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MIT Center for. Transportation & Logistics. prosalgreavsunfma.tk1x -Supply Chain & Logistics Fundamentals. Introduction to Logistics & Supply. Chain Management. this book is an excellent tool for reflection on all things supply chain. “Paul does a great job compacting supply chain management and logistics into one text. I. He has written numerous books and articles and is on the editorial advisory board Logistics & Supply Chain Management examines the tools, core processes.
Customer service may be defined as the consistent provision of time and place utility. There are clearly many facets of customer service, ranging from on-time delivery through to after-sales support. In this way significant differentiation of the total offer that is the core product plus the service package can be achieved.
Those companies that have achieved recognition for service excellence, and thus have been able to establish a differential advantage over their competition, are typically those companies where logistics management is a high priority. Companies like Xerox, Zara and Dell are typical of such organisations. The achievement of competitive advantage through service comes not from slogans or expensive so-called customer care programmes, but rather from a combination of a carefully thought-out strategy for service, the development of appropriate delivery systems and commitment from people, from the chief executive down.
The attainment of service excellence in this broad sense can only be achieved through a closely integrated logistics strategy. Not only do customers want shorter lead times, they are also looking for flexibility and increasingly customised solutions. In other words, the supplier has to be able to meet the precise needs of customers in less time than ever before.
The key word in this changed environment is agility. Agility implies the ability to move quickly and to meet customer demand sooner. In a fast-changing marketplace agility is actually more important than long-term planning in its traditional form. Because future demand patterns are uncertain, by definition this makes planning more difficult and, in a sense, hazardous. In the future, organisations must be much more demand-driven than forecastdriven.
The means of making this transition will be through the achievement of agility, not just within the company but across the supply chain. Responsiveness also implies that the organisation is close to the customer, hearing the voice of the market and quick to interpret the demand signals it receives. Significant improvements in reliability can only be achieved through re-engineering the processes that impact performance.
Manufacturing managers long ago discovered that the best way to improve product quality was not by quality control through inspection but rather to focus on process control. The same is true for logistics reliability. One of the keys to improving supply chain reliability is through reducing process variability. The concept of six sigma will be discussed in more detail in Chapter 10 but in essence these tools are designed to enable variability in a process to be reduced and controlled.
Thus, for example, if there is variability in order processing lead times then the causes of that variability can be identified and where necessary the process can be changed and brought under control through the use of six sigma tools and procedures. The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are vulnerable to disruption and, in consequence, the risk to business continuity is increased.
Whereas in the past the prime objective in supply chain design was probably cost minimisation or possibly service optimisation, the emphasis today has to be upon resilience. Resilience refers to the ability of the supply chain to cope with unexpected disturbances. There is evidence that the tendencies of many companies to seek out low-cost solutions because of pressure on margins may have led to leaner, but more vulnerable, supply chains.
Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and the related information flows through the organisation and its marketing channels in such a way that current and future profitability are maximised through the cost-effective fulfilment of orders.
This basic definition will be extended and developed as the book progresses, but it makes an adequate starting point. Supply chain management is a wider concept than logistics Logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of products and information through a business.
Supply chain management builds upon this framework and seeks to achieve linkage and co-ordination between the processes of other entities in the pipeline, i. Thus, for example, one goal of supply chain management might be to reduce or eliminate the buffers of inventory that exist between organisations in a chain through the sharing of information on demand and current stock levels.
The definition of supply chain management adopted in this book is: The management of upstream and downstream relationships with suppliers and customers in order to deliver superior customer value at less cost to the supply chain as a whole. Thus the focus of supply chain management is upon the management of relationships in order to achieve a more profitable outcome for all parties in the chain. This brings with it some significant challenges since there may be occasions when the narrow self-interest of one party has to be subsumed for the benefit of the chain as a whole.
Figure 1. AITkEn3 Competitive advantage A central theme of this book is that effective logistics and supply chain management can provide a major source of competitive advantage — in other words a position of enduring superiority over competitors in terms of customer preference may be achieved through better management of logistics and the supply chain.
Ohmae, k. Seeking a sustainable and defensible competitive advantage has become the concern of every manager who is alert to the realities of the marketplace. It is no longer acceptable to assume that good products will sell themselves, neither is it advisable to imagine that success today will carry forward into tomorrow.
Let us consider the bases of success in any competitive context. At its most elemental, commercial success derives from either a cost advantage or a value advantage or, ideally, both. It is as simple as that — the most profitable competitor in any industry sector tends to be the lowest-cost producer or the supplier providing a product with the greatest perceived differentiated values.
Let us briefly examine these two vectors of strategic direction. Researchers in the Second World War discovered that it was possible to identify and predict improvements in the rate of output of workers as they became more skilled in the processes and tasks on which they were working. Subsequent work by Boston Consulting Group, extended this concept by demonstrating that all costs, not just production costs, would decline at a given rate as volume increased see Figure 1.
