Logistics And Supply Chain Management To Espouse Business Essay
A lot of researches have been conducted in the subject area of logistics and supply chain management to espouse the need for organisations to regard their logistics and supply chain as a strategic capability. This has been partly attributed to the fact that they depict a critical success factor for corporate performance that needs to be managed accordingly. Many authors have published books and journals to wholly or partly cover the subject area for use in the academia as well as for organisations to be abreast on current logistics and supply chain management trends and practices.
An in-depth knowledge and understanding of the rudiments of strategic logistics and supply chain management undoubtedly, serves as leverage for logistics and supply chain researchers and practitioners to make sound analysis in achieving research and business objectives (Merminod et al; 2007) . Although most of the research works in this subject area are focused on the business sector, the results are as well suitable and applicable to non-profit making organisations such as the military.
The focus of this thesis is on logistics and supply chain management practices in a military organisation. Although the military recognizes logistics as crucial to the success of all operations, it has not placed much emphasis on its utilization for financial benefits. This is so because the core function of the military happens to be provision of a public service that bother mostly on national interests (Rutner et al 2012). In order to take advantage of the financial avenue that the United Nations peace support operations has opened up for troop contributing countries, it has become another imperative for the military of most countries to blend their logistics operations with business logistics. This is a possible way for them to maintain credibility and be competitive as a consequence in their participation in UN peace support missions.
This chapter will therefore review the concepts of logistics and supply chain management in the business setting and briefly highlight on the importance of military logistics as well as UN logistics. It will dovetail into strategic logistics management planning and implementation since they are the fundamental driving force for all successful business undertakings. Finally a review of literature on logistics and supply chain performance measures would be carried out.
2.1 LOGISTICS MANAGEMENT
Quite a number of terms have been used by individuals when referring to logistics. Langley et al (2009) lists eight (8) terms which are used to describe logistics. These are logistics management, integrated logistics management, business logistics management, marketing logistics, physical distribution management, materials management, industrial logistics and distribution. Langley et al (2009) argues that logistics management is the most widely accepted term and indicates that it encompass logistics not only in the private sector but also in the public/government and nonprofit sectors.
Whilst Martin Christopher (2011) defines logistics as the process of strategically managing the procurement, movement and storage of materials, parts, and finished inventory and the related information flows through the organisation and its marketing channels in such a way that current and future profitability are maximised through the cost-effective fulfillment of orders, Longley et al (2009) views logistics from a more customer perspective. Longley el al (2009) defines logistics as the process of anticipating customer needs and wants; acquiring capital, materials, people, technologies, and information necessary to meet those needs and wants; optimising the goods or service producing network to fulfill customer requests; and utilising the network to fulfill customer requests in a timely manner.
Logistics management has also been defined by the Council for Supply Chain Management (CSCMP) as that part of supply chain management that deals with the planning, implementation and control of the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer requirement (CSCMP, 2006). This definition apart from its customer focus also identified reverse flows in addition to forward flows as mentioned in the above definitions. It was also emphatic on logistics management as being part of supply chain management.
Rushton et al (2007) deduced the commonality in all the above definitions to be cost effectiveness and customer service. Rushton et al (2007) asserts that logistics concerns of industries were the efficient transfer of goods from the source of supply through the place of manufacture to the point of consumption in a cost-effective way whilst providing an acceptable service to the customer.
It has as well been pointed out that logistics owes its origin to the military that have long recognised the importance of logistical activities in national defense (Coyle et al 2003). It has also been suggested that logistics should be viewed as part of management and should have the following four subdivisions (Coyle et al 2003):
Business Logistics. Business logistics as explained by Coyle et al (2003) is that part of the supply chain process that plans, implement, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of use or consumption in order to meet customer requirements.
Military Logistics. Coyle et al (2003) explains military logistics as the design and integration of all aspects of support for the operational capability of the military forces and their equipment to ensure readiness, reliability, and efficiency.
Event Logistics. Event logistics is the network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event (Coyle et al (2003).
Service Logistics. Coyle et al (2003) explains service logistics as the acquisition, scheduling, and management of facilities/assets, personnel, and materials to support and sustain a service operation or business.
Coyle et al (2003) further highlights some common characteristics in the four subdivisions as forecasting, scheduling, and transportation but indicated that they have some differences in terms of their primary purpose. Coyle et al (2003) further argues that all the four subdivisions could be viewed in a supply chain context; implying that upstream and downstream, there are other organisations that play a role in their overall success and long-run viability.
“The process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimising the goods or service producing network to fulfill customer requests; and utilizing the network to fulfill customer request in a timely way” therefore appears to be a general definition for logistics that encompass all the four disciplines (Coyle et al, 2003).
Logistics again is said to have a micro perspective dimension which examines the relationship between logistics and other functional areas in an organisation such as marketing, manufacturing/operations, finances and accounting and others. This implies that logistics actually focuses upon processes that cut across traditional functional areas with particular emphasis upon the supply chain (Coyle et al 2003). This therefore suggests that logistics management should be viewed in the context of supply chain management (SCM).
2.2 SUPPLY CHAIN MANAGEMENT AS A WIDER CONCEPT
Although industry and academia have investigated the concept of SCM for the last decade, there is still no consistent definition of the concept. As a result, there is generally a lack of consistency in meaning and clarity across the diverse definitions of SCM available in the literature.
Considering definitions of SCM and logistics management, the definitions made by the Council of Supply Chain Management Professionals, CSCMP (former Council of Logistics Management, CLM), are one of the most cited sources. In a document on their homepage, SCM is defined as follows: “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also included coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies” (www.cscmp.org).
