Lecture notes on logistics and supply chain management

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Logistics Management Harrison and van Hoek and Strategy Logistics Management and Strategy Competing through the supply chain Logistics Management 3rd edition Alan Harrison and Remko van Hoek and Strategy A concise, applied and strategic introduction to the subject of logistics and supply chain management, perfect for modern managers and students of logistics and supply chain management. Competing through the supply chain Logistics and supply chain management continue to transform the competitive landscape and have become one of today’s key business issues. This third edition of Logistics Management and Strategy continues to take a practical, integrated and international approach to logistics and includes the very latest research to reflect the innovative and exciting developments in this subject area. 3rd edition A clear framework guides the reader through the four parts of the book, covering: l an introduction to logistics and its contribution to competitiveness and value creation, l leveraging logistics operations within the context of the customer, l supplier partnerships, interfaces and the challenges of integration, l leading-edge thinking in logistics and the future challenges ahead. New to this edition… 3rd l more on reverse logistics together with green, ethical and CSR issues, edition l revised chapters on supply chain planning and control and on agility, l fully revised final chapter ties in the future challenges facing logistics more closely with the rest of the book. Every chapter features case studies with study questions, activities and end of chapter discussion questions to help students explore logistical concepts in operational detail. Teaching support notes and PowerPoint slides for lecturers can be downloaded from the book’s website at www.pearsoned.co.uk/harrison ‘Well written and contains a wealth of valuable ideas and concepts.’ Dr Jan de Vries, University of Groningen ‘Very up-to-date, both in terms of its conceptual framework and the topics covered. Remarkably clear and easy to read.’ Dr Tony Whiteing, University of Huddersfield Alan Harrison is Professor of Operations and Logistics at Cranfield School of Management, and Director of Research at The Cranfield Centre for Logistics and Supply Chain Management. Remko van Hoek is Professor of Supply Chain Management at The Cranfield Centre for Logistics and Supply Chain Management. He is also Vice President Procurement at Nuon in the Netherlands. Alan Harrison and www.pearson-books.com Remko van Hoek 9780273712763_03_COVER.indd 1 18/10/07 13:56:29 LOGI_C01.QXP 17/10/07 10:36 Page 3 CHAPTER 1 Logistics and the supply chain Objectives The intended objectives of this chapter are to: ● identify and explain logistics definitions and concepts that are relevant to managing the supply chain; ● identify how supply chains compete in terms of time, cost and quality; ● show how different supply chains may adopt different and distinctive strategies for competing in the marketplace. By the end of this chapter 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 end- customer. Introduction A car takes only 20 hours or so to assemble, and a couple more days are needed to ship it to the customer via the dealers. So why does it take more than a month for a manufacturer to make and deliver the car I want? And why are the products I want to buy so often unavailable on the shelf at the local supermarket? These are questions that go to the heart of logistics management and strategy. Supply chains today are slow and costly compared with what they will be like in a few years’ time. But let us start at the beginning, by thinking about logistics and the supply chain in terms of what they are trying to do. It is easy to get bogged down in the complexities of how a supply chain actually works (and very few people actually know how a whole supply chain works). We shall address many of those details later in this book. First, let us focus on how a supply chain competes, and on what the implications are for logistics management and strategy. The overall aim of this chapter is to provide an introduction to logistics, and to set the scene for the book as a whole. The need is to look outside the individ- ual organisation and to consider how it aligns with other organisations in a given supply chain. This is both a strategic and a managerial task: strategic, because it brings in long-term decisions about how logistics will be structured and the sys- LOGI_C01.QXP 17/10/07 10:36 Page 4 4 Chapter 1 • Logistics and the supply chain tems it will use; managerial, because it encompasses decisions about sourcing, making and delivering products and services within an overall ‘game plan’. Key issues This chapter addresses four key issues: 1Logistics and the supply chain: definitions, structure, tiering. 2Material flow and information flow: the supply chain and the demand chain. 3Competing through logistics: competitive criteria in the marketplace. 4Logistics strategies: aligning capabilities across 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 pur- pose of a supply chain? Logistics is a big word for a big challenge. Let us begin by giving an example of that challenge in practice, because that is where logistics starts and ends. CASE STUDY Tesco 1.1 Tesco is the UK’s largest food retailer, with a sales turnover of more than €67.5 billion. While it has some 638 stores in central Europe, and some 636 in the Far East, most are in the United Kingdom and Northern Ireland, where it has nearly 1,800. This number has increased rapidly as Tesco entered the convenience store market with deals such as the Tesco Express alliance with Esso to run grocery shops at petrol stations. The prod- uct range held by the stores has grown rapidly in recent years, and currently stands at 65,000 stock-keeping units (skus) depending on the size of the store as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery, clothing and the like. This massive range is supported by 3,000 suppliers, who are expected to provide service levels (correct time and quantities) of at least 98.5 per cent by delivering to Tesco within half-hour time ‘windows’. Volumes are equally impressive. In a year, some 2.5 billion cases of product are shipped from suppliers to the stores. Tesco states that its core purpose is ‘to create value for customers to earn their life- time loyalty’. Wide product range and high