The purpose of this assignment is to identify and apply Logistics and Supply Chain Management concepts/tools to suggest logistics performance priorities. To this purpose, you should search and review about these companies through secondary available information. Think about how you can apply the concepts/tools that you learned in this course.
Suggest logistics performance priorities for a fast food chain Five Guys restaurant (product), and explain why you have come to your conclusions:
The Answer must follow the outline points below:
1. Executive summary (word count rage 100)
– Summarize what is logistics performance priorities, what Logistics and Supply Chain Management concepts/tools applied to achieve the company’s objective in Saudi Arabia.
2. Background information (word count rage 250)
– Briefly introduce the company background (e.g., name, products, business size, location, internal/external interesting facts, etc.).
3. Problem Description (word count rage 300)
– Describe the objectives clearly and specifically.
– The objective may involve either logistics decision-making or process improvement.
4. Application of logistics and supply chain management concepts/tools that applied (300)
– Describe what specific logistics and Supply Chain Management concepts/tools be applied to achieve the objective. This section should make it clear that you understand the concepts/tools you are about to use.
5. References (7 references)
Use APA style of referencing
Logistics
Management
& Strategy
Alan Harrison &
Remko van Hoek
Competing Through
the Supply Chain
Fourth Edition
Logistics Management & Strategy
Competing Through the Supply Chain
Fourth Edition
www.pearson-books.com
A concise, applied and up-to-date introduction to logistics and supply chain management, perfect for modern
managers and students.
Logistics and supply chain management continue to transform the competitive landscape and have become
one of today’s key business issues. This fourth edition of Logistics Management and Strategy continues to
take a practical, integrated and international approach to logistics; the very latest research is used to refl ect
the innovative and exciting developments in this area.
A clear framework guides the reader through the four parts of the book, covering:
• an introduction to logistics and its contribution to competitiveness and value creation
• leveraging logistics operations within the context of the customer
• supplier partnerships, interfaces and the challenges of integration
• leading-edge thinking in logistics and the future challenges ahead.
New to this edition…
• continued development of the theme of sustainable logistics
• revised chapters on Just-in-time and the agile supply chain, and on supply chain planning and control
• new chapter on sourcing and supply management.
Every chapter features case studies with study questions, activities and end-of-chapter discussion questions
to help students explore logistical concepts in operational detail. Many of the case studies are new or updated
for this new edition.
Alan Harrison &
Remko van Hoek
Alan Harrison is Professor of Operations and Logistics at Cranfi eld School of Management, and Director
of Research at The Cranfi eld Centre for Logistics and Supply Chain Management.
Remko van Hoek is visiting Professor of Supply Chain Management at The Cranfi eld Centre for Logistics
and Supply Chain Management. He is also Chief Procurement Offi cer at GDF SUEZ/Cofely the Netherlands.
‘This is my ‘go to’ book. It is a highly informative, practical and above all understandable reference
book about the supply chain business. It also teaches us to challenge our own thinking’
– Leigh Pomlett, President Northern Europe, CEVA Logistics
‘Excellent work which covers all the relevant concepts in an attractive way that’s easy to read’
– Professor Jack van der Vorst, Chair, Operations and Logistics Group, Wageningen University
Teaching support notes and PowerPoint slides for lecturers can be downloaded from the book’s
website at www.pearsoned.co.uk/harrison
Logistics M
anagem
ent & Strategy
Com
peting Through the Supply Chain
Fourth
Edition
Alan Harrison &
Remko van Hoek
CVR_HARR0224_04_SE_CVR.indd 1 12/11/2010 13:08
Logistics Management
and Strategy
We work with leading authors to develop the
strongest educational materials in logistics,
bringing cutting-edge thinking and best
learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high quality print and
electronic publications which help readers to understand
and apply their content, whether studying or at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
Logistics Management
and Strategy
Competing through the supply chain
Fourth Edition
Alan Harrison
Remko van Hoek
To Cathi, Nick, Katie, Maryl and Ticho, with love.
Contents
Foreword xiii
Preface xv
Authors’ acknowledgements xvii
Publisher’s acknowledgements xix
How to use this book xxi
Plan of the book xxiii
Part One COMPETING THROUGH LOGISTICS
1 Logistics and the supply chain 3
Introduction 3
1.1 Logistics and the supply chain 4
1.1.1 Definitions and concepts 6
1.1.2 Supply chain: structure and tiering 8
1.2 Material flow and information flow 12
1.2.1 Material flow 12
1.2.2 Information flow 15
1.3 Competing through logistics 16
1.3.1 Hard objectives 17
1.3.2 Supportive capabilities 19
1.3.3 Soft objectives 25
1.3.4 Order winners and qualifiers 26
1.4 Logistics strategy 27
1.4.1 Defining ‘strategy’ 28
1.4.2 Aligning strategies 29
1.4.3 Differentiating strategies 30
1.4.4 Trade-offs in logistics 31
Summary 32
Discussion questions 33
References 33
Suggested further reading 34
2 Putting the end-customer first 35
Introduction 35
2.1 The marketing perspective 36
2.1.1 Rising customer expectations 37
2.1.2 The information revolution 37
2.2 Segmentation 38
2.3 Demand profiling 46
2.4 Quality of service 50
2.4.1 Customer loyalty 51
2.4.2 Value disciplines 53
viii Contents
2.4.3 Relationship marketing and customer relationship
management (CRM) 53
2.4.4 Measuring service quality 56
2.5 Setting priorities for logistics strategy 56
2.5.1 Step 1: Diagnose current approach to market segmentation 58
2.5.2 Step 2a: Understand buying behaviour 59
2.5.3 Step 2b: Customer value analysis 60
2.5.4 Step 3: Measure logistics strategy drivers 60
2.5.5 Step 4: Specify future approach to market segmentation 63
Summary 68
Discussion questions 69
References 70
Suggested further reading 71
3 Value and logistics costs 73
Introduction 73
3.1 Where does value come from? 74
3.1.1 Return on investment (ROI) 75
3.1.2 Financial ratios and ROI drivers 77
3.2 How can logistics costs be represented? 79
3.2.1 Fixed/variable 81
3.2.2 Direct/indirect 85
3.2.3 Engineered/discretionary 87
3.3 Activity-based costing (ABC) 89
3.3.1 ABC example 91
3.3.2 Cost–time profile (CTP) 92
3.3.3 Cost-to-serve (CTS) 94
3.4 A balanced measurement portfolio 95
3.4.1 Balanced measures 96
3.4.2 Supply chain management and the balanced scorecard 97
3.4.3 Supply chain financial model 99
3.5 Supply chain operations reference model (SCOR) 101
Summary 105
Discussion questions 105
References 106
Suggested further reading 106
Part Two LEVERAGING LOGISTICS OPERATIONS
4 Managing logistics internationally 109
Introduction 109
