companies who consider their customer's point of view. In the instances above some may be: 1. In return for carrying stock for the retailer he can expect to obtain a

share of his competitor's business and an increase in display when the retailer reduces his purchases from other suppliers.

2. The reduction in retail stock-outs means a reduction in a manu-facturer's share of lost sales.

3. The increased profitability for the customer-manufacturer will in-crease his dependence and therefore business with his service-minded supplier.

4. Again, loyalty to the supplier will be increased in direct proportion to the amount of time (and money) saved in terms of order progress chasing.

5. An increase in business from customers not normally serviced reduces the company's dependency on existing accounts. It is likely that it will afford an opportunity to diversify the business across a variety of end users and could perhaps help to even out seasonal sales and pro-duction problems and reduce operational risks.

By now it is clear that customer service is an important ingredient to profitability. Equally important is the need to determine just what customers require in terms of service. It must not be assumed that all customer service requirements are the same. It is possible, but by no means certain, that customers within a specified category have similar service needs. This should never be taken for granted: it is essential that individual needs are determined before designing a physical distribution system and reviewed regularly.

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The final section proposes the format of a distribution system planning model. It applies the techniques down to a general level, beyond which planning becomes specific to the individual company and its detail would not serve to add to the value of the proposed model.

The model is therefore both conceptual and operational in as much that it directs activities by suggesting an approach that is new but not beyond the means of average companies.

A PHYSICAL DISTRIBUTION SYSTEM PLANNING MODEL: A PROPOSAL Before discussing the proposed model in detail it is necessary to combine the missions and systems concepts discussed in the previous section. This is not difficult and has in fact been suggested by a number of authors. Johnson et al (32) points to the need for programmes (missions) to be future orientated and to the fact that responsibility for achieving the programme objectives and the allocation of resources needs to be vested in managers whose responsibility and influence will cut across traditional departmental lines.

This is in line with Titles who suggested, ". . . the programme elements bear no relationship to the organisational structure" (25), while for Ward (27) it is essential that dynamic product areas (missions) are based on the present but be future orientated. Johnson too makes this point.

The systems analysis procedure of Quade (11) has many similarities with that for defining missions suggested by Smalter and Ruggles (29) In both there is a need to define objectives clearly; to consider alternative methods by which objectives may be achieved; to determine cost-effectiveness relationships between alternatives; to model the company's performance criteria against which to assess operations.

Kazanowskl (13) suggests that unless specific mission requirements are made explicit, systems comparison is difficult. Therefore, mission goals if they are to have tangible meaning must have their requirements specified. Thus:

"Mission requirements are those attributes that must be met on evaluation of the systems to fulfil the goals". They refer to those elements of the goals that must be met by the

system capabilities. Evaluation criteria constitute measures by which the suitability of the

candidate systems to fulfil the desired goals is judged. The aim of the cost-effectiveness evaluation is to identify the system whose capabilities meet the mission requirements in the most advantageous manner.

Developing the Model—An Outline Kazanowski's model is a good place to start. From it must be developed a basic model for physical distribution planning.

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To do this it is necessary to make some assumptions concerning the overall planning activity within companies. First it is assumed that com-panies have basic objectives in terms of both economic and non-economic performance. Once established objectives are published and thus all members of the company are aware of them. Implicit in this process is the fact that there are a number of interested parties and the firm has operating constraints imposed upon it by its internal and external environments. Thus as well as the shareholders there are employees; suppliers; customers; financial institutions; competitors; government; and labour unions to be considered as well as internal strengths and weak-nesses relating to its competitive position, financial structure and pro-duction capabilities. Other external considerations include opportuni-ties and threats presented by social, technological, political and economic change.

From this interaction a clear, explicit statement of objectives must be published stating both qualitatively and quantifiably —financial performance parameters, e.g. R.O.I. or R.O.C.E. —competitive profile and expansion and/or diversification programmes —asset base intentions —technological profile —management development programmes —employee development programmes.

The second assumption concerns the acceptance of the missions concept. There is evidence to suggest that many companies do in fact accept the concept and to some extent use it operationally, e.g. brand management, venture management and other similar organisational forms. Thus it is assumed that missions such as those delineated hypo-thetically for a company in the growing business in Figure 8 have been established, viz. —a consumer service mission —an institutional service mission —a catering mission —an own label mission

We can call these: Product Market Missions.