In fact, to be precise, the relationship that the experience curve describes is between real unit costs and cumulative volume. Real costs per unit Figure 1.
Hence it can be argued that it is increasingly through better logistics and supply chain management that efficiency and productivity can be achieved leading to significantly reduced unit costs. How this can be achieved will be one of the main themes of this book. These benefits may be intangible, i. In addition, the delivered offering may be seen to outperform its rivals in some functional aspect. Hence the importance of seeking to add additional values to our offering to mark it out from the competition.
What are the means by which such value differentiation may be gained? Essentially the development of a strategy based upon added values will normally require a more segmented approach to the market. In other words, different groups of customers within the total market attach different importance to different benefits.
The importance of such benefit segmentation lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments.
Take the car industry as an example. Most volume car manufacturers such as Toyota or Ford offer a range of models positioned at different price points in the market. However, it is increasingly the case that each model is offered in a variety of versions. Thus at one end of the spectrum may be the basic version with a small engine and two doors and at the other end, a fourdoor, high-performance version. Adding value through differentiation is a powerful means of achieving a defensible advantage in the market.
Equally powerful as a means of adding value is service. Increasingly it is the case that markets are becoming more service-sensitive and this of course poses particular challenges for logistics management. Quite simply this means that it is becoming progressively more difficult to compete purely on the basis of brand or corporate image. Additionally, there is increasingly a convergence of technology within product categories, which means that it is often no longer possible to compete effectively on the basis of product differences.
Thus the need to seek differentiation through means other than technology. Many companies have responded to this by focusing upon service as a means of gaining a competitive edge.
This augmentation can take many forms including delivery service, after-sales services, financial packages, technical support and so forth. Seeking the high ground In practice what we find is that the successful companies will often seek to achieve a position based upon both a cost advantage and a value advantage. A useful way of examining the available options is to present them as a simple matrix. Let us consider these options in turn.
These are typical commodity market situations and ultimately the only strategy is either to move to the right of the matrix, i. Often the cost leadership route is simply not available. This particularly will be the case in a mature market where substantial market share gains are difficult to achieve. Cost leadership strategies have traditionally been based upon the economies of scale gained through sales volume. This is why market share is considered to be so important in many industries.
However, if volume is to be the basis for cost leadership then it is preferable for that volume to be gained early in the market life cycle. This cost advantage can be used strategically to assume a position of price leader and, if appropriate, to make it impossible for higher-cost competitors to survive.
However, an increasingly powerful route to achieving a cost advantage comes not necessarily through volume and the economies of scale but instead through logistics and supply chain management. In many industries, logistics costs represent such a significant proportion of total costs that it is possible to make major cost reductions through fundamentally re-engineering logistics processes.
The means whereby this can be achieved will be returned to later in this book. Customers in all industries are seeking greater responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-time delivery and value-added services that enable them to do a better job of serving their customers.
In Chapter 2 we will examine the specific ways in which superior service strategies, based upon enhanced logistics management, can be developed. High Low Relative differentiation Figure 1. Indeed the challenge to management is to identify appropriate logistics and supply chain strategies to take the organisation to the top right-hand corner of the matrix.
Companies who occupy that position have offers that are distinctive in the value they deliver and are also cost competitive. Logistics management, it can be argued, has the potential to assist the organisation in the achievement of both a cost advantage and a value advantage.
As Figure 1. Whilst these possibilities for leverage will be discussed in detail later in the book, suffice it to say that the opportunities for better capacity utilisation, inventory reduction and closer integration with suppliers at a planning level are considerable. Equally the prospects for gaining a value advantage in the marketplace through superior customer service should not be underestimated.
It will be argued later that the way we service the customer has become a vital means of differentiation.
The underlying philosophy behind the logistics and supply chain concept is that of planning and co-ordinating the materials flow from source to user as an integrated system rather than, as was so often the case in the past, managing the goods flow as a series of independent activities.
Thus under this approach the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and yet at lower cost. In other words the goal is to achieve competitive advantage through both cost reduction and service enhancement. To a large extent the credit for this must go to Michael Porter, the Harvard Business School professor, who through his research and writing4 has alerted managers and strategists to the central importance of competitive relativities in achieving success in the marketplace.
It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. These activities are integrating functions that cut across the traditional functions of the firm. Competitive advantage is derived from the way in which firms organise and perform these activities within the value chain.
To gain competitive advantage over its rivals, a firm must deliver value to its customers by performing these activities more efficiently than its competitors or by performing the activities in a unique way that creates greater differentiation.