4.1 Drivers and logistics implications of internationalisation 111
4.1.1 Logistical implications of internationalisation 114
4.1.2 Time-to-market 115
4.1.3 Global consolidation 116
4.1.4 Risk in international logistics 119
4.2 The tendency towards internationalisation 120
4.2.1 Focused factories: from geographical
to product segmentation 120
4.2.2 Centralised inventories 121
Contents ix
4.3 The challenges of international logistics and location 124
4.3.1 Extended lead time of supply 125
4.3.2 Extended and unreliable transit times 125
4.3.3 Multiple consolidation and break points 125
4.3.4 Multiple freight modes and cost options 126
4.3.5 Price and currency fluctuations 126
4.3.6 Location analysis 128
4.4 Organising for international logistics 130
4.4.1 Layering and tiering 130
4.4.2 The evolving role of individual plants 131
4.4.3 Reconfiguration processes 132
4.5 Reverse logistics 141
4.6 Managing for risk readiness 143
4.6.1 Immediate risk readiness 143
4.6.2 Structural risk readiness 144
4.7 Corporate social responsibility in the supply chain 145
Summary 150
Discussion questions 150
References 151
Suggested further reading 151
5 Managing the lead-time frontier 153
Introduction 153
5.1 The role of time in competitive advantage 154
5.1.1 Time-based competition: definition and concepts 154
5.1.2 Variety and complexity 155
5.1.3 Time-based initiatives 156
5.1.4 Time-based opportunities to add value 157
5.1.5 Time-based opportunities to reduce cost 159
5.1.6 Limitations to time-based approaches 161
5.2 P:D ratios and differences 162
5.2.1 Using time as a performance measure 162
5.2.2 Using time to measure supply pipeline performance 163
5.2.3 Consequences when P-time is greater than D-time 165
5.3 Time-based process mapping 168
5.3.1 Stage 1: Create a task force 169
5.3.2 Stage 2: Select the process to map 169
5.3.3 Stage 3: Collect data 170
5.3.4 Stage 4: Flow chart the process 170
5.3.5 Stage 5: Distinguish between value-adding
and non-value-adding time 170
5.3.6 Stage 6: Construct the time-based process map 171
5.3.7 Stage 7: Solution generation 171
5.4 Managing timeliness in the logistics pipeline 176
5.4.1 Strategies to cope when P-time is greater than D-time 177
5.4.2 Practices to cope when P-time is greater than D-time 178
5.5 A method for implementing time-based practices 179
5.5.1 Step 1: Understand your need to change 179
5.5.2 Step 2: Understand your processes 180
5.5.3 Step 3: Identify unnecessary process steps and large
amounts of wasted time 181
x Contents
5.5.4 Step 4: Understand the causes of waste 181
5.5.5 Step 5: Change the process 181
5.5.6 Step 6: Review changes 181
5.5.7 Results 182
5.6 When, where and how? 183
Summary 183
Discussion questions 184
References 184
Suggested further reading 184
6 Supply chain planning and control 185
Introduction 185
6.1 The supply chain ‘game plan’ 187
6.1.1 Planning and control within manufacturing 187
6.1.2 Managing inventory in the supply chain 193
6.1.3 Planning and control in retailing 198
6.1.4 Inter-firm planning and control 201
6.2 Overcoming poor coordination in retail supply chains 203
6.2.1 Efficient consumer response (ECR) 204
6.2.2 Collaborative planning, forecasting
and replenishment (CPFR) 210
6.2.3 Vendor-managed inventory (VMI) 214
6.2.4 Quick response (QR) 217
Summary 218
Discussion questions 219
References 219
Suggested further reading 220
7 Just-in-time and the agile supply chain 221
Introduction 221
7.1 Just-in-time and lean thinking 223
7.1.1 The just-in-time system 224
7.1.2 The seven wastes 228
7.1.3 JIT and material requirements planning 229
7.1.4 Lean thinking 232
7.1.5 Application of lean thinking to business processes 234
7.1.6 Role of lean practices 235
7.2 The concept of agility 236
7.2.1 Classifying operating environments 241
7.2.2 Preconditions for successful agile practice 242
7.2.3 Developing measures that put the end-customer first
to improve market sensitivity 246
7.2.4 Shared goals to improve virtual integration 247
7.2.5 Boundary spanning S&OP process to improve
process integration 248
Summary 249
Discussion questions 250
References 251
Suggested further reading 252
Contents xi
Part Three WORKING TOGETHER
8 Integrating the supply chain 255
Introduction 255
8.1 Integration in the supply chain 257
8.1.1 Internal integration: function to function 258
8.1.2 Inter-company integration: a manual approach 259
8.1.3 Electronic integration 260
8.2 Choosing the right supply relationships 264
8.3 Partnerships in the supply chain 270
8.3.1 Economic justification for partnerships 271
8.3.2 Advantages of partnerships 271
8.3.3 Disadvantages of partnerships 271
8.4 Supply base rationalisation 272
8.4.1 Supplier management 272
8.4.2 Lead suppliers 272
8.5 Supplier networks 273
8.5.1 Supplier associations 273
8.5.2 Japanese keiretsu 276
8.5.3 Italian districts 278
8.5.4 Chinese industrial areas 280
8.6 Supplier development 284
8.6.1 Integrated processes 284
8.6.2 Synchronous production 285
8.7 Implementing strategic partnerships 285
8.8 Managing supply chain relationships 290
8.8.1 Creating closer relationships 290
8.8.2 Factors in forming supply chain relationships 291
Summary 292
Discussion questions 294
References 295
Suggested further reading 297
9 Sourcing and supply management 299
Introduction 299
9.1 What does procurement do? 301
9.1.1 Drivers of procurement value 302
9.2 Rationalising the supply base 314
9.3 Segmenting the supply base 316
9.3.1 Preferred suppliers 319
9.3.2 Strategic relationships 320
9.3.3 Establishing policies per supplier segment 320
9.3.4 Vendor rating 321
9.3.5 Executive ownership of supply relationships 322
9.3.6 Migrating towards customer of choice status 324
9.4 Procurement technology 326
9.5 Markers of boardroom value 326
9.6 What does top procurement talent look like? 327
xii Contents
Summary 328
Discussion questions 329
References 329
Suggested further reading 330
Part Four CHANGING THE FUTURE
10 Logistics future challenges and opportunities 333
Introduction 333
10.1 Changing economics? 334
10.2 Internal alignment 336
10.3 Selecting collaborative opportunities upstream and downstream 340
10.4 Managing with cost-to-serve to support growth and profitability 343
10.5 The supply chain manager of the future 345
10.6 Changing chains 347
Summary 349
Discussion questions 350
References 350
Suggested further reading 350
Index 351
Supporting resources
Visit www.pearsoned.co.uk/harrison to find valuable online resources
For instructors
● Complete, downloadable Instructor’s Manual, containing teaching notes, notes on case
studies and teaching tips, objectives and discussion points for each chapter
● Downloadable PowerPoint slides of all figures from the book
For more information please contact your local Pearson Education sales representative or visit
www.pearsoned.co.uk/harrison
Foreword
I am delighted to introduce Logistics Management and Strategy, now in its fourth
edition – a further aid in our ability to drive our understanding of such a critical
part of the business environment. In Bausch and Lomb logistics remains a key
area of management attention, given its central role in customer service and the
opportunities it provides for cost control, two fundamental essentials for any
global business today.
