Logistics & Supply Chain
Contents CHAPTER ONE THE INTRODUCTION OF LOGISTICS ..................... 2 CHAPER TWO PROCUREMENT ......................................................... 12 CHAPTER THREE MARKETING ........................................................ 21 CHAPTER FOUR LOGISTICS INFORMATION MANAGEMENT ..... 32 CHAPTER FIVE TRANSPORTATION.................................................. 44
. 60 CHAPTER SIX WAREHOUSE MANAGEMENT ................................
CHAPTER SEVEN STOCK CONTROL ............................................... 69 CHAPTER EIGHT LOGISTIC DECISION-MAKING .......................... 76 CHAPTER NINE LOGISTICS/SUPPLY-CHAIN MANAGEMENT ..... 86 CHAPTER TEN MARKET ECONOMY SOLUTIONS ....................... 102 CHAPTER ELEVEN NETWORK ECONOMY SOLUTIONS OF SCM109 CHAPTER TWELVE SELECTING SUPPLY CHAIN SOLUTION ... 121 CHAPTER THIRTEEN INTERNATIONAL TRADE ........................ 131 CHAPTER FOURTEEN LOGISTICS BEST PRACTICES .................. 138 CHAPTER FIFTEEN Best Practices Companies in SCM Action
Network Economy Solutions Of SCM
When we showed the supply chain relationships and technologies for the market economy in the previous chapter, we illustrated one extreme of the trade-off between production efficiency and customer responsiveness. Supply chain solutions for the market economy focus on production efficiency, based on demand forecasting. In contrast, the network economy solution has the customer at its center, pulling products and services as needed from the supply chain.
For ease of exposition, we will refer to the network economy model as the pull model. In the pull model, the entire supply chain is engaged in satisfying the customer's product, service, and support needs on an ongoing basis. In traditional supply chains supporting the push model, usually only the down-stream partners and the channel master interact directly with the customer in contrast, for the pull model, most trading partners of the supply chain will be required to interact directly with the customer Unlike the hierarchical relationships illustrated in the previous chapter, in the pull model there is a no linear flow of goods, services, and information to and from the customer Rather, the trading partners collaborate among themselves and communicate with the customer to provide customized products and services at the customer's point of need (refer to Figure 12.1). To highlight this difference, we will refer to the supply chain supporting the pull model as a supply web. The supply web is organized for communication and collaboration across all its trading partners with the goal of full responsiveness to customer needs. 11.1 Pull Model
Figure 11.1 shows the customer centered pull model and the supporting supply web. The customer can configure and order products and services through a variety of options for example,
physical outlets, and phone, fax, email, or Web forms.
The customer can configure the product to the exact specifications that meet his or her requirements. On submitting an order, the customer receives immediate feedback on the date the product will be shipped and other pertinent information, such as delivery firm information, for example. The customer is also provided with tools to check the status of the order through a variety of options, ranging from traditional (service centers) to technology-based self-service (telephone, Internet-based inquiry capabilities, etc.) The status notifications throughout the order fulfillment process can be customized to suit the customer requirements. The customer could also opt to receive automatic notification from the supply web when the product is shipped, via email,
a phone message, fax, or regular mail.
In the ideal pull model, every shipped product is built to order per customer specifications.
The order fulfillment process is visible to all trading partners involved in sourcing, making, and delivering the end product to the customer trading partners-from upstream raw materials and component suppliers to contract manufacturers, warehousing, and shipping services interact directly with this fulfillment process. All trading partners collaborate to provide a single face to the customer the customer is oblivious to the fact that multiple firms are handling various elements of building, shipping, and providing post sales service and support for the product. Business networks-internal to the firm and across the supply web would utilize Internet technologies to present a single face to the customer.
Reach and Range
Reach and range are critical concepts in the context of selecting various supply chain or Web technologies. These simple yet powerful concepts can help managers evaluate supply chain integration technologies along business functionalities without getting overwhelmed by technology minutiae. Peter G. W Keen introduced these terms in the early 1990s, and, despite the even changing technology integration landscape, they have remained relevant.
