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Logistics and Supply Chain Management

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Logistics and Supply Chain Management

BBA, Specialization, Marketing

CAMAD COLLEGE

Assistance Professor

Bijaya K. Shah

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MKT 113.3 - Logistic and Supply Chain Management Course Contents:

1.

Introduction

6 hours

Concept of marketing logistics, Competitive advantage: concept and gaining competitive advantage through logistics. Mission of logistics management, Supply chain and competitive performance

  • 2. Logistics Environment

8 hours

Changing logistics environment, Customer service, concept, components, an importance of customer services; Customer retention, service-driven logistic system; Systems; Setting customer service priorities and service standards

  • 3. Logistics Cost

8 hours

Total cost analysis. Principles of logistics costing, the bottom line approach, Shareholder value, customer profitability analysis, and direct product profitability, cost drivers and activity based costing.

  • 4. Logistics Performance

10 hours

Benchmarking the supply chain: concept, benchmarking the logistics process, supply chain process mapping, supplier and distributor benchmarking, setting the benchmarking priorities, and logistic performance indicators

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5.

Strategic Issues in Logistics

11 hours

Time based competition. Lead time. Logistics pipeline management. Logistics values engineering. Lead time gap. Just in time logistics:

the Japanese philosophy, implications for logistics Quick response logistics: concept, vendee managed inventory, logistics information system. Production strategies for quick response

6.

Supply Chain Management

5 hours

Concept,

Logistics

vision

and

problems

with

conventional

organizations,

Logistics

organization:

vertical

and

horizontal

organizations

Text Books:

  • 1. Martin Christopher: Logistics and Supply Chain Management, Pitman Publishing/ Pearson Education Reference Book:

  • 2. G. Raghuram and N. Rangaraj: Logistics and Supply Chain Management: Case and Concepts, Macmillan India Ltd.

INTRODUCTION

CHAPTER: I

Concept of Marketing Logistics

Logistics is the science of planning, organizing and managing activities that provide goods or services. Often used to describe supply chain management both in a manufacturing or a military capacity, logistics also has significant relevance in a marketing capacity. In order to manage the flow of materials, the science of logistics in the case of marketing, helps the flow of information from the business to the consumer in building stronger relationships.

The term logistics comes from the Greek logos meaning ―speech, reason, ratio, rationality, language, phrase‖, and more

specifically from the Greek word logistiki (meaning accounting and financial organization.)

The word logistics has its origin in the French verb loger to lodge or to quarter. Its original use was to describe the science of movement, supplying & maintenance of military forces in the field. Later on it was used to describe the management of materials flow through an organization, from raw materials through to finished goods. From Wikipedia (Logistics).

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INTRODUCTION

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INTRODUCTION

Market logistics involves planning, implementing, and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer requirements at a profit.

It is the task of managing value-added flows from suppliers to ultimate users and it involves coordinating the activities of suppliers, purchasing agents, manufacturers, marketers, channel members, and customers.

Kotler identified four major decisions in market logistics

Order

  • 1. How

processes

-

should

orders

be

handled?

  • 2. Where

Warehousing

-

stocks

should

be

located?

  • 3. Inventory

-

How

much

stocks

should

be

held?

  • 4. Transportation - How should goods be transported?

Marketing logistics involve planning, delivering, and controlling the flow of physical goods, marketing materials and information from the producer to a market as necessary to meet customer demands while still making a satisfactory profit.

Maintaining an organization‘s competitive edge means

understanding and implementing an effective marketing logistics strategy regarding product, price, place and promotion. These four functions of marketing logistics help the organization to reach the target customers and deliver the products or services sold by the organization to these customers.

Product Delivery

INTRODUCTION

One function of logistics marketing is finding out who your customer is and how to get the product or service to the customer. Each customer can have individualized needs so the logistical services provided may vary from customer to customer. Regardless of these differences, the customers expects 100 percent conformance and assured reliability at all times with every transaction. The goals of this aspect of marketing logistics include filling the order, on-time delivery, precise invoicing and zero damage.

Price

An organization bases pricing decisions on both internal and external factors. Marketing logistics must recognize price drivers. The profile of the customer, the product and the type of order are factors that drive the price. These changes are not typically controlled by marketing logistics. However, marketing logistics must react to these factors and understand how the factors affect customers‘ decisions. Discounts for quantities and the related logistical cost structure can impact the price the customer will ultimately pay for the product or service. Additional factors driving price include the shipping costs based on the size, weight and distance the organization will ship the item. Further, the size of the manufacturing run, labor costs and the types, quantities and quality of the materials used in the manufacturing process can affect price.

Promotion

INTRODUCTION

Promotion is another important aspect of an organization‘s marketing logistics process. When bringing a product to market, the organization must coordinate the logistics of the various marketing materials. For example, the art department might design the artwork for the product's box and an outside supplier might manufacture the boxes with the artwork. Marketing logistics can help to ensure that all of these entities work together and produce the marketing materials needed to sell the product.

Place

The function of place in marketing logistics allows the organization to simplify the transactions between a logistics provider and the customer. The organization must execute logistics in such a way that the customer is not aware of the complexities involved in the logistics process. For the customer, the output is always more important than the process. The organization should, therefore, never expose the backroom processes involved with logistics delivery to the customer. Also the location of the factory, warehouse and customer can greatly impact the marketing logistics process by increasing or reducing costs. For example, locating a factory in Mexico might reduce the labor costs associated with a product. However, at the same time locating the factory in Mexico might increase the shipping costs and negate any cost savings.

The ultimate purpose of logistics

Logistics is to deliver

INTRODUCTION

The right product

To the right place at the right time

In the right quantity

At the right quality

At the right price

For the right customer

Importance of logistics

Competitive advantage by giving customers better

service at lower prices Cost savings to the company and its customers

Product variety requires improved logistics

Information technology has created opportunities for distribution efficiency

Logistics and Marketing

INTRODUCTION

Recently logistics and marketing have been treated in companies as separate areas. The reasons of that fact were the following, Pilarczyk, Mruk, Sojkin, Szulce (1999):

traditional treatment and mechanical division of marketing and logistics function, but meaning of logistics in gaining and maintaining of competitive edge was small (logistics was treated and organized as a transportation and warehousing department),

showing off a role of logistic costs from the point of view of a growth of company effectiveness and success (cost approach was against marketing market orientation, which caused separation of marketing and logistics),

underestimation in practice of goods physical route management and its information conditions in aspect of integrated marketing management (not long ago

marketing management was restricted to product‘s

strategy, price and promotion; rarely a marketing department was responsible for all aspects of integrated management in the sphere of distribution and delivery with conscious logistics including).

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INTRODUCTION Fundamental occurrences and reasons bringing about a need of integration process between logistics and marketing

Fundamental occurrences and reasons bringing about a need of integration process between logistics and marketing and supporting this process could be, Pilarczyk, Mruk, Sojkin, Szulce (1999):

A growth of market differentiation (differentiation of customers´ needs and preferences, individualization of

market segments, products‘ diversification, etc.),

growing competition in scope of a level and quality of services and customer service (a growth of demands in scope of additional benefits and usefulness connected with purchasing and sales of goods),

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a shorter product life-cycle,

tendencies related to concentration in trade, creating

and developing of new distribution channels, integration of economic processes and decisive

processes (using of synergy in micro macro scale), A growth of new technology in the sphere of goods and

information flow, promotion, sales, etc., A growth of entrepreneurship and innovativeness in market and economic activities, integration and globalization of markets.

Marketing and logistics are similar because they both attend in

an adjusting process of structure and dimension of supply to

customers‘ needs and wants. They are also complementary —

marketing stimulates demand, logistics satisfies it by distribution processes, Blaik (2001).

Competitive Advantage:

Concept

and

Gaining

competitive

advantage

through

logistics

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.

INTRODUCTION

Michael Porter identified two basic types of competitive advantage:   cost advantage differentiation advantage
Michael
Porter
identified
two
basic
types
of
competitive
advantage:
cost advantage
differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation.

INTRODUCTION

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:

Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily.

The following are some examples of such resources:

Patents and trademarks

Proprietary know-how

Installed customer base

Reputation of the firm

Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily

INTRODUCTION

documented as procedures and competitors to replicate.

thus

are

difficult

for

The firm's resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.

INTRODUCTION

INTRODUCTION Value Creation The firm creates value by performing a series of activities that Porter identifiedvalue chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members. To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation). 17 | P a g e " id="pdf-obj-16-4" src="pdf-obj-16-4.jpg">

Value Creation

The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.

To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).

Seeking the high Ground

INTRODUCTION

For

a

long time

it

has understood that

customers don't buy

products, they buy "benefits". Put another way, the product is

purchased not

for itself but

for the promise of what

it

will

"deliver". Unless the product or service we offer can be distinguished in some way from its competitors there is a strong likelihood that the marketplace will view it as a

"commodity" and so the sale will tend to go to the cheapest

supplier.

Therefore

it

is

important

to

look

for

additional

functionalities of

a competitive advantage.

product

that

will

bring sustainable

What are the means by which such value differentiation and sustainable competitive advantage may be gained? Essentially the development of a strategy based upon added values will normally require a more segmented approach to the market.

When a company scrutinizes markets closely it frequently finds that there are distinct "value segments". 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.

The one way of getting the competitive edge and sustainable competitive advantage is through technology breakthroughs. The other way of getting sustainable competitive advantage is by focusing upon service as a means of gaining a competitive edge. The service can be seen in many forms including

INTRODUCTION

delivery service, after-sales services, financial packages, technical support etc.

Depending on the value they bring to their customers and their cost efficiency, the companies are grouped in one of four quadrants of logistic and competitive advantage matrix:

INTRODUCTION delivery service, after-sales services, financial packages, technical support etc. Depending on the value they bring

The supply chain becoming the value chain

The idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labor, materials, equipment, buildings, land, administration and management.

INTRODUCTION

How value chain activities are carried out determines costs and affects profits.

Most organizations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.

INTRODUCTION How value chain activities are carried out determines costs and affects profits. Most organizations engage

According to Porter (1985), the primary activities are:

  • 1. Inbound Logistics - involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs.

  • 2. Operations - are all the activities required to transform inputs into outputs (products and services).

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  • 3. Outbound Logistics - include all the activities required to collect, store, and distribute the output.

  • 4. Marketing and Sales - activities inform buyers about products and services induce buyers to purchase them, and facilitate their purchase.

  • 5. Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.

Secondary activities are:

  • 1. Procurement - is the acquisition of inputs, or resources, for the firm.

  • 2. Human Resource management - consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.

  • 3. Technological Development - pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.

  • 4. Infrastructure - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

INTRODUCTION

Mission of Logistics Management

The mission is to plan and coordinate 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 operating activity of the business. The scope of the logistics spans the organization, from the management of raw materials through to the delivery of the final product.

Logistics enables the connection of the supply base and the marketplace through the coordination and management of various activities. With logistics it‘s possible to meet the demands and expectations of the end customers, whether they are buying an end product or raw materials. Logistics runs through the entire organization, from the management of raw materials to the delivery of the final product, therefore it‘s essential the logistics is managed effectively.

