Harrisons logistics management and strategy, competing through the supply chain (3rd edition) 1

, Part One COMPETING THROUGH LOGISTICS , Logistics and the supply chain Introdu ction1.1 logisticsand the supplychain1.1.1 Definition s and concepts1.1 .2 Supply chain;structu reand tier

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Part One COMPETING THROUGH LOGISTICS , Logistics and the supply chain

Introdu ction1.1 logisticsand the supplychain1.1.1 Definition s and concepts1.1 2 Supply chain;structu reand tiering1.2 M aterial flow a d inform ation flow

1.2.1 Material flow 1.2.2 Information flo w 1.3 Com peting throug h logistics1.3.1 Hard objectives

1.3.2 Support ive capab ilities

1.3.3 Softobjectives1.3.4 O rder winners and qu alifiers1.4 logisticsstrategy

'.4 1 Defining 'strategy', 4.2 Align ing s t rategies 1.4.3 D ifferent iatin g st rategi esSummary

Discussionquestions

R eferences

Su gested further reading

2 Putting the end-customer firstInt rodu ct io n

2.1 The marketing pe rspecti ve 2.1.1 Rising custom er expectati ons 2.1.2 The informati on revo lut ion 2.2 Segment ation

2.3 Quality o f service 2.3.1 Customer loyalty

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viii Contents

2.3.3 Custome r relationsh ip managemen t (CRM) 47

2.4 Setting prioritiesfor logisticsstrategy 502.4.1 Step 1:Diagnosecurren t approach to market segmentation 502.4.2 Step 2a: Understand buying behaviour 52

2.4.4 Step 3: Measure logistics strategy driver 54

2.4.5 Step4: Spec ify future approach to ma rket segmentation 54

3.2 How can logisticscosts be re presen te d? 71

3.4.2 Supplychain managemen tand the balanced scorecard 87

3.5 Supplychain operations reference model (SCOR) 89

Part Two LEVERAGING LOGISTICS OPERATIONS

4 Managing logistics internationally

Introd uction

4.1 Driversand log isticsimplications ofinternat ionalisation

4.1.1 logistical implications ofinternationalisation

4.1.2 Time-to-ma rket

4.1.3 Globalconsolidation

4.1.4 Risk in international og istics

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Contents lx

4.2 The tendencytowardsinternationalisation 1114.2.1 Focused factories:from geographicalto produ ct

4.3 The challenges ofinternational logistics and location 115

4.3.2 Extended and unrelia ble transittimes 1164.3.3 Multipleconsolidationand break points 116

4.3.4 Multiple freight modesand cost option s 117

4.4 Organising for internation al log istics 120

4.4.2 The evolvi ng roleof individualplants 121

4.7 Corporatesocialresponsibility in the supp ly chain 132

5.1 The role oftime in compet itive advantage 1405.1.1 Time-based compet ition:definition and concepts 140

5.1.3 Time-based opportun itiesto add value 141

5.1.4 Time-based opportunities to reduce cost 144

5.1.5 Limitations to time-based approaches 146

5.2.1 Using time as a performance measure 147

5.2.2 Using time to measuresupply pipeline performance 1485.2.3 Consequences when Pctlrneis greater than Dctime 150

5.3.2 Stage 2: Select the process to map 154

5.3.4 Stage 4: Flow chart the process 1555.3.5 Stage 5: Distinguish between value-addin q and

5.3.6 Stage 6: Constructthe time-based process map 156

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5.4 Managing timeli nessin the logistics pipeline 1615.4.1 Strategies to cope when p-urne is greater tha n D ctirn e 1625.4.2 Practices to cope when P-time is greater than D-time 163

5.5 A met hod for implement ing time-based practices 1645.5.1 Step 1: Understand your need to change 165

5.5.3 Step 3:Identify unnecessary process steps and large

5.5.4 Step 4: Understand the causes ofwaste 166

6.1.1 Plan ning and controlwithinthefocalfirm 1736.1.2 Managing in entory inthe supply chain 1776.1.3 Interfirm planning and control 181

6.2.2 liTand materialrequirements planning (MRP) 190

6.3.2 Application oflean thinking to businessprocesses 195

7.1.1 Demand characteristicsan supply capabilities 206

7.1.2 Classifying operating environments 21

Co ntents xi

7.1.3 Preco ndit ions f or su ccessful ag ile pr ac t i ce 214

7 2 1 Jo int de cision mak ing to improve e xte rn al ne twork

Part Three WORKING TOGETHER

8.1 1 Int ernal i ntegrat ion: f u n ction t o f unct io n 2 35

8 1 2 In ter - company i n t e gra t i o n: a manual appr oach 23 7

8.3 Collabo rative p lan ning, forecast ing and r eplenish ment (CPF R) 248

8 3 1 Be nefits of e lectro ni c collaboration 252

8.6 2 Fac to rs in f orming s upp l y c hain r e l at io nship s 2 58

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9.1 Choosing theright supp ly relationships

9.2 Partnerships in the supply chain

9.2.1 Economic justificatio n for partnerships9.2.2 Advantages of partnerships

9.2.3 Disadvantagesof partn erships

9.3 Supply base rationalisation9.3.1 Supplier manag ement9.3.2 lead suppliers

9.5.1 Integrated processes

9.5.2 Synchronous production

9.6 Implementing strategic partnershipsSummary

DiscussionquestionsReferences

Suggested further reading

Part Four CHANGING THE FUTURE

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10 Logistics future challenges and opportunities 29 7

10.2 Selecting collaborative opportunities upstreamand downstream 302

10.3 Managing with cost-to-serveto support growth and profitability 305

Supporting resources

Visit www.pearsoned.co.uk/harrison to find valuableonline resources

For instructors

• Comp lete, downloadable Instructo r's Manual, containing teaching notes,

noteson case studies and teach ing tips, obje ctives and discussion points foreach chapter

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representative or visit www.pearsoned.co.uk/harrison

Plan of the book

Part One COMPETING T HROU GH LOG ISTICS

Part Two LEVERA GIN G L OGI STICS OPERATION S

Man aging logistics i nternationally M anag ing t he lea d-ti me fr ont ier

Supply c hain pla nning and control Th e agile supply chain

iPart Three WORK ING TOG ETHER

Chapter 8 Integrating the rupply chain : Purchasing and supply relationshipsChapter 9

P art F our C HANGING THE F UTURE

Chapter 10 logi stics fu tu re chlil lenge s li nd opportunit ies

COMPETING THROUGH

LOGISTICS

Our model of logi sti cs structures the supply netwo rk around th ree main factors: the flow of materia ls , the flow of information and the time taken to respond to demand from source of s upply The scope of the network extends from the 'focal firm ' indarker red at the ce ntre across supplier and custo me r interfaces, and the refore typi-cally stretches across func tio ns, organisations and borde rs The network isbest seen

as a syste m ofinterde pe nde nt processes,where actio nsinone part affect those ofallothers.The key 'initiato r' of the network is end-custo mer demand on the rig ht:only

the end-customer isfreeto make up their mind when to place an order After that,

the system takesover

Chapter 1 expla ins how networks are structu red the di fferent ways in w hich they may choose to compete, and how thei r capabi lities have to be aligned with the needs of the end -customer Chapter 2 places the end -customer f irst in log istics thinking, and develops the th eme of alig ning logi st ics strategy w ith marketing strategy Chapter 3 considers how value is created in a supply network, how logi s cs costs can be man- aged, and how a balanced measurement portfolio can be designed.

Logistics and the supply chain

The intended objectivesofthis chapter areto :

• ide nt ify and explain log istics definitions and concepts that are relevant tomanaging the supplychai n;

• iden t ify how supply chains compete in terms of time, cost and quality;

• show how differe nt supplychains may adopt different and distinctive

strategies for competing in the marketplace

By the end of this c hapter you should be able to understand:

• how supply chains are structured;

• different ways in which supply chains may choose to compete in the

marketplace;

• the need to align supply chain capabilities with the needs of the endcustomer

-Introduction

Acar takes only 20 hours or so to assemble and a couple more days are needed

to sh ip itto the custo mervia thedealers.So whydoes it take more than amonth

for a manufacturer to makeand deliverthe car I want? Andwhy are theproducts

I want to buy so often unavailabl e on the shelf at the local superma rket? These

are questions tha t go to the heart of logistics management and strategy Sup ply

chai ns today are slow and costly compared with what they will be like in a fewyears' time Butlet us start at the begin ning, bythinking about logistics and the

sup plychain in terms of wh at they aretrying to do Itise syto get bogged down

in the complexities of how a supply chai n actually work s (and very few people

actuallykn ow how awhole supply chain worksl).We shall add res man y ofthose

detail slater in thisbook Plrst,let us focus on howa supplycha in compet es,and

on what the implications are for logistics man agem ent and stra tegy

The overall aim of th is chapter is to provide an introduction to logistics, and

to set the scen efor the bookas awhole.The need is to look outside the indi vid

-ualorgani satio nand to consider howi aligns withotherorganisationsin a givensupply ch ain.This is both a strategic and a managerial task: strategic, because itbrin gs in long- term decisions about how logistics will be structured and the sys-

4 Chapter1 • Logistics and the supply chain

terns it will use; managerial, because it encompasses decisions about sourcing,making and delivering products and services within an overall 'ga m e plan'.This chapter addresses four key issues:

-1 logist ics and the supply chain: definitions, stru ct ure, tiering

2 Material flow and in fo rm at io n flow: the supply chain and the demand chain

3 Competing th ro ug h logistics: competitive criteria in the market place

4 logistics strategies : aligning capabilitiesacross the supply chain

1.1 Logistics and the supply chain

Key issues: What is the supply chain, and how is it structured? What is the pose of a supply chain?

pur-Logist ics is a big wo rd for a big challe nge Let us begin by giving an example of

that challenge in practice, because tha t is where lo gisti cs starts and en ds

65,000 stock-keeping units (skus)depending on the sizeof the storeasresco broadens

its presence inthe 'non-food' market for electricalgoods, stationery, clothing and the

like Thismassive range is suppo rted by 3,000 suppliers, who are expected to provideservice levels (correct time and quantities) of at least 98.5 per cent by delivering toTesco withinhalf-hourtme'wind ows' Volumesare equally impressive In a year, some2.5 billion cases of prod uctare shipped fromsuppliersto the stores

Tesco states that its core purpose is 'to create valueforcusto mers to earn their li

fe-time loyalty' Wide prod uct range and hig h on-shelfavailability across that range are

key enablersof that core purpose.So how do you maintainhighavailabilityof so manyskus in so many stores? This question goes to the heart of logisticsmanagement for

such a vast organisation logistics is about material flow, and about information flow.let us lookat how Tesco deals witheach ofthese in turn

An early reform forsupermarket operationwas to have suppliersdeliver to a dbution centre ratherthan to everystore During the 1980s, distribut ion to reta il stores

istri-was handled by 26 depots These operated on a sing le-temperat ure basis, and weresmall and relatively inefficient Delivery volumes to each store were also relativelylow,and it was not economic to deliver to all stores each day Goods that required tern-

perewre-contronedenvironmentshad to be carried on separatevehicles Each productgroup had different ordering systems The network of depots simplycould not handle

\

Logis tics and the s upply c hain 5

t he g rowth i n vol ume a nd t he incr easingly hig h s tandards o f te mperature con trol A

n ew d istribution s tra tegy w as needed

Un de r t he 'composit e' d istributio n system, m any small depots wi th limited te

mpera-tu re con trol facilit ies were replaced b y composite d istrib ution centres (called regiona l

d istribution cen tres, R DCs), which c an han dle m any p roducts a t several temperatu re

ranges The oppo rtunity is to provid e a cost-ettectfve daily delivery service to all stores Typically, a composite d istribution centre can hand le over 60 million cases per year on

a t s -acre site The wa rehouse b u ild ing comp rises 25.000 square metres divided into

th ree temperatu re zones: frozen (-2Ye), +2°C(chilled) and + 1 2°C (se mi-ambient) Each distribution centre (DC) serves a group of between 100 and 140 retail stores Delivery vehicles fo r co mposite depots can use insulated trailers divided into chambers

by means of movable bu lkhead s $0 they can opera te at different temperatures Deliveries are made at agreed scheduled times Ambientqocdssuch 03$ cans and cloth- ing are delivered through a separate grocery distribution network which relies on a stocked environment where o rders are picked by sto re Thi$ operation is complemented

by a streteqlcany located trunking station which operates apickto zero ope ration for fest -movinq grocery on merchandise units that can be placed directly on the shop floor.

So much for the method of tr ansportrnq qoods from supplier through to thestores, but how much should be sent to each store? With such a huge product range today, it i$ impossible fo r the individual store to reorder across the whole range (store-based ordering) i nstead, sales of each p roduct line are tracked continuously through the till

by means of elec tronic point of sale (EPOS) syste ms. Asa customer's purchases are scanned th rough the bar code reader at the ti ll, the sale is auto matically recor ded for each sk u Cumulative sales are upd ated every fou r ho urs on jescc Info rmation Exc hange (TIE) This Is a system based on Internet Pr otocol that allows Tesco and itssuppuersto com municate tradi ng i nformation The aim of i m proved co mmunication Is

to reduce response um es f rom m anufactu rer to s tores and to ensure prod uct a vailability

on t he s helt Am on g other thing s, TIE aim s t o improve processes for introd ucing new prod ucts and pr o mo tion s, and to monitor service l evels.

Based on the cum ulativesales, 'rescopla ces orders w it hitssuppliersby me ans of tronic data interchange (EDI ). As volumes and produ ct ranges increased d uring t he 1990s, f ood r etailers s uch as 'te sco aim ed t o destock their distribution centres by order-

elec-in g only wh at w as needed t o meet t omorrow's forecast sales For fast-m oving pr oducts such as types of cheese and washing powders, the aim i sday 1 fo r day2: th at is, to orde r today what is needed for t om orr ow F or f ast-moving products, th e aim is to pi ck

to zero in the di stribu tion cent re: no s toc k is left after s to re orders have been fulfilled and deliveries to sto res are mad e as soon as the produ ct is picked, wh ich increases the stoc k availability for th e cu stome r The flow of the pr od uct into t he d istribution centre

is broken into four w aves and specific produ cts are delivered in diffe rent cycles th rough the day This means that th e same s pace in th e d istrib ution centre can be used several times ove r.

Questions

1 Describe the key log ist ics processes at resco.

2 What do you think are the main logistics challenges in running the T esco operation?

6 Chapter 1• log isticsand the supplychain

So why isTesco growing in an intensely com pet itive market ?It describesitscore

purpose as being 'to create value for custo mers to earn their lifetime loyalty'

L o yal ty is an important term that we return to in the next chapter In order to

a hieve loyalty, Tesco has to understand customer needs and how they can be

served Its prod ucts must be recognised by i s customers as represen ting o

ut-<ta ndi ng value for money To support such goals i mus t ensure tha t the p

rod-ucts that its customers want are available on the shelfat each of itsstoresat alltimes,day and night Planni ngand controlling the purchase and distributio n of

t esco'smassiveproduct range from suppliersto sto resis oneoflogistics.Logistics

isthe task of manag ing two key flows:

• mat erial fl ow of the physical goods from su ppliers through the distribution

centres to stores;

• in forma ti on fl ow of demand data fro m the en d-customer back to purchasingand to suppliers,and supply data from suppliers to theretail er, so that material

flow can be accurately plan ned and controlled

The logistics task of managin g material flow and information flow is a key part

of the overall taskofs u pp ly ch ain mana gemt.'7lt Supplychain man agement is con

-cerned with managing the en tire chai n of processes, including raw materia lsupply, man ufacture,packaging anddistributi on to the end-custome r.TheTesco

UKsupply chain stru cture comprises three main functions:

• di strib ution :the operations and support task of managing Tesco's distribution

c n tres,and the distribution of products from the DCsto theassociated stores;

• n e twork a nd c a paci ty pl ann ing: the task of plann ing and implementing sucient capacity in thesupplychain to ens urethatthe right products c n be pro-

ffi-cured in the right quantities now and in the future;

• s upp l y c ha i n deve lopment: the taskofim proving Tesco 's supplychain sothat itsprocesses are stable and in con trol, that it is efficient, and that i is correctly

structured to meet the logi stics needsof materialflow an d information flow.Thuslogistics can beseen aspart of the overallsupplychainchallenge.Whil e theterms 'logistics' and 'supply chai n managem ent' areoften used in tercha ngeably,logistics is actuallyasubset of supplychain management It istime forsome defi-

nitions

1.1 1 D efinitions and concepts

Asupplychain asa whole rang es from basic commodities (what isin theground,sea or air) to selling the final product to the end-custo merto re ycling the used

prod uct Material flows from a basic com modity (such as a bauxi e mine as' a

sourceof alu min ium ore)to the finis hed product (such as a can ofcola) The can

is recycled after use.The analogy to the flow of water in a river is often used to

describe organisations near the source as up stream ,and those near the end-ens

-tamer asdow nstream We refer toe ch firm in a supply chain as apartner,because

that is what they are.There isa collect ive aswellas an ind ividual role to playin

logisticsand the supply chain 7

the con version of basic commodity into finish ed product At each stage of the

co n version , ther e may he retur ns which could be reject mat eri al from the prece

d-ing firm, or waste like the finished can that needsto be recycled

A supply c h a in is a netwo rk of partners whoconecuvetyconvert a ba ste co m m od ity (u pstream ) in to a fi nished produce (d o w n st rea m) that is valued b y e no -cu s-

-to rnerc , and who manage returns at eac h stage

Each partner in a su pplycha in is responsibledirectly fora process that adds val u

ans-ite (per kilogram of aluminium)

Supplychain management in volvespill/millS and cot/trollingallof the processes

from raw material product io n to purchase by the end-user to recycling of the

used cans I'lan ni ng refers to makinga plan that defineshow much of each puct should be bought made, dlstrtbuted and sold each day, week or month

rod-Contro lling means keeping to plan - in spite of the many problem s that may get

in the way.The aim isto coordinat e planningand controlof each processso that

the needs of the end -customerare met correc tly,The definition of supply chain

managemen t used in thisbook is as fo llo ws:

Pla n ni ng a nd co ntrolli ng all of th e b ustness processes - from end-custo mer to raw materia l supplie~ - tha t lin k togethe r part ners i n a supp ly chain in order to serve Ihe needs of the end-cus tomer,

'Serve the needs ofthe end-c us to me r' hasdiffere nt im plic ations in differen t contexts In no t-for-profit enviro nments such as public health and local gover n-