Bausch and Lomb is built on a tradition of developing state of the art Optical
products – from contact lenses to cataract surgery and the fast-growing optical
pharmaceutical markets. These complex supply chains cover five continents and
serve varying types of customers including hospitals, opticians and multiple
retailers. They involve stock-keeping units (skus) requiring temperature control,
serial traceability and sterility, and make for a diverse and challenging set of
logistics demands.
When you then add these challenges to a range of over 100,000 skus – with
some products being offered in over 7,000 different refractive powers/pack sizes –
then you can understand why utilising the very latest approaches to logistics
management and strategy is absolutely crucial.
In recent years we have invested heavily in automated warehouses, such as
at our site in Amsterdam, recently recognised as one of the ‘top ten’ logistics
facilities in the Netherlands. We have also developed our utilisation of agile
logistics. This has been addressed by reducing the number of base products
produced in our 17 factories, whilst increasing our customer responsiveness
through postponement of labelling, bundling, promotional artwork and lan-
guage compliance. In this regard, being a member of the Agile Supply Chain
Research Club at Cranfield and working with Alan has been a rewarding and
beneficial experience. I note that some of our experience has been invested in
Chapter 7.
In the last two years Bausch and Lomb has greatly reduced inventory holdings
through a number of logistics initiatives – improving working capital whilst
maintaining, and even improving, customer service levels.
But the fight goes on, and it is with texts such as Logistics Management and
Strategy in your armoury that you can continue to drive further improvements in
your supply chain. The great aspect of this text is its readability – it does not seek
to lecture the reader, but imparts its wisdom in a straightforward and practical
manner. Fundamentally, I believe that is the essence of the science of logistics.
Every element of our complex logistical environment is captured in this book
with new sections covering sustainability, planning and control, and particularly
the strategic role of procurement – all adding to the rich content.
In introducing this collaboration between Alan and Remko my parentage
springs to mind. This was another Anglo-Dutch partnership – albeit with differ-
ent outcomes!
xiv Foreword
I have spent the last twenty-five years in logistics, working in both British and
Dutch environments. The last ten of these years have been in a global role. The
output of Alan’s and Remko’s partnership rings true in so many areas – and offer
methods and approaches which will continue to drive our improvements in the
coming years.
Paul Mayhew MSc, MCILT
Vice President, Global Logistics
Bausch and Lomb.
Preface
Logistics has been emerging from Peter Drucker’s shadowy description as ‘the
economy’s dark continent’ for some years. From its largely military origins, logis-
tics has accelerated into becoming one of the key business issues of the day, pre-
senting formidable challenges for managers and occupying some of the best
minds. Its relatively slow route to this exalted position can be attributed to two
causes. First, logistics is a cross-functional subject. In the past, it has rightly
drawn on contributions from marketing, finance, operations and corporate strat-
egy. Within the organisation, a more appropriate description would be a business
process, cutting across functional boundaries yet with a contribution from each.
Second, logistics extends beyond the boundaries of the organisation into the sup-
ply chain. Here, it engages with the complexities of synchronising the movement
of materials and information between many business processes. The systems na-
ture of logistics has proved a particularly difficult lesson to learn, and individual
organisations still often think that they can optimise profit conditions for them-
selves by exploiting their partners in the supply chain. Often they can – in the
short term. But winners in one area are matched by losers in another, and the los-
ers are unable to invest or develop the capabilities needed to keep the chain
healthy in the long term. The emergence of logistics has therefore been depend-
ent on the development of a cross-functional model of the organisation, and on
an understanding of the need to integrate business processes across the supply
network.
While its maturity as a discipline in its own right is still far from complete, we
believe that it is time to take a current and fresh look at logistics management
and strategy. Tools and concepts to enable integration of the supply chain are
starting to work well. Competitive advantage in tomorrow’s world will come
from responding to end-customers better than competition. Logistics plays a vital
role in this response, and it is this role that we seek to describe in this book.
The globalisation of logistics assumes that quality can be duplicated anywhere,
that risks are relatively small, and that sustainability does not really matter. Case
study 4.2 quotes an environmental activist as saying ‘we are producing food in
one corner of the world, packing it in another and then shipping it somewhere
else. It’s mad.’ The reality is that 21st-century supply chains are developing very
different profiles from those developed by the mindsets of ten or 20 years ago.
Risk will become more important. Plans will need to be in place to prevent or
mitigate the impact of financial, operational and political uncertainty. It is both
environmentally and economically right to focus on sustainability. Logistics
stands at the heart of this debate.
This text has a clear European foundation (its currency is the euro) and an in-
ternational appeal. In line with the globalisation of logistics, we have included
cases from other parts of the world than Europe – diverse though European logis-
tics solutions are – including South Africa, the United States, Japan, China and
Australia.
xvi Preface
Accordingly, we start in Part One with the strategic role of logistics in the sup-
ply chain. We continue by developing the marketing perspective by explaining
our view of ‘putting the end-customer first’. Part One finishes by exploring the
concept of value and logistics costs. In Part Two, we review leveraging logistics
operations in terms of their global dimensions, and of the lead-time frontier. Part
Two continues by examining the challenges of coordinating manufacturing and
retail processes, and the impact on logistics of just-in-time and the agile supply
chain. Part Three reviews working together, first in terms of integrating the sup-
ply chain and second in terms of sourcing and supply management. Our book
ends with Part Four, in which we outline the logistics future challenge.