Logistics management is when the flow of material and information fulfill the needs of the customers. In the past the areas of manufacturing and marketing were seen as separate entities within the company but today, it is impossible for these departments to act independently. Marketing focuses on the customer, working to understand who they are and in meeting their requirements while manufacturing focuses on operation efficiency, optimizing cost, minimization of setup/ change over and standardizing products.

INTRODUCTION

INTRODUCTION Figure: Logistic Network Procurement also plays a vital role and is part of the integrated

Figure: Logistic Network

Procurement also plays a vital role and is part of the integrated logistics process. The planning creates the framework to ensure costs are managed and the needs of the marketplace are met. This is then translated into manufacturing. Therefore the mission of logistics management is to be involved in marketing, distribution, production and procurement.

INTRODUCTION

Supply Chain and Competitive Performance

Logistics management is term used to describe the planning, implementation, and movement of goods, services and related information from the point of origin to the point of consumption. Increasingly, in the modern business environment logistics management involves supply chain management (SCM), for the purpose of this paper we shall attempt to demonstrate the concept of supply chain and competitive performance and how it relates to logistics. According to Schonsleben P., (2007), a Supply Chain encompasses all activities in fulfilling customer demands and requests. These activities are associated with the flow and transformation of goods from the raw materials stage, through to the end user, as well as the associated information and funds flows. There are four stages in a supply chain: the supply network, the internal supply chain (which are manufacturing plants), distribution systems, and the end users. Moving up and down the stages are the four flows: material flow, service flow, information flow and funds flow. A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. Within each organization, such as manufacturer, the supply chain includes all functions involved in receiving and filling a customer request. These functions include, but are not limited to, new product development,

INTRODUCTION

marketing, operations, distribution, finance, and customer service (Chopra and Meindl:2004). Bearden et al (2004) noted that business buyers are increasingly involved in supply chain

management or ―the integration of business processes from end

user through original suppliers that provides products, services

and information that add value for customers.‖ Schonsleben P.,

(2007) describes Supply Chain Management as the coordination of strategic and long-term cooperation among co- makers in the total supply chain for the development and production of products, both in production and procurement and in product and process innovation. The chief criteria when

choosing co-makers is their potential contribution towards realization of short lead times (time to market). The demand for short product innovation times (time to

market) has come to the fore especially in buyer‘s markets.

Cross-company product and process development with co- makers can be advantageous to logistic management. When product development becomes more and more costly, entrepreneurial risk may in this way be more widely distributed. Reducing the time for product innovation and production demands more intensive business collaboration with co-makers and this can be done at all levels of the supply structure. This type of cooperation gives co-makers insight into the participating companies. Entrepreneurial cooperation thus becomes intensive. One absolute prerequisite is the long-term formation of trust which gives competitive advantage to the co- makers.

INTRODUCTION

According to Kotler and Keller (2009), supply chain management yields several insights. Firstly, the company can estimate whether more money is made upstream or downstream, in case it might want to integrate backward or forward. Secondly, the company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly. Thirdly, companies can go online with their business partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy using SCM software We shall now look at the concept of competitive advantage, Schonsleben P., (2007) defines competitive advantage as an edge, i.e., a process, and patent, management philosophy, or system that enables the company to have a larger market share or profit than it would have without that advantage. Product differentiation is a strategy of making a product different, the best or unique from the competition with regard to at least one feature or goal of a target area. In today‘s environment the ideas of collaborative planning, forecasting, and replenishment of co-makers is a source of major competitive advantage through well organized logistics management. Effective supply chain collaboration is increasingly seen as a major competitive advantage viewing the business process as something that extends beyond the enterprise, and understanding the impact of decisions on key customers and suppliers will become a critical success factor. The ability to effectively collaborate with several other stakeholders outside your organization will

INTRODUCTION

become increasingly important. Successful players will operate comfortably in virtual and perhaps even transient cross- functional teams, providing domain expertise to some and leadership skills to others. The ability to rapidly process information, filtering out the noise, while gleaning the relevant pieces is the key to understanding that disconnected pieces of information are indeed part of a larger event. This knowledge can then be used to proactively plan several potential decision scenarios and to execute one or more of them in a pre-emptive mode. In conclusion it can be said that logistics management is of great importance to any enterprise in order to achieve competitive advantage in an attempt to reduce production costs and enhance relationships with co-makers such as suppliers and distributors. In a nut-shell the lesson is obvious, a well-run supply chain can give a huge competitive advantage and help achieve success; a badly run one leads to dissatisfied customers and commercial failure.

LOGISTIC ENVIRONMENT

CHAPTER: II

Changing Logistics Environment

Some of the challenges of logistic and supply chain management are:

  • 1. The new rules of competition Comparing to those early days where organization used to be isolated and independent. Companies have begun to think more responsive to faster changing market becoming more consistent and reliable. Setting goal and achieving those goals has become more importance. Before firm used to focus on strong brands backed up by large advertising budgets and aggressive selling. Nowadays they began to think it differently focusing on their capabilities and competencies. A major contributing factor influencing the changed competitive environment has been the trend towards ‗commoditization‘ in many markets. A commodity market is characterized by perceived product equality in the eye of customers resulting in a high preparedness to substitute one market of product to other. In today‘s marketplace the order-winning criteria are more likely to be service based than product based.

LOGISTIC ENVIRONMENT

  • 2. Globalization of industry

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 customization.

The global industries seeks to achieve competitive advantages by identifying world markets and then to develop a manufacturing and logistics strategy to support its marketing strategy. For a global companies like Philips, caterpillar management of the logistic process has become an issue of central concern.

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 even more willing to accept a substitute product it their choice is not instantly available.

  • 3. Downward pressure on price

So to prepare for the inevitable, consider these 5 response tactics for coping with downward price pressure.

Acknowledge the Issue. Agencies can no longer be divas and run screaming from this issue. This is not an ―if‖ topic; it‘s a ―when‖ topic. Prepare yourself by tightening up your

timesheets and getting control of your own stats. By having

a good feel for the margins on each piece of business and the client-driven factors, which might have increased costs

or times, you‘ll be ready to confront the hungry bean

counters.

LOGISTIC ENVIRONMENT

Designate a Champion. Make productivity analysis a senior player‘s job. Insist that this person do battle in the

world of numbers, ratios and productivity. Be sure your champion can talk easily and authoritatively about process, cost factors and client business results. Arm them with every data set you can.

Take an Output POV. Focus on how the agency product drives the client business. Forget about time and materials. Clients want agencies with skin in the game. Build a pyramid of deliverables that takes into account both the tangibles of the client‘s business and the intangible value-adds the agency brings to the game. Accept the idea that not every asset has the same value or weight. Rank your projects according to their difficulty or complexity and price them accordingly. Be sure to extract a premium for projects that require unusual experience, insight or strategic thinking.

Examine Your Process. How can you become leaner and

meaner? Start by creating a process map that a kindergartener can follow. Look for ways to pull people and time out of your

supply chain. If necessary, re-engineer your process. Then show your clients what you‘ve done. Set internal benchmarks to keep agency people focused and honest. Think Like a CFO. Focus on the return clients get from

agency services. Price your services so that strategic planning, account service and project management get bought out and represent fixed and predictable costs. Sell creative and production services on a by-project variable cost basis. Separate the regular and routine projects from the significant, difficult or unusual projects and price them accordingly. And while CFOs are eager to hammer all suppliers all the time, they

understand that making magic and making toasters are two

LOGISTIC ENVIRONMENT

different things. Meet them half way and you‘ll be surprised

how much you can hold the line.

  • 4. Customers taking control

Managing the ‗4Rs‘ As we move rapidly into the era of supply chain competition a number of principles emerge to guide the supply chain manager. These can be conveniently summarized

as the ‗4Rs‘ of responsiveness, reliability, resilience and

relationships.

Responsiveness

In today‘s just-in-time world the ability to respond to customers‘ requirements in ever-shorter time-frames has become critical. Not only do customers want shorter lead times, they are also looking for flexibility and increasingly customized 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, organizations must be much more demand-driven than forecast driven. 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 organization is close to the customer, hearing

LOGISTIC ENVIRONMENT

the voice of the market and quick to interpret the demand signals it receives.

Reliability

One of the main reasons why any company carries safety stock is because of uncertainty. It may be uncertainty about future demand or uncertainty about a supplier‘s ability to meet a delivery promise, or about the quality of materials or components. 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. In recent years there has been a considerable increase in the use of so-called ‗six sigma‘ methodologies. 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.

Resilience

Today‘s marketplace is characterized by higher levels of turbulence and volatility. The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are

LOGISTIC ENVIRONMENT

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 minimization or possibly service optimization, 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. Sometimes these ‗critical paths‘ may be where there is

dependence on a single supplier, or a supplier with long replenishment lead times, or a bottleneck in a process.

Other characteristics of resilient supply chains are their recognition of the importance of strategic inventory and the

selective use of spare capacity to cope with ‗surge‘ effects.

Relationships

The trend towards customers seeking to reduce their supplier

base has already been commented upon. In many industries the

practice of ‗partnership sourcing‘ is widespread. It is usually

LOGISTIC ENVIRONMENT

suggested that the benefits of such practices include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. Underlying all of this is the idea that buyer/supplier relationships should be based upon partnership. Increasingly companies are discovering the advantages that can be gained by seeking mutually beneficial, long-term relationships with suppliers. From the suppliers‘ point of view, such partnerships can prove formidable barriers to entry for competitors. 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.

Customer service

Customer service is the service provided to customers before, during and after purchasing and using goods and services. Good customer service provides an experience that meets

LOGISTIC ENVIRONMENT

customer expectations. It produces satisfied customers. Bad customer service can generate complaints. It can result in lost sales, because consumers might take their business to a competitor.

Components of Customer Services

Three major components of customer services are:

Pre-transaction

Transaction

Post -transaction

Pre Transaction Service

The pre-transaction element of good customer service will continually ensure that the firm and its premises, employees and procedures are set up to provide excellent customer service. The firm's systems have to be flexible enough to adequately respond to customer and market needs.

Pre-transaction marketing aims to persuade consumers to visit the firm's retail stores through highlighting store facilities, product features/benefits and promotional offers. It also involves highlighting the firm's ethos, values, vision and policies. For example price match policies, free return process and ethical values such as fair trade and sustainability.

Once in the store, how can the store welcome and support the potential customer. The retail store environment should make

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customers feel comfortable so that they want to stay in the store. Research shows that the longer a customer stays in the store, the more money they spend i.e. the length of time in a store directly correlates to the amount of money spent. Retailers go to great lengths to ensure that their stores are set at a comfortable temperature, lighting and even smell (scent marketing). The store should be easy to navigate with prices and information displayed clearly and accurately.

Retailers provide toilets and cafes to ensure that hunger and sanitary needs do not make the customer leave. There are often facilities to entertain children so that their parents can relax and shop with minimal disturbance. For example restaurants will provide crayons and coloring pads at the table and their gardens often have slides, swings and climbing frames, whilst some retailers, gyms and cinemas offer a Crèche. Many shopping centre‘s and eateries now have free wireless internet access (wifi) in the hope that internet access will encourage people to stay longer and therefore spend more.