-ment, serving implies 'continuously im p roving' , 'better than other

regions/countries', 'best value' and the like, In the com mercial sector, serving

implies 'better than competition', 'be tt er value for money' and so on In either

situation, the focusof managing the supply chain as a whole ison int egrat ingtheprocesses of su p ply chain partners,of which the end-customeris the key one In

effect , the end-cus tomer starts the whole process by buying finished products It

is this behaviou r that causes materials to flow th rough the supply cha in(Gattorna, 1998:2)

The degree to which the end-custo mer is satisfi ed with the finished product

depe n ds cruci ally on the managem ent of material flow and inform ati on flow

along the supply chain If delivery is late, or the product has bits missing, the

whol e su pplychai nisat risk from co m pe tit o rs who can perform the log isticstask

better Logistics is a vital enabler for su ppl ychain managem ent We use the lowing definition of logistics in thisbook:

fol-T he task of coord inati ng materia l flow and information flow across the su p ply chain

Log istics has both s trategic (long-te rm planning) and ,muws".r;" l (short- andmedium-term planni ng and con tro l) aspects Tesco has a clear view about the

8 Chapter1 • Logistics and the supplychain

opportunities here.A breakdo wn ofcosts in Te s co's part of the UK sup ply chain

is as follows:

• Supplier delivery to Tesco distribution centre (DC) 18%

• T e s co DC operations and deliverto store 28%

• Supplier repleni shment syste ms 8%Nearly halfof supply chain costs are incurred in-store In order to reduce these

in-store costs, Tesco realises tha t the so lution is 'to spe nd more upstream and

downs trea m to secureviable trade-offsforin-store replen ishme n t' If aproduct is

not available on the shelf, the sale is potentially lost By integrating externalmanufacturing and dist ribu tion proces es with its own, Tesco seeks to serve the

need s ofits customers better than its com petitors

1.1 2 Supply chain: structure and tiering

The concept of a supply chain suggests a series of processes linked together toform a chain Atypical Tesco supplychain is formed fro m five such lin ks

M aterial flow

Dai ry cooper ative Cheese fac tory Na tio nal D C R etailer DC R et a ile r s tore and

-e nd-customer

Figure 1.1 From cow to customer

Here, milk is produced by a dairy cooperative and shipped to a cheese facto ry.Once made, the cheese is shi pped to the man ufacturer's natio nal distr ibutio n

c ntre (NDC), where it is stored and matured for nine months It can then be

shipped in response to an order from the retailer, and is tra nsporte d first to the

retailer's regio nal distri bution cen tre (ROC) From there, it is shipped to store.Lookingat the arrows in Figure 1.1, materialflow sfrom left to right Info rmation

is shared acro ss the cha in: i is demand from the end-c ustomer th at makes thewhole chain work

Ifwe loo k more closely at what happens in practice, theterm 'supply chain' is

some what misleading in that the 'cha in' represents a simple series of linksbetween a basic commodity (m ilk in thiscase)and a final prod uct (cheese).Thus

Log isticsand the supply chain 9

the cheese man ufact urer will need packaging materials such as film, labels and

cases Cheese requi resmateria lsadditionalto milkin the manufacturing process

So the manufacturer deals with su ppliersother tha n the milkcooperative alon e

Once made, the che ese is dispatched for mat uration to the supplier's NDC, and

then dispatched to man y custome rs in addition to Tesco Once at a Tcsco RDC,

the'chain' spreads again because up to 1 00storesare served byagiven RDC.The

add itional complexity prompts many authors to refer to supply networks rather

than to supply chain s, a point we ret urn to shortly

Seco nd t ie r

cu sto mers

Fo cal firm

BUY SIDE

•

•

Figure 1 2 Supply network

(SO ur c Afte r S lac ket 0 1., 1 99 7 )

A more realistic representatio n of the supply chain is shown in Figure 1.2,

where each link can connect with several othe rs A [oca! firm is shown at the

centre of man y possible connections with other supplier and cust o mer

compan ies

The supp ly chain can be seen in this diagram as a num ber of processes thatextend across organisati o nal hounda ries.The focal firm is embedded within the

cha in, and its operat on al processes ('inside') must coord in at e with others that

arc part of the same chain Materials flow from left (upstream, or 'buy side') to

right (downs trea m, or 'sup ply side') I everyth ing is as orderly as i seem s,then

only the end-custome r (to the extreme right of the chain) is free to place orders

when he orshe likes: after that, the system takes over.

The supply chain ts tie red in that su pply side and demand side can be orgaised into groupsof partners with which we deal Th us ifwe place an assembler

n-such as the Ford plant at Valencia asthe focal firm, buyside co mprises tier I s

up-pliers of major parts and subassem blies who deliver directly to Ford, wh ile tier 2

suppliers deliver to the tier Is,etc.On the sell side, Ford supplies to the natio nalsales compan iesas t er 1custome rs,who in tu rn su pplyto main dealers as tier2,

and so on

10 Chapter 1 • logisticsand the supplychain

Otherterms thatare usedtodescribeaspectsof managing the supply chain are:

• Purch asin g and supply deals with a focal firm's immed iate suppliers (upstream)

• P hysica l distrib ution deals with the task ofdistributing products to tier 1 tomers (downs tream)

cus-• Lo gisticsrefersto managementof materialsand informatio n Inbou nd logisticsdeals with linksbetween the focal firm and its upstrea m (' bu y side') suppliers,while outbound logistics refers to the links between the focal firm and itsdownstream (' sell side') custom ers

Supply chain management thusappearsasthe'end to end' (or 'cow to customer'

as we have expressed i in Figure 1.1) management of the network as a whole,and of the relati onships between the various links The essential points were

su m marised lo ng ago by Oliver and Webber (1982):

• Supply chain managem ent views th e supply chain as a s i ngle ent ity

• It deman dsstrategic decision making

• It views balanci ng in ventoriesasa last resort

• It demands system i nte gration.

A naturalextension of thisthin kingisthat supply chain sshould ratherbe viewed

as n etwo rks.Figure 1.3 shows how a foca l firm can be seen at the centre of a nworkof upstream and downstream organisations

et-figure 1 3 A n etwork o f o rgani sat io ns

The terms 'sup ply chain' and 'su p ply network' both attem pt to describe thewayin which buyers an d suppliersare lin ked to gether to serve the end-customer.'Netwo rk' describesa more co m plex structure, where organ isati ons can be cross-

lin ked and there are two-w ay exchanges between the m; 'chain ' describes a pler, sequen tial set of links (Harland et a l , 2001) We have used the termsinterchangeably in this book, preferring 'chain' to describe simpler sequences of

sim-a few organisations and 'network' where there are many organisatio ns linked in

a more complex way

Figure 1.3 takes a basic view of the network, with a focal fum linked to threeupstream suppliers and three downstreamcustomers.Ifwe then add materialflow

and infor m atio n flow to this basic model, and pla e a boundary around the work, Figure 1.4 shows the network in context Here we have added arrows show-

net-ing the logistics contributionof materia land infor matio n flows, togetherwith the

Logistics and the supply chain 11

timedimension Material flo ws f om primary manufacture (fo rexam ple farming,mining or forestry) through variou s stages of the network to the end-customer.Materialflow represents the s upp lyof product throughthe networkin respo nsetodemand from the next (succeedi ng) organisation Infor mat o n flow broadcasts

demand from the end -cus tomer to preceding organ isations in the network Thetimedimension add resses the question'How longdoes it taketo get from primarysourceto the end-custome r?'That is,how longdoes it taketo get product throughthevariou s stages from one end of thesup plychain to the other?Time isimport-

ant because it measures how quickly a given network can respond to demand

fr om the end -customer I n fact, the co nce p t of flocv ·is based on time:

Flowme asures thequantity ofmaterial (measured in inputtermssuchasnumbers of

compo nents.tonnesand litrcs}thatpassesthrough agiven network perunit of time

lecith in Emulsifiers,

F igure 1.S Example of a confectionery network map

(SOurtt : Att er lhenget 01 , 199 8 )

12 Chapter 1• Logistics and the supply chain

Figure 1.5 shows an example networkmap of a chocolatebar Draw a network map showing

howyour organisation, or one that you know well, links with other organisations Explain the

upstream and downstream processes as far as you can.We expectyou to address at least the

firsttiers of demand andsupply Youwillderive further benefit fromresearching additionaltiers,

a nd b develo ping t he linka9f> of r f>lilfin o hip that i involved Explain howthese work inprac

-tice,andhow materials flow between the different tiers

An important point here isthat the supply network shouldbeviewed as a system

All processes within the network need to be understood in terms of how they

inte ractwith other processes.1'\0organisation is an island: its inputsand outputs

are affected by the behaviourofother playersin the networ k One powerful, druptive playercan make life very diffi cult for everyoneelse Forexample, several

is-auto assem blersopti m ise theirown processes,but disrupt those ofupst ream spliers and downs treamdistributors Theeffect isto increase totalsystemcosts ami

up-reduce responsiveness to end-cus tomer deman d

Kq issue:What is the relationship between material flow and information flow?

