Chap2 Logistics Management
Content
Chapter 2
1
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`
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The objective is to plan and coordinate all the activities necessary to achieve desired level of delivered service and quality at lowest possible cost. The scope of logistics include the entire gamut of activities starting from the procurement and management of raw materials through to delivery of final product to the customer. The ultimate purpose of any logistics system is to satisfy the customer by establishing linkages of people at all levels in the organization directly or indirectly to the market place.
2
`
`
As it is getting increasingly difficult to maintain a competitive edge through product alone, customer service has started to provide the distinctive difference between one company¶s offer and that of its competitors. The underlying concept is ³ The process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and the related information flows through the organization and its marketing channels in such a way that the current and future profitability are maximized through the cost effective fulfillment of orders.´
3
Customers seeking benefits at acceptable cost
Company A (Asset utilization)
Cost differential
Company B (Asset utilization)
4
`
`
Competitive advantage is the ability of an organization to differentiate itself in the eyes of the customer, from its competition, and to operate at a lower cost and hence greater profit. Competitive advantage helps organizations to achieve commercial success which mainly depends upon two factors ± cost advantage and value advantage.
5
Commercial success
Cost advantage
Value advantage
6
` -
` -
Cost advantage or Productivity advantage Characterized by low cost of production due to greater sales volume, economies of scale enabling fixed costs to be spread over a greater volume and the impact of the µexperience curve¶. Value advantage is in terms of product offering a differential µplus¶ over competitive offerings. Based on marketing concept that customers that µcustomers don't buy products, they buy benefits¶. Benefits may be intangibles and may not relate to specific product features. It can be an image or reputation or even some functional aspects.
7
`
`
`
`
Adding value through differentiation is extremely powerful means of achieving competitive edge in the market. One of the significant method of adding value is service. Service helps in developing relationship with the customers through provision of an augmented offer. Augmentation takes many forms such as delivery services, after-sales services, financial packages, technical support etc.
8
V a l u e A d v
Service Leader (3)
Cost and Service Leader (4) Cost Leader (2)
Commodity Market (1)
Productivity Advantage
9
`
`
`
For companies in quadrant (1), the market is uncomfortable place as their products cannot be differentiated from their competitors¶ offerings as they do not have any cost advantage. These are commodity markets. Companies in quadrant (2), adopt cost leadership strategies. Traditionally, these are based on economies of scale gained through volume. Another route to achieving cost advantage is through logistics management. As logistics constitutes a major proportion of total costs, reengineering logistics processes results into substantial cost reduction.
10
`
`
`
`
`
Companies in quadrant (3), seek differentiation through service excellence since markets are becoming more and more service sensitive. Customers expect greater responsiveness and reliability from the suppliers, reduced lead times, just-in-time delivery, and various other value added services. Services strategies can be developed through enhanced logistics management. Companies in quadrant (4) are distinctive in value they deliver and are also cost competitive. Competitors find it hard to attack these companies which try to excel in all the value chain activities.
11
Value Chain Activities
Primary Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
Secondary Activities Infrastructure Human Resource Management Technology Development Procurement
12
`
`
`
Primary activities represent the functional areas like arranging inputs for transforming them into output, and managing distribution, marketing, sales, and services. The secondary activities facilitate the integration of all the functions across the entire organization. The companies can achieve competitive advantage and create differentiation by organizing and performing these activities more efficiently or in a unique manner than their competitors.
13
Productivity advantage Capacity utilization Asset utilization Inventory reduction Integration with the suppliers. B. Value advantage Customized services Reliability Responsiveness.
A.
14
Materials Flow Suppliers Procurement Operation Distribution Customers
Information Flow
15
`
The objective of logistics is to link the market place, distribution network, the manufacturing process and procurement activity, so as to provide higher levels of services to the consumers yet at a lower cost. Scope of logistics management encompasses management of raw materials and other inputs through the delivery of the final product.
`
16
`
A process of satisfying customer needs through coordination of materials and information flows that extend from the market through the firm¶s operation and beyond that to the suppliers. A shift to an integrated orientation from the conventional manufacturing or marketing orientation. Traditionally, manufacturing and marketing have been considered as separate activities each having different priorities.
`
`
17
`
`
`
Manufacturing priorities and objectives are concerned with achieving operating efficiencies based on long production runs, minimized set ups and changeovers, and product standardization. Marketing priorities and objectives are concerned with achieving competitive advantage based on varieties, high service levels, and frequent product changes. Customer orientation and cost competitiveness has been integrated by introducing flexible manufacturing systems, practicing inventory management policies based on manufacturing requirement planning and justin-time inventory policy, laying sustained emphasis on quality and integrating supply side issues in strategic plans.