This text is intended for MSc students on logistics courses, and as an accompa-
nying text for open learning courses such as global MSc degrees and virtual uni-
versities. It will also be attractive as a management textbook and as recommended
reading on MBA options in logistics and supply chain management.
In the second edition, we listened carefully to students and to reviewers alike
and set out to build on the foundation of our initial offering. We updated much
of the material while keeping the clear structure and presentation of the first
edition. There were lots of new cases and we updated others. We attempted to
touch on many of the exciting developments in this rapidly expanding body of
knowledge, such as governance councils, the prospects for a radio frequency
identification device (RFID) and the future of exchanges. The third edition re-
tains the clarity and up-to-date content which have become hallmarks of the pre-
vious editions. This edition continues to provide further new and updated cases
to illustrate developments in the subject. This time, Chapters 6, 7 and 10 have
been largely reconstructed, but you will also find many improvements to other
chapters resulting from our research and work with industrial partners.
The fourth edition continues to build on the foundations we have developed
so far, while continuing to update the content and keep it abreast of the rapidly
developing logistics body of knowledge. Many of the cases have been updated
too and new ones introduced. Chapters 6 and 7 have again been largely recon-
structed, and we have refocused Chapter 9 around sourcing and supply manage-
ment. We have continued to develop the theme of sustainable logistics, which
we classify as a competitive priority right from the start. We are grateful to Paul
Mayhew of Bausch and Lomb, who has written the Foreword to this edition fol-
lowing the retirement of Alain Le Goff.
We hope that our book will offer support to further professional development
in logistics and supply chain management, which is needed today more than
ever before. In particular, we hope that it encourages you to challenge existing
thinking, and to break old mindsets by creating a new and more innovative fu-
ture. Transformation of supply chains is a focus for everyone in the 21st century.
Since we launched this textbook in 2001, it has become a European best seller –
and is popular in Australia, Singapore and South Africa. It is also developing an
important following in the United States. Our book has also been launched in
local language formats in Japan, Brazil, Russia, China, Poland, Mongolia and the
Ukraine.
Authors’ acknowledgements
We should like to acknowledge our many friends and colleagues who have con-
tributed to our thinking and to our book. Cranfield colleagues deserve a special
mention: Dr Janet Godsell, Dr Carlos Mena, Simon Templar, Dr Heather
Skipworth, Dr Paul Chapman (now at Saïd Business School), Dr Paul Baines and
Professor Richard Wilding have all made important contributions. Sri Srikanthan
helped us with the financial concepts used in section 3.2. Members of the Agile
Supply Chain Research Club at Cranfield also deserve special mention, notably
Chris Poole of Procter & Gamble (now of B&Q), Paul Mayhew of Bausch & Lomb
(who provides the foreword for the new edition), Ian Shellard and David Evans of
Rolls-Royce, Mark Brown of Pentland Brands (who updated the apparel cases 4.4
and 8.1) and Joe Thomas of Tesco (who updated Case study 1.1). We have picked
the brains of several who have recently retired from the industry, including
David Aldridge (formerly of Cussons UK), Philip Matthews (formerly of Boots
the Chemist) and Graham Sweet (formerly of Xerox, Europe). A number of pro-
fessors from other universities have contributed ideas and cases, including
Marie Koulikoff-Souviron (SKEMA Business School, Nice), Jacques Colin (CretLog,
Aix-en-Provence), Konstantinos Zographos (Athens University of Economics and
Business), Huo Yanfang (University of Tianjin), Thomas Choi (Arizona State Uni-
versity), David Bennett (Newcastle Business School) and Corrado Ceruti (University
of Roma Tor Vergata). Many of our MSc graduates, such as Steve Walker and
Alexander Oliveira, also made important contributions. Professor Yemisi Bolu-
mole (University of North Florida) helped us to re-draft earlier versions of the first
edition. Dr Jim Aitken (University of Surrey) contributed to our supply chain seg-
mentation thinking in Chapter 2, and we have used his work on supplier associ-
ations in Chapter 8. We also acknowledge the encouragement of Matthew Walker
and Sophie Playle at Pearson Education in the preparation of this text and their
encouragement to meet deadlines! Also, we thank the reviewers who made many
valuable comments on earlier editions of this book. We are very grateful to all of
these, and to the many others who made smaller contributions to making this
book possible. Cathi Maryon helped to research several of the cases and to proj-
ect manage the manuscript. Finally, we thank Lynne Hudston for helping wher-
ever she could – in addition to helping to run our Supply Chain Research Centre
at Cranfield!
How to use this book
This book is divided into four parts, centred around a model for logistics. The
model for logistics is introduced in the first chapter of Part One, which places logis-
tics in terms of its contribution to competitiveness, customer service and the
creation of value. Part Two of the book focuses on leveraging logistics operations
within the context of quality of service and cost performance objectives. Part Three
focuses on working together, and Part Four pulls together four elements of leading-
edge thinking in logistics, homing in on future challenges for the subject.
Part One
Competing
through
logistics
Part Two
Leveraging
logistics
operations
Part Four
Changing
the future
Part Three
Working
together
The book has been arranged to take you through the subject in logical stages.
The limitation of a text presentation is that the subjects are then arranged in se-
quence, and links between stages have to be made by the reader. We have set out
to facilitate cross-linkages by including:
● activities at the end of many of the sections, which are aimed at helping you to
think about the issues raised and how they could be applied;
● discussion questions at the end of each chapter to help you assess your under-
standing of the issues raised, and give you practice in using them;
● case studies, which draw together a number of issues and help you to think
about how those issues are linked together in a practical setting. Use the study
questions at the end of each case to guide your thinking.
We have sought continually to break up the text with figures, tables, activities
and case studies, so you will rarely find two successive pages of continuous text.
You should therefore regard the activities and case studies as an integral part of
the method used in this book to help you to learn.
xxii How to use this book
Where possible, discuss the activities and case study questions in groups after
you have prepared them individually. Discussion helps to broaden the agenda
and create confidence in handling the issues. While you are studying this book,
think about the logistics issues it raises – in your own firm or ones that you know
well, and in articles in newspapers such as the Financial Times and magazines
such as Business Week. Follow up the website addresses we have included in the
text and again link them with the issues raised in the book.