Retail employees should make customers feel welcome and facilitate the buying process through excellent customer service skills, product knowledge and store facilities knowledge. Employees should answer customer questions confidently and skillfully demonstrate products if required. Interactions with store employees are often what makes a sale on the day or prevents people visiting a store in the future.

Transaction Service

It should be easy for the customer to buy products and services they have selected to ensure that the sale does not fail at this

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critical stage. Otherwise the efforts involved in persuading the customer to visit the store (internet site/telephone sales) will become a waste of time. Customer service during the purchase process needs good product availability, efficient queuing systems, a choice of payment methods and accurate technology/software systems so that the prices and offers at the point of sale match those displayed around the store, on marketing material and websites.

Post Transaction Service

Good customer service continues after the purchase transaction, consumers expect a quality after sales service for product failures, complaints and questions/queries. Post transaction service will determine whether consumers buy from a firm in the future. Customers will feel reassured about the firm through efficient complaint resolution, product/service warranties and quick product replacement and repairs. For online/remote purchases customer deliveries need to process accurately, made on time, invoiced correctly and goods have to arrive undamaged.

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Importance of Customer Services

Quality customer service is about exceeding the expectations of your customers.

Superior customer service can help your business to grow by increasing:

the number of customers attracted by favorable word- of-mouth advertising the dollars spent by each customer per transaction The frequency and number of times your customers shop with you.

Other benefits of high-quality service include:

improved customer satisfaction

stronger customer loyalty

consistency of work-flow practices

reduced marketing costs

competitive advantage

improved market position

Staff pride and satisfaction.

Customer service is sometimes the only way a business can differentiate itself from its competitors. It isn't just about the way you greet and serve your customers. It involves many aspects of business operations, including:

products and services information

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counter and face-to-face service

telephone service

taking customer orders

follow-up documentation

billing and managing payments

visiting the customer

making repairs

handling complaints

Managing the service culture.

Customer Retention

Customer retention is on the minds of small and medium-sized businesses across the world. With rising customer acquisition costs, businesses need to innovate and assume a proactive role in retaining clients.

An assessment of the product or service quality provided by a business that measures how loyal its customers are. Customer retention statistics are typically expressed as a percentage of long term clients, and they are important to a business since satisfied retained customers tend to spend more, cost less and make valuable references to new potential customers.

According to the Harvard Business School, increasing customer retention rates by 5 percent increases profits by 25 percent to 95 percent

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The easiest way to grow your customers is not to lose them

The average business loses around 20 percent of its customers annually simply by failing to attend to customer relationships. In some industries this leakage is as high as 80 percent. The cost, in either case, is staggering, but few businesses truly understand the implications.

Imagine two businesses, one that retains 90 percent of its customers, the other retaining 80 percent. If both add new customers at the rate of 20 percent per year, the first will have a 10 percent net growth in customers per year, while the other will have none. Over seven years, the first firm will virtually double, while the second will have no real growth. Everything else being equal, that 10-percent advantage in customer retention will result in a doubling of customers every seven years without doing anything else.

The consequences of customer retention also compound over time, and in sometimes unexpected ways. Even a tiny change in customer retention can cascade through a business system and multiply over time. The resulting effect on long-term profit

and growth shouldn‘t be underestimated.

Marketing Wizdom can introduce you to a number of simple customer retention strategies that will cost you little or nothing to implement. Behind each technique listed here there is an in- depth step-by-step process that will increase your customer retention significantly once implemented, and will have a massive impact on your business.

1. Reducing Attrition

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Virtually every business loses some customers, but few ever measure or recognize how many of their customers become inactive. Most businesses, ironically, invest an enormous amount of time, effort and expense building that initial customer relationship. Then they let that relationship go unattended, in some cases even losing interest as soon as the

sale has been made, or even worse, they abandon the customer as soon as an easily remedied problem occurs, only to have to spend another small fortune to replace that customer. The easiest way to grow your business is not to lose your

customers. Once you stop the leakage, it‘s often possible to double or triple your growth rate because you‘re no longer

forced to make up lost ground just to stand still.

2. Sell and then sell again

So many people do an excellent job of making the initial sale, and then drop the ball and get complacent, ignoring the customer, while they chase more business. Your selling has actually only just begun when someone makes that initial purchase decision because virtually everyone is susceptible to

buyer‘s remorse. To lock in that sale, and all of the referrals

and repeat business that will flow from it, you need to strike

while the iron is hot to allay your customers‘ fears and

demonstrate by your actions that you really care. You should

thank them and remind them again why they‘ve made the right

decision to deal with you … and put a system in place to sell to

them again, and again, constantly proving that they made the right decision.

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  • 3. Bring back the “lost sheep”

There‘s little point in dedicating massive resources to

generating new customers when 25-60% of your dormant customers will be receptive to your attempts to regenerate their business if you approach them the right way, with the right

offer. Reactivating customers who already know you and your product is one of the easiest, quickest ways to increase your revenues. Re-contacting and reminding them of your existence,

finding out why they‘re no longer buying, overcoming their

objections and demonstrating that you still value and respect them will usually result in a tremendous bounty of sales and

drastically increased revenues in a matter of days … and will

lead to some of your best and most loyal customers.

  • 4. Frequent Communications Calendar

Avoid losing your customers by building relationships and keeping in touch using a rolling calendar of communications. This is a programmed sequence of letters, events, phone calls, ―thank you‖, special offers, follow-ups, magic moments, and cards or notes with a personal touch etc. that occur constantly and automatically at defined points in the pre-sales, sales and post-sales process. People not only respond to this positively, they really appreciate it because they feel valued and important. It acknowledges them, keeps them informed, offsets post-purchase doubts, reinforces the reason they‘re doing business with you and makes them feel part of your business so that they want to come back again and again.

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  • 5. Extraordinary Customer Service

The never-ending pursuit of excellence to keep customers so satisfied that they tell others how well they were treated when doing business with you. Moving the product or service you deliver into the realm of the extraordinary by delivering higher than expected levels of service to each and every customer. Key facets include: dedication to customer satisfaction by every employee; providing immediate response; no buck passing; going above and beyond the call of duty; consistent on-time delivery; delivering what you promise before AND after the sale; a zero-defects and error-free-delivery process and recruiting outstanding people to deliver your customer service. Extraordinary service builds fortunes in repeat customers, whereas poor service will drive your customers to your competition.

  • 6. Courtesy system

Powerful systems that improves the interpersonal skills of your team and changes the spirit of your organization. It involves speaking to colleagues politely and pleasantly, without sarcasm or parody, and treating them at least as well as you would want them to treat your customers. This will help your team to feel worthwhile and important, which makes for pleasant social contacts at work. It also motivates them to provide extraordinary service, encourages them to be consistently pleasant in all of their dealings and to relate to customers in a warm, human and natural manner. This results in better, warmer, stronger, more trusting relationships and longer term bonds with your customers.

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  • 7. Product or service integrity

Long-term success and customer retention belongs to those who do not take ethical shortcuts. There must always be total consistency between what you say and do and what your customer's experience. The design, build quality, reliability and serviceability of your product or service must be of the standard your customers want, need and expect. Service

integrity is also demonstrated by the way you handle the small things, as well as the large. Customers will be attracted to you if you are open and honest with them, care for them, take a

genuine interest in them, don‘t let them down and practice what you preach … and they will avoid you if you don‘t.

  • 8. Measure lifetime value

There‘s a vast difference between the one-off profit you might make on an average sale, which ignores the bigger picture, and the total aggregate profit your average customer represents over the lifetime of their business relationship with you. Once you recognize how much combined profit a customer represents to your business when they purchase from you again

and again, over the months, years or decades, you‘ll realize the critical importance of taking good care of your customers. And

because you‘ll understand just how much time, effort and

expense you can afford to invest in retaining that customer,

you‘ll be in control of your marketing expenditure.

  • 9. A complaint is a gift

96 percent of dissatisfaction customers don‘t complain. They just walk away, and you‘ll never know why. That‘s because

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they often don‘t know how to complain, or can‘t be bothered, or are too frightened, or don‘t believe it‘ll make any difference. Whilst they may not tell you what‘s wrong, they will certainly

tell plenty of others. A system for unearthing complaints can therefore be the lifeblood of your business, because customers

who complain are giving you a gift, they‘re still talking to you,

they‘re giving you another opportunity to return them to a state

of satisfaction and delight them and the manner in which you respond gives you another chance to show what you‘re made of and create even greater customer loyalty.

Other customer retention strategies include:

  • 1. Blogs

  • 2. CRM Systems

  • 3. Loyalty Programs

  • 4. Magic Moments

  • 5. Overcome Buyer‘s Remorse

  • 6. Personal Touches

  • 7. Premiums and Gifts

  • 8. Questionnaires and Surveys

  • 9. Regular Reviews

    • 10. Social Media

    • 11. Welcome Book

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Service-Driven Logistic System

S Smiling to everyone

E Excellence in everything you do

R Reaching out to every customer with hospitality

V- Viewing every customer as special

I Inviting your customer to return

C Creating a warm environment

E Eye contract that show we care

The role of logistic can be seen as the development of system and the supporting co-ordination processes to ensure that customer service goals are meet. This is idea of the service driven logistics system - a system that is designed to meet defined service goals. So often we find that organization design and manage system which has internally focused objectives rather than external goals.

Service-Driven Logistic system consists of three components as:

  • 1. Identify customer service needs.

Identifying the key components of customer service as

seen by customer themselves. Establish the relative importance of those service

components to customers. Identify cluster of customer according to similarity of service preferences.

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  • 2. Define customer service objectives.

  • 3. Design the logistic system.

  • 1. Identify customer service needs

2. Define customer service objectives 3. Design the logistic system
  • 2. Define customer service objectives

2. Define customer service objectives 3. Design the logistic system
  • 3. Design the logistic system

Setting Customer Service Priorities

If your company provides customer service, you need to establish priorities for customer service representatives. Customer service representatives have many duties and responsibilities to fulfill whenever they are speaking with customers. The order in which the duties are prioritized will determine if your customers are satisfied or disgruntled. If a customer service representative is working on commission

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based on cross-selling additional products and services, she may have a tendency to skip right to that function without handling the customer's initial inquiry.

Determine all of the duties and responsibilities that a customer service representative is likely to encounter. A customer service representative should greet customers in a friendly, courteous manner by providing his name and company name, solving the customers' problems, cross-selling other products and services, and updating and verifying the customers' personal information such as addresses and phone numbers.

Prioritize the job duties. A greeting should always be the first thing that occurs when there is interaction with a customer. The next duty of a representative should be to find out why the customer is calling. Before anything is done on a customer's account, the representative should verify personal information such as Social Security number, date of birth and the customer's address. Once the preliminaries are out of the way, the representative should attempt to resolve the customer's inquiry.

Define what goals need to be accomplished within the

customer service department. Customer service representatives should have a goal of servicing customers efficiently and effectively, which leads to more satisfied customers. When customers are satisfied they have a tendency to stay with the same company. Customer retention, acquiring

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new customers and increasing market share become top priorities for companies that want to remain competitive. These goals are accomplished automatically when the customer service department performs its job duties in an excellent manner.

Cross-sell other products and services to the customer After resolving the issue to the customer's satisfaction, the representative should ask the customer if there is anything else she can do for her. At this point the customer service representative should mention the latest available products and services that may help the customer meet her future needs.

