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In recent years there has been a growing recognition that the processes whereby we satisfy customer demands are of critical importance to any organization. These processes are the means by which products are developed, manufactured and delivered to customers and through which the continuing service needs of those customers are met. The logistics concept is the thread that connects these crucial processes and provides the basis for the design of systems that will cost-effectively deliver value to customers. 
Accompanying this recognition of the importance of process has been a fundamental shift in the focus of the business towards the marketplace and away from the more inwardly oriented production and sales mentality that previously dominated most industries. This change in orientation has necessitated a review of the means by which customer demand is satisfied -- hence the dramatic upsurge of interest in logistics as a core business activity.
The Emergence of the Value-Conscious Customer Recession in many markets, combined with new sources of competition, has raised the consciousness of customers towards value. 'Value' in today's context does not just mean value for money -- although that is certainly a critical determinant of the purchase decision for many buyers -- but it also means perceived benefits. Customers increasingly are demanding products with added value, but at lower cost, and hence the new competitive imperative is to seek out ways to achieve precisely that. Michael Porter (1980, 1985) was one of the first commentators to highlight the need for organizations to understand that competitive success could only come through cost leadership or through offering clearly differentiated products or services. The basic model is illustrated in FIG. 1. Porter's argument was that a company with higher costs and no differential advantage in the eyes of the customer was in effect a commodity supplier with little hope of long-term success unless it could find a way out of the box. His prescription was that the organization should seek to become either a low-cost producer or a differentiated supplier. However, in reality it is not sufficient to compete only on the basis of being the lowest-cost supplier. The implication of this is that a competitor in the bottom right-hand corner has to compete on price -- if a company is only a cost leader, how else can it compete? Competing solely in terms of price will merely reinforce the customer's view that the product is a commodity -- the very thing the company wishes to avoid. On the other hand, a strategy based upon differentiation will make it possible to compete on grounds other than price. While value for money will always be an issue, the aim is to increase customers' perception of the value they are receiving and hence their willingness to pay a higher price. Organizations create value for their customers either by increasing the level of 'benefit' they deliver or by reducing the customers' costs. In fact customer value can be defined as follows: Customer value = Perceived benefits/Total cost of ownership Perceived benefits include the tangible, product-related aspects as well as the less tangible, service-related elements of the relationship. The key point to note is that these benefits are essentially perceptual and that they will differ by customer. The 'total cost of ownership' reflects all the costs associated with the relationship, not just the price of the product. Hence the customer's cost of carrying inventory, ordering costs and other transactions costs all form part of this total cost concept. Because logistics management, perhaps uniquely, can impact upon both the numerator and the denominator of the customer value equation, it can provide a powerful means of enhancing customer value. An argument that is being heard more frequently is that logistics is a core capability that enables the firm to gain and maintain competitive advantage. More and more the view is expressed that it is through capabilities that organizations compete. These capabilities include such processes as new product development, order fulfillment, marketing planning and information systems. There can be little doubt that companies that in the past were able to rely upon product superiority to attain market leadership can no longer do so, as competitive pressure brings increasing technological convergence. Instead these companies must seek to develop systems that enable them to respond more rapidly to customer requirements at ever lower costs. Logistics and Supply Chain Management Logistics management is essentially an integrative process that seeks to optimize the flows of materials and supplies through the organization and its operations to the customer. It is essentially a planning process and an information-based activity. Requirements from the marketplace are translated into production requirements and then into materials requirements through this planning process. It is now being recognized that, for the real benefits of the logistics concept to be realized, there is a need to extend the logic of logistics upstream to suppliers and downstream to final customers. This is the concept of supply chain management. Supply chain management is a fundamentally different philosophy of business organization and is based upon the idea of partnership in the marketing channel and a high degree of linkage between entities in that channel. Traditional models of business organization were based upon the notion that the interests of individual firms are best served by maximizing their revenues and minimizing their costs. If these goals were achieved by disadvantaging another entity in the channel, then that was the way it was. Under the supply chain management model the goal is to maximize profit through enhanced competitiveness in the final market - a competitiveness that is achieved by a lower cost to serve, achieved in the shortest time-frame possible. Such goals are only attainable if the supply chain as a whole is closely coordinated in order that total channel inventory is minimized, bottlenecks are eliminated, time-frames com pressed and quality problems eliminated. This new model of competition suggests that individual companies compete not as company against company, but rather as supply chain against supply chain. Thus the successful companies will be those whose supply chains are more cost-effective than those of their competitors. What are the basic requirements for successful supply chain management? FIG. 2 outlines the critical linkages that connect the marketplace to the supply chain. The key linkages are between procurement and manufacturing, and between manufacturing and distribution. Each of these three activities, while part of a continuous process, has a number of critical elements. ==========