The concept of reach as it relates to IT infrastructure refers to the capability of technology to allow interaction with other systems within the firm and across the trading partner network. Specific technology families can be mapped to different levels of reach. On one end of the reach spectrum for a technology are stand-alone systems within the business unit. An example of such a stand-alone dedicated system would be a mainframe-based inventory system accessible via dedicated terminals only in the warehouse. Moving along the spectrum, reach expands to interaction with business units across multiple geographic locations within the firm. At the other end of the spectrum reach includes the ability to interact with all units within the firm and all customers and suppliers, irrespective of the underlying technologies. Simple examples of technologies with such broad reach are phone, fax, or PC-based Web browsers. Figure 11.2 illustrates the reach and range spectrums.
The range of an integration technology describes the nature of the interaction the technology facilitates. The range of a technology at one end of the spectrum starts with the ability to send simple messages. A simple message could be an email, fax, or a database query Depending on the reach of the technology, these messages can be accessed within the business unit, within the firm, or across the supply web. Range progresses along the spectrum to offer query information of varying complexity from simple lookups to complex queries of real-time systems. The extreme end of the range spectrum provides the ability to perform complex transactions across multiple applications in real-time. For example, a complex transaction may involve checking the availability of product from an inventory system, scheduling its delivery through the shipping system, and getting credit authorization from the credit bureau while creating the billing information.
The different technology families shown along the reach spectrum in Figure 11.2 vary in their ability to provide range. The technology family at the single department, single location is typified by mainframe or minicomputer systems dedicated to a single task such as receiving or accounts payable functions. They support an integrated set of functions that span the range spectrum from allowing simple messages within the department up to complex real-time transactions within a single location. They do not have the ability to perform transactions across multiple systems.
The next families of technologies in the reach spectrum are typified by client/server technologies that allow departments within the firm and across the firm to access multiple back-end mainframe systems and perform complex transactions spanning multiple real-time systems. The next family of technologies allows the trading partners and all departments across the firm to access multiple transaction systems. These technologies fall in the intranet and extranet categories. The point to note here is that as we move up the reach spectrum, the ability to perform complex real-time transactions decreases due to the number of systems that have to be
synchronized for real-time transaction processing. Ultimately, the technology families at the extreme of the reach spectrum, such as phone or fax, have restricted range to perform simple actions such as passing messages, looking up static data sources, and performing simple transactions with a single system.
Customization and the supply Chain
Many firms have corporate mission statements that include the promise “to develop and distribute customized products.” If the incremental cost of producing an additional unit of customized product is negligible, the firm can offer mass customization. This mass customization is possible for certain product categories where the marginal cost of production for a customized product is negligible. There is a limit on the amount of customization that a product with physical properties which require storage, handling, and conventional delivery can have. This limit on customization of physical products is dictated by the ability of the firm to produce and sell the product at a price attractive to potential customers. We will discuss specific product categories and the supporting supply chains within the context of customization.
11.2 Limitations Imposed by Property, Plant, and Equipment
Now let's consider a different type of product and a different type of firm. With Dell, production facilities are idled when there are no customer orders to build to. However, Dell's investments in PPE are significantly lower than the investments of an automobile manufacturer, for example. An automobile manufacturer can't allow production lines to be driven by actual customer orders. The investments in PPE are enormous, and production lines need to be working at a given capacity utilization to realize benefits. However, some car manufacturers are developing the capacity to build and deliver a car to customer specifications within a few days. These manufacturers will be using both the push model and the pull model: They will be making cars both to actual order and to forecasted demand to maximize the utilization of PPE.
Given the large investments in PPE across the automotive supply chain, one way to modify operations to shift to a customer centered pull model is to “reinvent” the production process. The “reinvented process” postpones the incorporation of customizable features such as color, interior fabric, accessories, and instrumentation to just prior to shipment to dealers or customers. Despite this “reinvention, “however, cars may be manufactured without final customization due to a mismatch between overall projected demand and actual customized orders. As multiple tiers of suppliers are involved, each having to ensure optimum capacity utilization, moving to a pure pull model would create time delays due to component bottlenecks and would make the price of a car very high.