Porter, M. If they do not, the argument goes, then perhaps they should consider outsourcing that activity to a partner who can provide that cost or value advantage. This logic is now widely accepted and has led to the dramatic upsurge in outsourcing activity that can be witnessed in almost every industry. Whilst there is often a strong economic logic underpinning the decision to outsource activities that may previously have been performed in-house, such decisions may add to the complexity of the supply chain.
Because there are by definition more interfaces to be managed as a result of outsourcing, the need for a much higher level of relationship management increases. The effect of outsourcing is to extend the value chain beyond the boundaries of the business. In other words, the supply chain becomes the value chain. Value and cost is not just created by the focal firm in a network, but by all the entities that connect to each other.
The mission of logistics management It will be apparent from the previous comments that the mission of logistics management is to plan and co-ordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible cost.
Logistics must therefore be seen as the link between the marketplace and the supply base. The scope of logistics spans the organisation, from the management of raw materials through to the delivery of the final product. To achieve this company-wide integration clearly requires a quite different orientation than that typically encountered in the conventional organisation.
For example, for many years marketing and manufacturing have been seen as largely separate activities within the organisation. At best they have coexisted, at worst there has been open warfare. Manufacturing priorities and objectives have typically been focused on operating efficiency, achieved through long production runs, minimised set-ups and change-overs and product standardisation.
On the other hand, marketing has sought to achieve competitive advantage through variety, high service levels and frequent product changes. It is no coincidence that in recent years both marketing and manufacturing have become the focus of renewed attention. Marketing as a concept and a philosophy of customer orientation now enjoys a wider acceptance than ever.
It is now generally accepted that the need to understand and meet customer requirements is a prerequisite for survival. At the same time, in the search for improved cost competitiveness, manufacturing management has been the subject of a massive revolution.
The last few decades have seen the introduction of flexible manufacturing systems FMS , of new approaches to inventory based on materials requirements planning MRP and just-in-time JIT methods and, perhaps most important of all, a sustained emphasis on total quality management TQM.
Equally there has been a growing recognition of the critical role that procurement plays in creating and sustaining competitive advantage as part of an integrated logistics process.
Leading-edge organisations now routinely include supply-side issues in the development of their strategic plans. In this scheme of things, logistics is therefore essentially an integrative concept that seeks to develop a system-wide view of the firm. It is fundamentally a planning concept that seeks to create a framework through which the needs of the marketplace can be translated into a manufacturing strategy and plan, which in turn links into a strategy and plan for procurement.
This, quite simply, is the mission of logistics management. However, such a philosophy can be self-defeating if it leads to an unwillingness to co-operate in order to compete. Behind this seemingly paradoxical concept is the idea of supply chain integration. The supply chain is the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer.
Thus, for example, a shirt manufacturer is a part of a supply chain that extends upstream through the weavers of fabrics to the manufacturers of fibres, and downstream through distributors and retailers to the final consumer. Each of these organisations in the chain are dependent upon each other by definition and yet, paradoxically, by tradition do not closely co-operate with each other.
Vertical integration normally implies ownership of upstream suppliers and downstream customers. So, for example, companies that perhaps once made their own components now only assemble the finished product, e. Other companies may also subcontract the manufacturing as well, e. Clearly this trend has many implications for supply chain management, not the least being the challenge of integrating and co-ordinating the flow of materials from a multitude of suppliers, often offshore, and similarly managing the distribution of the finished product by way of multiple intermediaries.
At the centre of the network is Pyramid Sportswear AB, which directly employs fewer than ten people. Pyramid contracts with designers, identifies trends, uses contract manufacturers, develops the retailer network and creates the brand image through marketing communications. Through its databases, Pyramid closely monitors sales, inventories and trends. Its network of closely co-ordinated partners means it can react quickly to changes in the market.
The network itself changes as requirements change, and it will use different designers, freelance photographers, catalogue producers, contract manufacturers and so on as appropriate.
It is still the case today that some companies will seek to achieve cost reductions or profit improvement at the expense of their supply chain partners.
Companies such as these do not realise that simply transferring costs upstream or downstream does not make them any more competitive. The reason for this is that ultimately all costs will make their way to the final marketplace to be reflected in the price paid by the end user. The leading-edge companies recognise the fallacy of this conventional approach and instead seek to make the supply chain as a whole Figure 1.
Stevens, G. They have realised that the real competition is not company against company but rather supply chain against supply chain. It must be recognised that the concept of supply chain management, whilst relatively new, is in fact no more than an extension of the logic of logistics. Logistics management is primarily concerned with optimising flows within the organisation, whilst supply chain management recognises that internal integration by itself is not sufficient.
An example would be where production seeks to optimise its unit costs of manufacture by long production runs without regard for the build-up of finished goods inventory and heedless of the impact it will have on the need for warehousing space and the impact on working capital.