PROCUREMENT -- MANUFACTURING -- DISTRIBUTION Co-makership Requirements planning Schedule coordination Master scheduling JIT management Flexibility Demand management Quick response Postponement ========== Procurement Typically in the past, supply management has been paid scant attention in many companies. Even though the costs of purchases for most businesses are the largest single cost, procurement has not been seen as a strategic task. That view is now changing, as the realization grows that not only are costs dramatically impacted by procurement decisions and procedures but also that innovation and response-to-market capability are profoundly affected by supplier relationships. The philosophy of co-makership is based upon the idea of a mutually beneficial relationship between supplier and buyer, instead of the more traditional adversarial stance that is so often encountered. With this partnership approach, companies will identify opportunities for taking costs out of the supply chain instead of simply pushing them upstream or downstream. Paperwork can be eliminated, problems jointly solved, quality improved and information shared. By its very nature, co-makership will often involve longer-term relationships, but with fewer suppliers. A fundamental feature of this integrated approach to supply chain management is the adoption of some form of alignment and synchronization of the customer's and the supplier's processes. The aim should be to view your suppliers' operations as merely an extension of your own. Companies like Nissan, in their manufacturing facility, have developed closely linked systems with all of their suppliers so that those suppliers have full visibility not only of the production schedule at Nissan's Washington plant, but also of the real-time sequence in which cars are moving down the assembly line. By the use of electronic data interchange (EDI) and open communications, Nissan has been able to reduce lead times, eliminate inventories and take costs out of the supply chain. Other companies may have introduced similar just-in-time (JIT) systems, but often, in so doing, have added to their suppliers' costs, not reduced them. Manufacturing There has been much talk of 'lean' manufacturing in recent years. The idea of leanness in this sense is that wasteful activities are reduced or eliminated and that value-creating processes are performed more quickly. However, just as important as leanness is agility. Agility is a wider supply chain concept that is more concerned with how the firm responds to changes in marketplace requirements - particularly requirements for volume and variety. Leanness is undoubtedly a desirable feature of a supply chain unless it leads to a misplaced emphasis on manufacturing costs. It may be preferable, for example, to incur a cost penalty in the unit cost of manufacture if it enables the company to achieve higher levels of customer responsiveness at less overall cost to the supply chain. The key word in manufacturing in today's environment is flexibility -- flexibility in terms of the ability to produce any variant in any quantity, without significant cost penalty, has to be the goal of all manufacturing strategies. In the past, and even still today, much of the thinking in manufacturing was dominated by the search for economies of scale. This type of thinking led to large mega-plants, capable of producing vast quantities of a standardized product at incredibly low unit costs of production. It also has led many companies to go for so-called 'focused factories', which produce a limited range of products for global consumption. The downside of this is in effect the possibility of hitting the 'diseconomies' of scale: in other words, the build-up of large inventories of finished product ahead of demand, the inability to respond rapidly to changed customer requirements and the limited variety that can be offered to the customer. Instead of economies of scale, the search is now on for strategies that will reduce total supply chain costs, not just manufacturing costs, and that will offer maximum flexibility against customer requirements. The goal must be 'the economic batch quantity of one', meaning that in the ideal world we would make things one at a time against known customer demands. One of the lessons that the Japanese have taught us is that the route to flexibility in manufacturing does not necessarily lie through new technology, e.g. robotics, although that can help. A lot can be achieved instead through focusing upon the time it takes to plan, to schedule, to set up, to change over and to document. These are the classic barriers to flexibility and if they can be removed then manufacturing can respond far more rapidly to customer requirements. In a factory with zero lead times, total flexibility is achieved with no forecasts and no inventory! While zero lead times are clearly an impossibility, the Japanese have shown that impressive reductions in such lead times can be achieved by questioning everything we do and the way in which we do it. Distribution The role of distribution in the supply chain management model has extended considerably from the conventional view of the activity as being concerned solely with transport and warehousing. The critical task that underlies successful distribution today is demand management. Demand management is the process of anticipating and fulfilling orders against defined customer service goals. Information is the key to demand management: information from the marketplace in the form of medium-term forecasts; information from customers, preferably based upon actual usage and consumption; information on production schedules and inventory status; and information on marketing activities such as promotions that may cause demand to fluctuate away from the norm. Clearly, while forecasting accuracy has always to be sought, it must be recognized that it will only rarely be achieved. Instead the aim should be to reduce our dependence upon the forecast by improved information on demand and by creating systems capable of more rapid response to that demand. This is the principle that underlies the idea of quick response logistics. Quick response logistics has become the aim for many