on-shelf availability across that range are key enablers of that core purpose. So how do you maintain high availability of so many skus in so many stores? This question goes to the heart of logistics management for such a vast organisation. Logistics is about material flow, and about information flow. Let us look at how Tesco deals with each of these in turn. An early reform for supermarket operation was to have suppliers deliver to a distri- bution centre rather than to every store. During the 1980s, distribution to retail stores was handled by 26 depots. These operated on a single-temperature basis, and were small and relatively inefficient. Delivery volumes to each store were also relatively low, and it was not economic to deliver to all stores each day. Goods that required tem- perature-controlled environments had to be carried on separate vehicles. Each product group had different ordering systems. The network of depots simply could not handle LOGI_C01.QXP 17/10/07 10:36 Page 5 Logistics and the supply chain 5 the growth in volume and the increasingly high standards of temperature control. A new distribution strategy was needed. Under the ‘composite’ distribution system, many small depots with limited tempera- ture control facilities were replaced by composite distribution centres (called regional distribution centres, RDCs), which can handle many products at several temperature ranges. The opportunity is to provide a cost-effective daily delivery service to all stores. Typically, a composite distribution centre can handle over 60 million cases per year on a 15-acre site. The warehouse building comprises 25,000 square metres divided into three temperature zones: frozen (25°C), "2°C (chilled) and "12°C (semi-ambient). Each distribution centre (DC) serves a group of between 100 and 140 retail stores. Delivery vehicles for composite depots can use insulated trailers divided into chambers by means of movable bulkheads so they can operate at different temperatures. Deliveries are made at agreed, scheduled times. Ambient goods such as cans and cloth- ing are delivered through a separate grocery distribution network which relies on a stocked environment where orders are picked by store. This operation is complemented by a strategically located trunking station which operates a pick to zero operation for fast-moving grocery on merchandise units that can be placed directly on the shop floor. So much for the method of transporting goods from supplier through to the stores, but how much should be sent to each store? With such a huge product range today, it is impossible for the individual store to reorder across the whole range (store-based ordering). Instead, sales of each product line are tracked continuously through the till by means of electronic point of sale (EPOS) systems. As a customer’s purchases are scanned through the bar code reader at the till, the sale is automatically recorded for each sku. Cumulative sales are updated every four hours on Tesco Information Exchange (TIE). This is a system based on Internet Protocol that allows Tesco and its suppliers to communicate trading information. The aim of improved communication is to reduce response times from manufacturer to stores and to ensure product availability on the shelf. Among other things, TIE aims to improve processes for introducing new products and promotions, and to monitor service levels. Based on the cumulative sales, Tesco places orders with its suppliers by means of elec- tronic data interchange (EDI). As volumes and product ranges increased during the 1990s, food retailers such as Tesco aimed to destock their distribution centres by order- ing only what was needed to meet tomorrow’s forecast sales. For fast-moving products such as types of cheese and washing powders, the aim is day 1 for day 2: that is, to order today what is needed for tomorrow. For fast-moving products, the aim is to pick to zero in the distribution centre: no stock is left after store orders have been fulfilled and deliveries to stores are made as soon as the product is picked, which increases the stock availability for the customer. The flow of the product into the distribution centre is broken into four waves and specific products are delivered in different cycles through the day. This means that the same space in the distribution centre can be used several times over. Questions 1 Describe the key logistics processes at Tesco. 2 What do you think are the main logistics challenges in running the Tesco operation? LOGI_C01.QXP 17/10/07 10:36 Page 6 6 Chapter 1 • Logistics and the supply chain So why is Tesco growing in an intensely competitive market? It describes its core purpose as being ‘to create value for customers to earn their lifetime loyalty’. Loyalty is an important term that we return to in the next chapter. In order to achieve loyalty, Tesco has to understand customer needs and how they can be served. Its products must be recognised by its customers as representing out- standing value for money. To support such goals, it must ensure that the prod- ucts that its customers want are available on the shelf at each of its stores at all times, day and night. Planning and controlling the purchase and distribution of Tesco’s massive product range from suppliers to stores is one of logistics. Logistics is the task of managing two key flows: ● material flow of the physical goods from suppliers through the distribution centres to stores; ● information flow of demand data from the end-customer back to purchasing and to suppliers, and supply data from suppliers to the retailer, so that material flow can be accurately planned and controlled. The logistics task of managing material flow and information flow is a key part of the overall task of supply chain management. Supply chain management is con- cerned with managing the entire chain of processes, including raw material supply, manufacture, packaging and distribution to the end-customer. The Tesco UK supply chain structure comprises three main functions: ● distribution: the operations and support task of managing Tesco’s distribution centres, and the distribution of products from the DCs to the associated stores; ● network and capacity planning: the task of planning and implementing suffi- cient capacity in the supply chain to ensure that the right products can be pro- cured in the right quantities now and in the future; ● supply chain development: the task of improving Tesco’s supply chain so that its processes are stable and in control, that it is efficient, and that it is correctly structured to meet the logistics needs of material flow and information flow. Thus logistics can be seen as part of the overall supply chain challenge. While the terms ‘logistics’ and ‘supply chain management’ are often used interchangeably, logistics is actually a subset of supply chain management. It is time for some defi- nitions. 