Stage 2 companies have recognised the need for at least a limited degree of integration between adjacent functions, e. Stage 4 represents true supply chain integration in that the concept of linkage and co-ordination that is achieved in stage 3 is now extended upstream to suppliers and downstream to customers.
There is thus a crucial and important distinction to be made between logistics and supply chain management. The changing competitive environment As the competitive context of business continues to change, bringing with it new complexities and concerns for management generally, it also has to be recognised that the impact on logistics and supply chain management of these changes can be considerable.
Indeed, of the many strategic issues that confront the business organisation today, perhaps the most challenging are in the area of logistics and supply chain management. Much of this book will be devoted to addressing these challenges in detail but it is useful at this stage to highlight what are perhaps the most pressing currently. These are: Instead, the need to create value delivery systems that are more responsive to fast-changing markets and are much more consistent and reliable in the delivery of that value requires that the supply chain as a whole be focused on the achievement of these goals.
In the past the ground rules for marketing success were obvious: This formula now appears to have lost its power. Instead, the argument is heard, companies must recognise that increasingly it is through their capabilities and competencies that they compete. These core processes encompass such activities as new product development, supplier development, order fulfilment and customer management. By performing these fundamental activities in a more cost-effective way than competitors, it is argued, organisations will gain the advantage in the marketplace.
As we move forward in this complex industry, winning will be less about what we do and more about the way we do it. For example, one capability that is now regarded by many companies as fundamental to success in the marketplace is supply chain agility.
This is a theme to which we will return in Chapter 5. A commodity market is characterised by perceived product equality in the eyes of customers resulting in a high preparedness to substitute one make of product for another.
Research increasingly suggests that consumers are less loyal to specific brands but instead will have a portfolio of brands within a category from which they make their choice. In situations such as this actual product availability becomes a major determinant of demand. There is evidence that more and more decisions are being taken at the point of download and if there is a gap on the shelf where Brand X should be, but Brand Y is there instead, then there is a strong probability that Brand Y will win the sale.
It is not only in consumer markets that the importance of logistics process excellence is apparent. In business-to-business and industrial markets it seems that product or technical features are of less importance in winning orders than issues such as delivery lead times and flexibility.
A parallel development in many markets is the trend towards a concentration of demand.
In other words customers — as against consumers — are tending to grow in size whilst becoming fewer in number. The retail grocery industry is a good example in that in most northern European countries a handful of large retailers account for over 50 per cent of all sales in any one country. This tendency to the concentration of downloading power is being accelerated as a result of global mergers and acquisitions. The impact of these trends is that these more powerful customers are becoming more demanding in terms of their service requirements from suppliers.
At the same time as the power in the distribution channel continues to shift from supplier to downloader, there is also a trend for customers to reduce their supplier base.
In other words they want to do business with fewer suppliers and often on a longer-term basis. The successful companies in the coming years will be those that recognise these trends and seek to establish strategies based upon establishing closer relationships with key accounts. Such strategies will focus upon seeking innovative ways to create more value for these customers.
Building competitive platforms that are grounded in this idea of value-based growth will require a much greater focus on managing the core processes that we referred to earlier. Whereas the competitive model of the past relied heavily on product innovation this will have to be increasingly supplemented by process innovation.
The basis for competing in this new era will be: This is not to suggest that product innovation should be given less emphasis — far from it — but rather that more emphasis needs to be placed on developing and managing processes that deliver greater value for key customers. What we have witnessed in many markets is the effect of changes in technology and consumer demand combining to produce more volatile markets where a product can be obsolete almost as soon as it reaches the market.
There are many current examples of shortening life cycles but perhaps the personal computer symbolises them all. In this particular case we have seen rapid developments in technology that have first created markets where none existed before and then almost as quickly have rendered themselves obsolete as the next generation of product is announced.
Such shortening of life cycles creates substantial problems for logistics and supply chain management. In particular, shorter life cycles demand shorter lead times — indeed our definition of lead time may well need to change. Lead times are traditionally defined as the elapsed period from receipt of customer order to delivery. The real lead time is the time taken from the drawing board, through procurement, manufacture and assembly to the end market.
This is the concept of strategic lead time and the management of this time span is the key to success in managing logistics operations. There are already situations arising where the life cycle is shorter than the strategic lead time.
In other words the life of a product on the market is less than the time it takes to design, procure, manufacture and distribute that same product! The implications of this are considerable both for planning and operations.
In a global context the problem is exacerbated by the longer transportation times involved. Ultimately, therefore, the means of achieving success in such markets is to accelerate movement through the supply chain and to make the entire logistics system far more flexible and thus responsive to these fast-changing markets. Globalisation of industry A further strategic issue that provides a challenge for logistics management is the continued trend towards globalisation.
A global company is more than a multinational company. In the global business materials and components are sourced worldwide and products may be manufactured offshore and sold in many different countries, perhaps with local customisation. Such is the trend towards globalisation that it is probably safe to forecast that before long most markets will be dominated by global companies.