The manufacturing constraints illustrated here have certainly not escaped the attention of executives in the automobile industry. In fact, there is a great deal of debate in many manufacturing firms about what products they are actually selling and where their competitive advantage is derived from. Legend has it that in the early 1990s, at an annual meeting of automotive executives from various companies, the chairman of Toyota remarked how the laws of physics are driving the aerodynamic design of cars to the most optimal shape. As a consequence, he found he could hardly tell the difference between Toyota cars and those of his competitors without getting close enough to read the company nameplates. In addition, over the past few years, there has been increasing trend toward leasing cars as opposed to outright ownership. Both of these factors have influenced a trend toward a shift in car manufacturers, focus from manufacturing to selling the automotive “experience” to customers.
Benefits of the Pull Model
Recall that Figure 11.l listed the visible and invisible costs in a firm. To reduce the biggest chunk of invisible costs requires collaborative processes, within the firm and with the members of the supply web. The benefits accrue from intermediation between the trading partners across the supply web. By contrast, disintermediation of bureaucratic overhead within the procurement process reduces the visible transaction related costs. Using IT to implement a pull model approach to providing goods and services has both coordination and transaction cost benefits.
Allowing customers to configure and order products of their choice online has considerable impact on customer satisfaction and customer retention. More importantly, taking an order via automated entry reduces the cost per order significantly as compared to taking orders through conventional means. There is less risk of transcription errors because the customer enters the order once and the automatically generated, correct order is passed directly to the firm’s supply web for sourcing, manufacture, and delivery According to survey research conducted at the University of Texas, 69 percent of firms reported an increase in revenue as a result of allowing customer access
to IT systems for configuring orders or researching information online.
On the supplier end, there is no time lapse or filtered or transcribed view of the customer requirements. This puts the onus on the suppliers to ensure the customer's needs are met. As we will illustrate in the next section, this is the biggest organizational and cultural hurdle to overcome. The customer becomes a customer to every trading partner in the supply web. This idea sounds very appealing, but it is difficult to implement. Consider that in most firms access to customers is typically claimed by sales and marketing. If these departments zealously guard access to customers from other departments within their own firms, how likely are they to permit the supply chain to have direct customer contact?
We used the musical analogy of a symphony to describe market economy or push model supply chain solutions. The network economy or pull model supply chain solutions can be likened to a jazz score. During the performance of a jazz ensemble, every player can innovate and improvise within certain parameters of the score. Similarly, the supply web in a pull model strives to satisfy customer needs while working within quality and delivery objective parameters. How exactly the trading partners serve customer needs is left to the individual suppliers, who collaborate within the supply web to ensure that customer needs are met. Allowing the supply web to directly support the product and service delivery needs of the customer frees the channel master to focus on sensing changing customer needs and keeping up with product and service innovations.
Additional profitable revenue can be generated by cross-selling and up-selling to customers at multiple touch points in the supply web, such as customer care or field service centers. Such added opportunities can more easily be generated, because the channel master can focus on analyzing customer needs rather than production efficiency. The benefits from increased customer retention rates and revenue from repeat customers through cross-selling and up-selling make a significant dent in the invisible costs in the selling and general administrative expense category.
Not only does the pull model reduce invisible costs and enhance customer satisfaction, it also enables the company to be a more frequent innovator to make a product or service more compelling. This ability will ensure that a firm's product rarely goes through the typical product life cycle in which a product eventually becomes like a commodity. For example, GEICO changed the commodity nature of car insurance by servicing the customer need for transportation after an accident. When a GEICO customer reports a car accident to the insurance company, an automatic alert is placed with the nearest car rental agency ordering a car to the driver's location. Adding features or auxiliary services sets the product apart from the offerings of competitors, thus reducing price competition, enhancing revenue and margins, and improving customer retention.
Intermediation based on collaborative infrastructure necessary for supporting the pull model is the biggest source of potential benefits. Let's revisit our iceberg analogy. We illustrated how the pooling of common direct and indirect raw materials procurement for the entire supply web yields savings in the invisible component of the iceberg. In addition, outsourcing MRO purchases to an integrated MRO supplier with specific financial targets provides benefits through reduction of administrative overhead for all firms within the supply web. The internal procurement functions across the trading partners can then focus exclusively on developing and executing critical direct raw materials and component strategies, such as advance commitment to purchase, thus reducing landed costs for the entire supply web.