1.1.1 Definitions and concepts A supply chain as a whole ranges from basic commodities (what is in the ground, sea or air) to selling the final product to the end-customer to recycling the used product. Material flows from a basic commodity (such as a bauxite mine as a source of aluminium ore) to the finished product (such as a can of cola). 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 upstream, and those near the end-cus- tomer as downstream. We refer to each firm in a supply chain as a partner, because that is what they are. There is a collective as well as an individual role to play in LOGI_C01.QXP 17/10/07 10:36 Page 7 Logistics and the supply chain 7 the conversion of basic commodity into finished product. At each stage of the conversion, there may be returns which could be reject material from the preced- ing firm, or waste like the finished can that needs to be recycled. A supply chain is a network of partners who collectively convert a basic commod- ity (upstream) into a finished product (downstream) that is valued by end-cus- tomers, and who manage returns at each stage. Each partner in a supply chain is responsible directly for a process that adds value to a product. A process: Transforms inputs in the form of materials and information into outputs in the form of goods and services. In the case of the cola can, partners carry out processes such as mining, trans- portation, refining and hot rolling. The cola can has greater value than the baux- ite (per kilogram of aluminium). Supply chain management involves planning and controlling all of the processes from raw material production to purchase by the end-user to recycling of the used cans. Planning refers to making a plan that defines how much of each prod- uct should be bought, made, distributed and sold each day, week or month. Controlling means keeping to plan – in spite of the many problems that may get in the way. The aim is to coordinate planning and control of each process so that the needs of the end-customer are met correctly. The definition of supply chain management used in this book is as follows: Planning and controlling all of the business processes – from end-customer to raw material suppliers – that link together partners in a supply chain in order to serve the needs of the end-customer. ‘Serve the needs of the end-customer’ has different implications in different con- texts. In not-for-profit environments such as public health and local govern- ment, serving implies ‘continuously improving’, ‘better than other regions/countries’, ‘best value’ and the like. In the commercial sector, serving implies ‘better than competition’, ‘better value for money’ and so on. In either situation, the focus of managing the supply chain as a whole is on integrating the processes of supply chain partners, of which the end-customer is the key one. In effect, the end-customer starts the whole process by buying finished products. It is this behaviour that causes materials to flow through the supply chain (Gattorna, 1998: 2). The degree to which the end-customer is satisfied with the finished product depends crucially on the management of material flow and information flow along the supply chain. If delivery is late, or the product has bits missing, the whole supply chain is at risk from competitors who can perform the logistics task better. Logistics is a vital enabler for supply chain management. We use the fol- lowing definition of logistics in this book: The task of coordinating material flow and information flow across the supply chain. Logistics has both strategic (long-term planning) and managerial (short- and medium-term planning and control) aspects. Tesco has a clear view about the LOGI_C01.QXP 17/10/07 10:36 Page 8 8 Chapter 1 • Logistics and the supply chain opportunities here. A breakdown of costs in Tesco’s part of the UK supply chain is as follows: ● Supplier delivery to Tesco distribution centre (DC) 18% ● Tesco DC operations and deliver to store 28% ● Store replenishment 46% ● Supplier replenishment systems 8% Nearly half of supply chain costs are incurred in-store. In order to reduce these in-store costs, Tesco realises that the solution is ‘to spend more upstream and downstream to secure viable trade-offs for in-store replenishment’. If a product is not available on the shelf, the sale is potentially lost. By integrating external manufacturing and distribution processes with its own, Tesco seeks to serve the needs of its customers better than its competitors. 1.1.2 Supply chain: structure and tiering The concept of a supply chain suggests a series of processes linked together to form a chain. A typical Tesco supply chain is formed from five such links. Material flow Dairy cooperative Cheese factory National DC Retailer DC Retailer store and end-customer Information flow Figure 1.1 From cow to customer Here, milk is produced by a dairy cooperative and shipped to a cheese factory. Once made, the cheese is shipped to the manufacturer’s national distribution centre (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 transported first to the retailer’s regional distribution centre (RDC). From there, it is shipped to store. Looking at the arrows in Figure 1.1, material flows from left to right. Information is shared across the chain: it is demand from the end-customer that makes the whole chain work. If we look more closely at what happens in practice, the term ‘supply chain’ is somewhat misleading in that the ‘chain’ represents a simple series of links between a basic commodity (milk in this case) and a final product (cheese). Thus LOGI_C01.QXP 17/10/07 10:36 Page 9 Logistics and the supply chain 9 the cheese manufacturer will need packaging materials such as film, labels and cases. Cheese requires materials additional to milk in the manufacturing process. So the manufacturer deals with suppliers other than the milk cooperative alone. Once made, the cheese is dispatched for maturation to the supplier’s NDC, and then dispatched to many customers in addition to Tesco. Once at a Tesco RDC, the ‘chain’ spreads again because up to 