The only role left for national companies will be to cater for specific and unique local demands, for example in the food industry. For global companies like Hewlett Packard, Philips and Caterpillar, the management of the logistics process has become an issue of central concern.
The difference between profit and loss for an individual product can hinge upon the extent to which the global pipeline can be optimised, because the costs involved are so great. The global company seeks to achieve competitive advantage by identifying world markets for its products and then to develop a manufacturing and logistics strategy to support its marketing strategy. Where appropriate, Caterpillar will use third-party companies to manage distribution and even final finishing.
So, for example, in the US a thirdparty company in addition to providing parts inspection and warehousing attaches options to fork lift trucks. Wheels, counterweights, forks and masts are installed as specified by Caterpillar. Thus local market needs can be catered for from a standardised production process. Globalisation also tends to lengthen supply chains as companies increasingly move production offshore or source from more distant locations.
The impetus for this trend, which in recent years has accelerated dramatically, is the search for lower labour costs. In time-sensitive markets, longer lead times can be fatal. Time compression has become a critical management issue. Product life cycles are shorter than ever, customers and distributors require just-in-time deliveries and end users are ever more willing to accept a substitute product if their first choice is not instantly available.
The globalisation of industry, and hence supply chains, is inevitable. However, to enable the potential benefits of global networks to be fully realised, a wider supply chain perspective must be adopted.
It can be argued that for the global corporation competitive advantage will increasingly derive from excellence in managing the complex web of relationships and flows that characterise their supply chains. Downward pressure on price Whilst the trend might not be universal there can be no doubting that most markets are more price competitive today than they were a decade ago.
Prices in the high streets and the shopping malls continue to fall in many countries. Whilst some of this price deflation can be explained as the result of normal cost reduction through learning and experience effects, the rapid fall in the price of many consumer goods has other causes.
The same phenomenon is apparent in markets as diverse as clothing, home furnishings and air travel. A fundamental change in the global competitive landscape is driving prices to levels that in real terms are as low as they have ever been. A number of causal factors have contributed to this new market environment. Firstly, there are new global competitors who have entered the marketplace supported by low-cost manufacturing bases.
The dramatic rise of China as a major producer of quality consumer products is evidence of this. Secondly, the removal of barriers to trade and the deregulation of many markets has accelerated this trend, enabling new players to rapidly gain ground. Overcapacity implies an excess of supply against demand and hence leads to further downward pressure on price.
A further cause of price deflation, it has been suggested, is the Internet, which makes price comparison so much easier.
The Internet has also enabled auctions and exchanges to be established at industry-wide levels, which have also tended to drive down prices. In addition, there is evidence that customers and consumers are more value conscious than has hitherto been the case. Brands and suppliers that could once command a price premium because of their perceived superiority can no longer do so as the market recognises that equally attractive offers are available at significantly lower prices.
Against the backdrop of a continued downward pressure on price, it is selfevident that, in order to maintain profitability, companies must find a way to bring down costs to match the fall in price. The challenge to the business is to find new opportunities for cost reduction when, in all likelihood, the company has been through many previous cost-reduction programmes.
This idea is not new. Back in Ralph Borsodi expressed it in the following words: In 50 years between and the cost of distributing necessities and luxuries has nearly trebled, while production costs have gone down by one-fifth … What we are saving in production we are losing in distribution. The car industry, which to many is the home of lean thinking and JIT practices, has certainly exhibited some of those characteristics.
One analysis of the western European automobile industry8 showed that whilst car assembly operations were indeed very lean with minimal inventory, the same was not true upstream and downstream of those operations. Holweg, M. The true cost of this inventory to the industry is considerable. Whilst inventory costs will vary by industry and by company, it will be suggested in Chapter 3 that the true cost of carrying inventory is rarely less than 25 per cent per year of its value.
In the conditions in which the automobile industry currently finds itself, this alone is enough to make the difference between profit and loss. This example illustrates the frequently encountered failure to take a wider view of cost.
For many companies their definition of cost is limited only to those costs that are contained within the four walls of their business entity. For many companies today, most of their costs lie outside their legal boundaries; activities that used to be performed in-house are now outsourced to specialist service providers. The amazing growth of contract manufacturing in electronics bears witness to this trend. Increasingly a prime source of this added value is through customer service.
Customer service may be defined as the consistent provision of time and place utility. There are clearly many facets of customer service, ranging from on-time delivery through to after-sales support.
In this way significant differentiation of the total offer that is the core product plus the service package can be achieved. Those companies that have achieved recognition for service excellence, and thus have been able to establish a differential advantage over their competition, are typically those companies where logistics management is a high priority. Companies like Xerox, Zara and Dell are typical of such organisations. The achievement of competitive advantage through service comes not from slogans or expensive so-called customer care programmes, but rather from a combination of a carefully thought-out strategy for service, the development of appropriate delivery systems and commitment from people, from the chief executive down.