These product market missions will each have goals and should be defined in quantitative terms, e.g.

"To increase the profitability of product A B C by X % from operations in the Consumer Service Product Market Mission".

Defining the missions in this way follows the suggestion that missions be delineated according to technological or manufacturing capability, or market outlet characteristics. From this it also follows that the conven-tional functions of production, finance and marketing can define missions and mission goals which align with the product market missions. Hence we get marketing missions, production missions and distribution missions. Figure 11 illustrates.

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Goals for functional missions will clearly be interrelated with each other and will reflect the product market mission goals. In the example above the marketing mission will indicate specific product throughput specified outlets. The distribution mission will obviously need to state the distribution function's goals in terms of the outlets to be serviced. This implies that within any one product market mission there is likely to be more than one distribution mission.

A basic input to any systems analysis is information. For planning purposes it is essential to be able to forecast likely future trends. Hence for business planning the firm's operating environment must be appraised. We have established that missions must be based in the present but be future orientated, hence the need is for a forecasting method which will produce data to indicate the likely development of specific mission characteristics and components.

One method currently under examination by the author is the Delphi method which enables a concensus to be arrived at by panel of experts who are particularly knowledgeable of topics within a specific product-market mission.

The principle of Delphi is simple. By conducting what amounts to an "anonymous debate by questionnaire" it has proved possible to draw on

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the benefits of the committee approach to arrive at a concensus of opinion on the development of predetermined topics within the field selected.

Use of a postal questionnaire has the advantages of eliminating the problem of not easily being able to convene all the experts at one time, and, because it allows each member to voice an opinion and removes most of the problems imposed by seniority, it overcomes the problems of group pressure.

The procedure is as follows: The topics (scenarios) are developed by discussion with the experts

who will participate as panel members. It is likely that two or three drafts will be necessary before the final form is reached. Once the final form is reached the first questionnaire can be circulated.

On the first questionnaire the panel are asked to make estimates of dates when they consider that the events forming the questions will occur or alternatively to estimate specific values for the topics at specified future dates. The responses will be spread over a wide range.

A follow up questionnaire is sent with a summary of the distributions of the responses stating the median value and the inter-quartile ranges (the interval containing the middle 50% of the responses)—this indicates the spread of opinions. The panel are asked to reconsider their previous answers and change them if they wish. Any member whose new answer lies outside the inter-quartile range is asked to state his reason for thinking that the answer should be that much lower or that much higher than the majority judgment of the group.

Placing the onus of justifying relatively extreme responses on the res-pondents has the effect of causing those without strong convictions to move their estimates closer to the median, while those feeling they have a good argument will tend to retain original estimates and defend them.

In the next round responses are again summarised and members are given a concise summary of the reasons presented in support of extreme positions. They are then asked to revise their second round responses, taking the "deviant reasons" Into consideration and giving them what weight they think is justified. A respondent whose answer still remains outisde the inter-quartile range is again required to state why he is unpersuaded by the opposing arguments.

In a fourth and final round, these criticisms of the reasons previously offered are re-submitted to the respondents, and they are given a last chance to revise their estimates. The median of these final responses can then be taken as representing the nearest thing to a group consensus.

In the current exercise, the product market mission under considera-tion represents the consumer service mission for a grocery-food manu-facturer. Panel members are being asked to estimate future volume trends for the years 1980 and 1990 in:

—consumer food expenditure —the structure of grocery retailing—organisational —the structure of grocery retailing—locational

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—the nature of shopping habits —consumer ownership patterns —the development of own brands —the development of convenience foods —store size trends —store self-service/counter service development —cash and carry volume trends —the sales development of products from other E.E.C. members The method has potential in the development of mission requirements,

another exercise aimed at developing a consensus forecast of developments in physical distribution philosophy and technology running concurrently. This exercise aims to derive forecast timings for developments such as:

—Computerised inventory prediction programmes —Linked inventory control systems —Containerisation —Out of hours deliveries —A National Pallet Pool —Nationwide consolidated distribution Actual results and an appraisal of the method in this type of application

will be published at the completion of the exercise. The alternative systems concepts are arrived at by examination of the

five distribution functions, i.e. facility location, transportation capability, inventory allocations, communications networks, and unitisation. Systems capabilities are performance measures of combinations of the functions designed to meet the mission requirements and expressed in rank order of cost-effectiveness. For example, if the mission requirements of a particular distribution mission are expressed as:

—A 95% first time order response —Delivery 7 days from order placement —Delivery variance ± one day —Delivery to be made to store locations —Delivery to be made between 10.00—12.00 hrs —Invoicing to be sent 14 days after order placement —All goods to be palletised The distribution functions must then be analysed for the most suitable

combination of alternative system concepts which will meet these mission requirements at the best maximum effectiveness/least cost level. The alternatives may (hypothetically) include: 1. A central stocking point with bulk trucking to regional distributors

who break bulk and deliver 2. Regional warehousing with carriers effecting deliveries 3. A combination of (1) and direct delivery of bulk orders 4. Some other combination

Immediately it can be seen that at the planning stage it is important clearly to define the product-market missions and to analyse and forecast their future development. From this stage the product market mission goals

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and the distribution mission goals must then be determined and in turn the mission requirements as they are now and as they may be over the forecast period. This is very necessary because of the type of decisions regarding investment in distribution facilities that are required.

The system capabilities must be appraised in terms of the evaluation criteria. These will vary. First, they must be based upon the overall objectives of the company, thus one series of criteria will involve such aspects as capital utilisation, labour utilisation, asset base constraints and other company objectives. Secondly, they must also include flexibility, reliability, and maintainability. In addition to establishing evaluation criteria a weighting system must be derived. This will be examined in more detail later.

At this juncture Kazanowski's model will be modified to make it applicable for distribution system planning. At the same time the major components and activities will be itemised.

The Model Components in Detail Having developed the model, each of the major components is now dis-cussed in some detail from the aspect of its individual input Into the model.

Objectives It has been established that objectives are, ideally, developed as a set of consensus objectives. The objectives of all interested parties must be considered, as was suggested by the discussion on the systems approach to management and summarised in Figure 3.

Particular attention must be paid to the need for detail. For example, an objective stating, "The company will maintain profitability" is not particularly enlightening. However, "The company intends to obtain a 15% R.O.C.E. and 20% on further projects undertaken" makes the board's intentions much clearer and is a much more useful statement from which to work in the remaining planning areas. The areas in which objectives must be set were discussed earlier and need not be repeated. What must be re-emphasised is that it is essential that operational management knows what they are. Without the knowledge of the board's expectancies in terms of financial performance and their plans in terms of expanding (or decreasing) capital employed, the best that can emerge at the next stage is a series of plans which cover every likely contingency, and this is not the base from which to operate. Summary: Objectives provide the basic data from which product market missions and goals are established and evaluation criteria are established.

Product Market Missions and Goals The advantages of the missions approach in general to business has, by now, been established: by delineating product market missions the company can best see Its areas of activity and can set itself performance levels which must be attained if the overall objectives are to be met. It also has the advantage of being able to provide the "total cost" involved in terms of resource allocation, in achieving the objectives set.

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By delineating the product market missions according to technological or manufacturing capability and/or market outlet characteristics it be-comes a relatively simple job to set mission goals and for functions to establish their own missions. The actual orientation chosen (i.e. techno-logical, manufacturing or marketing) depends entirely upon the company. Clearly, some industries will favour one above the others. The possibility of grouping missions with a different orientation for each group must also be considered. Summary: Product market missions and goals are the data base from which the functions develop functional missions and mission goals. Hence, there is again a need for an explicit statement, better still an entire budgeting system based on these missions, of what the missions are and what, in quantitative terms, are the expectations from mission goals.

Evaluation Criteria There are a number of requirements that any system must satisfy. In addition to providing a satisfactory service to customers a distribution system must also meet the requirements of the total system, the business, in order that the overall objectives are attained. Thus evaluation criteria must Include a financial performance measure and an asset resource measure.

During the previous section the case of Rayonier was quoted. It will be remembered that Rayonier looked at service (and its cost) in terms of the level necessary to achieve a profitable level of sales from business with Its larger customers. In this way it is possible to take both a short run view (one or two years) and a long run view (five years or more) of the situa-tion and plan accordingly. From this point of view it is essential that long run forecasts of product market mission developments are made because these will enable planning to be developed such that major customers in expanding sectors will be accommodated. It is vitally important if they have (or are likely to have) specific service requirements.