A few words on terminology are appropriate here. We have taken the view that
logistics and supply chain management (SCM) are sufficiently different for sepa-
rate definitions to be needed. We have included these definitions in Chapter 1:
logistics is a subset of SCM. ‘Supply chain’ and ‘supply network’ are used inter-
changeably, although we favour ‘chain’ for a few organisations linked in series
and ‘network’ to describe the more complex inter-linkages found in most situa-
tions. Again, our position is explained in Chapter 1.
A summary is provided at the end of each chapter to help you to check that
you have understood and absorbed the main points in that chapter. If you do not
follow the summary points, go back and read the relevant section again. If need
be, follow up on references or suggested further reading. Summaries are also there
to help you with revision.
We have designed this book to help you to start out on the logistics journey
and feel confident with its issues. We hope that it will help you to improve sup-
ply chains of the future.
Chapter 10
Logistics future challenges and opportunities
Part One COMPETING THROUGH LOGISTICS
Part Two LEVERAGING LOGISTICS OPERATIONS
Chapter 1
Logistics and the supply chain
Chapter 4
Managing logistics internationally
Chapter 6
Supply chain planning and control
Chapter 2
Putting the end-customer first
Chapter 5
Managing the lead-time frontier
Chapter 7
Just-in-time and the agile supply chain
Chapter 3
Value and logistics costs
Part Three WORKING TOGETHER
Part Four CHANGING THE FUTURE
Chapter 8
Integrating the supply chain
Chapter 9
Sourcing and supply management
Plan of the book
P a r t O n e
COMPETING THROUGH
LOGISTICS
Our model of logistics structures the supply network around three main factors: the
flow of materials, the flow of information and the time taken to respond to demand
from source of supply. The scope of the network extends from the ‘focal firm’ at the
centre across supplier and customer interfaces, and therefore typically stretches across
functions, organisations and borders. The network is best seen as a system of
interdependent processes, where actions in one part affect those of all others. The key
‘initiator’ of the network is end-customer demand on the right: only the end-
customers are free to make up their mind when to place an order. After that, the
system takes over.
Chapter 1 explains how networks are structured, the different ways in which they
may choose to compete, and how their capabilities have to be aligned with the needs
of the end-customer. Chapter 2 places the end-customer first in logistics thinking, and
develops the theme of aligning logistics strategy with marketing strategy. Chapter 3
considers how value is created in a supply network, how logistics costs can be
managed, and how a balanced measurement portfolio can be designed.
Material flow (supply)
Information flow
Time
En
d
–c
u
st
o
m
er
En
d
-c
u
st
o
m
er
D
o
w
n
st
re
am
U
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C H A P T E R 1
Logistics and the supply chain
Introduction
It only takes only 17 hours or so to assemble a car, 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 in relation to what they will be like in
the future. 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 ac-
tually 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
set the scene for the book as a whole. The need is to look outside the individual
organisation and to consider how it aligns with other organisations in a given
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, quality and
sustainability. Also, how there are supportive capabilities and soft
objectives;
● 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 competitive priorities.
Objectives
4 Chapter 1 • Logistics and the supply chain
supply chain. This is both a strategic and a managerial task: strategic, because it
requires long-term decisions about how logistics will be structured and the sys-
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:
1 Logistics and the supply chain: definitions, structure, tiering.
2 Material flow and information flow: the supply chain and the demand chain.
3 Competing through logistics: competitive criteria in the marketplace.
4 Logistics 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 purpose
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.
Tesco
Tesco is the UK’s largest food retailer, with a Group sales turnover of more than €67 billion.
It has over 2,100 stores in the US, central Europe, Ireland and the Far East, and over
2,300 in the UK alone. This number has increased rapidly as Tesco entered the conven-
ience store market with its Tesco Express store format. The product range held by the
stores has grown rapidly in recent years – a larger store can hold up to 20,000 products –
as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery,
clothing and the like. This massive range is supported by thousands of suppliers, who are
expected to meet agreed service levels (correct time and quantities) by delivering to
Tesco within specific time ‘windows’. Volumes are impressive. In a year, some 2.1 billion
cases of product are shipped from suppliers to the stores.
Mindful of its responsibilities, Tesco is the UK’s market leader in the use of bio fuels
and works hard to reduce its CO2 emissions per case delivered, through initiatives in-
cluding rail, barge and alternative fuels. The company also buys considerable numbers
of double-deck trailers to move more cases per trip.
Tesco states that its core purpose is ‘to create value for customers to earn their life-
time loyalty’. A 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
product lines in so many stores? This question goes to the heart of logistics manage-
ment for such a vast organisation. Logistics is about material flow, and about informa-
tion 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 depot
rather than to every store. During the 1980s, distribution to retail stores was handled by
CASE STUDY
1.1
Logistics and the supply chain 5
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 eco-
nomic to deliver to all stores each day. Goods that required temperature-controlled
environments had to be carried on separate vehicles. Each product group had different
ordering systems. The network of depots simply could not handle the growth in
volumes and the increasingly high standards of temperature control. A new distribution
strategy was needed.
Many small depots with limited temperature control facilities were replaced by
Fresh Food depots 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 Fresh Food depot can handle over 80 million cases per year on a 40-acre
site. The warehouse building comprises 36,000 square metres divided into three
temperature zones: �25°C (frozen), 1°C (chilled) and 12°C (semi-ambient). Each
depot serves a group of between 48 and 335 retail stores. Delivery vehicles for Fresh
Food depots 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. Grocery and Non-Food goods such as cans and clothing
are delivered separately.
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 stock-keeping unit (sku). Cumulative sales are updated every four hours on
Tesco Information Exchange (TIE). This is a system based on internet technology
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 cumulative sales, Tesco places orders with its suppliers by means of
electronic data interchange (EDI). As volumes and product ranges increased during
the 1990s, food retailers such as Tesco aimed to de-stock their depots by ordering
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 depot: no stock is left after store orders have been fulfilled. This means
that the same space in the depot can be used several times over. Deliveries to stores
are made in two waves, at specific times and within defined windows. This helps to
improve product availability at stores throughout the day, and thus support changes
in demand.