As , 'e have already seen, logistics is about managing material flow and imation flow, In this section, weexam ine material flow and information flow in

nfor-more detail

rn-part s and subassemblies that mus t come together in thefinal assemblyprocesses

The vision is that parts and subassemblies should flow continuously through thesupplychain, allorches trated likea ballet (Knill, 1992 : 5 4):

\

TIl e goa t l scontinuous,s ynch ronous 11 0w Continuousmean s n tnt errup tf ons. nodropping t he ball, no unnece\ \ar)·accumulations of In ventory, A n d s ync h ro no us

means th at i a ll runslikea ball et P arts a n d com ponen ts a re c euvered on lim e,in

th eproper sequ ence ,exactly to th e point th ey 're needed

Often it is difficult to see the 'end to end' nature offlow in a given supplycha in.The negative effects ofsuch difficulty include build-u psof in ventory and sluggish

Material flow and information flow 13

respo ns e to end-c us tomerde ma nd. And sheergreed hy the mo st powerful mbers of a sup ply chain often means that it is weaker partn e rs (notably sma ll tomedium-sized en te rp rises - SMEs)who end up holdi n g the in ven tories So man -

em-agement strategies fo r the supply ch ain require a more holistic lookat th e links,and an un dersta nding that organisational bou ndaries easily crea te harr iers toflow

Case st udy 1.2 descri be s howone com pany- Xero x in this case - re-engi neered

mat eri al flow in itsdistribution system

Xerox

Once the problemsofintrod ucing 'just-in-time' prod uction systems had been solved at

the Xerox pla nt making photocopiers at Venr ay in Holland, attention shifted towardsthe finished product inventory Historically, stocks offinished products had been 'man-aged' b trying to turn the tap of salesonor off as stocks develop ed.This wascharac-

terised by the familiar 'feast or famine' situations The objective ofthe next move for

Xerox becam e clea r: maki ng only what you need when you need it, then shipping

direct tothe custo mer.But the keyquestion had to be answered: just-in-time for what?The answe r is- the end-customer And custo mer surveys showe d that three types of

deliverywere needed:

• Com modity produ cts shou ld be delivered 'off the shelf'

• Middle-ran geproducts were required infive days

• Largerproducts that had to be integrated into existi ngcustomer processesand s

ys-tems had to be planned months ahead :but the quoted delivery datehad to be met

100 per cent

It was envisaged that thiswou ld lead to a radically different inventory 'profile' in the

supplychain Figure 1.6 shows a traditional inve ntory profi le on the left Most ofthestock was heldin localdepots waiting forcustome rorders If the mixhad been incor

rectlyforecast, too many ofthewrong productswe re in plentifulsup ply, while needed

productswe reunavailable.Further,a batch ofre plac me nt productswouldtake along

time to fight their way through the pipeline A new 'just-in-time' strategy was c

on-ceived to make the supply chain much more respon sive.This strategy had a profoundeffect on theinventory profile, pushing much ofthe inventoryawayfrom the end-cus-

tomer (where it has maximum added value and is already committed to a givenfished product specification) Instead, inven tory was mostly held furthe r upstream,whereitcould befinallyassembl ed to known orders, and where ithad lowervalue.Of

in-course, it has since been possible to remove several of the stages ofthe distr ibutionprocess, thereby eliminating some ofthe sources of inventory altogether

For commodity products, Xeroxcoinedthe term de liver jlT: that is, the produ ct had

to be delivered out of stock Where sales foreca stsare tradit ionally poor, the challenge

was one of flexibility, simplicity and spee d ofmanufacture Fo r mid-range products, it

wasunrealist icto hold 'just in case' inventoriesof products that are too complexto beassembled quickly Instead, fi nish JI Twasthe term coinedto describe thenewp licyof

building semi-finished products with the minimum of added value, consiste nt with

bein able to complet eand deliver the product in thefive-daytarget Finally, b ui ld JIT

14 Chapter1• Logisticsand the supplychain

was the term used to describe the newphilosophyof building larger prod ucts quickly

withina definedlead time

Tradi tiona l

-+

Days of stock Inflexible

I n en to ry loca t ion :

Local depot National depot International depot WIP at X erox Parts sto res

In tran sit WIP at sup plier

Just -in -tim e

-Da ys of stock

F lexible

Customer

Inventory position

!Supp lier

Note:WIP '" work in progress, i.e products being worked on, but not yet ready fo r sale Shaded areas ind icate day s o f stoc k.The wider t he area, the m ore days of stoc k in that pos ition.Figure 1.6 Xerox :the impact on inventories

The impact of the new build philosophies on thedownstreamsupplychain processescan be judged from Figure 1.6 Whilethe traditional inventory profileshows a maxi-mumnumber of days of stock (shown in the shaded area) atfinished product level,this

is risky Italways seems thatdemand is greatestforthe very items that are not available!

Postponing the decisionon exact specification until as late as possiblein the process,when we are more likely to know precisely what the end-custo mer wants, helps to

createthe much flattened inventory profile to the rightof thediagram.Theseare issues

to which we return in Chapters 6 and 7 (Adevelopment of thiscase, tracki ng 'whathappened next', is Case Study7.12.)

( Soorce After Egg l eton, 19 90)

Questions

How did inventory reduction inthe supplychainleadto improved competitiveness

at Xerox?

1 2.2 Informa t ion f low

As asked in the Xerox case study, just-in -time f or whatl It is all well and good toget materials flowing and movemen ts synchronised, but the 'sup ply orchestr a 'needsto respo nd in unison to a specific'co nd uctor ' The'conducto r' in thisanal-

ogy is actua lly the end-c ustomer, and it is the end-cu stomer's dema nd signa lsthat trigger the supp ly chain to respond By sharing the end -custo mer demand

information across the su pply cha in, we create a d emand cnain, directed at pr

o-vid ing enhanced cus tomer value Informa tio n technology enables the rapidsharing of deman d and supply dat a at increasing levels of detail and sophisti-

cation The aim is to integ rat esuch dema nd and supply data so that an incre

s-inglyaccurate pict ureis obta ined about th e nature of businessprocesses, markets

Competing through logistics 15

and end-customers.Such integration provides increasing competitive advantage,

as we explore further in Chapter 8

The greatest opportunities for meeting demand in the marketplace with amaximum of dependabilit y and a minimum of inventory come from imple-menting such integration acro ss the supply chain A focal firm cannot become'wo rld class' by itself!

Figure 1.7 gives a conceptua l model of how supply chain processes (supply,

so urce, make, dist ribute and sell) are in tegrated together in order to meet endcustom er demand (Beech, 1998) Demand signals are shared across the chai nrather than being inte rpreted and mas aged by the 'sell' process next to the

-market Demand fulfilment is also envisaged as an integrated process, as

mat erialsaremoved from one processto the nextin a seamlessflow Informati on

is the 'glue' that hinds the supply chain processes together

Writea brief(200 words)appraisalofmater ialand informationflowin the supplynetworkaffe

ct-ingone of the majorproducts inthe response you gave in Activity1.1.Perhaps the currentsitu

-ation is different from the above ideals?

1.3 - Competing through logistics

Key issue s: How do productswin orders in the marketplace ? Ho w does logisticscontribute to co m p et itive advantage?

There are many potentially co nflicting demands on an organisation today All

those unreasonable customers seem to want it yesterday, at no cost, and to becompensated ifit goes wrong! Within a given supply chain, it is important thateach organ isat ionunderstands how each group of productscompetes in the mar-ketplace, and that it aligns i s capabilities with those ofits partners

A 'prod uct ' is actually a combination of the pllY~ical produ ct ( or example, a200g pack of Camembert cheese)and its accompany ingse r vice(forexample, how

it ismerchandised in th estore- easyto find, availability,attractive presentation,

16 C hapter 1 • L ogistics and th e s upply c hain

lighti ng, temperatu re) Wh ile the physica l product is determined by marketi ng

and R&D, service isheavily influen ced by logistics

It is impossible to be outstanding at everyt h ing, and supply chain partners

need to give priority to capabilities that giveeach prod uct group its competitive

edge These are the advantages where supply chain partners 'dig in deep' bygiving priority to investme nt by training and by focusing product developmentand marketing efforts.They need only to match indus try average performance

on other criteria Let us now look at the competitive priorities that can be deliv

-ered by logistics in the supplycha in

There are variousways in which products compete inthe marketplace.Perhaps

a given prod uct is some thing that no one else can match in terms of price Or

maybe you offer a product that is tech n ica lly superior, such as Gillette razor

blades Wh ile new product developme nt has logistics implicati ons, the key

advan tage provided by logistics - assuggested in theTesco example in sectio n 1.1

- is avail ability of c onfo r mi ng produ ct ill t h e m a rketpla ce at l ow cos t. Logistics su

p-ports competitivenessof the supply chain as a whole by:

m eeting e n d-c u sto m e r d emand thr ou gh suppl ying w hat i s n eeded i n t h eform i i s

n eeded , w hen it i s n eeded , at a compettnve cost

Logistics advantage thu s shows up in the form of such competitive factors as

better product availablllty in the market place and low prod uct obsolescence

Defining logistics advantage means that we need to set goals that areclear, m

eas-urable and quantifiable.We disti ngui sh three 'hard objectives' for creati ng l

ogis-tics advantage: q uality, time and cost. There are two further im po rtant ways of

creating logistics advantage: contro lling variability in logistics processes, and deal

-ing with uncerta inty. We have called these 'supportive capabilities', and they can

be just as important as hard objectives Finally, there are 'soft objectives', whic h

relate to service aspects such as theconfidence customersdevelo p in the way thelogistics operat ion is performed Let us loo k at each of these ways of creat ing

advantage in turn

1.3 1 Hard objectives

Traditional ways ofcompeting are to offerthe end-cus tome r advantages related

to productquality,the speed with which it is delivered, an d/orthe price at which

it is offered We refer to quality time and cost as 'hard objecti ves' becau se theyare easy to measure and relativ ely obvious to the end-custo me r