Mentzer et al. (2001) make an invaluable contribution to the understanding of SCM by arguing that authors try to include two different things within the same definition and claimed it was the reason for the confusion and many definitions of SCM. In order to sort out the somewhat unclear definition, Mentzer et al. (2001) distinguish between SCM as a management philosophy on the one hand, and the actions undertaken to realise the philosophy on the other. It is suggested that the management philosophy, called supply chain orientation (SCO) is a prerequisite for SCM, which should be interpreted as actions undertaken by actors in a supply chain in order to realise the SCO. SCO is defined as “the recognition by an organisation of the systemic, strategic implications of the tactical activities involved in managing the various flows in a supply chain” (Mentzer et al., 2001). SCM in turn, is defined as “the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole” (Mentzer et al. 2001).
As stated in the two definitions of SCM above, all kinds of business functions in a company can be included in the SCM expression. Following these definitions, one part (as clearly stated in the definition from CSCMP) of SCM is logistics management.
The CSCMP definition for logistics management clearly point to the fact that SCM is considered as a broader concept. The definition stressed that fact the logistics management is that part of supply chain management that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between point of origin and the point of consumption in order to meet customer’s requirements (www.cscmp.org).
Although the CSCMP definition for logistics management points out that it is parts of SCM, the relationship between the two concepts is however not always easily understood. The issue is that different opinions exist about what they actually encompass. Sometimes SCM and Logistics management are interpreted in the same way and are therefore often used interchangeably in literature. Min and Menzer (2004) argued that in defining SCM, it is common to relate it to logistics to better understand the approach, since the concept of SCM started in the logistics literature.
Halldorsson and Larson (2004) show that SCM relative to logistics can be viewed in four different ways; from the views of the Traditionalist, Re-labelling, Unionist and Intersectionist. They proposed that one reason for these multiple perspective is that SCM has not been transparent by one universal definition. According to the Traditionalists view, the logistics function hires “supply chain analysts” to focus on cross-functional and inter-organisational issues. Some authors do not distinguish between SCM and logistics. They just change the name. The Unionists view SCM as more than simply logistics, but rather also as purchasing, operations, and marketing. While the Intersectionists, describe it as a staff function or internal consultants (Halldorsson and Larson, 2004).
For the SCM in the context of Ghana Armed Forces international peacekeeping operations, the most suitable definition would be that of the Unionist view of SCM. The reason for the Unionist view is that peace keeping logistics covers all decisions along the flow of materials (purchasing, logistics, and customer service). Martin Christopher’s (1998) definition for SCM is a typical example of such views. Martin Christopher (1998) defines SCM as an extension of logistics. Christopher (2011) argues that logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of products and information through a business while SCM builds upon this framework and seeks to achieve linkage and coordination between processes of other entities in the pipeline. Schary (1998) also sees supply chain as more than logistics. Supply chain includes the flow of materials and products to the customers and more than that; it also includes the organisations that are part of these processes, crossing organisational boundaries to link their internal operations as part of this system. The supply chain recognises that there are cooperative arrangements that tie firms to each other and in that way tie their success to the chain as a whole. The scope of SCM therefore spans the entire set of organisations from procurement of materials and product components to delivery of the completed product to the final customer (Schary, 1998).
The work of logistics in a firm’s supply chain is to move and geographically position inventory. This work of logistics is what creates value through timing and positioning of inventory. Logistics coverage basically integrates such activities such as order management, inventory, transportation, warehousing, materials handling, and packaging throughout a firm’s facility network. This is therefore essential for effective supply chain connectivity as it synchronizes all activities in a continuous process. The operating framework within which logistics is performed is therefore established by a supply chain strategy.
This thesis will therefore look at logistical performances holistically from a SCM perspective. Although in instances where the focus is organisation specific, an integrated logistics management of all the logistics activities would be stressed amidst the entire supply chain.
2.3 LOGISTICS AND SUPPLY CHAIN MANAGEMENT PROCESSES
Mentzer (2001) classifies SCM in three categories as; a management philosophy, implementation of a management philosophy and as a set of management processes. Cooper et al (1997) in their presentation entitled “Supply Chain Management, More Than a New Name for Logistics” also indicates that the SCM framework encompasses the combination of three closely inter-related elements; the structure of the supply chain, the supply chain business processes and the supply chain components.
In their explanation for SCM as a set of management processes, Mentzer (2001) indicates that the implementation of the SCM framework is carried through by three primary elements; the supply chain network structure, the supply chain process and the management component which are supportive of that of Cooper et al (1997) SCM framework.
The implementation of SCM strategy therefore involves identifying the critical supply chain members that need to be linked, the essential processes to link with each of these key members, and the type or level of integration that is applicable to each process link. It is worth noting that maximising competitiveness and profitability for the company as well as the whole supply chain network including the end customer is the objective of SCM (Lambert et al, 1998).
2.3.1 Supply Chain Management Processes
The Global Supply Chain Forum identified eight (8) key processes that make up the core of SCM. These processes are customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, procurement, product development and commercialisation, and returns management (Cooper et al, 1997).
The eight (8) key business processes run along the supply chain and cut across firms and functional silos within each firm. Functional silos include marketing, research and development, finance, production, purchasing and logistics.
The activities in the processes reside inside a functional silo, but the entire process will not be contained within a function. While management teams of all the firms in each supply chain should consider these processes. However the relative importance of each process and specific activities included may vary.