The attainment of service excellence in this broad sense can only be achieved through a closely integrated logistics strategy. Not only do customers want shorter lead times, they are also looking for flexibility and increasingly customised solutions.
In other words, the supplier has to be able to meet the precise needs of customers in less time than ever before. The key word in this changed environment is agility. Agility implies the ability to move quickly and to meet customer demand sooner. In a fast-changing marketplace agility is actually more important than long-term planning in its traditional form.
Because future demand patterns are uncertain, by definition this makes planning more difficult and, in a sense, hazardous.
In the future, organisations must be much more demand-driven than forecastdriven. The means of making this transition will be through the achievement of agility, not just within the company but across the supply chain. Responsiveness also implies that the organisation is close to the customer, hearing the voice of the market and quick to interpret the demand signals it receives.
Significant improvements in reliability can only be achieved through re-engineering the processes that impact performance. Manufacturing managers long ago discovered that the best way to improve product quality was not by quality control through inspection but rather to focus on process control. The same is true for logistics reliability.
One of the keys to improving supply chain reliability is through reducing process variability. The concept of six sigma will be discussed in more detail in Chapter 10 but in essence these tools are designed to enable variability in a process to be reduced and controlled. Thus, for example, if there is variability in order processing lead times then the causes of that variability can be identified and where necessary the process can be changed and brought under control through the use of six sigma tools and procedures.
The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are vulnerable to disruption and, in consequence, the risk to business continuity is increased. Whereas in the past the prime objective in supply chain design was probably cost minimisation or possibly service optimisation, the emphasis today has to be upon resilience.
Resilience refers to the ability of the supply chain to cope with unexpected disturbances. There is evidence that the tendencies of many companies to seek out low-cost solutions because of pressure on margins may have led to leaner, but more vulnerable, supply chains.
Resilient supply chains may not be the lowest-cost supply chains but they are more capable of coping with the uncertain business environment.
Resilient supply chains have a number of characteristics, of which the most important is a business-wide recognition of where the supply chain is at its most vulnerable. Managing the critical nodes and links of a supply chain, to be discussed further in Chapter 10, becomes a key priority. It is usually suggested that the benefits of such practices include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries.
Increasingly companies are discovering the advantages that can be gained by seeking mutually beneficial, long-term relationships with suppliers. The more that processes are linked between the supplier and the customer the more the mutual dependencies increase and hence the more difficult it is for competitors to break in.
Supply chain management by definition is about the management of relationships across complex networks of companies that, whilst legally independent, are in reality interdependent.
Successful supply chains will be those that are governed by a constant search for win-win solutions based upon mutuality and trust. This is not a model of relationships that has typically prevailed in the past. It is one that will have to prevail in the future as supply chain competition becomes the norm. These four themes of responsiveness, reliability, resilience and relationships provide the basis for successful logistics and supply chain management.
They are themes that will be explored in greater detail later in this book. Bowler, R. Shaw, A. Aitken, J. Stalk, G. Borsodi, R. In other words the ultimate purpose of any logistics system is to satisfy customers.
It is a simple idea that is not always easy to recognise if you are a manager involved in activities such as production scheduling or inventory control which may seem to be some distance away from the marketplace. The fact is of course that everybody in the organisation has a stake in customer service. The objective should be to establish a chain of customers that links people at all levels in the organisation directly or indirectly to the marketplace.
They have even extended the idea to the point of linking bonuses to an index of customer satisfaction. In organisations like Xerox, managing the customer service chain through the business and onwards is the central concern of logistics management. There are signs that this view is rapidly changing, however, as the power of customer service as a potential means of differentiation is increasingly recognised.
In more and more markets the power of the brand has declined and customers are more willing to accept substitutes; even technology differences between products have been reduced so that it is harder to maintain a competitive edge through the product itself. Two factors have perhaps contributed more than anything else to the growing importance of customer service as a competitive weapon. Likewise, in industrial downloading situations we find that downloaders expect higher levels of service from vendors, particularly as more companies convert to just-intime logistics systems.
Take, for example, the current state of the personal computer market. There are many competing models which in reality are substitutable as far as most would-be downloadrs are concerned. Since availability is clearly an aspect of customer service, we are in effect saying that the power of customer service is paramount in a situation such as this. This trend towards the service-sensitive customer is as apparent in industrial markets as it is in consumer markets.
Hence companies supplying the car industry, for example, must be capable of providing just-in-time deliveries direct to the assembly line; similarly a food manufacturer supplying a large supermarket chain must have an equivalent logistics capability, enabling it to keep the retail shelf filled whilst minimising the amount of inventory in the system. The evidence from across a range of markets suggests that the critical determinant of whether orders are won or lost, and hence the basis for becoming a preferred supplier, is customer service.