100 stores are served by a given RDC. The additional complexity prompts many authors to refer to supply networks rather than to supply chains, a point we return to shortly. Upstream Downstream Second tier First tier First tier Second tier suppliers suppliers customers customers Focal firm BUY SIDE INSIDE SELL SIDE SUPPLY CHAIN MANAGEMENT Figure 1.2 Supply network (Source: After Slack et al., 1997) A more realistic representation of the supply chain is shown in Figure 1.2, where each link can connect with several others. A focal firm is shown at the centre of many possible connections with other supplier and customer companies. The supply chain can be seen in this diagram as a number of processes that extend across organisational boundaries. The focal firm is embedded within the chain, and its operational processes (‘inside’) must coordinate with others that are part of the same chain. Materials flow from left (upstream, or ‘buy side’) to right (downstream, or ‘supply side’). If everything is as orderly as it seems, then only the end-customer (to the extreme right of the chain) is free to place orders when he or she likes: after that, the system takes over. The supply chain is tiered in that supply side and demand side can be organ- ised into groups of partners with which we deal. Thus if we place an assembler such as the Ford plant at Valencia as the focal firm, buy side comprises tier 1 sup- pliers of major parts and subassemblies who deliver directly to Ford, while tier 2 suppliers deliver to the tier 1s, etc. On the sell side, Ford supplies to the national sales companies as tier 1 customers, who in turn supply to main dealers as tier 2, and so on. Primary manufacturers End-customersLOGI_C01.QXP 17/10/07 10:36 Page 10 10 Chapter 1 • Logistics and the supply chain Other terms that are used to describe aspects of managing the supply chain are: ● Purchasing and supply deals with a focal firm’s immediate suppliers (upstream). ● Physical distribution deals with the task of distributing products to tier 1 cus- tomers (downstream). ● Logistics refers to management of materials and information. Inbound logistics deals with links between the focal firm and its upstream (‘buy side’) suppliers, while outbound logistics refers to the links between the focal firm and its downstream (‘sell side’) customers. Supply chain management thus appears as the ‘end to end’ (or ‘cow to customer’ as we have expressed it in Figure 1.1) management of the network as a whole, and of the relationships between the various links. The essential points were summarised long ago by Oliver and Webber (1982): ● Supply chain management views the supply chain as a single entity. ● It demands strategic decision making. ● It views balancing inventories as a last resort. ● It demands system integration. A natural extension of this thinking is that supply chains should rather be viewed as networks. Figure 1.3 shows how a focal firm can be seen at the centre of a net- work of upstream and downstream organisations. Focal firm Figure 1.3 A network of organisations The terms ‘supply chain’ and ‘supply network’ both attempt to describe the way in which buyers and suppliers are linked together to serve the end-customer. ‘Network’ describes a more complex structure, where organisations can be cross- linked and there are two-way exchanges between them; ‘chain’ describes a sim- pler, sequential set of links (Harland et al., 2001). We have used the terms interchangeably in this book, preferring ‘chain’ to describe simpler sequences of a few organisations and ‘network’ where there are many organisations linked in a more complex way. Figure 1.3 takes a basic view of the network, with a focal firm linked to three upstream suppliers and three downstream customers. If we then add material flow and information flow to this basic model, and place a boundary around the net- work, Figure 1.4 shows the network in context. Here we have added arrows show- ing the logistics contribution of material and information flows, together with the LOGI_C01.QXP 17/10/07 10:36 Page 11 Logistics and the supply chain 11 time dimension. Material flows from primary manufacture (for example farming, mining or forestry) through various stages of the network to the end-customer. Material flow represents the supply of product through the network in response to demand from the next (succeeding) organisation. Information flow broadcasts demand from the end-customer to preceding organisations in the network. The time dimension addresses the question ‘How long does it take to get from primary source to the end-customer?’ That is, how long does it take to get product through the various stages from one end of the supply chain to the other? Time is import- ant because it measures how quickly a given network can respond to demand from the end-customer. In fact, the concept of flow is based on time: Flow measures the quantity of material (measured in input terms such as numbers of components, tonnes and litres) that passes through a given network per unit of time. Material flow (supply) Focal firm Information flow Time Figure 1.4 The network in context Activity 1.1 Printed Wheat Flour Aluminium Fibreboard materials Multiple Praline Wafers retailers Confectionery End Chocolate Packing Wholesalers manufacturer customers Others (hospital, etc.) Creamery Cocoa Vegetable Cocoa Emulsifiers, Sugar Lecithin (milk) beans oil butter salt, etc. Figure 1.5 Example of a confectionery network map (Source: After Zheng et al., 1998) Raw material Raw material Upstream Downstream End-customer End-customerLOGI_C01.QXP 17/10/07 10:36 Page 12 12 Chapter 1 • Logistics and the supply chain Figure 1.5 shows an example network map of a chocolate bar. Draw a network map showing how your organisation, or one that you know well, links with other organisations. Explain the upstream and downstream processes as far as you can. We expect you to address at least the first tiers of demand and supply. You will derive further benefit from researching additional tiers, and by developing the linkage of relationships that is involved. Explain how these work in prac- tice, and how materials flow between the different tiers. An important point here is that the supply network should be viewed as a system. All processes within the network need to be understood in terms of how they interact with other processes. No organisation is an island: its inputs and outputs are affected by the behaviour of other players in the network. One powerful, dis- ruptive player can make life very difficult for everyone else. For example, several auto assemblers optimise their own processes, but disrupt those of upstream sup- pliers and downstream distributors. The effect is to increase total system costs and reduce responsiveness to end-customer demand. 