The quality advantage

The most fundamental objective - in that it is a founda tio n for the others- is to

carryout all processes across thesupply chain so that the end product does what

i is supposed to do Quality is the most visible aspect of supply chain

perform-ance Defects, incorrect quantit iesand wrong items delivered are symptoms of

quality problems in supply cha in processes that are all too appa rent to the e

nd-custome r Such problems negatively in fluence that custome r's loyalty Robust

Co mpeting through logistics 1 7

processes are at the heart of sup ply chai n performance Internally, robu st

pro-cesses help to reduce costs by elim ina ting erro rs, and help to increase d

epend-ability by making processes more certa in

While conformance Quality in the factory may be contro lled to defect levels

tha t are below 25 par ts per million (ppm),a product may end up on the retailer'sshelf with betwee n 2 and 5 per cent defects, which is 10,000 to 20,000 ppm.This

huge escalation takes place as the result of cumulative problem s in successivesupply cha in processes Cases may be squashed whe n shrin k-wrapped at the

manu fact urer's N ne.In the back of the retail store, cases may be cut open with

a sha rp knife - in spite of instructi o ns to the contrary, The end-customersees the

prod uct on the retail shelf at its wurs t state of quality perfor ma nce, and tha t is

where the buying decision is mad e tha t drives the su pplychain as a whole

In many logts tlcssit ua tio ns, quality ofscrvtce isabout selecti ng the righ tquan

-tity oftheright product in the right sequence in respo ns e to customer orde rs For

exam ple, sto re orders must be picked from a range of thousand s ofskus (stoc k

keeping units) at a Iesco R D e.This must be carried out accurately (co rrect sk ,correct quantity) against tightdelive ryschedules day in day out P ick a ccuracy(for

example, 99.5 per cen t correct sku and correct quantity) is wide ly used to

measu re the quali ty of this operati o n And increa sing requirementsfor in-store

efficiencies mean that categories of product (fo r example, sham poos and toothpastes) need to be picked in a set seq ue nce to facilitate direct-to-shelf delivery atthe store.Lo gistics service providerswho can implement and maint ain the high-

-est standards ofservice quality place them selves at an advantageoverthose whocannot

The time advantage

Timemeasures how lo ng acustome rhas to wait in order to receivea given prod

-uct or service Volkswagen calls this time the Cll5 tomer to c ustomerlead time:that

is, the time it takes from the moment acustomer places an order to the moment

tha t custome r receives the car he or she specified Such lead times can vary from

zero (the product isim mediatelyavail ab le, such as good s ona supe rmarket shelf )

to mo nths or years (suc h as the cons truc tion of a new build ing) Com peting ontime isabout survival of the fastest!

Time can be used to win ordersbyco m pa nies who have learned that some

cus-to mers do not wan t to wait- and are prepared to pay a premium to get what they,want quick ly An exam pleis Vision Express, which offers prescription spectacles'in about one hour' Tech nicians machine lenses from blan ks on the premises,Staff are given incentives to maintain a 9S percent service levelagainst the one-

hour target Vision Exp ress has been successful in the marke tplace b reeertng the supplycha in so that partsand information can flow rapid ly from one

-engtn-process to the nex t Compare this with othe r opticia ns in the high street, who

must send customer orders to a cen tral fact o ry Un de r the 'remo te factory'system, orde rs typically take abou t 10 days to proces s An individu al custo me r

orde r is first dispatched to the factory It then has to join a queue wit h ordersfrom all the othe r high street branc hes arou nd th e country. Once the orde r hasbeen processed,it must ret urn to the bran chthat raised theorde r While thismay

18 Chapter1 • Logistics and the supplychain

be cheape r to do (a cen tral, highly productive facto ryserves allofthe branches),

it takes much lo nger to process an order

The time advantage is variou sly described asspe edorr espons ivenessin practice.Speeding up sup ply chain processes may help to improve fresh ness of the endproduct, or to red uce the risk of obsolete orover aged stock in the system.Time

is an ab solute measure, that is, it is not open to interpretatio n like quality andcost.By following a productthrou gh a supp lychain, we can d i sc~ver which pro-cesses add value and which add time and cost but no value We explore this fur-

ther in Chapter 5, which is about managing time for advantage in the su p ply

cha in

The cost advantage

Co st is im po rtan t fo r all supplycha in processes - that goes without saying Lowcoststranslate in to advantages in the marketplace in termsof low prices or high

margins,or a bit ofeach Man y prod uctscompetespecifically on the basisof lowprice.This issup ported from a supply cha in point ofview by low cost manufac-ture,distr ibutio n, servicing and the like Examples of products that co m pete on

low price are 'ow n brand' su permarket goods that reduce the high margins and

heavyadvertisingspend of major brands Theyalso perhaps cut some ofthe corners in termsofproduct specification in thehope tha t the custo mer will considerlow price to be more im portant tha n minor differences in product quality

-The pressu re to red uce prices at au tomotive component su ppliers is intense

Th e assemblers have been setting annua l price red uctio n target s fo r their

in bound su pply cha ins for some years Unless a sup plier can match reducedprices at which products are being sold by means of reduced costs,that supplierwill graduallygo out of business.As a result, many su ppliersarecynicalabout the'price down' policiesof th e assemblers Red uced pric s are the reward of cost cut-

ting,and that ismo st oftena collaborativeeffort by several partnersin the sup plychain As indicated in section 1.1, Tesco can make only limited inroads in to its

in-s tore costs witho u t the help of its supply ch ain partners On the othe r ha nd,small dairy farmers continue to be forced out of business because the price ofmilk paid by superma rketsis'less than theprice of water'.For them, there are fewopportunities to cut costs

1.3.2 Supportive capabilities

While the hard objectives listed above are always importa nt to com petitiveadvantage,supportive capabilitiescan also be key to creating logistics advantage

in the marke tplace When there is little to choose in term s of quality, time or

cost, supportive capabilities can make all the difference to the end-customer.Variabili ty refers to real and identifiable differe nceswith in a popu lation,suc h asthe differences in time each patient at an optician has to wait for theireyes to be

tested Uncertainty refers to our lack of k o wledge (Thompson, 2002): in lo tics terms, uncerta inty result s in us having to deal with even ts that are not

gis-known in advance

Co mpeting through logistics 19

Controlling variability: the dependability advantage

Time is not just about speed Quality is not just abo ut meeting defect targets

Behi nd both 'ha rd' ob jectives is the need to co ntrol va riability in logistics cesses Variability underm inesthe de pendability with which a product or service

pro-meets target Wh ile Vision Express offers a one- hour service for prescription

glasses, the 95 per centservicelevelis a measure ofthedependability of thaticeagainstthe one-hourtarget Firmswho do not offer instant aneousavailabilityneedto tellthe custome r- in othe rwords to 'promise' - whe ntheproduct or serv-ice willbe delivered Delivery dependabilitymeasureshowsuccessfu lthe firm has

serv-been in meeting those prom ises For exam ple, the UK's Royal Mail offersa 'firstclass' service for letters where by the re is a 90 per cent probability that a letterposted tod ay will reach its destination tomo rrow It is important to measure

depe ndab ility in the same 'end to end' way that speed is measured

Dependabili ty measures are widely used in industries such as train and air travel

services to monitor how well published timetables are met And in ing firm s, dependability is used to monitor a sup plie r's performance in suchterms as:

manufactur-• o time (percentage of orders delivered on time, and the variability against

target);

• in full (perce ntage of orders delivered complete, and the variability against

target);

• Ofl q uality (percen tage of defects, and the variability against target)

So logistics is concerned not just with the ave rage percentage of orders delivered

on time but also wit h the vari ability. For example, a manufacturer has to cope

with theday-to-day variability oforders placed In practice, thisis moreim

port-ant than the average orders placed because of the resource implications of 'ups

and downs' in dem and Case stu dy 1.3 explores the impact of variability on a

supplier's processes

Measuring schedule variability

A p roblem th at is all t oo fa mi liar t o s uppliers in th e a utomotive ind ustry i s t hat of

sched-u le va riabil ity A ve hicle manu fact urer issu es de livery s chedules t o specify h ow many

p arts o f e ach type a re r equired eac h d ay f or th e f ollowing m onth A nd e ach da y a off' quantit y is iss ued, whi ch spe cifies h ow man y t he ve hicle m anufactu rer actu ally

'call-w ants T he two sets o f fig ures a re no t ne cessarily the sa me, alt hough t hey us ually ad d

u p t o the s ame cumul ative nu m bers for t he m onth a s a whole In ot her wo rds, the tota l

s ched uled q uantities an d t he t otal ca ll-off q uantities ar e th e s ame 5 wh at i s the pr

ob-l em?

Th e p roblem i s t hat th e s uppl ier has t o cope w ith u ps and d own s of ca ll-off quan tities tha t c reate hu ge pro blems fo r t he su pplier's p rocess l et sc heduled d ernand » 5, a nd

c all-off q uantities = A Th en the diff erence D between s chedule and ac t ual is g iven by

D '" 5 - A If t he su pplier pr oduces to sc hedule, the n 5 > A, th e s uppl ier w ill

over-pro-d uce t he p art a nd end up w ith excess s toc k Wh ere 5<A, t he effects co uld ei ther b e a

20 Chapte r1• logistics and the supply chain

red uction instoc kheld by the supplie r, or a shortfall of (5- A)ofparts from the plier The two conditions (5> A and 5< A) therefore have different logistics Impltca-

sup-tion s.