Tier 2
Supplier
Tier 1
Supplier
Manufacturer
Customer
End User
R&D
Logistics
Finance
M&S
Production
Purchasing
INFORMATION FLOW
PRODUCT FLOW
Returns Management
Product Development and Commercialization
Procurement
Manufacturing Flow Management
Order Fulfilment
Demand Management
Customer Service Management
Customer Relationship ManagementFigure 2.1
A discussion on each of the processes is as follows:
Customer Relationship Management. The objective of customer relationship management at the strategic level is to identify customer segments, provide criteria for categorising customers, provide customer teams with guidelines for customizing the product and service offer develop a framework for metrics and provide guidelines for the sharing of process improvement benefits with the customers. Meanwhile, at the operational level, CRM process deals with writing and implementing the Product and Service Offers (PSOs). The customer relationship management process provides the structure for how the relationship with the customer is developed and maintained. Customer teams tailor PSO to meet the needs of customer according to market segmentation. Teams work with key accounts to improve on current processes, smoothen demand variability and eliminate demand variability. (Croxton et al, 2001).
Customer Service Management. The customer service management process is the firm’s face to the customer. It provides the single source of customer information, such as product availability, shipping dates and order status. The objective of customer service management at the strategic level is to develop the necessary infrastructure and coordination means for implementing the PSO and providing a key point of contact to the customer. At the operational level, the CSM process is responsible for responding to both internal and external events. (Croxton, et al, 2001)
Order Fulfillment. A key to effective supply chain management is to meet customer requirements in terms of order fulfillment. Effective order fulfillment requires integration of the firm’s manufacturing, logistics and marketing plans. The process defines the specific steps regarding how customer orders are: generated, communicated, entered, processed, documented, picked, delivered and handled post delivery (Croxton et al, 2001). According to Croxton and Keely, the design and operation of the network has a significant influence on the cost and performance of the system.
Manufacturing Flow Management. The manufacturing flow process deals with making the products and establishing the manufacturing flexibility needed to serve the target markets. The process includes all activities necessary for managing the product flow through the manufacturing facilities and for obtaining, implementing and managing flexibility. This could be categorised into Strategic Sub-Processes which are determine degree of manufacturing flexibility, determine push-pull boundaries, identify manufacturing constrains, determine, manufacturing capabilities and Operational Sub-Processes including developing a master production schedule and last but not least synchronised capacity and demand (Croxton et al, 2001).
Supplier Relationship Management. Supplier relationship management is the process that determines how a company interacts with its suppliers. It is a mirror image of customer relationship management. Just as a company needs to develop relationships with its customers, it needs to foster relationships with its suppliers too. At the strategic level, the output of the process is an understanding of the levels of relationships the firm will maintain, and the process for segmenting the suppliers and working with them to develop appropriate PSOs. Once the process team determines the criteria for categorisation of suppliers and the levels of customisation, the operational supplier relationship management process develops and manages the PSOs.
Product Development and Commercialisation. Developing new products quickly and getting them to the marketplace in an efficient manner is a major component of corporate success. Time to market is a critical objective of this process. As product life cycles shorten, the right products must be developed and successfully launched in ever-shorter timeframes in order to remain competitive. This includes the sub-processes of establish new product project guidelines, develop product rollout issues and constraints, design and build prototypes, make/buy decision, determine product distribution channels and etc. (Croxton et al, 2001).
Returns Management. Effective returns management is a critical part of supply chain management. While many firms neglect the returns process because management does not believe it is important, this process can assist the firm in achieving a sustainable competitive advantage. Effective management of the returns process enables the firm to identify productivity improvement opportunities and breakthrough projects (Croxton, et al, 2001). At the operational level, the returns management process is about managing the day-to-day returns activities, initiated by a customer. The subsequent sub-processes including analyses of the return and select appropriate dispositions and post-return credit management.
2.3.2 Logistics Management Activities
Langley et al (2009) deduced a comprehensive list of logistics activities from the definitions of logistics for which they presumed logistics managers might be responsible. The activities listed includes transportation, warehousing and storage, industrial packaging, materials management, inventory control, order fulfillment, demand forecasting, production planning/scheduling, procurement, customer service, facility location, return goods handling, parts and service support and salvage and scrap disposal.
At a glance, it could be said with certainty that almost all the logistics activities mentioned above are contained in the SCM processes enumerated by Croxton et al (2001). It is further advocated that organisations with well-developed logistics departments might not place responsibility for all these activities within the logistics area and hence decisions regarding these areas must utilize the systems view that is critical to logistics management (Langley et al, 2009).
2.4 UNITED NATIONS CONCEPT OF LOGISTICS
2.4.1 UN Logistics Defined
Logistics is defined as the science of planning and carrying out the administration, movement and maintenance of forces and materials needed on a UN mission, and includes activities related to communications, engineering and aviation services (UNITAR POCI 2002). In its most fundamental sense, logistics is the art of transporting, housing, supplying and providing technical support to military troops. However, in the context of UN operations, because support is often required for non-military personnel and circumstances, this definition is broadened. Thus the UN definition of logistics covers not only the needs of military and police units, but also of related civilian personnel originating from 189 different countries and widely diverse cultures (UNITAR POCI 2002) UN logistics covers all aspects of the needs and physical support for missions to be carried out. This covers finances, supplies, transportation, technical support and housing needs, as well as administrative, communications, engineering and aviation services (UNITAR POCI 2002).
2.4.2 Principles of UN Logistics
Logistics for all UN missions according to the UNITAR POCI (2002) have common principles, as all UN missions require mobility, flexibility and is a multination venture. The principles of UN logistics are therefore discussed as follows:
Responsibility. Contributing member states and the UN have a collective responsibility to ensure that forces deployed on any UN operation are fully equipped and supported. This may be achieved either through national or cooperative arrangements, but must be clearly agreed upon prior to deployment. Member states and the UN have a collective responsibility for the care, custody and safeguarding of UN and contributing member states assets (UNITAR POCI, 2002).