18
`
Supply Chain: the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service.
Sometimes referred to as value chains
11-19
` ` ` ` ` `
Warehouses Factories Processing centers Distribution centers Retail outlets Offices
11-20
` ` ` ` ` ` ` `
Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service
11-21
Production
Distribution
Purchasing Receiving Storage Operations Storage
1122
Supplier
Supplier
St r
e
Mf .
St r
e
i t.
et iler
u t
er
Supplier
1123
1. Improve
operations 2. Increasing levels of outsourcing 3. Increasing transportation costs 4. Competitive pressures 5. Increasing globalization 6. Increasing importance of e-commerce 7. Complexity of supply chains 8. Manage inventories
11-24
Figure 16.3
Demand
Initial Supplier
Final Customer
Inventory oscillations become progressively larger looking backward through the supply chain
1125
` ` ` ` ` ` `
Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system
11-26
Organization
Campbell Soup Hewlett-Packard Sport Obermeyer National Bicycle Wal-Mart
Benefit
Doubled inventory turnover rate Cut supply costs 75% Doubled profits and increased sales 60% Increased market share from 5% to 29% Largest and most profitable retailer in the world
11-27
`
`
Requires linking the market, distribution channels processes, and suppliers Supply chain should enable members to:
Share forecasts Determine the status of orders in real time Access inventory data of partners
11-28
Element
Customers Forecasting Design Processing Inventory Purchasing Suppliers Location Logistics
Typical Issues
Determining what customers want Predicting quantity and timing of demand Incorporating customer wants, mfg., and time Controlling quality, scheduling work Meeting demand while managing inventory costs Evaluating suppliers and supporting operations Monitoring supplier quality, delivery, and relations Determining location of facilities Deciding how to best move and store materials
11-29
` ` ` `
Trust among trading partners Effective communications Supply chain visibility Event-management capability
The ability to detect and respond to unplanned events
11-30
1. Quality 2. Cost 3. Flexibility 4. Velocity 5. Customer
service
11-31
`
Inventory velocity
The rate at which inventory(material) goes through the supply chain
`
Information velocity
The rate at which information is communicated in a supply chain
11-32
` ` ` ` ` `
Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty Long lead times
11-33
1. Lot-size-inventory
Bullwhip effect
2. Inventory-transportation
costs
Cross-docking
3. Lead
time-transportation costs variety-inventory service
4. Product
Delayed differentiation
5. Cost-customer
Disintermediation
11-34
`
Bullwhip effect
Inventories are progressively larger moving backward through the supply chain
`
Cross-docking
Goods arriving at a warehouse from a supplier are unloaded from the supplier¶s truck and loaded onto outbound trucks Avoids warehouse storage
11-35
`
Delayed differentiation
Production of standard components and subassemblies, which are held until late in the process to add differentiating features
`
Disintermediation
Reducing one or more steps in a supply chain by cutting out one or more intermediaries
11-36
`
SCM raises the challenge of integrating and coordinating the flow of materials from multitude of suppliers, including offshore, and similarly managing the distribution of the finished product by way of multitude intermediaries. Transferring costs upstream or downstream leads to logistics myopia as all costs ultimately will make way to the final market place to be reflected in the price paid by the end user. The prime objective of SCM is to reduce or eliminate the buffers of inventory that exists between the organizations in a chain through sharing of information on demand and current stock levels.
`
`
37
` ` `
`
Logistics management is primarily concerned with optimizing flows within the organization. Supply chain management deals with integration of all partners in the value chain. Logistics is essentially a framework that creates a single plan for flow of products and information through a business. Supply chain builds upon this framework and seeks to achieve linkage and coordination between processes of other entities in the pipeline i.e. suppliers and customers, and organization itself.
38
`
`
`
Traditionally, marketing has focused on endcustomer or consumer, seeking to promote brand values and to generate a µdemand pull¶ in the market place for company¶s products. Due to shift in power in marketing channels, companies are realizing to develop strong relations with such intermediaries like large retail outlets to create a customer franchise as well as consumer franchise. The impact of both strong consumer franchise and customer franchise can be enhanced or diminished by effectiveness of suppliers¶ logistics system.
39
Consumer Franchise Brand values Corporate image Availability
Customer Franchise Customer Services Partnership Quick Response
Supply Chain arketing Efficiency Effectiveness Flexibility arket Reduced Share Inventory Customer Low cost Retention supplier Superior ROI
40
`
Logistics competency is achieved by coordinating the following functional areas.
Network design Information Transportation Inventory Warehousing, material handling and packaging.