Updated by Joe Thomas (Tesco) 2010
Questions
1 Describe the key logistics processes at Tesco.
2 What do you think are the main logistics challenges in running the Tesco operation?
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 outstand-
ing value for money. To support such goals, it must ensure that the products that
its customers want are available on the shelf at each of its stores at all times, day
and night. Logistics is the task of planning and controlling the purchase and dis-
tribution of Tesco’s massive product range from suppliers to stores. Logistics is
concerned with 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
concerned 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 (DCs), 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 interchange-
ably, logistics is actually a subset of supply chain management. It is time for some
definitions.
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 raw materials (such as a bauxite mine as a source of
aluminium ore) to the finished product (such as a can of cola). The can is recy-
cled 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-customer as
downstream. We refer to firms that are involved in supply chains as partners, because
that is what they are. There is a collective as well as an individual role to play in
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 such as the finished can that needs to be recycled. Sometimes,
the whole product is wasted because the consumer throws it away.
A supply chain is a network of partners who collectively convert a basic commodity
(upstream) into a finished product (downstream) that is valued by end-customers,
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 bauxite
(per kilogram of aluminium).
Supply chain management (SCM) 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
product 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 SCM used in
this book is adapted from the Council of SCM Professionals (CSCMP, 2010):
SCM encompasses the planning and controlling of all processes involved in procure-
ment, conversion, transportation and distribution across a supply chain. SCM in-
cludes coordination and collaboration between partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence, SCM inte-
grates supply and demand management within and between companies 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 government,
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 the buying behaviour of
the end-customer that causes materials to flow through the supply chain.
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 following
definition of logistics in this book:
The task of coordinating material flow and information flow across the supply
chain to meet end-customer needs.
8 Chapter 1 • Logistics and 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
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
Information flow
Dairy cooperative Cheese factory National DC Retailer DC Retailer store and
end-customer
Figure 1.1 From cow to customer
In Figure 1.1 milk is produced by a dairy cooperative and shipped to a cheese
factory. Once made, the cheese is shipped to the manufacturer’s national distri-
bution 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 the 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 be-
tween a basic commodity (milk in this case) and a final product (cheese). Thus the
Logistics and the supply chain 9
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 dis-
patched 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 supply
chains, a point we return to shortly. Logistics today is also concerned with what
happens after a product has been sold. Two major concerns are:
● Reverse logistics: the return of unwanted goods and packaging in the opposite
direction (from right to left) to the normal flow shown in Figure 1.1.
● Waste: the discarding of product at any stage in the supply chain due to quality
problems – for example, the disposal of out-of-date or damaged stock by a retailer
or by an end-customer. We consider waste more generally in Chapter 6.
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.
Upstream
Inbound logistics Outbound logistics
Focal
firm
Second tier
suppliers
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First tier
suppliers
Downstream
First tier
customers
Second tier
customers
Internal logistics
Supply chain management
Figure 1.2 Supply network
(Source: After Slack et al., 1997)
The supply chain can be seen in this diagram as a number of processes that ex-
tend across organisational boundaries. The focal firm is embedded within the
chain, and its internal processes must coordinate with others that are part of the
same chain. Materials flow from left (upstream) to right (downstream). If every-
thing 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.
10 Chapter 1 • Logistics and the supply chain
The supply chain is tiered, in that supply side and demand side can be organised
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, inbound logistics comprises tier 1 suppli-
ers of major parts and subassemblies that deliver directly to Ford, while tier 2 suppli-
ers deliver to the tier 1s and so on. Outbound logistics covers the supply by the Ford
Valencia plant to national sales companies as tier 1 customers, which in turn supply
to main dealers at tier 2 and so on. Internal logistics covers the planning and control
of parts movements within the Ford Valencia plant. The ultimate aim of supply
chain management is to integrate inbound, outbound and internal logistics into a
seamless whole, focused on meeting end-customer needs with no waste.
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 suppliers, while
outbound logistics refers to the links between the focal firm and its downstream
customers. Internal logistics deals with planning and control of material flow
within the boundaries of the focal firm.
Supply chain management thus appears as the ‘end to end’ (or ‘cow to cus-
tomer’ 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 network 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.
Logistics and the supply chain 11
‘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
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 the product
through the various stages from one end of the supply chain to the other? Time
is important 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)
Information flow
Time
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Figure 1.4 The network in context
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 up-
stream, downstream and internal 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
practice, and how materials flow between the different tiers.
Activity 1.1
12 Chapter 1 • Logistics and the supply chain
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, disruptive player can make life very difficult for everyone else. For
example, several auto assemblers optimise their own processes, but disrupt those
of upstream suppliers 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 informa-
tion 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 is 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. In order to prevent local
Wheat
Creamery
(milk)
Cocoa
beans
Sugar
Vegetable
oil
Cocoa
butter
Lecithin
Emulsifiers,
salt, etc.
Praline
Flour
Wafers
Chocolate Packing Wholesalers
Others
(hospital, etc.)
Multiple
retailers
End-
customers
Confectionery
manufacturer
Printed
materials
Aluminium Fibreboard
Figure 1.5 Example of a confectionery network map
(Source: After Zheng et al., 1998)
Material flow and information flow 13
build-ups of inventory, flow must be orchestrated so that parts movement is co-
ordinated. The term often used is synchronous. Caterpillar Inc. makes complex
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
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.
Xerox
Once the problems of introducing ‘just-in-time’ production systems (internal logistics)
had been solved at the Xerox plant making photocopiers at Venray in Holland, atten-
tion shifted towards the finished product inventory (outbound logistics). Historically,
stocks of finished products had been ‘managed’ by trying to turn the sales ‘tap’ on or
off as stocks developed. This was characterised by the familiar ‘feast or famine’ situa-
tions. 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 conceived
to make the supply chain much more responsive. This strategy had a profound effect on
the inventory profile, pushing much of the inventory upstream. The closer that inventory
CASE STUDY
1.2
is located towards the end-customer, the higher the value added – and the more that it
is committed to a given finished product specification. Instead, inventory was mostly
held further upstream. This was a more flexible solution, where product could be finally
assembled to known orders, and where it had lower value. Of course, it has since been
possible to remove several 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
was the term used to describe the new philosophy of building larger products quickly
within a defined lead time.
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 Chapter 6. (A development of this case, tracking ‘what happened
next’, is Case study 7.4.)
(Source: After Eggleton, 1990)
Question
1 How did inventory reduction in the supply chain lead to improved competitiveness
at Xerox?
14 Chapter 1 • Logistics and the supply chain
Traditional Inventory location:
Local depot
National depot
International depot
WIP at Rank Xerox
Parts stores
In transit
WIP at supplier
Notes: 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.