Foresight. The administrative and logistic planning for any mission begins well before the commencement of any operation. This includes first identifying resources within or close to the deployment area and obtaining information regarding the infrastructure of the site concerned. Consideration is given to any special on-site requirements such as, clothing, munitions, accommodation and mobility. Contingency planning for strategic movement should begin at the earliest opportunity. Such a logistic reconnaissance is an important step in preparing for a mission (UNITAR POCI, 2002).
Flexibility. Flexibility in the field of logistics means the ability to conform to operational plans that will almost inevitably be subject to frequent change, particularly in the early stages of any operation. In conditions where lines of communication are liable to be disrupted, it may be necessary to deviate from pre-set procedures and to modify standard methods of operation to meet unexpected events (UNITAR POCI, 2002).
Economy. On any mission, resources are rarely plentiful and must be used effectively, efficiently and economically. Early integration of all available assets provided by the contributing member states is therefore a main goal. When possible, this integration should be planned prior to deployment to avoid duplication of resources at the mission site. Notwithstanding a desire to rationalise logistic assets at the earliest opportunity, there is likely to be a surge of operational requirements to assist with the initial deployment of any UN force and this may, in the short term, create a duplication of some resources (COE Manual, 2011).
Simplicity. The simpler the logistic plan, the easier it is to understand. The greater the understanding of the plan, the more effective will be the cooperation between contributing nations and the speed with which an original plan can be adapted to meet changing circumstances (COE Manual, 2011).
Cooperation. Cooperation will always be the key to producing a workable logistic structure for a UN mission. Levels and standards of support differ by nations. Often, there are a variety of nationalities with different languages, cultural requirements and capabilities. In order to achieve a workable logistic end product, cooperation is necessary (COE Manual, 2011).
Sufficiency. The levels and distribution of logistic resources must be sufficient to meet the sustainability and mobility needs of the operational plan. Stock levels should take into account the expected nature and duration of the mission and consumption pattern (UNITAR POCI 2002).
Accountability. Accurate accounts must be kept for all assets that are purchased and issued to contingents for the support of a mission. This includes any equipment classified as Contingent Owned Equipment (UNITAR POCI 2002).
Visibility. Logistic assets are vital to an operation and represent huge sums of money. It is important that a full audit trail is available for all assets dispatched to, in and from the mission site. This can be achieved using a number of methods ranging from barcode, satellite tracking, or basic card systems (UNITAR POCI 2002).
2.4.3 Basic Concepts of UN Logistic Support
Logistic support according to UNITAR POCI (2002) needs to be tailored to a specific mission as UN missions can vary in size from a small group of observers, who may be civilian, police, military or a mixture of personnel types, to a combined operation of land, sea and air assets involving tens of thousands of personnel. Because there are a wide range of possible missions, there is also a wide range of logistic concepts. Logistic support is tailored according to the task required, space and time considerations, manpower, material, environment, climate, onsite infrastructure and availability of resources. The support system may be mobile or static, civilian or military, have on-site warehousing or national resupply lines or, in most cases, is a combination of all of the above. A number of such concepts have proven to be workable and valuable, and includes the Self-Reliance Concept, Lead Member State Concept, The Force Logistic Support Group (FLSG) Concept and the Civilian Contract Support Concept (UNITAR POCI, 2002).
2.4.4 Types of UN Logistics Support
Logistics activities in the UN are grouped by the function they serve:
Administrative services include all managerial, administrative and clerical support services provided where required, at all levels of the mission.
Supply support requires obtaining needed goods and materials and to continue to supply them throughout the mission. These include food provisions, furniture, office supplies, cleaning materials, clothing, military equipment as well as recreational materials, and whatever else is required for a particular mission.
Transportation logistics include supplying transport as needed.
Equipment maintenance requires that all vehicles and equipment be maintained in working order. This includes communications and land based equipment.
Technical support covers training and upkeep for field or construction engineering and technical requirements. This includes the provision of water and accommodation, which at times needs to be constructed for particular missions.
Aviation support requires the provision of aviation and air services, including maintenance of aircraft and flight safety procedures.
Communications logistics covers provision of signals and communications needs, including postal and courier services for all those involved in a mission.
Personnel needs are a logistic concern. Logistics cover the administration of personnel, which may require choosing personnel or assigning them to tasks. Services also cover all needs of personnel, such as overall welfare needs, recreational needs, and the provision of amenities as much as is possible on a particular mission.
Security services include establishing and maintaining military police for military missions and the provision and upkeep of all security services.
Accounting services provide budgeting and financial services. A mission is required to keep accounts of all expenses incurred, and also to keep track of whether the expense is incurred by the UN, the contributing country, the host country, or another source.
Medical services require the logistic provision of all health services, including dental needs.
Procurement services procure all material and services required for all aspects of a mission.
General services provide mail, courier, travel and traffic services, and office supplies.
2.4.5 Contingent Owned Equipment (COE)
Contingent Owned Equipment is a major concern of this thesis. The logistics involved in the acquisition, provision and maintenance of COE establishes the business contract between the UN and troop contributing states. Contingent Owned Equipment (COE) is equipment provided by a contributing Member State (COE Manual, 2011). Maintenance of the equipment depends on the Wet Lease or Dry Lease arrangement with the Member State. The quantity and types of Contingent Owned Equipment provided to the UN are set out in agreements between the UN and the contributing Member State. Ownership of Contingent Owned Equipment is retained by Member States (COE Manual, 2011).
Binding Arrangement. One of the goals of the Contingent Owned Equipment system is to have troop contributor and the United Nations sign a Memorandum of Understanding (MOU) prior to deployment, stipulating the obligations of each party, related to personnel, major equipment and self-sustainment (COE Manual, 2011).