1.2 Material flow and information flow Key issue: What is the relationship between material flow and information flow? As we have already seen, logistics is about managing material flow and infor- mation flow. In this section, we examine material flow and information flow in more detail. 1.2.1 Material flow The aim within a supply chain must be to keep materials flowing from source to end-customer. The time dimension in Figure 1.4 suggests that parts are moved through the supply chain as quickly as possible. And in order to prevent local build-ups of inventory, flow must be orchestrated so that parts move in a coor- dinated fashion. The term often used is synchronous. Caterpillar Inc. makes com- plex earth-moving equipment, and there are literally thousands of component parts and subassemblies that must come together in the final assembly processes. The vision is that parts and subassemblies should flow continuously through the supply chain, all orchestrated like a ballet (Knill, 1992: 54): The goal is continuous, synchronous flow. Continuous means no interruptions, no dropping the ball, no unnecessary accumulations of inventory. And synchronous means that it all runs like a ballet. Parts and components are delivered on time, in the proper sequence, exactly to the point they’re needed. Often it is difficult to see the ‘end to end’ nature of flow in a given supply chain. The negative effects of such difficulty include build-ups of inventory and sluggish LOGI_C01.QXP 17/10/07 10:36 Page 13 Material flow and information flow 13 response to end-customer demand. And sheer greed by the most powerful mem- bers of a supply chain often means that it is weaker partners (notably small to medium-sized enterprises – SMEs) who end up holding the inventories. So man- agement strategies for the supply chain require a more holistic look at the links, and an understanding that organisational boundaries easily create barriers to flow. Case study 1.2 describes how one company – Xerox in this case – re-engineered material flow in its distribution system. CASE STUDY Xerox 1.2 Once the problems of introducing ‘just-in-time’ production systems had been solved at the Xerox plant making photocopiers at Venray in Holland, attention shifted towards the finished product inventory. Historically, stocks of finished products had been ‘man- aged’ by trying to turn the tap of sales on or off as stocks developed. This was charac- terised by the familiar ‘feast or famine’ situations. The objective of the next move for Xerox became clear: making only what you need when you need it, then shipping direct to the customer. But the key question had to be answered: just-in-time for what? The answer is – the end-customer. And customer surveys showed that three types of delivery were needed: ● Commodity products should be delivered ‘off the shelf’. ● Middle-range products were required in five days. ● Larger products that had to be integrated into existing customer processes and sys- tems had to be planned months ahead: but the quoted delivery date had to be met 100 per cent. It was envisaged that this would lead to a radically different inventory ‘profile’ in the supply chain. Figure 1.6 shows a traditional inventory profile on the left. Most of the stock was held in local depots waiting for customer orders. If the mix had been incor- rectly forecast, too many of the wrong products were in plentiful supply, while needed products were unavailable. Further, a batch of replacement products would take a long time to fight their way through the pipeline. A new ‘just-in-time’ strategy was con- ceived to make the supply chain much more responsive. This strategy had a profound effect on the inventory profile, pushing much of the inventory away from the end-cus- tomer (where it has maximum added value and is already committed to a given fin- ished product specification). Instead, inventory was mostly held further upstream, where it could be finally assembled to known orders, and where it had lower value. Of course, it has since been possible to remove several of the stages of the distribution process, thereby eliminating some of the sources of inventory altogether. For commodity products, Xerox coined the term deliver JIT: that is, the product had to be delivered out of stock. Where sales forecasts are traditionally poor, the challenge was one of flexibility, simplicity and speed of manufacture. For mid-range products, it was unrealistic to hold ‘just in case’ inventories of products that are too complex to be assembled quickly. Instead, finish JIT was the term coined to describe the new policy of building semi-finished products with the minimum of added value, consistent with being able to complete and deliver the product in the five-day target. Finally, build JIT LOGI_C01.QXP 17/10/07 10:36 Page 14 14 Chapter 1 • Logistics and the supply chain was the term used to describe the new philosophy of building larger products quickly within a defined lead time. Traditional Just-in-time Inventory location: Customer Local depot National depot International depot Inventory WIP at Xerox position Parts stores In transit Days of Days of stock stock WIP at supplier Supplier Inflexible Flexible Note: WIP = work in progress, i.e. products being worked on, but not yet ready for sale. Shaded areas indicate days of stock.The wider the area, the more days of stock in that position. Figure 1.6 Xerox: the impact on inventories The impact of the new build philosophies on the downstream supply chain processes can be judged from Figure 1.6. While the traditional inventory profile shows a maxi- mum number of days of stock (shown in the shaded area) at finished product level, this is risky. It always seems that demand is greatest for the very items that are not available Postponing the decision on exact specification until as late as possible in the process, when we are more likely to know precisely what the end-customer wants, helps to create the much flattened inventory profile to the right of the diagram. These are issues to which we return in Chapters 6 and 7. (A development of this case, tracking ‘what happened next’, is Case Study 7.12.) (Source: After Eggleton, 1990) Questions 1 How did inventory reduction in the supply chain lead to improved competitiveness at Xerox? 