Therefore if service requirements (functional mission requirements) can be determined along with the cost of providing the service, a measure of performance required to meet a criteria based on R.O.C.E. objectives is possible.

Thus we can establish the first evaluation criterion of Return on Capital Employed. Arbury (30) suggests a method whereby it is possible by liaison with the sales team, to project probability values of sales increases likely to be obtained by varying levels of improvements (or reductions) in distribution service. D.C.F. techniques may usefully be applied.

This ties in with an Asset Base Constraint, because clearly there is an overall limit on the capital that can be employed within the business and hence if the distribution function can in fact justify an increase it can only do so by proving that the expected return exceeds the basic return demanded by the board of directors.

Another evaluation criterion concerns human assets. It is likely that senior management will have labour policies and hence the distribution

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system must be planned in line with these policies. For example, the full ramifications of closing company owned regional facilities must be con-sidered in terms of its effect on staff, not only the loss of experienced managers, redundancy payments, etc. but also its effects on management succession within the company. A regional depot manager may have the capability, experience, etc. to fit him for a senior post made available by future expansion or natural wastage. To let him go now may prove expensive in the long run. System flexibility must also be considered. It is possible that three areas may need to be taken into account:

—The fluctuation of volume throughput, which will increase directly with the planning time horizon (i.e. the longer the period planned for, the larger the expected fluctuations will be). —The possible changes in distribution philosophy and technology (e.g. the effects of an improvement in service combined with a reduction of costs in the freightliner service could have far reaching significance and therefore this type of development should be considered). —The possibility of product changes in terms of additions, deletions and technological developments.

System reliability is reflected in the service level. In terms of system performance reliability can be defined as the probability that a system will perform as expected for the duration of its mission. Hence, assuming that management wishes to set a minimum overall value for service level of say 95% for all distribution missions then this implies an expected reliability of 95% with an expected failure of 5%. There is obvious over-lap with an asset base requirement because of the relationship between service level and inventory investment. Nevertheless, it is a useful overall criterion because it enables a minimum level to be set and provides a base from which to work, any upward variations requiring justification in terms of an increased service/profitability relationship. System maintainability is again linked to asset base requirements but does have other facets. For example, it focuses attention on time perspective and poses the question "how long does the system operate at any given service level?" It also serves to draw attention to such problems as reserve carriers or vehicles, management succession, etc.

These six evaluation criteria: return on capital employed, asset base constraint, labour utilisation, flexibility, reliability, maintainability, serve to act as illustrations; there may be others which are necessary to specific companies.

The weighting factors should be derived as a consensus of the Interests of the company and its customers. A simple base is recommended where by each criterion is allocated, depending upon its priority, its share of a base figure, e.g. ten. Thus, if Return on Capital Employed is the most important factor it should be allocated the highest share, the remainder then share according to relative priorities. It must be remembered that these criteria apply for the distribution system and that the system must serve a number of distribution missions—a point which will be expanded below.

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Summary: The evaluation criteria provide a means for ensuring that the distribution system meets the performance parameters laid down by the board in its objectives.

Functional Missions (Distribution missions) The functional missions are derived from the product market missions. Research is conducted to establish a forecast of expected developments and each function can then establish its own goals. A great deal of liaison between functions will be necessary.

Distribution missions are likely to be orientated towards customer types if the basis for delineating the product market missions was market outlet characteristics. Clearly this depends upon the type of industry the company operates in. This will also reflect itself on the selection of functional mission goals. Summary: The functional missions and goals provide the basis for establish-ing service requirements of customers by Identifying and grouping them.

Functional Mission Requirements Functional mission requirements are customer service requirements and must be established by discussion with the customers serviced. Immedi-ately there is a problem. Many companies service a large number of customers, particularly those whose customers are end users. This suggests analysis of accounts to determine these large customers who are responsible for a large proportion of the company's business. Mention has been made of the phenomena whereby some 20 per cent. of customers account for 80 per cent. of the revenue. This reduces the task consider-ably and the distribution mission requirements for each should reflect the requirements of these largest firms.