Reimbursement. The troop-contributors are reimbursed under wet or dry lease as per rates adopted by the General Assembly (GA). Reimbursement is limited to those items of major equipment specifically agreed by the UN. Rates of reimbursement for special equipment are negotiated separately between troop-contributor and United Nations. Reimbursement rates are adjusted for any period for which troop-contributors are not meeting the standards (COE Manual, 2011).
Verification and control. The United Nations, in conjunction with the respective contingents or delegated authority designated by the troop-contributor, is responsible to ensure that the equipment and services provided by troop-contributors meets the requirements of the peacekeeping operation and is provided in accordance with the MOU entered into by the United Nations with the troop-contributor. In order to do so, the United Nations verifies the status, condition and quantity of the equipment and services provided (COE Manual, 2011).
2.4.5.1 Major equipment
According to the COE Manual (2011), major equipment under COE can include:
Communications Equipment (network)
Electrical (generating power for base camps)
Engineering
Medical and Dental (equipment provided as per UN standards and authorized in the MOU)
Observation Equipment (observation posts)
Accommodation (semi-rigid and or hard frame structures that can be moved)
Aircraft
Armaments
Naval Vessels
Vehicles
Equipment arrangements can be made under Wet and Dry lease arrangements
2.4.5.2 Self-sustainment
The United Nations is normally required to provide self-sustainment services to troop-contributors. Should the United Nations not be able or wish not to provide the services, it can request a troop-contributor to provide those services. This can include:
Catering
Communications (telephone, VHF/UHF-FM communications, etc.)
Offices
Electrical (for sub-units)
Minor Engineering (permanent rigid structure)
Explosive Ordnance Disposal (EOD)
Laundry and Dry-cleaning
Tentage
Accommodation
Medical
Observations (Binoculars, etc)
Nuclear, biological & chemical (NBC) protection
Field Defense Stores
Miscellaneous General Stores (Bedding, Furniture, Welfare)
Unique Equipment.
2.5 COMPETITIVE ADVANTAGE THROUGH LOGISTICS AND SUPPLY CHAIN MANAGEMENT
The assumption that good products will sell themselves is no longer acceptable. Also it is neither advisable to assume that amassing success today implies subsequent successes. Seeking a sustainable and defensible competitive advantage is the concern of managers who conscious to the realities if the marketplace.
Christopher (2011) identifies the basis of competitive advantage as firstly, the ability of an organisation to differentiate itself in the eyes customer from its competition, and secondly by operating at a lower cost that leads to greater profit. Considering the basis of success in any context, Christopher (2011) advocates that, commercial success is fundamentally derived from either a cost advantage or a value advantage or if possible from both. Christopher further argues that the most profitable competitor in any industry sector either tends to be the lowest-cost provider or the supplier providing a product with the most apparent differentiated values.
Alan Rushton et al (2010) also argue that a company may compete as a service leader to gain an advantage over its competitors through the provision of a number of key service elements purposely to differentiate itself. On the other hand the company may compete as a cost leader by utilising its resources such that it will be in a best position to offer products at the lowest possible cost, thus gaining a productivity advantage.
Christopher (2011) finally concludes that successful companies either have a cost advantage or value advantage or at its best, a combination of cost and value advantage.
2.5.1 Cost Advantage
The main route to cost reduction was suggested traditionally to be through the achievement of greater sales volume and in particular by improving market share. Christopher (2011) argues that the blind pursuit of economies of scale through volume increases may not always lead to improved profitability. Christopher’s reason was that much of the cost of a product in today’s world lies outside the four walls of the business in the wider supply chain. Christopher (2011) further argued that it is increasingly through better logistics and supply chain management that efficiency and productivity can be achieved and hence significantly to reduced unit costs.
2.5.2 Value Advantage
A product or service may be seen as a ‘commodity’ and the sale of which mostly tends to the cheapest supplier unless the product or service offered could be distinguished somehow from that of its competitors (Christopher 2011).
It is therefore important to seek to add additional values to offer purposely to standout from the competition. Organisations can nevertheless gain such value differentiation by developing a strategy that is based on added values. A more segmented approach to the market will normally be required in such instance because different groups of customer within the total market will ideally attach different importance to different benefits. The importance of such benefit segmentation according to Christopher (2011) lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments. Christopher (2011) further indicates that a strong means of achieving a defensible advantage in the marketplace is by adding value through differentiation.
Another powerful and useful means of adding value is service. Christopher (2011) asserts that it is becoming more and more difficult to compete solely on the basis of brand or corporate image because markets are becoming more service-sensitive.
2.5.3 Combining Cost Advantage and Value Advantage
Companies that emerge successful in business mostly seek to attain a position based upon both cost and value advantage. Christopher (2011) examined the available options using the matrix below.
Figure 2.2 Logistics and competitive advantage
High
Low
Value AdvantageService Leader
Cost and Service Leader
Commodity Market
Cost Leader
Low High
Cost Advantage
Source: Adopted from Martin Christopher, Logistics and Supply Chain Management,2011 4th ed, p.7
He explained that companies at the bottom left-hand corner of the matrix do not have cost advantage because their products are just the same as that of their competitors. The strategic options available are to either move to the right of the matrix to be a cost leader or upwards towards service leadership.
Cost leadership strategies are traditionally based upon economies of scale gained through sales volumes. Christopher (2011) argues that a more powerful means of achieving cost advantage comes through logistics and supply chain management not necessarily through volume and economies of scale as traditionally acclaimed. Logistics costs in many industries constitute a significant percentage of total costs and hence re-engineering the logistics processes could possibly lead to major cost reductions. Another way to get out of the “commodity” quadrant is to seek a strategy of differentiation through service excellence (Christopher, 2011).
Examples of how an organisation could compete as a service leader or as a cost leader were given by Rushton et al (2010) as shown in the figure 2.3 below.