Time has become a far more critical element in the competitive process. Customer value can be defined quite simply as the difference between the perceived benefits that flow from a download or a relationship and the total costs incurred.
Another way of expressing the idea is: For example, inventory carrying costs, maintenance costs, running costs, disposal costs and so on. In business-to-business markets particularly, as downloaders become increasingly sophisticated, the total costs of ownership can be a critical element in the download decision. Figure 2. For example, there may be little difference between two competitive products in terms of technical performance, but one may be superior to the other in terms of the customer support that is provided.
In other words, their ratio of benefits to costs is superior to other players in that market or segment. Logistics management is almost unique in its ability to impact both the numerator and the denominator of the customer value ratio. This point becomes clearer if we expand the ratio as follows: Johansson, H. Each of the four constituent elements can briefly be defined as follows: The functionality, performance and technical specification of the offer.
The availability, support and commitment provided to the customer. The time taken to respond to customer requirements, e. Each of these four elements requires a continuous programme of improvement, innovation and investment to ensure continued competitive advantage. One company that has built a global leadership position in its markets is Caterpillar, marketing machines and diesel engines for the construction and mining industries.
Caterpillar has for many years focused on developing not just its manufacturing capabilities and innovative products but also its customer support and responsiveness. Underpinning these initiatives has been a continuing emphasis on creating superior logistics and supply chain management capabilities. Caterpillar has developed a world-class reputation for customer support, in particular its guarantee to provide hour availability of parts no matter how remote the location.
Through close partnership with its worldwide network of dealers and distributors and through advanced inventory and information management systems, Caterpillar offers levels of customer support — and thus customer value — that few companies in any industry can match. Put another way, there is no value in the product or service until it is in the hands of the customer or consumer. These factors might include delivery frequency and reliability, stock levels and order cycle time, for example.
Indeed it could be said that ultimately customer service is determined by the interaction of all those factors that affect the process of making products and services available to the downloader. In practice, we see that many companies have varying views of customer service. LaLonde and Zinszer2 in a major study of customer service practices suggested that customer service could be examined under three headings: The transaction elements are those customer service variables directly involved in performing the physical distribution function, e.
The post-transaction elements of customer service are generally supportive of the product while in use, for instance, product warranty, parts and repair service, procedures for customer complaints and product replacement. Table 2. MM Written customer service policy Is it communicated internally and externally?
Is it understood? Is it specific and quantified where possible? Is there a single point of contact? MM Organisation structure Is there a customer service management structure in place?
What level of control do they have over their service process? MM System flexibility Can we adapt our service delivery systems to meet particular customer needs?
MM Order cycle time What is the elapsed time from order to delivery? MM Inventory availability What percentage of demand for each item can be met from stock? MM Order fill rate What proportion of orders are completely filled within the stated lead time? MM Order status information How long does it take us to respond to a query with the required information? Do we inform the customer of problems or do they contact us?
Post-transaction elements For example: Availability of spares What are the in-stock levels of service parts? MM Customer complaints, claims, etc. How promptly do we deal with complaints and returns? Do we measure customer satisfaction with our response?
Indeed the argument that will be developed later is that it is essential to understand customer service in terms of the differing requirements of different market segments and that no universally appropriate list of elements exists; each market that the company services will attach different importance to different service elements.
It is because of the multivariate nature of customer service and because of the widely differing requirements of specific markets that it is essential for any business to have a clearly identified policy towards customer service. A considerable body of evidence exists that supports the view that if the product or service is not available at the time the customer requires it and a close substitute is available then the sale will be lost to the competition.
Even in markets where brand loyalty is strong a stock-out might be sufficient to trigger brand switching. The impact of out-of-stock One study3 identified that a significant cost penalty is incurred by both manufacturers and retailers when a stock-out occurs on the shelf.
The research found that on a typical day a shopper in the average supermarket will face stock-outs on 8 per cent of items in the categories studied.
The reaction of customers when faced with a stock-out was highlighted by the same study. As Figure 2. This represents bad news for both the manufacturer and the retailer. Even worse, other research4 has suggested that over two-thirds of shopping decisions are made at the point of download, i.
If the product is not on the shelf then the download will not be triggered. The potential loss of business for both manufacturers and retailers caused by out-of-stock situations is clearly significant. Corsten, D. The demand is for ever shorter delivery lead times and reliable delivery.
The pressure on suppliers is further increased as these same customers seek to rationalise their supplier base and to do business with fewer suppliers.
Becoming a preferred supplier in any industry today inevitably means that a high priority must be placed on delivering superior customer service. However, whilst these are still necessary dimensions of a successful marketing strategy they are not sufficient.