The first step is to identify specifically what elements of service are important to the distribution mission. Some suggestions are:

1. Order cycle time—the total time that elapses from placing to receiving an order

2. Order cycle time variance—the range of variation the customer can and will allow

3. Service level—stock outs, back orders, omission rate and other factors allowable

4. Order size constraint—both maximum and minimum expectancies and discount structures

5. Consolidation allowed—consolidated shipment from several plants to form one delivery

It is essential that not only the expected levels of service be determined but that current performance be checked. Often this is lower (or rated lower) than is expected by the manufacturer.

At the same time important aspects of the customer's view of service should be obtained:

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1. Additional elements of service that are important to the customer: —frequency of salesmen's visits —ordering convenience —order progress information —inventory back up for new product promotions, etc. —invoice format and submission arrangements

2. The economic significance to the customer of service elements —in other words what effect on costs does an increase of service have for the customer.

3. The customer's rating of the company's service levels compared with those of its competitors:

—is it better, worse, or the same? —how is it better, etc.? —could it be improved and how?

By conducting this type of enquiry it is possible to build groups of distribution mission requirements around each distribution mission goal. Summary: Distribution mission requirements provide the basis for matching system capabilities to customer needs by establishing tasks to be per-formed by the system.

Alternative System Concepts and System Capabilities The distribution mission requirements establish the tasks that the distribution system must perform. To do this alternative system concepts must be established and analysed for cost-effectiveness. The end result is a series of system capabilities which are able to meet the demands of the various groups of distribution mission requirements.

The cost-effectiveness analysis is conducted on alternative system con-cepts based upon various mixes of the functional components. Because the requirements are for various "amounts" of service it is recommended that a fixed effectiveness approach be adopted and that costs for the alternatives be assembled and compared.

Distribution system costing is a subject requiring specific and separate treatment and only brief mention can be made here. However, what is required is:

—the determination of "total" system costs —the determination of cost variance for each component Procedures for aiming at costs of alternative system concepts have

been examined by Martin Christopher (18) who discusses the use of cost-estimating relationships and cost modelling, and deals with problems of estimating cost categories. Summary: The output of this stage of the design is to produce rank-ordered system alternatives which meet mission requirements. These be-come the system capabilities which must be reviewed against the evalua-tion criteria and also examined for synergy potential.

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Mission Synergy It must be remembered that at this stage the analysis is concerned with servicing one product market mission. In the hypothetical case of the grocery manufacturer, four were identified and it is necessary to examine each using the same method. However, before making system design decisions in terms of facilities, locations, transport modes, inventory allocations, communications networks and unitisation it is necessary to look for overlap areas in order to utilise fully the eventual system. Obviously scale effects do operate and the more service requirements that can be combined the greater the effect is likely to be in terms of total system costs.

As well as overlap between system capabilities of different missions there is the possibility of engineering overlap by trade-off activities be-tween distribution missions. For example, it may be possible to "sell" customers in the institutional service and catering product market missions on to palletisation by offering attractive discounts, because this would then enable a standard pallet to be used for all movements within the system, thereby reducing total system costs by an amount which exceeds the discounts given.

Distribution System Design This, the last activity, comprises designing a distribution system which satisfies the service demands of each product market mission. The process which has led to this stage will have eliminated many of the possible designs. Trade-offs among the system capabilities (previous step) will have reduced this last step to one of specifying locations, dimensions, and other resource allocation decisions.

CONCLUSION This has not been a "how to do it" exercise but rather a "why not t ry" suggestion. It has attempted to synthesise a number of recent manage-ment techniques into an operational approach to physical distribution system planning.

Space has not permitted a detailed examination of many of the prob-lems. Indeed some of them can only be solved after much more discussion and debate. Nevertheless, this does not mean we should ignore them and hope either that they will go away or reject them entirely and opt for the status quo.

Physical distribution management is only just emerging as a discipline in its own right. There can be no doubt that it offers management a number of alternatives in terms of increasing profitability, by means of increasing sales through better service or reducing total system costs by intelligent and rigorous analysis. Therefore, no opportunity however small should be overlooked—its benefits may outweigh the costs involved a thousandfold.

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This article has been cited by:

1. Timothy F. Barrett. 1982. Mission Costing: A New Approach to Logistics Analysis. International Journal of PhysicalDistribution & Materials Management 12:7, 3-27. [Abstract] [PDF]

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