1.2.2 Information flow As asked in the Xerox case study, just-in-time for what? It is all well and good to get materials flowing and movements synchronised, but the ‘supply orchestra’ needs to respond in unison to a specific ‘conductor’. The ‘conductor’ in this anal- ogy is actually the end-customer, and it is the end-customer’s demand signals that trigger the supply chain to respond. By sharing the end-customer demand information across the supply chain, we create a demand chain, directed at pro- viding enhanced customer value. Information technology enables the rapid sharing of demand and supply data at increasing levels of detail and sophisti- cation. The aim is to integrate such demand and supply data so that an increas- ingly accurate picture is obtained about the nature of business processes, markets LOGI_C01.QXP 17/10/07 10:36 Page 15 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 a maximum of dependability and a minimum of inventory come from imple- menting such integration across the supply chain. A focal firm cannot become ‘world class’ by itself Figure 1.7 gives a conceptual model of how supply chain processes (supply, source, make, distribute and sell) are integrated together in order to meet end- customer demand (Beech, 1998). Demand signals are shared across the chain rather than being interpreted and massaged by the ‘sell’ process next to the market. Demand fulfilment is also envisaged as an integrated process, as materials are moved from one process to the next in a seamless flow. Information is the ‘glue’ that binds the supply chain processes together. Demand signal Supply Source Make Distribute Sell Demand response Demand fulfilment Figure 1.7 Integrating demand and supply chains (Source: After Beech, 1998) Activity 1.2 Write a brief (200 words) appraisal of material and information flow in the supply network affect- ing one of the major products in the response you gave in Activity 1.1. Perhaps the current situ- ation is different from the above ideals? 1.3 Competing through logistics Key issues: How do products win orders in the marketplace? How does logistics contribute to competitive advantage? There are many potentially conflicting demands on an organisation today. All those unreasonable customers seem to want it yesterday, at no cost, and to be compensated if it goes wrong Within a given supply chain, it is important that each organisation understands how each group of products competes in the mar- ketplace, and that it aligns its capabilities with those of its partners. A ‘product’ is actually a combination of the physical product (for example, a 200g pack of Camembert cheese) and its accompanying service (for example, how it is merchandised in the store – easy to find, availability, attractive presentation, LOGI_C01.QXP 17/10/07 10:36 Page 16 16 Chapter 1 • Logistics and the supply chain lighting, temperature). While the physical product is determined by marketing and R&D, service is heavily influenced by logistics. It is impossible to be outstanding at everything, and supply chain partners need to give priority to capabilities that give each product group its competitive edge. These are the advantages where supply chain partners ‘dig in deep’ by giving priority to investment by training and by focusing product development and marketing efforts. They need only to match industry average performance on other criteria. Let us now look at the competitive priorities that can be deliv- ered by logistics in the supply chain. There are various ways in which products compete in the marketplace. Perhaps a given product is something that no one else can match in terms of price. Or maybe you offer a product that is technically superior, such as Gillette razor blades. While new product development has logistics implications, the key advantage provided by logistics – as suggested in the Tesco example in section 1.1 – is availability of conforming product in the marketplace at low cost. Logistics sup- ports competitiveness of the supply chain as a whole by: meeting end-customer demand through supplying what is needed in the form it is needed, when it is needed, at a competitive cost. Logistics advantage thus shows up in the form of such competitive factors as better product availability in the marketplace and low product obsolescence. Defining logistics advantage means that we need to set goals that are clear, meas- urable and quantifiable. We distinguish three ‘hard objectives’ for creating logis- tics advantage: quality, time and cost. There are two further important ways of creating logistics advantage: controlling variability in logistics processes, and deal- ing with uncertainty. We have called these ‘supportive capabilities’, and they can be just as important as hard objectives. Finally, there are ‘soft objectives’, which relate to service aspects such as the confidence customers develop in the way the logistics operation is performed. Let us look at each of these ways of creating advantage in turn. 1.3.1 Hard objectives Traditional ways of competing are to offer the end-customer advantages related to product quality, the speed with which it is delivered, and/or the price at which it is offered. We refer to quality, time and cost as ‘hard objectives’ because they are easy to measure and relatively obvious to the end-customer. The quality advantage The most fundamental objective – in that it is a foundation for the others – is to carry out all processes across the supply chain so that the end product does what it is supposed to do. Quality is the most visible aspect of supply chain perform- ance. Defects, incorrect quantities and wrong items delivered are symptoms of quality problems in supply chain processes that are all too apparent to the end- customer. Such problems negatively influence that customer’s loyalty. Robust LOGI_C01.QXP 17/10/07 10:36 Page 17 Competing through logistics 17 processes are at the heart of supply chain performance. Internally, robust pro- cesses help to reduce costs by eliminating errors, and help to increase depend- ability by making processes more certain. While conformance quality in the factory may be controlled to defect levels that are below 25 parts per million (ppm), a product may end up on the retailer’s shelf with between 2 and 5 per cent defects, which is 10,000 to 20,000 ppm. This huge escalation takes place as the result of cumulative problems