Figure 1.8 shows that actual dema nd, totalled acrossfou rdiffe rent partsat Pressco(asupplierof pressed metal compo nents), may be up to , 600 units above sche du le,

or2,200 below schedulein the case ofveh icleassemblerWestCo Thisrange has be n

divided up into intervalsof 100 units.The mode(0 - 9 ) indicatesthat 5= Afor a f

Assuming that the distributon is roughlynormal, the standard deviation (5D) is573,which is characteristicoftheflat, wide spread ofdata.Figure1.9 shows the distributionof

5-Afor ou rsimilarpartsfromthesamesupplier but to a different vehicleassembler,EastCo.This time,the 50 forthedistribution is95,representing a much narrowe rspread ofdif-ferences thanfor WestCo

( Source : H.1rri son, 19 96)

Quality is not just about meeting target pick accuracy,or target defect levels.It isalso about controlling variability.The same argume nt can be made about costs.

The implication of dependab ility for logistics is that supplycha in processes need

to be robust and predictable.In Chapter 6, wedevelop the casefor dependability

in supply chains under the themes of planning and control and lean thinking

D ealing with un certainty: the agility advantage

Dealing wit h uncertai nty means responding rapidly to un known problems that

affect logistics processes Some times, problems can be toreseen - even if theirtiming cannot Toyota UK manages inbound deliveries of parts from suppliers insouthern Europe by a process called c hain logistics. Trailers of parts are moved infour-hour cycles,afterwhich they are exchanged for the returning em pty trailer

on its way back from the United Kingdom.One hitch in this highly orchestrated

process means that incoming parts do not arrive just-in-time at the assembly

plant Toyota demands that its suppliers and logistics partner plan c ountermea

-SUTe s This means that alternative routes for suppliers to deliver to its Burnastonassembly plant in the UK have been planned in advance to deal, for example,

with a French cha nnel ferry strikeat Calais.The weatheris alsoa cause of uncer

-tainty in logistics- for example, it may mean that Tesco has to switch between

saladsand soupsas the result ofa cold snap Othe rforms ofuncertaintyconcernevents whe re neither the problem nor its timin g can be foreseen Case study 1.4

provid es an exampleofsuch aneven tand howtwo organisatio ns responded di

f-ferently to it

Nokia deals with uncertainty

In March, 2000, a thund erstorm struck the Phili ps semiconductor plant atAlbuq uer q ue in New Mexico which mad e silicon chips fo r products like cellphones

Damage at firstseemed minor, and fire fighte rssoonleft the pre mises.At first Philipstold major customers like Nokia and Ericsson that the delay to production wouldonly be one week But damage to some of the clean areas in the plant - created bysmoke and water - was actually going to take months to remedy Clean rooms insemiconductor plants must be spotless, and particles of more than 0.511 are filtered

out

22 C hapter 1 • l og istics and th e s upply c hain

T he o n e-week dela y w as qu ickly r ep orted b y Ta pia M arkk i, No kia 's c h ief compone

nt-p urchasing m anager, to P ertti Ko rho nen , Nok ia' s top tr ou ble sh oo t er 'We enc oura ge

ba d news to t rave l fa st', sai d M r K o rhonen YVh ile Ph il ips i nitially r eject ed offe rs of help

fr om No k ia, it soon bec ame a pparent t h at production del ays would be much m ore than one week K orhon en put together a team to find solu tions to supplying the five

ctupsthat we re affected by the Philips fi re I hree we re quickly re-s ourced from Japanese and American su ppliers, but the other two were only supplied by P hilips This time

P hilip s cooper ated at t h e h ighest l evel Nokia 's chairman a nd ch ief execut ive, Mr Ollila , met wi th the P hi lips CEQ M r Boostra and the h ead of the P hilips s em iconductor div-

i sion, M r van d er P oet Fa ct ories at E indhoven and at S hanghai we re resc hedu led t o

su pply t he m issing chips , and en g i neers f rom both Noki a an d Ph i lips wo rked t o acce

l-e rate th e r eturn of the Albu querque p lant to fu ll prod uction As a r esult o f these inte

n-s ive e fforts, th ere we re r elatively min or d elays to Nok i a's cellphone s hipments.

Ex ecutives a t Er icsson in S w eden onl y l earned o f t he p roblem seve ral wee ks afte r the fire Compan y cu lture wa s l ess proactiv e t han a t its Fi nnish ri val Th e ba d n ews wa s

w ithheld fr om s enior mana gement long a fter it b ecame cl ear that d elays w ere b

ecom-i ng s erio us B y th e time tha t Eric sson r ealised t he magn itud e o f t he pr oblem , it wa s t oo

l ate to find alt ernative sour ces N okia h ad seized r ema ining wo rld ca pacity, an d it too k

n ine m onths for the si tuation t o b r ectif ied Th e dis ruption led to a 3 p er cent loss of mar ket sh are b y E ricsson, a nd c on tributed i n t urn to its e xit f rom the pho ne han dset mar ket.

Question

1 wha t a re the k ey lessons fr om t his case f or deal ing effectively with d isrup tions to the

su pply cha in?

(Source: ~ i 2005, I'ld Lalou r, 20(1)

The implication of uncertaintyfor supply chain processesis that they need to be

fl exible. Flexibility is defined as the 'ability to re ct or transform [supply chain

proce sses] with minimum penalties in time, cost and performa nce' (Upton,

1995).Flexibiltty comes in two basic forms (Sawhney,2006):

• P roactive: to create the capabili ty in advance to handle uncerta int y - for

example, Toyota 's counter-measures

• R e active :to cope with uncert aint y in a focalfirm'sinternalorexte rna lenviro

n-ment - for example, Nokia's response to the fire at Philips

Uncertainties, wherever they originate, may affect othe r supply chain partn ers

In Chapter 7, we develop the case for managing uncertainty in supply chains

1 3.3 Soft objectives

There are other ways in which logistics advantage may be gain ed, but these are

not so readily measurable as those listed above They are referred to as 'soft'

Com peting th rough logistics 23

ob jectives asdistinct from themore easilymeasurable'hard' objecti ves Examples

of soft objective sare:

• contide nce: queries answered promp tly, courteous ly and efficiently;

• sec urity: customer 's information and prope rty treated in a confidential and

secure manner

Soft objectives need to be measured in differe nt ways to hard ob jectives, such as

customer att itude surveys

Logistics is not the onlyway in which product competitiven ess in the m

arket-place can be enhanced.The performa nce ob jectives listed above can he added to(an d in some cases eclipsed by) other ways in which prod ucts may win orders,

such as design and marketin g features No matter how good the logistics system

might have bee n , lack of an early 'cla m shell' design led to the reduction of

Nokia's market share for mobil e telephone ha nd sets in Europ e Supe rior product

orservice design - often suppo rted bybrand image- may become the dominant

ways of ach ieving advantage in the marketp lace Here, thelogisticstask is to

sup-port the superior design BMW's supply chain is one of the most efficient there

is, mai n ly because its products are sold (at least in Europe) as soon as they havebeen made Fin ished cars do not accumulate in disused airfields across Europe,like those of the mass producers Fini shed product storage adds cost, with no

value added from an end-cus tomer perspective

1.3.4 Order winners and qualifiers

The relative imp ortance of the above logistics performance objectives is usually

different for a given product or service A helpful distinction is that between

orde r win ners and orde rqua lifiers (Hill, 2(00) :

• O rder wi nners are facto rs that directly and significan tly help products to win

orders in the marketpl ace Custome rs regard such factors as key reasons for

buying that productor service I a firm raisesitsperformance on thosefactors,

i will increase its chancesof getting morebusiness.Th us a produ ct that com

-petes mainly on prlce would benefit in the market place if productivity

improvements enabled further price reductions

• Or der q ualifiersare factors that are regarded by the market asan 'entry ticket'

Unless theproduct or service meets basic perform ance standards, it will not be

taken seriously An example is quality accred itation: a poss ible supplier to

major utilities such as PowerGen in Britain and EDF in Fra nce would not beconsidered serio usly without ISO 9000 cert ifi cation And delivery reliability is

a must for newspap ers - yesterday's news is worthless Note that, in both

examples, order qualifiers are orde r-losing s ensitive:loss of ISO 9000 accredita

-tion would make it impossible to supply to major utilities, and late delivery of

newspaperswould miss the market

The different impacts of the two sets of criter ia are illustrated in Figure 1.10

Increased performance in an order winner, shown by the solid line, increases

24 Chapter 1 • logisticsand the supply chain

competitive benefit for the product in proportion.Orde rqualifiers,shown bythe

dotted line, have different character tstics.Attainment of a required performance

stand ard, such asISO 9000 accred itation,gains en try to the mar ket but no more

Order win ners and qualifiers are s J'f.'ci[i c t o i ndividual !> t'X m (,lI b, a point we

develop in the next chapter.Table 1.1 provides an exampleof how two differen t

products made by the same man ufact urer and passin g th rou gh the same d

istri-bution cha n ne l have different performance objectives The first product group

com prisesstandard shirts that are sold in a limited range of 'classic' colours and

sizes The second prod uct grou p com prises fashion blouses that are designedspecially for each season in many colours and a choice of styles with associateddesigner labels