Service standards

A service standard is a public commitment to a measurable level of performance that clients can expect under normal circumstances.

Service standards are integral to good client service and to effectively managing performance. They help clarify expectations for clients and employees, drive service improvement, and contribute to results-based management. Service standards reinforce government accountability by making performance transparent, and increase the confidence of Canadians in government by demonstrating the government's commitment to service excellence.

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Service standards serve two key purposes:

To provide staff with performance targets ("Phone must

be answered within three rings"); and To inform clients what to expect ("Waiting time is less than 10 minutes").

A service standard should

be

linked

to

an operational

performance target or the frequency to which the organization expects to meet the service standard. The target takes into account the risks associated with process delays and uncertainties arising from factors such as workload fluctuations, staff movements, and seasonal variations.

Characteristics of a Good Service Standard

Relevant to the client: Service standards are consistent with client priorities and address aspects of the service they value most within available resource allocations. Based on consultation: Service standards are developed in consultation with clients, managers, staff, and other partners in service delivery to ensure that they are meaningful and match the organization's mandate. Measurable: Service standards are quantifiable and linked to monitoring activities. Consistent across government: Service standards should be consistent throughout federal organizations providing similar services. Having similar service standards across government for similar services helps both clients and government. Clients will find it easier

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to deal with different organizations, and the organizations themselves will find it easier to share best practices and adopt common approaches. Ambitious but realistic: Service standards are realistic, based on analysis and consistent with objectives, yet sufficiently challenging to service providers. Endorsed by management: Service standards are understood and endorsed by senior management. Communicated: Service standards are clearly communicated to clients, employees, and other stakeholders to help manage expectations. Transparent: Service standards are monitored and reported to senior management, and performance results are published to ensure transparency and client trust. Continuously updated: Service standards are regularly reviewed and updated as appropriate.

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CHAPTER: III

Total cost analysis

In logistics, the idea that all logistical decisions that provide equal service levels should favor the option that minimizes the total of all logistical costs and not be used on cost reductions in one area alone, such as lower transportation charges.

In cost-volume-profit (breakeven) analysis, the total cost curve is composed of total fixed and variable costs per unit multiplied by the number of units provided. Breakeven quantity occurs where the total cost curve and total sales revenue curve intersect. See: break-even chart, break-even point. In inventory theory, the total cost curve for an inventory item is the sum of the costs of acquiring and carrying the item. In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream. The main insight that TCO offers to the supply chain manager is the understanding that the acquisition cost is often a very small portion of the total cost of ownership.

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Principles of Logistics Costing

A logistics costing system should mirror the material flow and identify the costs that result from providing customer service, and also it should be capable of enabling separate cost and revenue analysis to be made by customer type and by market segment or distribution channel (no to deal with averages).

A mission cost approach can be implemented, in which a customer service goal is set within a specific product/market context, then cost associated with this mission are taken from a number of functional areas within the firm.

Barrett‘s mission costing method:

1)

Identify

activity

centres

associated

with

a distribution

mission,

2) Identify and isolate the incremental costs (no sunk costs) incurred as a result of undertaking that mission.

This approach becomes particularly powerful when combined with a customer revenue analysis, because even the customers with low sales off-take may still be profitable in incremental costs terms if not on an average cost analysis.

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The Bottom Line Approach

The 3 financial dimensions for decision making are the bottom line (immediate pay-back only), strong positive cash flow, and the productivity of capital (return on Investment ROI)

ROI = Profit/Capital employed

ROI = (Profit/Sales) (Sales/Capital employed)

Margin X capital turnover

Retailers can have good ROI with low margins but high capital productivity (limited inventory, high sales per square foot, leasing instead of owning) Logistics management can improve the following elements that determine ROI:

1) Sales revenue: Service can improve sales and be a powerful source of differentiation.

2) Costs: Higher cost when outsourcing, inventory holding, obsolescence, and deterioration.

3) Asset deployment and utilization: Better cash and receivables with shorter order cycle time, better order completion rate and invoice accuracy. Lower inventories, minimizing the premature purchase of materials (by using MRP and DRP Distribution requirements planning). By converting fixed assets into continuing expenses with the use of third-party suppliers (for transport and warehousing)

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Adopt a bottom-line approach. Here are five keys

steps to

fostering a successful transition to results-based sales and

marketing.

Develop a systematic approach to demand creation - To achieve measurable results, you must have a systematic approach to generating demand. Start by doing the math. If you need to close 100 customers, how many proposals will have to be generated? If your close ratio is 50 percent, 200 is the answer. How many qualified leads will you have to generate to get 200 proposals? If you're efficient, perhaps 1,000, to get 1,000 qualified leads, how many prospects must flow into your lead qualification systems? At this entry stage of the sales funnel, you have to make assumptions as to how many leads each marketing vehicle will generate. You'll need some multiple of the 1,000 qualified leads because many leads will turn out to be merely tire kickers. Finally, make assumptions as to the response rates you'll get from every marketing vehicle you use, from advertising to direct and e-mail marketing to events and public relations. Ultimately, measuring how each element of the marketing mix performs will let you increase your efficiency and meet your sales goals.

Focus on high-return opportunities - The operative word here is "focus." Many business people have a tendency to "spread out" in times of crisis and look outside core markets for business. It's only natural to think the more potential customers you have the more potential business you could get. However, what often results from this flurry of activity is just that: a flurry of activity. Instead, you need to be more productive and precise with the limited dollars you have. You should concentrate your efforts and resources where you have

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the highest probability of winning business. Then, further concentrate on getting wins that represent high-return opportunities. Know what types of customers represent potential growth and which represent a distraction. Understand who is buying today -and who has the potential to buy more tomorrow.

Get closer to your customers - In the game of darts, the closer you are to the target, the more likely you are to score. The same principle applies in business. The closer you are to your customers, the more likely you are to score sales. Understand why they buy your product or service, how they use it, what frustrates them and what pleases them. Understand these subtleties and nuances better than your competition - and respond to them better than your competition - and you'll be more effective at winning business and building relationships.

Test high-return techniques For your organization, a high-return marketing technique may mean using electronic mail or e-newsletters. The Web represents a high-return opportunity because of the very low variable costs associated with it. If you're selling a high-cost product that requires approval from multiple decision-makers, you might be better off spending more marketing dollars per contact. Whatever your technique, you should be disciplined about having measurement systems in place to determine what's working and what's not. Use both qualitative and quantitative indicators to measure your effectiveness.

Integrate all your efforts - This tip is perhaps where you can get the most bangs for your buck. All of your marketing programs should be inherently linked to your sales efforts.

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Whether you use a direct sales force, resellers, e-commerce, or a combination of all three, your marketing efforts should be focused on moving the sales process along. Integration also means making sure your marketing efforts are consistent and reinforcing your core brand proposition and key messages. Public relations, employee communications, advertising and on- and off-line marketing all should communicate with one voice. Long term, this unified effort will strengthen your brand and ultimately increase your revenues and profitability.

Shareholder value

Shareholder value is the value enjoyed by a shareholder by possessing shares of a company. It is the value delivered by the company to the shareholder.

Definition: Shareholder value is the value enjoyed by a shareholder by possessing shares of a company. It is the value delivered by the company to the shareholder.

Description: Increasing the shareholder value is of prime importance for the management of a company. So the management must have the interests of shareholders in mind while making decisions. The higher the shareholder value, the better it is for the company and management.

For this to happen, management must exercise efficient decision making so as to earn/increase profits, thereby increasing shareholder value. On the other hand, faulty decision making using unfair tactics might damage shareholder value.

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Customer Profitability Analysis

A customer profitability analysis is an evaluation process that focuses on assigning costs and revenues to segments of the customer base, instead of assigning revenues and costs to the actual products, or the units or departments that compose the corporate structure of the producer. Approaching profitability from this angle can sometimes provide valuable insights into how each step of the process of designing, manufacturing, and ultimately selling a good or service incurs cost and generates revenue. Many businesses use a customer profitability analysis as a means of streamlining processes so they provide the highest degree of efficiency and return, while generating the lowest degree of cost.

In actual practice, this type of analysis looks at each segment of the process of creating and selling products to customers. The idea is to look closely at the costs that are associated with each of those segments, and compare those costs with the gains that result from the processes and procedures connected with the operation of that segment. Breaking down the task into segments makes it much easier to identify what is actually working to increase profitability with a major client or a group of clients within the customer base, as well as what elements may be inhibiting the potential for earning more revenue from those same clients.

Along with aiding in making sure that every aspect of the business operation is functioning in a way that allows for the generation of maximum profits, a customer profitability analysis can also help identify factors that could have a negative impact on the future of the company. For example,

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most customer profitability analysis templates allow for determining what percentage a given customer or group of customers actually make up of the overall client base, usually in terms of revenue generated.

If the analysis makes it clear that the company is depending on two or three large customers to generate half or more of the its business volume, then steps are usually taken to diversify and expand the client base, often by attracting more small to mid- sized customers. As a result, the business is less likely to be crippled in the event that one of those major clients decides to withdraw, since the increased bank of smaller customers who are less likely to wander now accounts for a larger share of the monthly revenue.

A proper customer profitability analysis will also look closely at how much of the company‘s resources are dedicated to producing goods and services for specific clients. The idea is to determine if the maximum benefit is being earned from the current use of those resources, or if there is some way to allocate a portion of those resources to other functions while still satisfying the customer. Reallocating resources also makes it possible to engage in responsible cost allocation, which in turn strengthens the business over the long term.

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Direct Product Profitability

Direct product profitability (DDP) is defined as a way of

measuring a product‘s handling costs from the time it reaches

the warehouse until a customer buys it in the retail store.

According to the American Marketing Association - (retailing definition) DDP is the profit on sale of a product after deducting the cost of the goods and only the expenses directly related to that particular product or product line.

Improve sales and gross margin by changing:

product assortment

article presentation in the store

consumer prices

Reduce costs by changing:

process (logistics, store handling)

product characteristics (package size, item size)

The Seven Step DPP process

The DPP model is capable of calculating net profitability of individual items of fast moving consumer goods. Working with the DPP model is a seven-step process:

1. DPP model fine tuning: the classical DPP model is adapted to specific product characteristics of your industry

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  • 2. Input of process characteristics: process characteristics of the logistics chain are entered as activity drivers in the DPP model (examples: delivery frequency, productivity ratios)

  • 3. Input of general ledger resource costs: resource costs of the central depot, transportation and the store (examples: transportation cost per km, costs per working hour)

  • 4. Calculation of activity costs: activity costs are calculated in the DPP model

  • 5. Input of product characteristics: all characteristics of individual products are entered as cost drivers

  • 6. Calculation of direct product costs: activity costs are allocated to products

  • 7. Calculation and presentation of direct product profitability ratios

Cost Drivers and Activity Based Costing

Ideally, a cost driver is an activity that is the root cause of why a cost occurs.

In the past century, the root cause of indirect manufacturing

costs has changed from a single cost driver (such as direct

labor hours) to

several

cost drivers.

Due

to

sophisticated

manufacturing and increased demands from customers, direct labor is no longer the main cost driver of indirect manufacturing overhead.