in successive supply chain processes. Cases may be squashed when shrink-wrapped at the manufacturer’s NDC. In the back of the retail store, cases may be cut open with a sharp knife – in spite of instructions to the contrary. The end-customer sees the product on the retail shelf at its worst state of quality performance, and that is where the buying decision is made that drives the supply chain as a whole. In many logistics situations, quality of service is about selecting the right quan- tity of the right product in the right sequence in response to customer orders. For example, store orders must be picked from a range of thousands of skus (stock keeping units) at a Tesco RDC. This must be carried out accurately (correct sku, correct quantity) against tight delivery schedules day in day out. Pick accuracy (for example, 99.5 per cent correct sku and correct quantity) is widely used to measure the quality of this operation. And increasing requirements for in-store efficiencies mean that categories of product (for example, shampoos and tooth- pastes) need to be picked in a set sequence to facilitate direct-to-shelf delivery at the store. Logistics service providers who can implement and maintain the high- est standards of service quality place themselves at an advantage over those who cannot. The time advantage Time measures how long a customer has to wait in order to receive a given prod- uct or service. Volkswagen calls this time the customer to customer lead time: that is, the time it takes from the moment a customer places an order to the moment that customer receives the car he or she specified. Such lead times can vary from zero (the product is immediately available, such as goods on a supermarket shelf) to months or years (such as the construction of a new building). Competing on time is about survival of the fastest Time can be used to win orders by companies who have learned that some cus- tomers do not want to wait – and are prepared to pay a premium to get what they want quickly. An example is Vision Express, which offers prescription spectacles ‘in about one hour’. Technicians machine lenses from blanks on the premises. Staff are given incentives to maintain a 95 per cent service level against the one- hour target. Vision Express has been successful in the marketplace by re-engin- eering the supply chain so that parts and information can flow rapidly from one process to the next. Compare this with other opticians in the high street, who must send customer orders to a central factory. Under the ‘remote factory’ system, orders typically take about 10 days to process. An individual customer order is first dispatched to the factory. It then has to join a queue with orders from all the other high street branches around the country. Once the order has been processed, it must return to the branch that raised the order. While this may LOGI_C01.QXP 17/10/07 10:36 Page 18 18 Chapter 1 • Logistics and the supply chain be cheaper to do (a central, highly productive factory serves all of the branches), it takes much longer to process an order. The time advantage is variously described as speed or responsiveness in practice. Speeding up supply chain processes may help to improve freshness of the end product, or to reduce the risk of obsolete or over-aged stock in the system. Time is an absolute measure, that is, it is not open to interpretation like quality and cost. By following a product through a supply chain, we can discover 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 supply chain. The cost advantage Cost is important for all supply chain processes – that goes without saying. Low costs translate into advantages in the marketplace in terms of low prices or high margins, or a bit of each. Many products compete specifically on the basis of low price. This is supported from a supply chain point of view by low cost manufac- ture, distribution, servicing and the like. Examples of products that compete on low price are ‘own brand’ supermarket goods that reduce the high margins and heavy advertising spend of major brands. They also perhaps cut some of the cor- ners in terms of product specification in the hope that the customer will consider low price to be more important than minor differences in product quality. The pressure to reduce prices at automotive component suppliers is intense. The assemblers have been setting annual price reduction targets for their inbound supply chains for some years. Unless a supplier can match reduced prices at which products are being sold by means of reduced costs, that supplier will gradually go out of business. As a result, many suppliers are cynical about the ‘price down’ policies of the assemblers. Reduced prices are the reward of cost cut- ting, and that is most often a collaborative effort by several partners in the supply chain. As indicated in section 1.1, Tesco can make only limited inroads into its in-store costs without the help of its supply chain partners. On the other hand, small dairy farmers continue to be forced out of business because the price of milk paid by supermarkets is ‘less than the price of water’. For them, there are few opportunities to cut costs. 1.3.2 Supportive capabilities While the hard objectives listed above are always important to competitive advantage, supportive capabilities can also be key to creating logistics advantage in the marketplace. When there is little to choose in terms of quality, time or cost, supportive capabilities can make all the difference to the end-customer. Variability refers to real and identifiable differences within a population, such as the differences in time each patient at an optician has to wait for their eyes to be tested. Uncertainty refers to our lack of knowledge (Thompson, 2002): in logis- tics terms, uncertainty results in us having to deal with events that are not known in advance. LOGI_C01.QXP 17/10/07 10:36 Page 19 Competing through logistics 19 Controlling variability: the dependability advantage Time is not just about speed. Quality is not just about meeting defect targets. Behind both ‘hard’ objectives is the need to control variability in logistics pro- cesses. Variability undermines the dependability with which a product or service meets target. While Vision Express offers a one-hour service for prescription glasses, the 95 per cent service level is a measure of the dependability of that serv- ice against the one-hour target. Firms who do not offer instantaneous availability need to tell