Analysisof the order winners and quali fiers shows that the two product ranges

have very differen t performa nce criteriain the marketplace.Of the two, the range

of fashi on blouses presents more loglstt cs cha llenges beca use dem and for indlvidual skusare much moredifficult to forecast It is not unt il the season is under

-way that a pict u re begms to emerge abo ut which colo urs are selling most in

which region ofthe market The logistics challe nge istherefore concerned with

spe ed of response and flexibility to changing demand The logistics ch alle ngesbetween the two ranges arequit e distinc tive

Not only can orde r win ners and qualifiers be different fo r different prod ucts

and services.TIley can also dil mge over tim e Th us, in the early phase of a newprod uct life cycle, such as the launch of a new integrated circuit,theorder win-

ners arc avail ab ility and design per formance Price would oflen be a qualifier:

pro vided the price is no tso exorbitan t that no one can afford it, there is a marker

fo r innovators who want the best-perform ing chip that is ava ilable But by the

mat u rity phase of the life cycle, com pe titors have eme rged the next gene ra tion

is already on the stocks,and the orde r winners have changed to price and product reliab ility '(h e fo rmer orde r win ners (availability and design performance)

-have changed to become ord er qua lifiers.The logistics challengeis tounderstand

the marke tdynamics and to adjust capabilities accord ingly

logisticsstrateg 25

Ta ble 1.1 Different product ranges have different logistics performan ce objectives

Cla ssic s h irts F ashion b lou ses

Product r ange Na rr ow: few c olours , standard Wid e: ma ny co lours , c hoice

s izes of s tyles, d esign er la bels

s eason )

P rice E veryd ay low pr ic e Prem i um pr ices

Qua l it y C onsistency, c onforma ce to High grades o f ma teri al, h igh

(ba s ic ) s pec st anda r ds of wo r k manship

S l es vo lu mes C onsistent sales ove r ti me Sales pe a k f or g iven f ashion

s eason

Ord er w inners Price T ime-to-market

B ran d /la be l Quali ty

O rder q ualif iers QU il l ity P rice

Availab ility A vai lab i li ty

D e end a bility F lexibility

The act ions o f comp eti tors are thereforea furt her influence on logistics perfor

m-ance objectives For exa mple, low-price compet tors are a feature of most

markets, and attemp t to differentiat e them selves from the perhap s higher-grade

but pricier incumbents.Thus competitors like Matalan have sparked fundamen

-talchangesin logisticsstrategy attheIong-cstabltshed UKclothing retailer Marks

& Spencer (www.ma rksandspcnccr.co m) In response to loss of sales to cheaper

new entrants, Marks &. Spen cerditched long-standing agreements with local UK

suppliersand sourced garments from new, lower-priced suppliers in the FarEast

Selectthetop twoprod uct lines(in termsofsales) or you rfirm oronethatyou k ow well.Using

the he dingsinTable 1.1,fill in the details forcharacteristicsofboth prod uct fines.Aim to uw

precise details, so identify the a tual sales figures instead of putting 'high' or 'low' Use

additionalorother headings iftheydescribethesituat ion better Goon toide ntify the principal

orderwinnersand qualifiersforeach produ ct

Key issues :What is 'st rat eg y' ? How can competitive criteria be aligned within a

supply chain? How can logistics strategies be tu ned to differen t product needs?

26 Chapter 1 • logistics and the supply chain

1.4.1 Defining ' st rate gy'

Strategy is about planning as distinct from doing It is about formulating a

long-term plan for the sup ply chain, asdisti nct from solving the day-to-day issues and

problems that inevitably occur Extending the concept of 'strategy' from Hayes

a nd Whee lw right ( 1981), Logist ics st rate gy is the set of guiding principles, driving fo rces a nd ingrained atti- tud es that h e lp to coordina te goals, plans and policies, a n d which arc reinforced through co nscious and su bc o ns cious behaviourwithinand between partners a cro ss

a network.

Alltoo often,logistics'strategy' is set using few such characteristics:decisions are

made piecem eal by accident, mud dle or inertia Weneed, however,to recognise

that str ategic decisions may Indeed be made by such means

Wh ittingto n (2000) proposes four approaches to setting strategy He star ts by

suggesti ng different moti vati ons for setting strategy:

• H ow d eliberate ar e th e processes of str ategy setti ng?These can range from clearly

and carefully planned to a series of ad hoc decisions taken on a day-to-day

basis

• What a re th e goa ls atstr ategy sett in l{? These can range from a focus on mimising profit to allowin g other business priorit iessuch as salesgrowth to beinclude d

ax-If we make these two considerations the axes of a ma trix, Figure 1.11 suggests

four options for craftingstrategy

"•

"

~

Figure 1.11 Four options forcrafting strategy

What are the im plications for the way in which supply chai n str ategy isapproached indifferentorganisa tions? Here isabriefdescriptionof the four options:

Logistics strategy 27

• E volve 'Strategy'isnot something that is formallyundertaken at all.'Our

strat-egy is not to have a strategy' is a typical viewpoint Operating decisions are

ta ken in relation to the needsofthe moment,with financialgoalsas the main

guid ing principle

• C l assical.While finan cialgoals areagain the main guiding princip le, these are

ach ieved through a fo nnal planning process.Thisisca lled 'classical' becauseit

is the oldes tand most influe n tialoption

• Acco mmodat e. Here, decisions are back to the day-to-da y mode, but financial

objectives are no longer the primary concern Strategy is accommodated

instead to the realities of the focal firm and the market s in which it operates

• S yste m ic This option forstrategy setting seesnoconflict between the ends and

me ns of reali sin g business goal s While goal setting takes place across all

major aspects of the business (includ ing human resources, market ing and

manufacturing policies), these are linked to the means by which they will be

achieved in practic

Logistics strategy usually dem ands syste m ic strategy setting between net work

partners, who may have to coordinate order winnersand quali fiers across di

ffer-en t market segme nts

1.4.2 Aligning strategies

In section 1.1 we showed the su p ply cha in as a network of operating processes

In sectio n 1.2 we emphasised the need to 'in tegrate' these processes to maxim ise

flow and focus on the end -custome r And in section 1.3 we saw how supply

chainscan chooseto compete on a rangeof different com pe titivepriorities.Now

it is time to put these ideas together and show how strategies need to be a ligned

acrossthe supply chain

Ifdifferen t links in the su pplychainare directedtow ard s different competitive

priorit ies, then the chain will not be able to serve the end-custome r as wellas a

su p plychain in which the links are directed towards the same priorities.That is

the basicargu me nt for alignment in the supplychain (Cousins,200S).Where the

links are directed by a co m mon and consistent set of competitive criteria, then

that sup ply chain will compete better in the marketplace than one in which the

links have different, conflicting prior ities.Thisis the concept of 'focus'

Focusisbased on th eview thatyouca nnot begoodat everyt h ing.Forexam ple,

it is diffi cult to handle high volume, low cost products in the same channe l to

market as low volume, high variety prod uct s,for which flexibility is the name of

the game While the assembly line is the method of choice for manufact uring

cars in volume, develop men t of pro to types for new models is kept well away

from the factory in special facilities until close to launch Th is is because the

develo p me n t proce ss dem ands quite differen t techn ical skills and equipment

that are better physically sepa rated from the more routine, efficient and r

epeti-tive assem bly line In the exa m pleof the stand ard shirts and fash ion blouses in

sectio n 1.3,the associated operations processes would bekept separate(focused')

fo r sim ilarreasons And the sepa ration could be thousandsof kilometres.'Classic'

28 Chapter1 • Logistics and the supplychain

shirts could b sourced from Ch ina,where prices are low, and long delivery lead

times are not so importan t 'Fashion' shirts may be sourced neare r to home,because respon se time is key and cost is less important (see Case study 4.2).What ha p pe ns when th e processesare not align ed within a supply ch ain? Let

us address that question with Cast' stud y 1.4 to showthe problems th atcan arise

Talleres Auto'ralleres Auto (TA) is an SME based in Barcelona TAattends to broken-down vehicles,providing a roadside repair and recovery service Two of the parts that TAfreque ntlyusesare starte rs and alternators, which wereobtained from alocaldistributor.In turn,the local distributorordered partsfroma prime distributor Starte rs and alterna tors wereobtained from a remanufacturer, who replaced the windingsand tested the productsusing parts bought from a component supplier A diagram of thispart of the supplychain isshown in Figure 1.12

Compon ent

R emanutacturer Prime -+ local -+ I nstal l er

s up plie r -+ ~ d istribu tor distr ibu tor

• 'raueres A uto is t he installer

• TA buys starters and alternators from iI local distr i but or

• the local distributor buys from a prime distribu tor

• the prime distributo r buys fro m <I remanutactu re r

• the remanutact urer buys com po nents from a compone nt sup plierFigure 1.12 The Talleres Auto sup plychai n

Most of TA's custome rs made 'distresspurchases' - their car had broken down andthey wanted itto be fixed quickly So TA needed a fast replacement service from thelocal distributor While the distributors both recognised the need for fast replacements,theperformanceof the purchasing departmentat theremanufacturerwas measured oncost savings Thus the componentsupplierthought that thename of the game was lowcost

(Source: Ha rland, 1997)

Questions

What were the orderwinners and order qualifiers at TA?