In

addition

to

direct

labor,

today's

drivers of indirect

manufacturing costs include the number of machine setups required, the number of engineering change orders, the

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demands from customers for special inspections, handling and storage, the number of components in the units produced, and the number of production machine hours.

Manufacturers that want to know the true costs of their products need to know what is driving their indirect manufacturing costs. For these companies it is not sufficient to merely spread overhead costs to products by using a single factor such as direct labor hours or production machine hours.

Activity-based costing (ABC) is a better, more accurate way of allocating overhead.

Recall the steps to product costing:

  • 1. Identify the cost object;

  • 2. Identify the direct costs associated with the cost object;

  • 3. Identify overhead costs;

  • 4. Select the cost allocation base for assigning overhead costs to the cost object;

  • 5. Develop the overhead rate per unit for allocating overhead to the cost object.

Activity-based costing refines steps #3 and #4 by dividing large heterogeneous cost pools into multiple smaller, homogeneous cost pools. ABC then attempts to select, as the cost allocation base for each overhead cost pool, a cost driver that best captures the cause and effect relationship between the cost object and the incurrence of overhead costs. Often, the best cost driver is a nonfinancial variable.

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ABC can become quite elaborate. For example, it is often beneficial to employ a two-stage allocation process whereby overhead costs are allocated to intermediate cost pools in the first stage, and then allocated from these intermediate cost pools to products in the second stage. Why is this intermediate step useful? Because it allows the introduction of multiple cost drivers for a single overhead cost item. This two-stage allocation process is illustrated in the example of the apparel factory below.

ABC focuses on activities. A key assumption in activity-based costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. Usually, costing the activity is an intermediate step in the allocation of overhead costs to products, in order to obtain more accurate product cost information. Sometimes, however, the activity itself is the cost object of interest. For example, managers at Levi Strauss & Co. might want to know how much the company spends to acquire denim fabric, as input in a sourcing decision. The ―activity‖ of acquiring fabric incurs costs associated with negotiating prices with suppliers, issuing purchase orders, receiving fabric, inspecting fabric, and processing payments and returns.

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CHAPTER: IV

Benchmarking the supply chain:

"Benchmarking is the process of measuring an organization's internal processes then identifying, understanding, and adapting outstanding practices from other organizations considered to be best-in-class.

It an Ongoing process of measuring products, services, practices & processes against the best that can be identified in order to:

Learn about & improve best practice. Achieve realistic targets. Integrate improvements into your strategy.

Use

best

practice

as

inspiration

for

innovation. Be externally focused.

Be purposeful about improvement.

Measure improvement.

Most business processes are common throughout industries. For example; NASA has the same basic Human Resources requirements for hiring and developing employees as does American Express. British Telecom has the same Customer Satisfaction Survey process as Brooklyn Union Gas. These processes, albeit from different industries, are all common and

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can be benchmarked very effectively. It's called "getting out of the box".

One of the biggest mistakes organizations make when first benchmarking is that they limit their benchmarking activity to their own industry. Benchmarking within your industry is essential. However, you already have a pretty good idea how your industry performs so it's imperative that you reach outside and above your own industry into other industries that perform a similar process but may have to perform this process extremely well in order to succeed. Here are a couple examples of how one industry can leapfrog their competitor by learning and adapting a similar process from a totally different industry:

Benchmarking the logistics process

1. Planning:

Prior to engaging in benchmarking, it is imperative that corporate stakeholders identify the activities that need to be benchmarked.

For instance, the processes that merit such consideration would generally be core activities that have the potential to give the business in question a competitive edge.

Such processes would generally command a high cost, volume or value. For the optimal results of benchmarking to be reaped, the inputs and outputs need to be redefined; the activities chosen should be measurable and thereby easily comparable, and thus the benchmarking metrics needs to be arrived at.

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Prior to engaging in the benchmarking process, the total process flow needs to be given due consideration. For instance, improving one core competency at the detriment to another proves to be of little use.

Therefore, many choose to document such processes in detail (a process flow chart is deemed to be ideal for this purpose), so that omissions and errors are minimized; thus enabling the company to obtain a clearer idea of its strategic goals, its primary business processes, customer expectations and critical success factors.

An honest appraisal of the company's strengths, weaknesses and problem areas would prove to be of immense use when fine-tuning such a process.

The next step in the planning process would be for the company to choose an appropriate benchmark against which their performance can be measured.

The benchmark can be a single entity or a collective group of companies, which operate at optimal efficiency.

As stated before, if such a company operates in a similar environment or if it adopts a comparable strategic approach to reach their goals, its relevance would, indeed, be greater.

Measures and practices used in such companies should be

identified, so that business process examined.

alternatives can be

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Also,

it

is

always prudent

for

a

company to

ascertain its

objectives,

prior

to

commencement of the benchmarking

process.

 

The methodology adopted and the way in which output is documented should be given due consideration too. On such instances, a capable team should be found in order to carry out the benchmarking process, with a leader or leaders being duly appointed, so as to ensure the smooth, timely implementation of the project.

2. Collection of Information:

Information can be broadly classified under the sub texts of primary data and secondary data.

To clarify further, here, primary data refers to collection of data directly from the benchmarked company/companies itself, while secondary data refers to information garnered from the press, publications or websites.

Exploratory research, market research, quantitative research, informal conversations, interviews and questionnaires, are still, some of the most popular methods of collecting information.

When engaging in primary research, the company that is due to undertake the benchmarking process needs to redefine its data collection methodology.

Drafting a questionnaire or a standardized interview format, carrying out primary research via the telephone, e-mail or in face-to-face interviews, making on-site observations, and

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documenting such data in a systematic manner is vital, if the benchmarking process is to be a success.

LOGISTIC PERFORMANCE documenting such data in a systematic manner is vital, if the benchmarking process is
  • 3. Analysis of Data:

Once sufficient data is collected, the proper analysis of such information is of foremost importance.

Data analysis, data presentation (preferably in graphical format, for easy reference), results projection, classifying the performance gaps in processes, and identifying the root cause that leads to the creation of such gaps (commonly referred to as enablers), need to be then carried out.

4. Implementation:

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This is the stage in the benchmarking process where it becomes mandatory to walk the talk. This generally means that far- reaching changes need to be made, so that the performance gap between the ideal and the actual is narrowed and eliminated wherever possible.

A formal action plan that promotes change should ideally be formulated keeping the organization's culture in mind, so that the resistance that usually accompanies change is minimized.

Ensuring that the management and staff are fully committed to the process and that sufficient resources are in place to meet facilitate the necessary improvements would be critical in making the benchmarking process, a success.

5. Monitoring:

As with most projects, in order to reap the maximum benefits of the benchmarking process, a systematic evaluation should be carried out on a regular basis.

Assimilating the required information, evaluating the progress made, re-iterating the impact of the changes and making any necessary adjustments, are all part of the monitoring process.

LOGISTIC PERFORMANCE

Supply Chain Process Mapping

Producing a flow chart the first step and highlighting ―value adding‖ time and ―non-value adding time‖ (Christopher, M. 1998 pp 110)

Value Adding Time:

Time that results in increased value for the customer Non Value Adding Time:

Elimination of this time or activity would not reduce the perceived value of the ultimate consumer.

LOGISTIC PERFORMANCE Supply Chain Process Mapping Producing a flow chart the first step and highlighting ―value

LOGISTIC PERFORMANCE

Today‘s procurement, production and operations professionals

are faced with the challenges of managing risk across

increasingly global and complex supply chains.

Understanding how the business operates, the interfaces between departments, identifying non value adding activities and identifying the inherent conflict in processes offers great opportunity for continuous improvement. High level and detailed processing mapping and value identification skills are available.

Understanding your full supply chain

Managing Supply Chain risk

Global events far from your own business, can impact your supply chain; companies with visibility of the extended supply

chain are aware of these risks and can build contingencies and react to disruptions in an informed way. By identifying, qualifying and monitoring suppliers across your supply chain

you‘ll have visibility of:

The supply chain from Tier 1 and beyond

Areas of supply chain convergence highlighting potential single points of failure

Product level information

When the programme is activated, as a buyer you will be able to get visibility of your supply chain by product code. This will support you in understanding any previously unknown risks in

LOGISTIC PERFORMANCE

the supply chain. You‘ll be able to use a range of search and filter tools to manage this data.

Supply Chain visibility and insight

Supply Chain Mapping can help you by providing:

Clarity of who is in your supply chain beyond the first

tier Information to support mitigation of supply chain risk

Awareness of how global events (e.g. natural disasters)

might disrupt your supply chain Awareness of the interdependencies in your supply

chain through search, interfaces

report

and

visual display

The Supply Chain programme is designed to collect information on sub-suppliers, link relationships and therefore expand visibility of the wider supply chain.

As part of the Supply Chain Programme suppliers will be asked basic questions that relate to their company profile and contact

details. They‘ll then confirm relationships between the

products they sell and the products they buy creating links that

map the supply chain.

LOGISTIC PERFORMANCE

Supplier and Distributor Benchmarking

Involve inbound and outbound elements for the value system.

Their cost will add to the ultimate cost!

Establish and Encourage:

Commitment to continuous improvement.

Acceptance of innovation and change.

Use of regular and formal and benchmarking.

Employee concern for the ultimate consumer.

Leadership involvement

Setting the Benchmarking Priorities

Priority Setting: involves balancing both long and short term goals in order to attain both.

Benchmarking: is a systematic comparison of organizational performance or processes to create new standards or improve processes.

Evaluation: is the systematic determination of merit , worth or significance

LOGISTIC PERFORMANCE

LOGISTIC PERFORMANCE 74 | P a g e

LOGISTIC PERFORMANCE

Logistic Performance Indicators

This comprehensive recommendation defines 6 indicators (EDI Precision / Delivery Accuracy / Vendor Managed Inventory / Material Handling & Identification / Production Disruptions / Supplier Communication & Cooperation) as well as their ratings.

5 of these indicators are used by at least 2 companies who participated in the work group:

EDI(Electronic Data Interchange) precision: PSA, Renault Delivery Accuracy: PSA, Nissan, Renault Material Handling & Identification: Bosch, SNOP, Nissan, Renault Production disruptions: Nissan, Renault Supplier Communication & Cooperation: Bosch, Nissan

The use of standard indicators of logistics performance will reduce cost and save time:

For the Suppliers, by harmonizing requirements in

logistics performance within the industry For the Customer, by facilitating the development or the enhancement of Supplier appraisal systems based on standard indicators.

The defined LKPI (logistic key performance indicator) are complementary to the Global Materials Management/Logistics

LOGISTIC PERFORMANCE

Evaluation Recommendation (Global MMOG/LE) which was developed jointly between AIAG and Odette:

-

Global MMOG/LE supports (auto) evaluation of a plant‘s

logistics

capability

-

LKPI measure the effectiveness of the logistics processes

between parties

LKPI highlights issues regardless of measurability that have high impact on the organisational success.

Articulate the strategic objectives to personnel.

Understand measurable outcomes of success.

Communicate importance of key processes.

Highlight

and

focus

attention

on

key

performance indicators. Better faster Cheaper!