Just-in-time
Inflexible Flexible
Days of
stock
Days of
stock
Customer
Supplier
Inventory
position
Figure 1.6 Xerox: the impact on inventories
Material flow and information flow 15
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 shar-
ing of demand and supply data at increasing levels of detail and sophistication.
The aim is to integrate such demand and supply data so that an increasingly ac-
curate picture is obtained about the nature of business processes, markets 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 max-
imum of dependability and a minimum of inventory come from implementing
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 (source,
make, deliver) are integrated together in order to meet end-customer demand
(based on SCOR, 2010). Demand planning information (‘plan’) is shared across
the chain rather than being interpreted and then changed 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. Informa-
tion is the ‘glue’ that binds supply chain processes together, and which coordi-
nates planning and fulfilment. (We explain the SCOR model in more detail in
section 3.5.)
Figure 1.7 Integrating demand and supply chains
Demand signal
Demand fulfilment
Supply Source Deliver Deliver DeliverSource
ReturnReturn
internal or external internal or external
Return Return Return Return
Customer:
Su
pp
lie
r
Su
pp
lie
r’s
C
us
to
m
er
’s
C
us
to
m
erSupplier:
Focal firm
Plan
Plan
SellSourceMake Make Make
Write a brief (200 words) appraisal of material and information flow in the supply network
affecting one of the major products in the response you gave in Activity 1.1. Perhaps the
current situation is different from the above ideals?
Activity 1.2
16 Chapter 1 • Logistics and the supply chain
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 lower prices and
to be compensated if it goes wrong! Within a given supply chain, it is impor-
tant that each organisation understands how each group of products com-
petes in the marketplace, 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, always available, attractive presen-
tation, lighting, temperature). While the physical product is determined by mar-
keting and research and development (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 giv-
ing priority to investment and 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 delivered
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 razors.
While new product development has logistics implications, the key advantage
provided by logistics – as suggested in Case study 1.1 about Tesco – is availability
of conforming product in the marketplace at low cost. Logistics supports 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, measur-
able and quantifiable. We distinguish three ‘hard objectives’ for creating logistics
advantage: quality, time and cost. There are three further important ways of creating
logistics advantage: controlling variability in logistics processes, dealing with uncer-
tainty and sustainability. 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.
Competing through logistics 17
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-cus-
tomer. Such problems negatively influence customer loyalty. Robust processes are
at the heart of supply chain performance. Internally, robust processes help to re-
duce costs by eliminating errors, and help to increase dependability by making
processes more certain. When quality was positioned second to sales growth and
cost, even the iconic Toyota Motor Company’s brand suffered – as a string of re-
calls and safety concerns in recent years has shown (see, for example, Cole, 2010).
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 crushed when shrink-wrapped at the
manufacturer’s NDC. In the back of the retail store, cases may be cut open with a
sharp knife – despite 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 concerned with selecting the
right quantity 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 and 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 require-
ments for in-store efficiencies mean that categories of product (for example,
shampoos and toothpastes) need to be picked in a set sequence to facilitate
direct-to-shelf delivery at the store. Logistics service providers who can imple-
ment and maintain the highest 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
18 Chapter 1 • Logistics and the supply chain
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-engineering
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 ten days to process. An individual customer order is first dis-
patched 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 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 as quality and cost
are. By following a product through a supply chain, we can discover which
processes add value and which add time and cost but no value. We explore this
further 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, and hence
costs to the assemblers, is intense. The assemblers have been setting annual price
reduction targets for their inbound supply chains for some years. Toyota an-
nounced demands for a 30 per cent reduction in prices on many components by
the time that new models are launched in 2013. But 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
Competing through logistics 19
of cost cutting, and that is most often a collaborative effort by several partners in
the supply chain. So suppliers are unlikely to meet Toyota’s demands on their
own: ‘Toyota is going to have to do a lot of work itself, by switching more quickly
to global platforms and using more common parts’ (Soble, 2009). 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.
1.3.2 Supportive capabilities
While the hard objectives listed above are always important to competitive ad-
vantage, 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. Variabil-
ity refers to real and identifiable differences within a population, such as the dif-
ferences in time each patient at an optician has to wait for his or her eyes to be
tested. Uncertainty refers to our lack of knowledge (Thompson, 2002): in logistics
terms, uncertainty results in us having to deal with events that are not known in
advance. Sustainability addresses the improvement of social and environmental
issues in the design of logistics systems.
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
processes. Variability undermines the dependability with which a product or
service meets target. While Vision Express offers a one-hour service for prescrip-
tion glasses, the 95 per cent service level is a measure of the dependability of
that service 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 service will be delivered. Delivery dependability measures how suc-
cessful the firm has been in meeting those promises. For example, the UK’s
Royal Mail quality of service target for letters posted with a ‘first class’ stamp is
that 93.0 per cent will arrive the next working day (Royal Mail, 2009). It is im-
portant 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 manufacturing firms, dependability is used to monitor a supplier’s perform-
ance 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 important than
the average orders placed because of the resource implications of demand variability.
Case study 1.3 explores the impact of variability on a supplier’s processes.
20 Chapter 1 • Logistics and the supply chain
Measuring schedule variability
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
problem?
The problem is that the supplier has to cope with the variability of call-off quantities
that create huge problems for the supplier’s process. Let scheduled demand � S,
and call-off quantity � 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-produce the part and end up with excess stock. Where S � A, the effects could
either be a reduction in stock held by the supplier, or a shortfall of (S � A) of parts
from the supplier. The two conditions (S � A and S � A) therefore have different
logistics implications.
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
frequency of 18 per cent of the observations.
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 � A for four similar parts from the same supplier but to a different vehicle assem-
bler; EastCo. This time, the SD for the distribution is 95, representing a much narrower
spread of differences than for WestCo.
(Source: Harrison, 1996)
CASE STUDY
1.3
�1500 �1000 �500 0 500 1000 1500 2000
30
20
10
0
Fr
eq
u
en
cy
Difference
(number of parts)
A
B
C
D
Figure 1.8 Distribution of differences between scheduled and actual demand for
WestCo
Competing through logistics 21
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 tim-
ing 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 UK. One hitch in this highly orchestrated process means
that incoming parts do not arrive just-in-time at the assembly plant. Toyota de-
mands that its suppliers and logistics partner plan countermeasures. 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 chan-
nel ferry strike at Calais. The weather is also a cause of uncertainty 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 nei-
ther the problem nor its timing can be foreseen. Case study 1.4 provides an ex-
ample of such an event and how two organisations responded differently to it.