2 What were the orderwinnersand order qualifiers at thecomponent supp lier?

3 What impact on custome rservice was this mismatch likely to cause?

1.4.3 Differentiating strategies

,,

Asupply ch ain, the n, may choose to compete on different criteria Such crite rianeed in turn to be recogni sed and fo rm part of the business strategies of all the

logistics strategy 29

members of a given netwo rk The choices so made have major implicat ions for

the operation of each member failure to recogn ise com petitivecriteria and theirimplications fora given product or service by "f ry membe r means that the supply

chain willcompete les effectively.It is like playing football wh en theg alk ee per

makes an erro r and lets in agoa lthat should not have happen ed - s/hc letsthe

whole sidedown

What makes a successful strategy? five principles of strategic positioni ng,

related to logisticsstrategy.arc as follows(a fter Port er, 1 98 04):

• A u niqu e valu e pr opos iti on:determin ing what makesthe product service dif

fer-ent from is competito rs

• A tail ored s uppl v c ha i n: governed by consistent order win n ing and qualifying

criteria

• lti c ntitY th e tr ad e -ott s:by choosing not just the prioritiesbut also what not to

do.Aresponsive supply chain isnot compatiblewith an efficient supplychain(Fisher, 1 9 9 7).

• A lig n l o ~i s tics pr ocesses:so that proces es are mutually reinforcing

• Co nti n ui ty: logistics processes are continu ally and con sisten tly improved overtime

'nJ rt'ill(U1 n-the issue of dtfferentiattng strategies, let us loo k at two commo nly

used strategies tha t have very different logistics im plications Consider products

with different logistics priorities,such as those in Table 1.1:

• C os t: a high volume product for\v'hich demand is relatively stable through out

the year Whil e subject to occasiona l en ha nceme nts, these arc usually small

scale: the life cycle is com paratively long.Demand forecasts art' usually pretty

accurate

• Tim e:a high variet y product,which Isdesigned for a given season and which

is completely redesigned forthe next season Often, i isimpossibleto predict

which colouror sty lewill sellbest The product life cycle is short, and deman d

is much more difficult to forec ast

Cost and time have quite differen t logistics im plications The very actions thathelp to red uce costs,such as Far East sourcing,are completelythe wro ngstrategy

when speed and respon sivenes are topofthe agenda Sim ilarly,investingin high

volume,lowvariety eq uipment in the factory maycreateefficiency and low cost,

but limit a firm 'sability to offer variety and fast response times Developing the

ca pabilityto support more ofonepriority (cost) hobblesthecapabilityto support

another (time) This is the principle of t flld e-o ffin logistics: more of one thing

mea ns les s of anoth er.Ideally, we want two separate supply cha ins, one focused

on cost, the otherall time.Th ismay not be fully practic al becau se oftheneed to

maintai n a single European distr ibut ion centre But logistics operations within

the DC may well be kept separ ate to avoid one product line interfering wi h the

flow of the other.Thesamethinking may alsoapplywill/if!a given prod uct range,

wh en everyday ('base') demand may need to be kept separate from promotional('surge') demand.We return to these concepts in the next chapter

30 Chapte r1 • Logisticsand the supply chain

1 Usingthe concepts fromthissection,analysethe supply chainsupport forboth of the prod

-ucts you analysed in Activity 1.3 What should the supply chain be (tu ncttonat-etticiau o r

i nnova t lve- r esponsiveil What is the rea lity, and whyare the two different?

2 Towhat extent isthere iJlignmcnt of strategy in the supplycha insfor these two PIUUUl.h ?

Summary

How does logistics work wi thin the supply chain?

• Supply chain managem ent is defined as 'planning and con trolling all of the

business proces es - from end-customer to raw mat er ial su p pliers - that linktogether partnersin a supplychain in orde r to serve the needs ofthe end-cus-

tomer'

• Logistics is define d as 'the taskofcoordina ting mate rial flow and in fo rmationflow across the su pplychain'

• In a supply chain, materials flow from upstream to downstream Demand

Inrcn uatro n (rom the end-c ustomer flows in the opposite directio n A focal

firm is positioned within a su pply 'network', with tier 1 suppliers and tier 1

customers its immediat e neighbours Material flo w measu res the quantity of

mat erial that passes through a given network per unit of time

• A sup ply netwo rk is a system in which each organ isation is linked to the

others.Therefore the overall performan ce ofthe networkresults fro mthe com

-bined performa nce of the ind ividu alpa rtn ers

• logistics supports competitivenessof the su pply chain as a whole by meeting

end-c ustomer demand through su pplying what is needed when it isneeded at

low cost

What are the performance objectives of the supp ly chain, and h ow does fogistics support those objectives?

• 'Hard objectives' are quality, speed and cost because they arc easy to measure

and relat ive ly obvio us to the end-customer Briefly, quali ty is about doing

things right, speed is about doi ng things fast, and cost is about doing th ings

cheaply Supporting capabilities areconcerned with controlling variability(thedependability advantage), and dealing with uncertainty (the rapid respons e

advantage) Unc ertain ty can be addressed by flexibility in logi sti cs processes

-either proact ively or reactively 'Soft objectives' are service-o rien ted, suc h ,as

security and confi de nce.They are less easily measurable than hard objectives

• Such performanceobjectives can,and often arc, augmented by other objectives

thatare outsidelogistics.These incl ude product superiority, in novation and brand

Herethe logisticstaskistosupportsuchperfo rmancco bjecttvesinthemarketplace

• The relative im porta nce of logist ics per formance objectives varies f om onesituation to another It can also vary over time.The concept oford er winners

References 31

and qua lifiers helps to prloritise the logistics task Key influences on relativeimportance are ind ividual product needs in the marketplace, posit ion in theproduct life cycle, and competitor activity

• Logist ics strategy is the set of guid ing principles, driving forcesand ingrained

atti tudes that help to commun icate goals, plans and policies, and which are

reinforced through consc ious and subconsciou s behaviour within and

between partners across a network

Discussion questions

1 Bill Gates of Microsoft describes the 2 00s as 'business @ the speed of tho ught'

Discussthe import ance of spee d in the supply chain How ca n spee d be increased

c an overnight parcelsservice such asT NT

3 What ismean t b theterm alignment in relation to supp lychain processes?Whyis

alignment impo rtantinsett ing a strategy for a given supplychain?

4 What does flow mean ina supplychain co ntext? Explain h w materia lflow relate s

to informat io n flow in a supply network

References

a cccb } , (1 99 8) 'The sup ply-demand nexus', in Gatt orn a, } ( ed.} , Strategic Supply Cha in

Cou sins,P (2005) 'The alignmentofappro priate firm and supply strategies forcompetitiveadvantage',t ntemationatlournat or P rudllction li nd O pa ations M anagf;'mm t ,Vol.25,No S,

pp.403-28

Eggleto n, D.] (1990) 'JITin a distribution environmen t', Inte mationa t Ioumal of LoSistics

a nd D i s tr i bution Manaxement ,Vol.9, No 1, p 32-4

Fisher, M (1997) 'What is the right supply chain for your prod uct?', H arvard Busine ss

R e\ ' iew,March/April,pp 1 5-16

Gatt orn a,I.[ed.)(199 8)Strategic Supply C hain Al ignment: B est practicei llsupply c hain m

a,,-age ment, Aldershot:Gower

Harlan ,C.(1997) "TatlcrcsAuto', inJohnston, R., Chambers,S Harlan ,c., Harrison ,A.

and Chambers, S (eds) (1997) Cases in O pe rati ons M a age m en t, 2nd ed n, pp 420-8

London: Pitman

Harland, C; Lamming, R , zhcng,j. andJohnsen, T (2001) 'A taxonomy ofsupply n

et-works J ourna l o (.'i upply \1a n agemen Fa ll,pp.21-7

Harrison , A (1996) 'An investigation of the impact of sched ule stability on supplierrespo nsiveness',t ntem auonat t oumot o rLog i.~ ti cs s tanogcmen t ,Vol 7,No 1,pp-83-91

Putting the end -customer first

The intended objectives of t his chap ter ore t o:

• develop the marketing perspectiveon supplychain management;

• explain how customer segmentat ionworks, and to emphasise its

importanceto logistics;

• explain the connection betwee n quality of service and customer loyalty;

• show how curre nt segmentation practice can be re-en g inee re d to set

logistics priorities

By the end of t his c hapter you sho uld be a ble to understand :

• how supplychains should compete by aligning lo gi st ics strategy with

marketing strategy;

• how to use logistics strategy drivers to he lp redefine segments to achieve

this alig nment

Introduction

In Chapter 1 we looked at the logist cs task from a perspective of material flow

and information flow.Wl 'also saw how logistics cont ributesto com petitive strat

-egy and the performan ce objectivesby which we can measure this contribution

But wha t is it that drives the need for now in the first place? The key point to

recognise here isthat it is the behaviour of the end-custome r that should dictate

wha t happens.As stated in Chapter I, theend-custome rstarts the whole process

by buying finished products It is th is behaviour that causes material s to flow

th rough the supply chain On ly end-customers should be free to make up their

minds about when they want to place an order on the network- after that, the

system takes over

Qualityof service addressesthe process ofhandin goverproducts andservices

into the hands of end-customers Onl y after this process has been completed

does the product/service reach its full value And th e han dover process offers

many opportunities for adding value Instead of picking up a product from a

dist ributor who is remote from the focal firm, there arc opportun iti es during

the sales transaction (for exam ple, help and advice in using the focal firm's

prod ucts), aswellafter the sales transaction (forexample, after salesservice and

warr a nty)