LOGISTIC PERFORMANCE

Differences between Innovation and Benchmarking

LOGISTIC PERFORMANCE Differences between Innovation and Benchmarking 77 | P a g e

LOGISTIC PERFORMANCE

CHAPTER: V

Strategic Issues in Logistics

STRATEGIC ISSUES IN LOGISTICS

Time Based Competition

The term time-based competition came into use with its appearance in a 1988 Harvard Business Review article entitled "Time-The Next Source of Competitive Advantage" by George Stalk, Jr. It was further defined in a series of articles and books written by consultants from the Boston Consulting Group.

Time-based competition is a broad-based competitive strategy which emphasizes time as the major factor for achieving and maintaining a sustainable competitive advantage. It seeks to compress the time required to propose, develop, manufacture, market and deliver its products.

In order to do this, the firm must change its current processes and alter the decision structures used to design, produce and deliver to the customer.

Time-based competition appears in two different forms: fast to market and fast to produce. Firms that compete with to-market speed emphasize reductions in design lead-time. In other words, the firm has the ability to minimize the time it takes to develop new products or make rapid design changes. Products fifty percent over budget but introduced on time have been found to generate higher profit levels than products brought to market within budget but six months late. Also, this form allows firms to gain a market edge by being able to consistently introduce more new products or large numbers of product improvements/variations faster than its competitors, thereby dominating the market. Sun Microsystems achieved leadership in engineering workstations by reducing (by fifty percent compared to competitors) the time required to design

STRATEGIC ISSUES IN LOGISTICS

and introduces new systems. Additionally, these firms are now moving further along the learning curve than the competition. Both factors ultimately increase barriers to entry by competitors.

George Stalk, Jr. relates that a firm becomes a time-based competitor by accomplishing four tasks: (1) understanding the rules of response, (2) making value-delivery systems two to three times as flexible and responsible as its competitors, (3) pricing how customers value these capabilities, and (4) implementing a strategy for surprising its competitors with time-based advantages.

STRATEGIC ISSUES IN LOGISTICS

Time-based competition is a reality for many firms. Generally, these time-based competitors began by correcting their manufacturing techniques (often through JIT), then fixing sales and distribution, and finally adjusting their approach to innovation. Their strategy is based on the results of flexible manufacturing, rapid response, expanding variety, and increasing innovation. It is a Meta strategy which improves performance through changes in the processes and structures used to design, manufacture and deliver products to the customer, thereby impacting overall firm performance (e.g., return on investment, return on assets). Motorola, Northern

STRATEGIC ISSUES IN LOGISTICS

Telecom, and Toyota are but a few of the companies that have found ways to increase the overall value of their delivery systems through the compression of time.

Lead Time

Lead Time is the time between the initiation of a process and its completion. In Supply Chain Management there are 2 types of lead times:

Manufacturing Lead Time

Information Lead Time

We will focus in this post on the manufacturing lead time. Manufacturing lead time is simply the time required to buy or make an item. In Oracle e-Business Suite, the lead times are defined at organization level (not at master level).

Make items lead times

As shown above, there are 4 different types of lead times required to make an item or an item lot.

STRATEGIC ISSUES IN LOGISTICS Telecom, and Toyota are but a few of the companies that have

Preprocessing Lead Time: The time required to create a work order (discrete job) from the time you learn of the requirement. It is also known as "planning time" or simply "paperwork".

STRATEGIC ISSUES IN LOGISTICS

Processing Lead Time: The time required to

make/manufacture the item. Fixed lead time: The fixed lead time is a portion of

processing lead time which is not dependent of order quantity Variable lead time: Portion of processing lead time which is dependent of order quantity

The total lead time is equal to the fixed lead time plus the variable lead time multiplied by the order quantity. The planning process uses the total lead time to calculate order start dates from order due dates.

Buy items lead times

Understanding buy items lead times is simpler.

STRATEGIC ISSUES IN LOGISTICS  Processing Lead Time : The time required to  make/manufacture the

Preprocessing Lead Time: The time required to create

a Purchase Order from the time you learn of the requirement. As for Make items, the buy item preprocessing lead time is also known as "planning time" or simply "paperwork". Processing Lead Time: The time required to buy an

item. Post processing lead time: The time required to receive a buy or transfer item from the receiving dock to inventory (it includes quarantine, inspection time, etc.)

STRATEGIC ISSUES IN LOGISTICS

Cumulative lead times

Please find below an illustration showing the different cumulative lead times you may find in manufacturing processes.

STRATEGIC ISSUES IN LOGISTICS Cumulative lead times Please find below an illustration showing the different cumulative

STRATEGIC ISSUES IN LOGISTICS

Logistics Pipeline Management

The key to successful control of logistics lead times in pipeline management. Pipeline management is the process whereby manufacturing and procurement lead times are linked to the need of the marketplace. At the same time, pipeline management seeks to meet the competitive challenge of increasing the speed of response to those market needs.

For the supply chain to be effective in a multichannel operation, it is necessary for management to meet four goals:

1) Increased efficiency 2) improved customer service 3) increased sales 4) improved relationships

Each of these goals includes definitive and specific objectives required within an operation. Fortunately, there are proven best practices to help you achieve those objectives.

1) Increased efficiency

To increase efficiency, a company must develop cost- effective transportation rates while reducing overhead, total inventory, and overall cost-per-order processing. You can improve your warehouse operations, including processes, layout, and flow, by working closely with your transportation provider. Establish a two-way relationship

STRATEGIC ISSUES IN LOGISTICS

with your carrier to frequently share best practices, issues, and opportunities.

To improve logistical efficiencies, consider having the vendor perform value-added services such as packaging, marking, and quality inspections. This improves the chance of errors being caught at the source; source-based services speed product flow through the warehouse.

  • 2. Improved customer service

In direct marketing enterprises, fulfillment operations are in partnership with marketing and merchandising. This

partnership is like a three-legged stool without all three legs the stool cannot stand. Fulfillment operations‘ inbound and

outbound transportation is keys to delivering marketing‘s promise to the customer to get the shipment delivered on time

and in good condition.

In direct marketing, customer service must be balanced with costs. First is the cost to acquire a customer, which stands at roughly $10-$25, depending on the efficiency of the prospecting. This figure includes catalog and other marketing costs, as well as the cost of non-responses. In many businesses, u to 70% of all first-time buyers does not purchase a second time. Most direct businesses need a customer to purchase two or three times to break even.

The second cost element to consider is the high cost of being on backorder. Hundreds of customer studies show that in most

STRATEGIC ISSUES IN LOGISTICS

direct businesses it costs $7-$12 to process one backordered unit of merchandise.

The third type of cost element is the erosion of gross demand by customer returns and customer and company cancellations. Figure 2 shows typical return rates by category. The higher the fashion nature of the product, the higher the return rate tends to be. Sized or tailored fashion products have higher returns.

3. Increased sales

How can inbound and outbound logistics and transportation

help a retailer‘s sales? Several opportunities exist for

improving service, and those in turn can be used to marketing‘s

advantage. Look at inbound and outbound freight as separate operations with separate requirements. Bundle the volumes wherever possible with your carriers, but recognize the differences between the channels.

With direct promotions and advertised retail product,

maintaining on-time and in-stock position is a must. Without an available, reliable source of merchandise, you could end up

losing sales and customers. Because it‘s difficult to project

sales, you need to get product quickly and safely into the logistics pipeline. Product damage from inbound transportation can seriously reduce product availability, and of course without product you can sell, profits decline.

The logistics of delivering to the customer can hurt sales if the customer‘s expectations are not met–for example, if a gift is

STRATEGIC ISSUES IN LOGISTICS

delivered late or arrives damaged. If the customer doesn‘t want

the product that arrives, returns increase the cost of operation.

  • 4. Building relationships

True two-way collaboration between retailer and carrier is key to the success of logistics execution. Measures of success are total cost, time in transit, and responsiveness of the carrier representative.

The single-carrier vs. multicarrier philosophy is one of the primary issues you need to address with regard to carrier relations. Using one carrier allows a higher aggregate volume of shipments, which can result in lower negotiated rates. The downside is total dependence on the carrier and possible problems if there is a carrier service interruption.

A good relationship with your carrier representative is vital. Inevitably there will be issues that must be addressed. Trust and a positive attitude can influence how those issues are resolved.

Use a structured approach to comparing carriers. When soliciting bids; give carriers as much information about your business requirements as possible. Throughout the bidding process, and later when working with carrier partners, follow these guidelines:

Stay involved with the process.

Verify results and reports.

Audit bills.

STRATEGIC ISSUES IN LOGISTICS

Consider the total costs of transportation in your

analysis and reviews. Keep options open and treat carrier contracts and relationships as dynamic and evolving not like a fixed three-year arrangement.

Material flow

STRATEGIC ISSUES IN LOGISTICS  Consider the total costs of transportation in your  analysis and
STRATEGIC ISSUES IN LOGISTICS  Consider the total costs of transportation in your  analysis and
STRATEGIC ISSUES IN LOGISTICS  Consider the total costs of transportation in your  analysis and

Information flow

STRATEGIC ISSUES IN LOGISTICS

Lead Time Gap

The fundamental problem that faces many companies not just those in fashion industries is that the time it takes to source materials, convert them into products and move them into the marketplace is invariably longer than the time the customer is prepared to wait. This difference between what might be called the ‗logistics pipeline‘ and the customers‘ order cycle time is termed the ‗lead-time gap‘. Conventionally, this gap was filled with a forecast-based inventory there was no other way of attempting to ensure that there would be product available as and when customers demanded it.

The problem was that often it would be the ‗wrong‘ inventory:

for example, sizes, colors or styles that were not those actually demanded.

Highlights the problems of the lead-time gap which in the fashion industry was traditionally measured in months rather than weeks

STRATEGIC ISSUES IN LOGISTICS Lead Time Gap The fundamental problem that faces many companies – not

STRATEGIC ISSUES IN LOGISTICS

Logistics Value Engineering (VE)

It is a systematic method to improve the "value" of goods and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that basic functions be preserved and not be reduced as a consequence of pursuing value improvements. Value engineering or Value analysis is a methodology by which we try to find substitutes for a product or an operation. In most cases this practice identifies and removes unnecessary expenditures, thereby increasing the value for the manufacturer and/or their customers.

Value engineering began at General Electric Co. during World War II. Because of the war; there were shortages of skilled labor, raw materials, and component parts. Lawrence Miles and Harry Erlicher at G.E. looked for acceptable substitutes. They noticed that these substitutions often reduced costs, improved the product, or both. What started out as an accident of necessity was turned into a systematic process.

They called their technique ―value analysis‖. Value

engineering process calls for a deep study of product and the purpose for which it is used, such as, the raw materials, used, the processes of transformation, the equipment needed and many others. Questions what is being done /used is the most economical or appropriate.

STRATEGIC ISSUES IN LOGISTICS

VE - Approaches and Aim

Nowadays principles of value engineering start at the product

concept and design and is carried down the ―value chain‖

The aim of value engineering is to effect economies by investigating every opportunity & discovering new materials, methods to achieve high quality performance. The aim of Value Engineering is listed as:

  • 1. Product Simplification

  • 2. Better and less costly material

  • 3. Improved product design

  • 4. High efficiency in the processes

  • 5. Economy in all activities

Providing Value to the Customers

  • 1. Promote employee involvement in value work

  • 2. Act on customer voice

  • 3. Enhance product reliability

  • 4. Ensure efficient procurement practices for better value

  • 5. Streamline business processes for quicker response.