To achieve value advantage might include the provision of a specially customized or tailored service. Also it could be through the usage of different channels of distribution so that the product is available in the marketplace in a number of different ways. For a cost and productivity advantage, it may include measures that are skewed towards cost minimization. This could be in the form of maintaining very low levels of inventory and concurrently ensuring full utilization of all manufacturing and distribution assets.
Figure 2.3: The Logistics implications of different competitive positions.
Cost and Service Leader
Cost Leader
Service
Leader
Commodity market
VALUE ADVANTAGE
Logistics Leverage Opportunities
Tailored Service
Distribution and Channel Strategy
Reliability
Responsiveness
Information
Flexibility
COST/PRODUCTIVITY ADVANTAGE
Logistics Leverage Opportunities
Capacity Utilisation
Asset Turn
Low inventory
Low wastage
SOURCE: Alan Rushton et al, The Handbook of Logistics & Distribution Management, 4th ed, 2010.
Companies therefore need to develop logistics structures that are differently configured in order to cater for the variety of service offerings they are required to provide (Rushton, 2011). That notwithstanding, a major challenge to management is to identify the appropriate logistics and supply chain management strategies to position the organisation as the cost and service leader. As indicated by Christopher (2011), it becomes extremely difficult for competitors to attack an organisation occupying that ‘high ground’ because it is a position of tremendous strength. Embracing logistics and supply chain management is therefore crucial for organisations in achieving both a cost advantage and a value advantage.
2.6 STRATEGIC LOGISTICS PLANNING
Cooper et al (1992) defined logistics strategic planning as a unified, comprehensive, and integrated planning process to achieve competitive advantage through increased value and customer service, which results in superior customer satisfaction, by anticipating future demand for logistics services and managing the resources of the entire supply chain.
Logistics strategic planning carried out within the framework of the overall corporate goals and plan. It therefore requires an in-depth understanding as to how the different elements and logistics activities relate in terms of trade-offs and the total cost to the organisation. Logistics can therefore best formulate its own strategy only by understanding the overall corporate strategy (Grant et al, 2006).
Studies by A.T Kearney (2004) noted an increase in the complexity of logistics and supply chain environments that necessitates a better planning by logistics professionals. They defined four (4) types of complexity in such environment as:
Market-facing with regard to product development and channel selection.
Internal operating decisions and practice.
External factors such as competitors and government.
Organisational factors such as corporate governance, IT and cross-functional capabilities.
Their believe was that organisations need to take a proactive role in the strategic logistics planning process in their companies, and differentiate their activities from a uniform and ‘predictable’ model to more responsive models in order to handle increasing complexity. Figure 2.4 below shows an example of how this could be done by organisations.
The Type 1 model focuses on a lean and efficient operation that is dominated by making products. The Type 2 model focuses on supplying complex products to specific requirements, with long lead-times, which require collaborative planning and supply chain partners. The Type 3 model focuses on maximizing efficiency to meet customer demands in terms of volume and mix, thus requiring flexibility and late configuration of finished goods (A.T Kearney, 2004).
Figure 2.4: Differentiation of Logistics and Supply Chains
Manage and ControlType 1:
Plan
Make
Procure
Distribute
Store
Type 2:
Manage and Control
Manage and Control
Procure
Plan
Distribute
Store
Make
Store
Make
Plan and
Procure
Distribute
Type 3:
Manage and Control
Distribute
Plan
Procure
Make
Store
Make
From uniform… … to differentiated
Source: Adopted European Logistics Association and A.T. Kearney, Differentiation for Performance; Excellence in Logistics 2004
2.6.1 Formulating the Strategic Logistics Plan
In their book “Fundamentals of Logistics Management”, Grant et al (2006) indicated that the development of the strategic logistics plan is dependent on the marketing, manufacturing, finance/accounting and logistics functional areas.
Marketing provides information about product or service offerings, pricing and promotion for each channel. This includes planned sales volume per month, type of customer, and regional areas; product introductions and deletions; and customer service policies for various types of customer and geographical area. Manufacturing provides information such as locations of current and planned production facilities, and planned volume and product mix for each site. When the same product is produced at multiple locations, logistics can determine how to serve each market most efficiently. Finance/accounting provides cost forecasts related to inflation rates and growth assumptions that need to be built into the planning process to project future costs, and as well the data for performing cost trade-off analysis. It is also responsible for capital budgeting, which determines the availability of capital to finance expenditures to improve logistics equipment and infrastructure.
Logistics itself provides data and analysis related to the existing logistics network to the other functions, including current storage and distribution facilities owned and rented, both at manufacturing locations and in the field; equipment and capabilities at each location; and current transportation arrangements between various channel members. Logistics must identify the costs associated with these activities and the various channels used and proposed.
Management needs to put the logistics plan into operation through the channel members it chooses. Channel members should be judged and selected according to predetermined criteria designed to meet logistics objectives, such as reliability, consistency, geographical coverage, variety of service offerings, use of information technology and cost.
2.6.2 Components of Strategic Logistics Plan
Stock and Lambert (1987) indicated that the strategic logistics plan should consist of the following:
A management overview that describes the logistics strategy in general terms and its relationship to the other major business functions.
A statement of the logistics objectives and how it relates to cost and service for both product and customer.
A description of the individual customer service, inventory, warehousing, order processing and transportation strategies necessary to support the overall plan.
An outline of the major logistics programs or operational plans described in sufficient detail to document plans, related costs, timing, and their business impact.
A forecast of the necessary workforce and capital requirements.
A logistics financial statement detailing operating costs, capital requirements, and cash flows.
A description of the business impact of the logistics strategy, in terms of corporate profits, customer service performance, and the impact on other business functions.