organizations, enabling them to achieve the twin strategic goals of cost reduction and service enhancement. In essence, the idea of quick response is based upon a replenishment-driven model of demand management. In other words, as items are consumed or purchased, this information is transmitted to the supplier and this immediately triggers a response. Often more rapid, smaller consignment quantity deliveries will be made, the trade-off being that any higher transport costs will be more than covered by reduced inventory in the pipeline and at either end of it, yet with improved service in terms of responsiveness. Clearly information technology has been a major enabling factor in quick response logistics, linking the point of sale or consumption with the point of supply. A further trend that is visible in distribution is the search for postponement opportunities. The principle of postponement is that the final con figuration or form of the product should be delayed until the last possible moment. In this way maximum flexibility is maintained, but inventory minimized. The distribution function takes on a wider role as the provider of the final added value. For example, at Xerox the aim is not to hold any inventory as finished product but only as semi-finished, modular work in progress, awaiting final configuration once orders are received. Similarly, at Hewlett-Packard, products are now designed with 'localization' in mind. In other words, products will be designed for modular manufacture but with local assembly and customization to meet the needs of specific markets. In this way economies of scale in manufacturing can be achieved by producing generic products for global markets while enabling local needs to be met through postponed configuration. What is apparent is that distribution in the integrated supply chain has now become an information-based, value-added activity, providing a critical link between the marketplace and the factory. The New Competitive Framework: The Four R's We began this section with a brief review of how today's customer is increasingly seeking added value and how logistics management can provide that value. In the past, the primary means of achieving competitive advantage were often summarized as the 'four Ps': product, price, promotion and place. These should now be augmented with the 'four Rs': reliability, responsiveness, resilience and relationships - and logistics strategies need to be formulated with these as the objectives. Let us briefly examine each in turn. Reliability In most markets and commercial environments today, customers are seeking to reduce their inventory holdings. Just-in-time practices can be found in industries as diverse as car assembly and retailing. In such situations it is essential that suppliers can guarantee complete order-fill delivered at agreed times. Hence a prime objective of any logistics strategy must be reliability. Making logistics systems more reliable means that greater emphasis must be placed upon process design and process control. The processes that are particularly germane to logistics are those to do with order fulfillment and supply chain management. Because traditionally these processes have been managed on a fragmented, functional basis they tend to have a higher susceptibility to variability. These processes are typified by multiple 'hand-offs' from one area of functional responsibility to another and by bottlenecks at the interfaces between stages in the chain. One of the benefits of taking a process view of the business is that it often reveals opportunities for simplification and the elimination of non-value-adding activities so that reliability inevitably improves. One of the main causes of unreliability in supply chain processes is performance variability. Recently, the use of so-called 'Six Sigma' methodologies has been adopted to reduce that variability. Six Sigma is the umbrella term applied to a range of tools that are designed to identify the sources of variability in processes and to reduce and control that variability. Responsiveness Very closely linked to the customers' demands for reliability is the need for responsiveness. Essentially this means the ability to respond in ever-shorter lead times with the greatest possible flexibility. Quick response, as we have seen, is a concept and a technology that is spreading rapidly across industries. For the foreseeable future, speed will be a prime competitive variable in most markets. The emphasis in logistics strategy will be upon developing the means to ship smaller quantities, more rapidly, direct to the point of use or consumption. The key to time compression in the logistics pipeline is through the elimination or reduction of time spent on non-value-adding activities. Hence, contrary to a common misconception, time compression is not about performing activities faster, but rather performing fewer of them. The old cliché 'Work smarter, not harder' is particularly relevant in this context. As experts have pointed out, many of the processes used in our organizations were designed for a different era. They tend to be paper-based, with many - often redundant - manual stages. They are sequential and batch-oriented rather than parallel and capable of changing quickly from one task to another. Even though eliminating or reducing such activities may in crease cost, the end result will often be more cost-effective. For example, shipping direct from factories to end customers may be more expensive in terms of the unit cost of transport compared to shipping via a regional distribution centre, but time spent in the distribution centre is usually non-value-adding time. Resilience Today's supply chains are more complex and vulnerable to disruption than ever before. In many cases, as a result of outsourcing and the increasingly global nature of supply chains, the likelihood of interruption to product and information flows has increased significantly. Identifying, mitigating and managing supply chain risk is now a critical requirement to ensure business continuity. The idea of resilience in the context of supply chain management is that supply chains need to be able to absorb shocks and to continue to function even in the face of unexpected disruption. The paradox is that in many cases, because companies have adopted 'lean' strategies and reduced inventories and, often, capacity, there is little 'slack' left in their systems. Resilient supply chains will typically incorporate strategic buffers at the critical nodes and links in their networks. These