  • 6. Provide comparative value mapping

STRATEGIC ISSUES IN LOGISTICS

The main benefits of the application of VE are:

Cost Reduction

Overall cost consciousness

A culture of effecting savings across organisations

Streaming of administration and creation of transparency in all dealings even with outsider. Development of reliable suppliers

Just-In-Time (JIT)

JIT can be defined as an integrated set of activities designed to achieve high-volume production using minimal inventories (raw materials, work in process, and finished goods).

JIT also involves the elimination of waste in production effort.

JIT also involves the timing of production resources (i.e., parts arrive at the next

Advantages of JIT

Increases Productivity

Reduces Operating costs

Improves performance the throughput

Improves quality

Improves deliveries

Increase Flexibility and innovativeness

STRATEGIC ISSUES IN LOGISTICS

Seven Wastes to be eliminated according to JIT are (TIMWOOD):

Transportation

Inventory Motion / Effort Waiting Overproduction

Over Processing

Defects

Transport: Movement of materials is

a

waste.

Minimize the amount of movement by arranging processes in close proximity to each other. Design facility layout that reduce or eliminate material handling and shipping.

Inventory: Too little inventory can lose sales; too much inventory can hide problems. Aim for "Just in Time" (JIT) manufacturing to expose problems to be eliminated and reduce cost.

Motion / Effort: Remove unnecessary motion of the operations and improve the ergonomics of the workplace. Improve productivity and quality by eliminating unnecessary human motions, make necessary motions more efficient, mechanize, and then automate.

Waiting: Minimize waiting time and maximize "value adding" time. Aim for a smooth flow.

STRATEGIC ISSUES IN LOGISTICS

Overproduction: Always aim to make exactly what the customer orders, just in time, to the correct quality standard.

Over Processing: Use machines which are of an appropriate capacity and capable of achieving the required quality standard.

Defects: Reducing the number of defects directly reduces the amount of waste. Aim for zero defects.

The Japanese Philosophy

Key Processes to eliminate waste

Kanban for material flow

High Quality Production

small and Uniform workload

Suppliers as partners

Flexible workforce and training

Total Productive maintenance

At the core of JIT manufacturing at Toyota is Kanban, an amazingly simple system of planning and controlling production. Kanban, in Japanese, means card or marquee. Kanban is the means of signaling to the upstream workstation that the downstream workstation is ready for the upstream workstation to produce another batch of parts.

STRATEGIC ISSUES IN LOGISTICS

There are two types of Kanban cards:

a conveyance card (C-Kanban)

a production card (P-Kanban)

Signals come in many forms other than cards, including:

an empty crate

an empty designated location on the floor

How Kanban Operates

When a worker at downstream Work Center #2 needs a container of parts, she does the following:

She takes the C-Kanban from the container she

#1

just emptied She finds a full container of the needed part in

storage She places the C-Kanban in the full container

and removes the P-Kanban from the full container and places it on a post at Work Center

She takes the full container of parts with its C- Kanban back to Work Center #2

STRATEGIC ISSUES IN LOGISTICS

STRATEGIC ISSUES IN LOGISTICS Differences between JIT and Traditional Purchasing JIT Purchase Traditional Purchasing Smaller lot

Differences between JIT and Traditional Purchasing

JIT Purchase

Traditional Purchasing

Smaller lot sizes

Relatively large lot sizes

More frequent deliveries

Less deliveries at higher quantities

No rejection from the supplier

2% rejection from supplier

Long-term contracts

Lowest price is main objective

Buyer decides delivery schedule

Time consuming

STRATEGIC ISSUES IN LOGISTICS

   

Innovation encouraged

Formal communication

Minimal paper work

formal paperwork

Less formal communication

 

Implications for logistics Quick response logistics:

Concept

The basic idea behind quick response (QR) is that in order to reap the advantages of time-based competition it is necessary to develop system that is responsive and fast.

Quick Response (QR):

Originated in Fashion industry (‗80s)

Consumer drives channel ship quickly on demand, like ECR (Efficient Consumer Response)

Involves keeping manufacturing flexible as to what and how much to make.

– More common when ―consumers don‘t know what

they need until they ‗try it‘‖. Often needed for

perishables (fashionables) that require consumer reactions vs. ECR for commodities (toothpaste).

STRATEGIC ISSUES IN LOGISTICS

Vendor Managed Inventory

Vendor Managed Inventory or VMI is a process where the vendor creates orders for their customers based on demand information that they receive from the customer.

The vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs.

This arrangement can improve supply chain performance but reducing inventories and eliminating stock-out situations.

STRATEGIC ISSUES IN LOGISTICS Vendor Managed Inventory Vendor Managed Inventory or VMI is a process where

One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed. This removes the need for the customer to have significant safety stock. Lower inventories for the customer can lead to significant cost savings.

The purpose of JIT chain is to reduce inventory at all places in the supply chain. Inventory is considered a waste because inventory is created by using materials, machines and efforts of persons. All of these resources which have already been used

STRATEGIC ISSUES IN LOGISTICS

up and that portion of it which is not consumed and send up the value chain cause a drag on the system. However inventories are inevitable because uncertainties exist at every stage, making it necessary to provide a buffer so that demands do not go unfilled. The challenge is to keep it to the minimum. To make this happen, the calculation involving the following are necessary.

Forecasts of the market demand

Capacities of the equipments

Worker absenteeism

Suppliers lead times

Quality of the produced components

Each of these will have many factors which affect them. JIT depends upon accurate assessment of them and based on the decisions taken activities are initiated. These should result is holding materials as small as the number of components or the products as feasible to maintain flow of material without disruption. Many companies make their suppliers hold their inventories and request then to make timely suppliers. This may be done at a cost.

STRATEGIC ISSUES IN LOGISTICS

STRATEGIC ISSUES IN LOGISTICS Logistics Information System Converting data to information, portraying it in a manner

Logistics Information System

Converting data to information, portraying it in a manner useful for decision making, and interfacing the information with decision-assisting methods are considered to be at the heart of an information system. Logistics information systems

are a subset of the firm‘s total information system, and it is

directed to the particular problems of logistics decision making. There are three distinct elements that make up this system: the input, the database and its associated manipulations, and the output. The inputs are data items needed for planning and operating logistics system obtained from sources like customers, company records, and published

STRATEGIC ISSUES IN LOGISTICS

data and company personnel. Management of the database involves selection of the data to be stored and retrieved, choice of the methods of analysis and choice of the basic data- processing procedures. The outputs of a logistics information system include:

Summary reports of cost or performance statistics, Status reports of inventories or order progress, Exception reports that compare desired performance with actual performance, and Reports that initiate action. Output can also be in the form of documents such as transportation bills of lading and freight bills.

It is the management of the flow of information, including customer orders, billing, inventory levels, and customer data.

STRATEGIC ISSUES IN LOGISTICS

Function of logistic Information System

Planning Function

Stock management

By product/customer

By location

Demand forecasting Strategy planning

Co - ordination Function

Production

scheduling

Material

requirement

planning

Sales/marketing

planning

 
Database External data  Customer orders  inbound shipments Internal data  Production  Inventory
 

Database

External data

Customer orders

inbound shipments

Internal data

Production

Inventory

 
Database External data  Customer orders  inbound shipments Internal data  Production  Inventory
STRATEGIC ISSUES IN LOGISTICS Function of logistic Information System Planning Function Stock management  By product/customer

Control function

Customer service level

vendor performance

carrier performance

System performance

STRATEGIC ISSUES IN LOGISTICS Function of logistic Information System Planning Function Stock management  By product/customer
Customer service communication function Customer order status Inventory availability
Customer
service
communication
function
Customer order
status
Inventory
availability

STRATEGIC ISSUES IN LOGISTICS

Production Strategies for Quick Response

Quick Response (QR) can be defined as:

A state of responsiveness and flexibility in which an organization seeks to provide a highly diverse range of products and services to a customer/consumer in the exact quantity, variety and quality, and at the right time, place and price as dictated by real-time customer/consumer demand. QR provides the ability to make demandinformation driven decisions at the last possible moment in time ensuring that diversity of offering is maximized and lead-times, expenditure, cost and inventory minimized. QR places an emphasis upon flexibility and product velocity in order to meet the changing requirements of a highly competitive, volatile and dynamic marketplace. QR encompasses an operations strategy, structure, culture and set of operational procedures aimed at integrating enterprises in a mutual network through rapid information transfer and profitable exchange of activity. (Lowson, King and Hunter, 1999)

QR has a number of strategic implications for the organization. Research has shown that mere implementation of technology or particular procedures without the strategic underpinning lead to sub-optimal performance (Lowson, 2002).

Quick Response Manufacturing (QRM) is a companywide strategy to cut lead times in all phases of manufacturing and office operations. It can bring your products to the market more quickly and help you compete in a rapidly changing manufacturing arena. It will increase profitability by reducing cost, enhance delivery performance and improve quality.

STRATEGIC ISSUES IN LOGISTICS

QRM's overarching focus on time as the guiding management strategy is ideally suited for companies offering high-mix, low- volume and custom-engineered products. In fact, many companies making highly customized products and/or a high variability in their product mix have used QRM as an addition to existing Lean, Six Sigma, and other improvement efforts.

STRATEGIC ISSUES IN LOGISTICS QRM's overarching focus on time as the guiding management strategy is ideally

STRATEGIC ISSUES IN LOGISTICS

The Alignment of Organizational Activity to Demand

This is a fundamental principle of QR. All activities within an enterprise should be paced to demand and customer behavior. Products and services are produced and delivered in the variety and volume that match demand. The activity within a company moves to the beat of this drum. Swings in demand are closely monitored: too little or too much leads to waste and inefficiency. Whether it is marketing, purchasing, new product development or operations, all endeavors follow the market tempo, and the realization that this alignment may necessitate a change in corporate culture. Consequently, it is important that senior management recognizes and understands these demand patterns. Resources need to be deployed that can undertake this vital externally focused role.

Linkages between Demand and Supply

Given the importance of the alignment activity mentioned above, a strategic understanding of the drivers of demand and its synchronized connection with supply is imperative for QR. In the past much attention has, quite rightly, been placed upon improvements in supply. However, demand is the target no matter how sophisticated the supply weaponry, it is ineffectual if the target is not understood. Only when the value and benefits sought by the customer/consumer are appreciated in all their complexity, can a strategy to supply them be developed. This involves detailed assessment of supply and demand processes and sub-processes by customer or consumer grouping. Together with the supply of a tangible product, there are myriad other dimensions peculiar to the customer/consumer. These include varying information

STRATEGIC ISSUES IN LOGISTICS

content, time- frames, physical arrangement for logistics, service support, marketing campaigns, and information systems.