the customer – in other words to ‘promise’ – when the product or serv- ice will be delivered. Delivery dependability measures how successful the firm has been in meeting those promises. For example, the UK’s Royal Mail offers a ‘first class’ service for letters whereby there is a 90 per cent probability that a letter posted today will reach its destination tomorrow. It is important to measure dependability in the same ‘end to end’ way that speed is measured. Dependability measures are widely used in industries such as train and air travel services to monitor how well published timetables are met. And in manufactur- ing firms, dependability is used to monitor a supplier’s performance in such terms as: ● on time (percentage of orders delivered on time, and the variability against target); ● in full (percentage of orders delivered complete, and the variability against target); ● on quality (percentage of defects, and the variability against target). So logistics is concerned not just with the average percentage of orders delivered on time but also with the variability. For example, a manufacturer has to cope with the day-to-day variability of orders placed. In practice, this is more import- ant than the average orders placed because of the resource implications of ‘ups and downs’ in demand. Case study 1.3 explores the impact of variability on a supplier’s processes. CASE STUDY Measuring schedule variability 1.3 A problem that is all too familiar to suppliers in the automotive industry is that of sched- ule variability. A vehicle manufacturer issues delivery schedules to specify how many parts of each type are required each day for the following month. And each day a ‘call- off’ quantity is issued, which specifies how many the vehicle manufacturer actually wants. The two sets of figures are not necessarily the same, although they usually add up to the same cumulative numbers for the month as a whole. In other words, the total scheduled quantities and the total call-off quantities are the same. So what is the prob- lem? The problem is that the supplier has to cope with ups and downs of call-off quantities that create huge problems for the supplier’s process. Let scheduled demand = S, and call-off quantities A. Then the difference D between schedule and actual is given by D = S – A. If the supplier produces to schedule, then S A, the supplier will over-pro- duce the part and end up with excess stock. Where S A, the effects could either be a LOGI_C01.QXP 17/10/07 10:36 Page 20 20 Chapter 1 • Logistics and the supply chain reduction in stock held by the supplier, or a shortfall of (S – A) of parts from the sup- plier. The two conditions (S A and S A) therefore have different logistics implica- tions. Figure 1.8 shows that actual demand, totalled across four different parts at PressCo (a supplier of pressed metal components), may be up to 1,600 units above schedule, or 2,200 below schedule in the case of vehicle assembler WestCo. This range has been divided up into intervals of 100 units. The mode (0 – 99) indicates that S = A for a fre- quency of 18 per cent of the observations. 30 A B C 20 D 10 0 1500 1000 500 0 500 1000 1500 2000 Difference (number of parts) Figure 1.8 Distribution of differences between scheduled and actual demand for WestCo Assuming that the distribution is roughly normal, the standard deviation (SD) is 573, which is characteristic of the flat, wide spread of data. Figure 1.9 shows the distribution of S–Aforfoursimilarpartsfromthesamesupplierbuttoadifferentvehicleassembler,EastCo. This time, the SD for the distribution is 95, representing a much narrower spread of dif- ferences than for WestCo. (Source: Harrison, 1996) 80 70 S R 60 Q 50 P 40 30 20 10 0 1500 1000 500 0 500 1000 1500 2000 Difference (number of parts) Figure 1.9 Distribution of differences between scheduled and actual demand for EastCo Frequency FrequencyLOGI_C01.QXP 17/10/07 10:36 Page 21 Competing through logistics 21 Questions 1 What are the logistics implications to PressCo for delivery reliability to customers WestCo and EastCo? 2 What steps will the supplier need to take in order to satisfy call-off orders from WestCo? 3 If separate parts of the PressCo factory were dedicated to production for WestCo and for EastCo, which would be the more efficient in terms of labour costs and inventory holding? Quality is not just about meeting target pick accuracy, or target defect levels. It is also about controlling variability. The same argument can be made about costs. The implication of dependability for logistics is that supply chain processes need to be robust and predictable. In Chapter 6, we develop the case for dependability in supply chains under the themes of planning and control and lean thinking. Dealing with uncertainty: the agility advantage Dealing with uncertainty means responding rapidly to unknown problems that affect logistics processes. Sometimes, problems can be foreseen – even if their timing cannot. Toyota UK manages inbound deliveries of parts from suppliers in southern Europe by a process called chain logistics. Trailers of parts are moved in four-hour cycles, after which they are exchanged for the returning empty 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 countermea- sures. This means that alternative routes for suppliers to deliver to its Burnaston assembly plant in the UK have been planned in advance to deal, for example, with a French channel ferry strike at Calais. The weather is also a cause of uncer- tainty in logistics – for example, it may mean that Tesco has to switch between salads and soups as the result of a cold snap. Other forms of uncertainty concern events where neither the problem nor its timing can be foreseen. Case study 1.4 provides an example of such an event and how two organisations responded dif- ferently to it. CASE STUDY Nokia deals with uncertainty 1.4 In March, 2000, a thunderstorm struck the Philips semiconductor plant at Albuquerque in New Mexico, which made silicon chips for products like cellphones. Damage at first seemed minor, and fire fighters soon left the premises. At first, Philips told major customers like Nokia and Ericsson that the delay to production would only be one week. But damage to some of the clean areas in the plant – created by smoke and water – was actually going to take months to remedy. Clean rooms in semiconductor plants must be spotless, and particles of more than 0.5m are filtered out.

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