41
Thank You
1
`
`
`
The objective is to plan and coordinate all the activities necessary to achieve desired level of delivered service and quality at lowest possible cost. The scope of logistics include the entire gamut of activities starting from the procurement and management of raw materials through to delivery of final product to the customer. The ultimate purpose of any logistics system is to satisfy the customer by establishing linkages of people at all levels in the organization directly or indirectly to the market place.
2
`
`
As it is getting increasingly difficult to maintain a competitive edge through product alone, customer service has started to provide the distinctive difference between one company¶s offer and that of its competitors. The underlying concept is ³ The process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and the related information flows through the organization and its marketing channels in such a way that the current and future profitability are maximized through the cost effective fulfillment of orders.´
3
Customers seeking benefits at acceptable cost
Company A (Asset utilization)
Cost differential
Company B (Asset utilization)
4
`
`
Competitive advantage is the ability of an organization to differentiate itself in the eyes of the customer, from its competition, and to operate at a lower cost and hence greater profit. Competitive advantage helps organizations to achieve commercial success which mainly depends upon two factors ± cost advantage and value advantage.
5
Commercial success
Cost advantage
Value advantage
6
` -
` -
Cost advantage or Productivity advantage Characterized by low cost of production due to greater sales volume, economies of scale enabling fixed costs to be spread over a greater volume and the impact of the µexperience curve¶. Value advantage is in terms of product offering a differential µplus¶ over competitive offerings. Based on marketing concept that customers that µcustomers don't buy products, they buy benefits¶. Benefits may be intangibles and may not relate to specific product features. It can be an image or reputation or even some functional aspects.
7
`
`
`
`
Adding value through differentiation is extremely powerful means of achieving competitive edge in the market. One of the significant method of adding value is service. Service helps in developing relationship with the customers through provision of an augmented offer. Augmentation takes many forms such as delivery services, after-sales services, financial packages, technical support etc.
8
V a l u e A d v
Service Leader (3)
Cost and Service Leader (4) Cost Leader (2)
Commodity Market (1)
Productivity Advantage
9
`
`
`
For companies in quadrant (1), the market is uncomfortable place as their products cannot be differentiated from their competitors¶ offerings as they do not have any cost advantage. These are commodity markets. Companies in quadrant (2), adopt cost leadership strategies. Traditionally, these are based on economies of scale gained through volume. Another route to achieving cost advantage is through logistics management. As logistics constitutes a major proportion of total costs, reengineering logistics processes results into substantial cost reduction.
10
`
`
`
`
`
Companies in quadrant (3), seek differentiation through service excellence since markets are becoming more and more service sensitive. Customers expect greater responsiveness and reliability from the suppliers, reduced lead times, just-in-time delivery, and various other value added services. Services strategies can be developed through enhanced logistics management. Companies in quadrant (4) are distinctive in value they deliver and are also cost competitive. Competitors find it hard to attack these companies which try to excel in all the value chain activities.
11
Value Chain Activities
Primary Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
Secondary Activities Infrastructure Human Resource Management Technology Development Procurement
12
`
`
`
Primary activities represent the functional areas like arranging inputs for transforming them into output, and managing distribution, marketing, sales, and services. The secondary activities facilitate the integration of all the functions across the entire organization. The companies can achieve competitive advantage and create differentiation by organizing and performing these activities more efficiently or in a unique manner than their competitors.
13
Productivity advantage Capacity utilization Asset utilization Inventory reduction Integration with the suppliers. B. Value advantage Customized services Reliability Responsiveness.
A.
14
Materials Flow Suppliers Procurement Operation Distribution Customers
Information Flow
15
`
The objective of logistics is to link the market place, distribution network, the manufacturing process and procurement activity, so as to provide higher levels of services to the consumers yet at a lower cost. Scope of logistics management encompasses management of raw materials and other inputs through the delivery of the final product.
`
16
`
A process of satisfying customer needs through coordination of materials and information flows that extend from the market through the firm¶s operation and beyond that to the suppliers. A shift to an integrated orientation from the conventional manufacturing or marketing orientation. Traditionally, manufacturing and marketing have been considered as separate activities each having different priorities.
`
`
17
`
`
`
Manufacturing priorities and objectives are concerned with achieving operating efficiencies based on long production runs, minimized set ups and changeovers, and product standardization. Marketing priorities and objectives are concerned with achieving competitive advantage based on varieties, high service levels, and frequent product changes. Customer orientation and cost competitiveness has been integrated by introducing flexible manufacturing systems, practicing inventory management policies based on manufacturing requirement planning and justin-time inventory policy, laying sustained emphasis on quality and integrating supply side issues in strategic plans.