Demand Relationships

QR recognizes that both customers/consumers and products are dynamic and place unique demands on the organization. Identical products, jeans for example, will have unique product flows depending upon customer/consumer buying behavior and QR needs (whether a department store, specialty store, supermarket, wholesaler, independent corner store, or whatever). Similarly, product attributes will vary by product, for example, volume and flow characteristics, demand patterns, seasonality, promotional strategy, cyclical needs, information content, credit terms and customer incentives and repeat purchase patterns. These attributes can be aligned with the QR product categories of ‗basic‘, ‗seasonal‘, ‗fashion or short season‘ and ‗ultra -short season‘. These different customer/consumer and product behaviors will customize and tailor QR channels in line with the requirements. Once this assessment is done, it is possible to apply specific QR components or systems that can be tied into the unique supply pipeline.

SUPPLY CHAIN MANAGEMENT

CHAPTER: V

Supply Chain Management

Concept

SUPPLY CHAIN MANAGEMENT

Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

Supply chain is an integrated process where raw materials are transformed into final products, then delivered to customers.

Beamon (1999)

A system whose constituent parts include material suppliers, production facilities, distribution services and customer linked together by feed forward flow of materials and feedback flow of information.

Berry (1995)

An integrating process based on flawless delivery of basic and

customized services.

Kalakata (2000)

Supply chain

is

a

process

of strategically managing the

movement

and

storage

of

materials,

parts

and finished

inventory from suppliers through the firm customers.

and

on

to

the

 

Johnson (1995)

SUPPLY CHAIN MANAGEMENT

Supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products and distributions of products to customers.

  • - Ganeshan and Harrision

SUPPLY CHAIN MANAGEMENT Supply chain is a network of facilities and distribution options that performs the

Examples:

SUPPLY CHAIN MANAGEMENT

  • Asian Paints operates in 22 countries and has 27 paint manufacturing facilities with combined total capacity of around 370 million liters per annum servicing consumers in over 65 countries.

  • HP sells approximately 400,000 computers through the 4000 wal Mart stores worldwide in one day during the Xmas season.

  • Wal Mart moves approximately 2.3 billion general cartons a year to its stores.

Overview of Strategic Planning for Logistics and Supply Chain Management

Logistics and supply chain management are changing quickly, and are characterized by:

Many innovations and improvements

Movement towards being considered as players in

strategic, competitive advantage Prime candidates for application of tried and proven

approaches to strategic planning Historical Perspective on Strategy:

Has become an appropriately meaningful and integrated activity in most globally competitive firms.

SUPPLY CHAIN MANAGEMENT

Evolutionary development phases:

In

the

50s

and 60s,

was referred to

as investment

planning.

 

In

the

70s,

began

to

focus

on

internal

growth

opportunities.

 

In the 80s, a combination of outside investment and

internal growth opportunities was used. In the 80s, a combination of outside investment and

internal growth opportunities was used. In the 90s, refocused on gaining strategic advantage in

the marketplace and for defending against competitors. In the early 2000s, strategic focus clearly moved toward the development of effective, inter firm relationships

that would create maximum value for the firm‘s

products and/or services.

How does SCM WORK?

The elements of SCM are (Location, Production, Inventory and Transportations.

Location

It is important to know where production facilities, stocking points and sourcing points are located. These determine the paths along which goods will flow.

Production

An organization must decide what products to create at

which plants which suppliers will service those plants,

SUPPLY CHAIN MANAGEMENT

which plants will supply specific distribution centers and sometimes, how goods will get to the final customers. These decisions have a big impact or revenue, costs and customer service.

Inventory

Each link in the supply chain has to keep a certain

inventory or raw materials, parts, subassemblies and those goods on hand as a buffer against uncertainties and unpredictability. Shutting down an assembly plant because an expected part shipment didn‘t arrive is expensive. But inventory costs money too, so it is importance to manage deployment strategies, determine efficient order qualities and recorder points, and set safety stock levels.

Transportation

Choosing the best way of transport goods often involves trading off the shipping cost against the indirect cost of inventory. For example, shipping by air is generally fast and reliable.

Managing the CHAIN

Once you have determined all the elements in the supply chain, how do you manage the chain? There are three main parts in the process.

There are 3 paths in the chain

  • Product Flow

  • Information Flow

  • Financial Flow

SUPPLY CHAIN MANAGEMENT

Product flow: includes the movement of goods from a supplier to a customer as well as customer returns.

Information

flow:

involves

transmitting

orders

and

updating the status of delivery.

 

Financial flow: consists of credit terms, payments and payments schedules, plus consignment and title ownership.

Supply chain software, especially large integrated packages, combine many different technologies to give a single view of

SUPPLY CHAIN MANAGEMENT

supply chain data that can be shared with others. (Planning and execution applications).Such applications make possible the JIT delivery of goods and services. New SCM option involves web based options with the capability to offer real time data.

Types of Supply Chain Decision

SUPPLY CHAIN MANAGEMENT supply chain data that can be shared with others. (Planning and execution applications).Such
SUPPLY CHAIN MANAGEMENT supply chain data that can be shared with others. (Planning and execution applications).Such

SUPPLY CHAIN MANAGEMENT

THE „7‟ PRINCIPLES OF SCM

  • 1. Group customer by needs Effective SCM groups customers by distinct service needs and tailors services to these particular segments.

  • 2. Customize the logistics network Need to focus on the service requirement and profit potential

  • 3. Listen to signals of market demand & plan accordingly Need to monitor the entire SC to detect early warning signals of changing customer demands and needs.

  • 4. Differentiate the product closer to the customer

Allows supply chains to respond quickly and cost

effectively to changes in customer needs.

  • 5. Strategically manage the sources of supply Work closely with suppliers to reduce the cost Win Win situation for all involved.

  • 6. Develop a supply chain wide technology strategy Employ IT to support multiple levels of decision making. It should also afford a clear view and ability to measure the flow of products, services and information.

  • 7. Adopt channel spanning performance measures Excellent supply chain performance measurement systems do more than just monitor internal functions. They apply performance criteria to every link in the supply chain criteria that embrace both service and financial metrics

SUPPLY CHAIN MANAGEMENT

Supply Chain Processes

SUPPLY CHAIN MANAGEMENT Supply Chain Processes TYPES OF SUPPLY CHAIN 1) Upstream supply chain (inbound logistics):-

TYPES OF SUPPLY CHAIN

1) Upstream supply chain (inbound logistics):- activities of a manufacturing company with its suppliers

2) Downstream supply chain (outbound logistics):- activities involved in delivering the products to the final customers.

3)

Internal

supply

chain:

-

in

house processes for

transformation the inputs from the suppliers into the

outputs.

SUPPLY CHAIN MANAGEMENT

What enables successful Supply Chain Management

  • 1. Pressure from market changes such as NAFTA and EEU

  • 2. Industry EDI standardization (codes, templates, software ) ...

  • 3. Heavy IT and EDI investment

  • 4. Excellent cost accounting

  • 5. Internal management incentives for system gains

  • 6. Culture of cross-functional integration

  • 7. Effective channel management fostering: trust, relationships, design, and judicious use of power

Key Supply Chain Management Issues

 

Chain

Global

Managing Risk

Optimization

and Uncertainty

Distribution Network Configuration

Supply

Y

Inventory Control

Supply

 

Y

Production sourcing

Supply

Y

Supply contracts

Both

Y

Y

Distribution Strategies

Supply

Y

Y

Strategies partnering

Development

Y

Outsourcing and off sourcing

Development

Y

Customer value

Both

Y

Y

Smart pricing

Supply

Y

Logistics Vision

SUPPLY CHAIN MANAGEMENT

The purpose of the logistics vision statement is to give a clear indication of the basis on which the business intends to build a position of advantages through closer customer relationship. Such statements are never easy to construct. There is always the danger that they they will descend into vague 'motherhood' statement that give everyone a warm feeling but provide no guidelines for action.

Logistics Vision SUPPLY CHAIN MANAGEMENT The purpose of the logistics vision statement is to give a

Ideally the logistics vision should be built around the simple issue of' how do we intend to use logistics and supply chain management to create value for our customers?' To operational

SUPPLY CHAIN MANAGEMENT

this idea will necessitate a detailed understanding of how customer value is (or could be) created and delivered in the markets in which the business completes.

Value chain analysis will be a fundamental element in this investigation, as will the definition of the core competencies and capabilities of the organization. Asking the questions 'what activities do we excel in?' and 'what is that differentiates us from the competitors?' is the starting point for creating logistics statement.

The four elements of logistics -derived customer value are 'Better, Faster, Cheaper, Closer and the criterion for the good logistics vision statement is that it should provide the roadmap for how these four goals are to be achieved.

SUPPLY CHAIN MANAGEMENT

Problems with Conventional Organizations

By now, the functional model has become the conceptual core of nearly all organizational structures, public and private. It is so ingrained in the daily activities of most companies that it is rarely questioned. But it is obsolete.

Even when functions are seen as shared services, which would place them relatively low on the org chart in many companies, they are typically the most permanent parts of the enterprise. Business units come and go with the product life cycle, but finance, HR, marketing, legal and R&D last forever. Even in matrix organizations, the functions maintain quite a bit of power, managing career tracks and a huge portion of discretionary investments.

The value of functions is undeniable; no company could do without them. But the business and organizational models that govern functions need updating. The most important business practices and collaborations no longer fall neatly into groupings designed many decades ago.

Perhaps the most obvious symptom of distress from the functional model is the widespread problem of incoherence. Most functional teams are good at many things, but great at nothing. They often struggle to meet the needs of all their constituents, juggling an endless (and sometimes conflicting) list of demands from line units; they never manage to build the type of advantage or differentiation that is required for long-

SUPPLY CHAIN MANAGEMENT

term success. The underlying problem is not a lack of desire to focus, a lack of functional ability, or an inadequate budget. The functional organization simply no longer serves companies as effectively as it once did.

Logistics

organization:

organizations

vertical

and

horizontal

Origin of Organization

Companies are built from the inside out. No matter what their roots are, from manufacturing to sales to R&D to whatever, they build internally in an attempt to satisfy an external customer market. The company wants to sell its product or service, yet designs itself by its own needs rather than the needs of the customers it is trying to satisfy. To compound it, they build their corporate structure in very traditional and very function-focused ways. Companies do not build "backwards", from their customer‘s inward to how they should satisfy these customers. Instead they build internally and then reach outward toward customers.

Horizontal Vs Vertical Organization

Logistics is a process that crosses many functional responsibilities. Logistics is not the purview of one department amid a mass of other company departments aligned in a vertical organization structure. As a process, logistics is a horizontal activity that involves many departments. It is a flat structure in a vertical organization.

SUPPLY CHAIN MANAGEMENT

Company structures are the first challenge to an effective logistics process. A multi-function activity is trying to succeed in a series of vertical tower of responsibilities. Each tower can be a fiefdom and has its own set of responsibilities and its own goals and objectives. And many of the responsibilities and goals are internal; they are not focused on bettering the total product and service for the company's customers.

Example of Hotel:

SUPPLY CHAIN MANAGEMENT Company structures are the first challenge to an effective logistics process. A multi-function

SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN MANAGEMENT 124 | P a g e

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Donald J.Bowersox and David J.Closs, Logistical Management: The Integrated Supply Chain Process, TMH, 2006. Martin Christopher, Logistics and Supply Chain Management, Pitman, London. B.S.Sahay, Supply Chain Management for Global Competitiveness,

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Hall, London.

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A.S.,

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