buffers could be in the form of inventory or capacity, possibly shared with competitors. As uncertainty in the business environment continues to increase, organizations need to adopt a more systematic and structured approach to supply chain risk management. One way in which this can be achieved is by creating a supply chain continuity team whose job is to audit risk across the supply chain and to develop and implement strategies for the mitigation of any identified risk. Relationships The trend towards customers seeking to reduce their supplier base has already been commented upon. The concept of 'strategic sourcing' is now receiving widespread support. Strategic sourcing is based on the careful selection of suppliers whom the customer wishes to partner. The benefits of such an approach include improved quality, innovation sharing, reduced costs and the integrated scheduling of production and deliveries. Underlying all of this is the idea that buyer-supplier relationships should be based upon partnership. More and more companies are discovering the advantages that can be gained by seeking out mutually beneficial, long-term relationships with suppliers. From the suppliers' point of view, such partnerships can prove formidable barriers to entry to competitors. Once again, companies are finding that logistics provides a powerful route to the creation of partnerships in the marketing channel. Logistics management should be viewed as the thread that connects the inbound and outbound flows of channel partners. A good example of logistics partnership is the growing use of 'vendor managed inventory' (VMI). The underlying principle of VMI is that the supplier rather than the customer assumes responsibility for the flow of product into the customer's operations. Thus instead of the customer placing orders on the vendor - often at short notice - the vendor can directly access information relating to the rate of usage or sale of the product by the customer. With this information the supplier can better plan the replenishment of the product with less need to carry safety stock. In effect, VMI enables the substitution of information for inventory in the supply chain. The challenge to marketing and strategic planning in any business is to construct a corporate strategy that specifically builds upon logistics as a means to achieving competitive advantage through a much stronger focus on the four Rs. It is still the case that many organizations have not fully understood the strategic importance of logistics and hence have not explicitly tailored logistics into their corporate strategies and their marketing plans. ======= PURCHASING | PRODUCTION | DISTRIBUTION Functional 'silos' or 'stovepipes' ======== The Organizational Challenge One of the most significant changes in recent years has been the way in which we think of organization structures. Conventionally, organizations have been 'vertical' in their design. In other words, businesses have organized around functions such as production, marketing, sales and distribution. Each function has had clearly identified tasks and within these functional 'silos' or 'stovepipes' (as they have been called) there is a recognized hierarchy up which employees might hope to progress. FIG. 3 illustrates this functionally oriented business. The problem with this approach is that it is inwardly focused and concentrates primarily on the use of resources rather than upon the creation of outputs. The outputs of any business can only be measured in terms of customer satisfaction achieved at a profit. Paradoxically, these outputs can only be realized through coordination and cooperation horizontally across the organization. These horizontal linkages mirror the materials and information flows that link the customer with the business and its suppliers. They are in fact the core processes of the business. FIG. 4 highlights the fundamental essence of the horizontal organization. In the horizontal organization, the emphasis is upon the management of processes. These processes, by definition, are cross-functional and include new product development, order fulfillment, information management, profitability analysis and marketing planning. ========= Functional resources Market-facing -- Markets Cross-functional -- Segments Process teams -- Customers ========= The justification for this radically different view of the business is that these processes are in effect 'capabilities' and, as we have observed, it is through capabilities that the organization competes. In other words, the effectiveness of the new product development process, the order fulfillment process and so on determine the extent to which the business will succeed in the marketplace. How does a conventionally organized business transform itself into a market-facing, process-oriented organization? One of the major driving forces for change is the revolution that has taken place in information technology and systems, enabling the supply chain linkage to become a reality. More and more, the business will find itself organizing around the information system. In other words, the processes for capturing information from the marketplace (forecasts, anticipated requirements, customer schedules and orders) will be linked to the processes for meeting that demand. It is no coincidence that companies that have installed the new generation of 'enterprise resource planning' (ERP) systems have also been at the forefront of the change from vertical to horizontal organizational structures. These systems enable entire supply chains to become truly demand-driven through the use of shared information. They open up new and exciting opportunities to create true end-to-end pipeline management and the achievement of the ultimate business goal of high service to customers at less cost. Summary Businesses in all types of industries are placing far greater emphasis on the design and management of logistics processes and the integration of those processes upstream and downstream with those of suppliers and customers. The business of the future will undoubtedly be market-driven, with logistics processes providing a critical means for achieving corporate goals. It will be a highly coordinated network of outsourced flows of materials zz and supplies, integrated through an information system that reaches from the ultimate consumer to the far end of the supply chain. The era of logistics and supply chain management, which many have predicted for some time, seems finally to have arrived. top of page Home Similar Articles |