18
`
Supply Chain: the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service.
Sometimes referred to as value chains
11-19
` ` ` ` ` `
Warehouses Factories Processing centers Distribution centers Retail outlets Offices
11-20
` ` ` ` ` ` ` `
Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service
11-21
Production
Distribution
Purchasing Receiving Storage Operations Storage
1122
Supplier
Supplier
St r
e
Mf .
St r
e
i t.
et iler
u t
er
Supplier
1123
1. Improve
operations 2. Increasing levels of outsourcing 3. Increasing transportation costs 4. Competitive pressures 5. Increasing globalization 6. Increasing importance of e-commerce 7. Complexity of supply chains 8. Manage inventories
11-24
Figure 16.3
Demand
Initial Supplier
Final Customer
Inventory oscillations become progressively larger looking backward through the supply chain
1125
` ` ` ` ` ` `
Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system
11-26
Organization
Campbell Soup Hewlett-Packard Sport Obermeyer National Bicycle Wal-Mart
Benefit
Doubled inventory turnover rate Cut supply costs 75% Doubled profits and increased sales 60% Increased market share from 5% to 29% Largest and most profitable retailer in the world
11-27
`
`
Requires linking the market, distribution channels processes, and suppliers Supply chain should enable members to:
Share forecasts Determine the status of orders in real time Access inventory data of partners
11-28
Element
Customers Forecasting Design Processing Inventory Purchasing Suppliers Location Logistics
Typical Issues
Determining what customers want Predicting quantity and timing of demand Incorporating customer wants, mfg., and time Controlling quality, scheduling work Meeting demand while managing inventory costs Evaluating suppliers and supporting operations Monitoring supplier quality, delivery, and relations Determining location of facilities Deciding how to best move and store materials
11-29
` ` ` `
Trust among trading partners Effective communications Supply chain visibility Event-management capability
The ability to detect and respond to unplanned events
11-30
1. Quality 2. Cost 3. Flexibility 4. Velocity 5. Customer
service
11-31
`
Inventory velocity
The rate at which inventory(material) goes through the supply chain
`
Information velocity
The rate at which information is communicated in a supply chain
11-32
` ` ` ` ` `
Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty Long lead times
11-33
1. Lot-size-inventory
Bullwhip effect
2. Inventory-transportation
costs
Cross-docking
3. Lead
time-transportation costs variety-inventory service
4. Product
Delayed differentiation
5. Cost-customer
Disintermediation
11-34
`
Bullwhip effect
Inventories are progressively larger moving backward through the supply chain
`
Cross-docking
Goods arriving at a warehouse from a supplier are unloaded from the supplier¶s truck and loaded onto outbound trucks Avoids warehouse storage
11-35
`
Delayed differentiation
Production of standard components and subassemblies, which are held until late in the process to add differentiating features
`
Disintermediation
Reducing one or more steps in a supply chain by cutting out one or more intermediaries
11-36
`
SCM raises the challenge of integrating and coordinating the flow of materials from multitude of suppliers, including offshore, and similarly managing the distribution of the finished product by way of multitude intermediaries. Transferring costs upstream or downstream leads to logistics myopia as all costs ultimately will make way to the final market place to be reflected in the price paid by the end user. The prime objective of SCM is to reduce or eliminate the buffers of inventory that exists between the organizations in a chain through sharing of information on demand and current stock levels.
`
`
37
` ` `
`
Logistics management is primarily concerned with optimizing flows within the organization. Supply chain management deals with integration of all partners in the value chain. Logistics is essentially a framework that creates a single plan for flow of products and information through a business. Supply chain builds upon this framework and seeks to achieve linkage and coordination between processes of other entities in the pipeline i.e. suppliers and customers, and organization itself.
38
`
`
`
Traditionally, marketing has focused on endcustomer or consumer, seeking to promote brand values and to generate a µdemand pull¶ in the market place for company¶s products. Due to shift in power in marketing channels, companies are realizing to develop strong relations with such intermediaries like large retail outlets to create a customer franchise as well as consumer franchise. The impact of both strong consumer franchise and customer franchise can be enhanced or diminished by effectiveness of suppliers¶ logistics system.
39
Consumer Franchise Brand values Corporate image Availability
Customer Franchise Customer Services Partnership Quick Response
Supply Chain arketing Efficiency Effectiveness Flexibility arket Reduced Share Inventory Customer Low cost Retention supplier Superior ROI
40
`
Logistics competency is achieved by coordinating the following functional areas.
Network design Information Transportation Inventory Warehousing, material handling and packaging.
41
Thank You