2.6.3 Developing the Strategic Logistics Plan
According to Grant et al (2006), the development of a strategic logistics plan requires the following:
A thorough grasp and support of corporate strategy and supporting marketing plans in order to optimize cost-service trade-offs.
A thorough understanding of how customers view the importance of various customer service elements and the performance of the firm compared with its competitors.
Knowledge of the cost and profitability of channel objectives.
Stock and Lambert (1987) stressed that when the overall corporate strategies and marketing plans have been determined, the logistics planner must evaluate basic alternatives and recommend the system configuration that satisfies customer requirement at lowest total cost. This implies, the process must begin with identifying and documenting customer service goals and strategies. The collection of such information is achieved through logistics audit.
2.6.4 The Logistics Plan
The logistics plan starts with a definition of customer service goals and strategies (Stock and Lambert, 1987). This will determine inventory goals and deployment strategies, warehouse strategies and programs, transportation strategies and programs and order processing strategies and programs.
The factors that must be evaluated to determine the most efficient and effective logistics strategy include: customer service requirements, variability of demand, number and location of warehouses, material handling methods, the frequency of replenishment, shipment size, modes used, order cycle times and total costs (Stock and Lambert, 1987).
Stock and Lambert (1987) finally summarised the logistics planning process in terms of 11 major steps as follows:
Initiate and plan the process.
Evaluate the current logistics activities.
Identify product manufacturing requirement.
Determine the impact of business growth.
Develop a profile of competitive logistics networks.
Develop customer service requirement.
Rationalise the logistics network.
Review and recommend improvement.
Formulate performance measurement and service levels.
Review and recommend steps to improve organizational responsibilities.
Document the plan and prepare an implementation plan.
2.7 LOGISTICS PERFORMANCE MEASURES
Rutner and Langley (2000) argue that the logistics function has for sometime been under pressure to show its contribution towards organizational performance. This assertion to some extent has been nullified as several researches in this area has shown that excellence in performing logistics activities and capabilities is associated with superior organizational performance (Lambert and Burduroglu, 2000)
Importantly, the strategic implications of logistics including the benefits of leveraging logistics to increase customer value have prioritised logistics performance measurement very high (Mentzer and Williams 2001; Stank et al. 2003), (Griffis et al. 2007). Enslow et al. (2005) argues that logistics performance has been empirically tested and conceptualized in a number of ways. Measures such as cost, service and return on investment have been connoted “hard” traditional logistics performance measures (Brewer and Speh 2000). On the other hand issues pertaining to the perceptions of managers on customer satisfaction and loyalty are considered “soft performance measures (Holmberg 2000). Zacharia and Mentzer (2004) also links logistics performance measures to corporate strategy and view it from a more customer perspective.
Logistics performance has been defined by Mentzer and Konrad (1991) as the effectiveness and efficiency in performing logistics activities. Langley and Holcomb (1992) extended this definition to include logistics differentiation as a key to logistics performance. This assertion by Langley and Holcomb was premised on the value customers receive from logistics activities which also serves as an indicator of logistics performance. Langley and Holcomb further contend that value could be created through logistics efficiency, effectiveness, and differentiation.
Basically all of the various logistics performance measures mentioned in previous literature can be considered under effectiveness, efficiency, and differentiation. The collective evidence of previous research recommends that logistics performance looks at multiple dimensions and hence by determining the degree of efficiency, effectiveness, and differentiation that are associated with the accomplishment of logistics activities perfectly defines logistics performance (Bobbitt 2004; Cameron 1986).
Logistics management plays a vital role in supply chain management and the fact that competition is currently viewed from a supply chain perspective, this thesis will look at logistics performance measures in the broader perspective of supply chain management.
2.8 SUPPLY CHAIN PERFORMANCE MEASUREMENT
2.8.1 Definition and Scope
The main objective of performance measurement is to provide valuable information which allows firms to improve the fulfillment of customers’ requirements and to meet firm’s strategic goals (Chan, 2003). It is therefore important to measure how effectively the customers’ requirements are met and how resources are efficiently used to reach a certain level of customer satisfaction (Neely, Gregory, & Platts, 2005). Supply chain performance management is a system of measures to evaluate the effectiveness and efficiency of organizational structures, processes and resources not only for one firm but also for the entire supply chain (Hellingrath, 2008). It provides some basis for understanding the whole system, influence the behavior and supply information about the performance of the supply chain participants and stakeholders (Simatupang & Sridharan, 2002). Developing and using performance measures is an essential function of management (Fredendall, 2001). The usage of performance measurement systems also supports the objectives of transparency and a mutual understanding of the whole supply chain (Simatupang & Sridharan, 2002).
2.8.2 Supply Chain Controlling
One of the main tasks of supply chain controlling is to implement a common knowledge and understanding of the processes in the whole supply chain (Otto & Stölzle, 2003). The phrase ‘supply chain controlling’ indicates the construction and steering of the interactions within the whole supply chain by using adequate controlling concepts (Hellingrath, 2008).
The objectives of supply chain controlling can be divided into direct and indirect objectives. The direct objectives focus on the performance measurement of processes and resources, while the indirect objectives concentrate on more strategic objectives, such as competitiveness or gaining market shares (Westhaus, 2007).
Considering this brief description it is seen that supply chain controlling includes the strategic objectives of companies, while supply chain performance measurement focuses on effective and efficient operations only. Therefore supply chain performance measurement could be seen as an element to support the supply chain controlling objectives. Supply chain controlling defines the strategic objectives of the supply chain performance measurement systems. In this master thesis supply chain performance measurement will be seen as an element of supply chain controlling. The concept of supply chain controlling covers all aspects of trying to control, measure or evaluate the performance in a complete supply chain on the strategic, tactical or operational levels (Seuring, 2006).