Cost reduction is a worthy goal as long as it is not achieved at the expense of value creation. Low-cost strategies may lead to efficient logistics but not to effective logistics.
One powerful way of highlighting the impact that customer service and logistics management can have on marketing effectiveness is outlined in Figure 2. The suggestion here is that customer service impacts not only on the ultimate end user but also on intermediate customers such as distributors. More recently we have come to recognise that this by itself is not sufficient. Because of the swing in power in many marketing channels away from manufacturers and towards the distributor e.
It is only when all three components are working optimally that marketing effectiveness is maximised. To stress the interdependence of these three components of competitive performance it is suggested that the relationship is multiplicative. In other words the combined impact depends upon the product of all three. A simple example would be that a finished product in a warehouse is the same as a finished product in the hands of the customer in terms of its tangible features.
Clearly, however, the product in the hands of the customer has far more value than the product in the warehouse. Distribution service in this case has been the source of added value. At the centre is the core product, which is the basic product as it leaves the factory. Clearly it is not only customer service and logistics activity that add value; in many cases advertising, branding and the packaging can all enhance the perceived value of the product to the customer.
However, it is increasingly evident, as we have seen, that it takes more than branding to differentiate the product. The example of Rolls-Royce aero engines, highlighted below, provides powerful support for this idea. Typically these engines will cost several million pounds and require periodic and expensive maintenance and upgrading. In the past most airlines having bought an engine would assume responsibility for the servicing of that engine and holding the necessary inventory of spare parts.
Clearly the cost of this was significant and also the unpredictability meant that a global service and repair capability was required. Thus an examination of the typical marketing plan will show a bias towards increasing market share rather than towards customer retention. Whilst new customers are always welcome in any business it has to be realised that an existing customer can provide a higher profit contribution and has the potential to grow in terms of the value and frequency of downloads.
The lifetime value of a customer is calculated as follows: A further benefit comes from the fact that the longer the customer stays with an organisation the more profitable they become. A study by consulting company Bain and Co. The reasons for this are that a retained customer typically costs less to sell to and to service.
Also as the relationship develops there is an increased likelihood that they will give a greater part of their business to a supplier whom they are prepared to treat as a partner. Furthermore, satisfied customers tell others and thus the chance increases that further business from new customers will be generated through this source.
A simple measure of customer retention is to ask the question: It can be extended to include the value of downloads made by the retained customer base to assess how successful the company has been in increasing the level of downloading from these accounts see Figure 2. Whilst customer service obviously also plays a role in winning new customers it is perhaps the most potent weapon in the marketing armoury for the keeping of customers.
The idea is that we should seek to create such a level of satisfaction with customers that they do not feel it necessary even to consider alternative offers or suppliers. In these markets customers will download one brand on one occasion and then are just as likely to download another on the next occasion.
At the other extreme, a company like IBM will consciously seek to develop long-term relationships with its customers through training programmes, client seminars, frequent customer communication and so on.
Thus a manufacturer might be motivated to establish supply and distribution arrangements that would enable production efficiencies to be maximised. Typically this would entail manufacturing in large batches, shipping in large quantities and buffering the factory, both upstream and downstream, with inventory. With the continuing transfer of power in the distribution channel from the producer to the consumer, this conventional philosophy has become less and less appropriate.
This new perspective sees the consumer not at the end of the supply chain but at its start. As one author has suggested: Managing demand chains is … fundamentally different to managing supply chains. This sequence begins with an understanding of the value that customers seek in the market in which the company competes.
This customer insight will enable the identification of the real market segmentation, i. The Spanish fashion chain Zara provides an excellent example of how market understanding and supply chain excellence can create real value for its target customers.
Almost uniquely they have developed supply chain processes that enable them to capture ideas and trends in the apparel market and to translate them into products in amazingly short lead times. To achieve this quick response capability Zara have developed an agile network of closely integrated company-owned and independent manufacturing facilities that have the flexibility to produce in small batches at short notice.
Whilst this is not the cheapest way to make a garment, it ensures that they achieve their value proposition. Define the value proposition How do we translate these requirements into an offer?
Identify the market winners What does it take to succeed in this market? Develop the supply chain strategy How do we deliver against this proposition? The logistics planner therefore needs to know just what the service issues are that differentiate customers. Market research can be of great assistance in understanding this service segmentation and it is often surprising to see how little formal research is conducted in this crucial area.
How might such a research programme be implemented? The first point to emphasise is that customer service is perceptual. We might use measures which, whilst providing useful measures of productivity, do not actually reflect the things the customer values. Hence it is critical that we develop a set of service criteria that are meaningful to customers. However, the truth is that it is easy to become divorced from the reality of the marketplace when management is consumed with the day-to-day pressures of running a business.