2.8.3 Supply Chain Monitoring
Theory states that the performance of supply chains should be monitored providing cost measures and non-cost related measures (Gunasekaran, Patel, & Tirtiroglu, 2001). The central concept to monitor the supply chain and achieve higher visibility is called supply chain monitoring (Hultman, Borgström, & Hertz, 2006). Hultman et al. (2006) define supply chain monitoring as the effort of actors in a supply chain to manage and control visibility of information regarding flows of products and services in different levels and directions in a supply chain. The central key of a supply chain monitoring system is the exchange of information in form of standardized data between all the participants of the chain (Hultman et al., 2006).
Therefore supply chain monitoring focuses on sharing information and data among the entire supply chain, while supply chain performance measurement is directly connected with specific goals, such as achieving effectiveness and efficiency. In general it can be seen that the three approaches of supply chain controlling, supply chain performance measurement and supply chain monitoring build up on each other.
These approaches can be related to the different strategic, tactical and operational levels in supply chain management. On the strategic level, supply chain controlling focuses on the entire supply chain and the controlling of the objectives of the whole supply chain. The tactical level is covered by supply chain performance measurement measuring the effectiveness and efficiency of resources and processes based on the strategic objectives of the supply chain. And last, on a more operational level, the supply chain monitoring concept is based on the exchange of information and data. In sum, supply chain controlling is the main phrase for measuring the performance of a supply chain, including or using the other two approaches. Therefore logistics and supply chain performance measurement, which will further be researched in this thesis, is a substantial element in controlling and managing a supply chain.
2.8.4 Internal Supply Chain Performance Measurement
Internal supply chain performance measurement primarily focuses on such measures as lead time, fill rate or on-time performance (Lambert & Pohlen, 2001). These measures are generated within a company and do not evaluate the whole supply chain. It is for this reason why this literature seeks to address performance measures holistically and not restrictive to logistics performance measures. Taking only one company into account can lead to situations where seemingly good measures lead to inappropriate outcomes for the entire supply chain (Coyle et al., 2003).
The central roles of these internal supply chain performance measurement systems are highlighted by Chan et al. (2006) as measuring the performance of business processes, measuring the effects of the companies’ strategies and plans, diagnosing of problems, supporting decision-making, motivating improvements and supporting communication within a company.
Furthermore, Chan et al. (2006) criticized such traditional roles of performance measurement as short-term and finance oriented, lacking strategic relevance, strong internal focus, avoiding overall improvements, inconsistent measures and the quantification of performance in numbers. Bearing these roles of internal performance measurement and the connected criticism in mind, it becomes obvious that these internal performance measurement systems cannot be adapted to external performance measurement systems, measuring the entire supply chain. Therefore in modern environment it has become necessary to develop external supply chain performance measurement systems which extend the limited scope of single companies and their individual functions (Coyle et al., 2003).
2.8.5 External Supply Chain Performance Measurement
Performance measurement systems are seldom connected with overall supply chain strategies, lack balanced approaches to integrate financial and non-financial measures, lack system thinking and often encourages local optimization (Gunasekaran et al., 2001). Due to increasing requirements of supply chain management it is necessary to explore suitable performance measures and how accurate performance measurement systems can meet the need of support in decision-making and continuous improvement in supply chains (Chan et al., 2006).
Taking these challenges and the fact that more and more firms recognize the potential of supply chain management into account, it becomes obvious that there is much request for supply chain performance measurement systems for the supply chain as a whole. The existing performance measurement systems in supply chain environment often fail to fulfill the needs due to the different vertical and horizontal influences in supply chains (Chan et al., 2006).
2.8.6 Supply Chain Performance Measurement Systems
Neely, Gregory & Platts (2005) defines performance measurement system as the set of metrics used to quantify the efficiency and effectiveness of actions. Supply chain performance measurement systems put more emphasis on the two distinct elements of customers and competitors than internal measurement systems do. Truly balanced performance measurement systems provide managers with information about both of these elements (Neely et al., 2005). According to Neely (2005), performance measurement systems consist of three levels:
The individual performance measures.
The set of individual performance measures; the performance measurement system as an entity.
The relationship between the performance measurement system and the environment within which it operates.
2.8.7 Supply Chain Operation Reference Model (SCOR)
The SCOR is a tool which offers the opportunity to describe a complete supply chain (Becker, 2005). SCOR has been developed by the Supply Chain Council (SCC), to implement a standard when modeling complete internal and external supply chains (Weber, 2002). The main objective of the model is to describe, analyze and evaluate supply chains (Poluha, 2007). The idea behind the model is that every company or supply chain can be described with some basic processes. The SCOR-model offers a detailed description, analysis and evaluation of a supply chain for the physical, information and financial flows. A main emphasis of the model bothers on the information flow.
The model can be used to consider the entire supply chain from the supplier’s supplier to the customer’s customer. Hence it is necessary to describe all involved participants of the supply chain with standardized criteria. The criteria are process types, SCOR-processes and the different hierarchy levels.
The criteria process types is separated in planning, executing and enabling processes and is used to ensure the overall connection towards the SCOR-processes (Bolstorff et al., 2007). The reason is that this way a more transparent documentation of the physical, information and financial flows becomes possible. For further documentation the model also separates the following company functions or SCOR-processes (Bolstorff et al., 2007):
Plan. The SCOR-process includes all planning issues from strategy to operational manufacturing planning
Source. All purchasing activities are summarized here.
Make. This process focuses on the production, while also including quality check-ups or the ordering of materials, for example with a Kanban-system.
Deliver. This SCOR-process is very comprehensive and complex since it combines many different functions such as sales, finance and distribution.
Return. The process return considers all retour products which are defect or have been broken. The element is seen twice for each compan
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