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?
�1500 �1000 �500 0 500 1000 1500 2000
80
70
60
50
40
30
20
10
0
Fr
eq
u
en
cy
Difference
(number of parts)
S
R
Q
P
Figure 1.9 Distribution of differences between scheduled and actual demand
for EastCo
22 Chapter 1 • Logistics and the supply chain
The implication of uncertainty for supply chain processes is that they need to
be flexible. Flexibility is defined as the ‘ability to react or transform [supply chain
processes] with minimum penalties in time, cost and performance’ (Upton,
1995). Flexibility comes in two basic forms (Sawhney, 2006):
● Proactive: to create the capability in advance to handle uncertainty – for exam-
ple, Toyota’s counter-measures.
● Reactive: to cope with uncertainty in a focal firm’s internal or external environ-
ment – for example, Nokia’s response to the fire at Philips.
Nokia deals with uncertainty
In March, 2000, a thunderstorm struck the Philips semiconductor plant at Albuquerque
in New Mexico, which made silicon chips for products such as mobile phones. Damage
at first seemed minor, and firefighters soon left the premises. At first, Philips told major
customers such as 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.
The one-week delay was quickly reported by Tapio Markki, Nokia’s chief component-
purchasing manager, to Pertti Korhonen, Nokia’s top troubleshooter. ‘We encourage bad
news to travel fast’, said Mr Korhonen. While Philips initially rejected offers of help from
Nokia, it soon became apparent that production delays would be much more than one
week. Korhonen put together a team to find solutions to supplying the five chips that
were affected by the Philips fire. Three were quickly re-sourced from Japanese and
American suppliers, but the other two were only supplied by Philips. This time Philips
cooperated at the highest level. Nokia’s chairman and chief executive, Mr Ollila, met
with the Philips CEO Mr Boostra and the head of the Philips semiconductor division, Mr
van der Poel. Factories at Eindhoven and Shanghai were rescheduled to supply the miss-
ing chips, and engineers from both Nokia and Philips worked to accelerate the return of
the Albuquerque plant to full production. As a result of these intensive efforts, there were
relatively minor delays to Nokia’s mobile phone shipments.
Executives at Ericsson in Sweden only learned of the problem several weeks after the
fire. Company culture was less proactive than at its Finnish rival. The bad news was
withheld from senior management long after it became clear that delays were becom-
ing serious. By the time that Ericsson realised the magnitude of the problem, it was too
late to find alternative sources. Nokia had seized remaining world capacity, and it took
nine months for the situation to be rectified. The disruption led to a 3 per cent loss of
market share by Ericsson, and contributed in turn to its exit from the phone handset
market (it formed a joint venture with Sony in 2001).
(Sources: Sheffi, 2005; Latour, 2001)
Question
1 What are the key lessons from this case for dealing effectively with disruptions to the
supply chain?
CASE STUDY
1.4
Competing through logistics 23
Uncertainties, wherever they originate, may affect other supply chain partners.
In Chapter 6, we develop the case for responding to uncertainty in supply chains
under the theme of agility.
Acting responsibly: the sustainability advantage
The Bruntland report (UNWCED, 1987) defines sustainability as ‘development
that meets the needs of the present without compromising the ability of future
generations to meet their needs’. Logistics has increasingly been turned to in re-
cent years because it offers enormous potential to mitigate damage to the envi-
ronment in which we live. Many logistics decisions impact the environment – for
example, sourcing from suppliers who use renewable raw materials and who
practise ethical labour standards, and transportation modes that minimise car-
bon dioxide (CO2) emissions. Sustainability emerges as a way of considering the
environmental and social values of business decisions alongside their economic
value. This thinking gave rise to the term ‘triple bottom line’ (TBL, Elkington,
1997, 2004). Taking these three ‘values’ in turn:
● Environmental: a focal firm such as Tesco is concerned with reducing consump-
tion of non-renewable energy and materials. It is also concerned with measur-
ing and reducing the environmental impact of processes across the SC – from
cow to customer (Figure 1.1). And collection and disposal by the end-user is
also factored in – what can be done to reduce the impact of car journeys and
the disposal of waste such as packaging? TBL thinking states that environmen-
tal polluters should not be given a free ride any more – they should be made
to pay. For example, the Australian government introduced carbon trading
(Humphreys, 2007, compares tax v trading): under the carbon pollution reduc-
tion scheme, the government requires a 5 per cent reduction in CO2 levels by
2020. Accreditation to the ISO 14001 series on environmental management
systems is becoming increasingly influential. And the Environmental Protec-
tion Agency (EPA, 2010) seeks to ‘make sustainability the next level of environ-
mental protection by drawing on advances in science and technology, applying
government regulations and policies to protect public health and welfare, and
promoting green business practices’.
● Social: large focal firms such as Nike and Wal-Mart have been forced to con-
sider the social contexts of the suppliers with whom they deal. Often, suppliers
are based on the other side of the world, but consumer pressure has forced
such firms to recognise their responsibility in ensuring that goods are manu-
factured in socially responsible conditions – such as no child labour (see Case
study 4.5). Organisations such as the Fairtrade Foundation (2010) aim to help
farmers in developing countries:
By facilitating trading partnerships based on equity and transparency, Fairtrade
contributes to sustainable development for marginalised producers, workers and
their communities. Through demonstration of alternatives to conventional trade
and other forms of advocacy, the Fairtrade movement empowers citizens to cam-
paign for an international trade system based on justice and fairness.
Social issues have been developed more broadly under the theme Corporate
Social Responsibility (CSR), which we examine in more detail in section 4.7.
24 Chapter 1 • Logistics and the supply chain
● Economic: this is the net value that a firm generates after social and environ-
mental values have been taken into account. This implies making the connec-
tion between TBL values and financial performance. The organisational changes
involved in recognising economic value can be wrenching and can take years to
implement. Nike – along with other premium brand companies – came under
enormous pressure from labour activists in the 1990s to adopt more sustainable
codes of conduct in their global supply chains. For example, purchasing teams
had to be constrained from going for lowest prices from suppliers, which
threatened short-term profitability. So Nike had to ‘offset any first-mover disad-
vantage by getting both its competitors and suppliers involved . . . it is essential
to work with others to move toward the adoption of a common approach to
labour compliance codes, monitoring and reporting to help ensure broader ac-
countability across the industry as a whole’ (Zadek, 2004).
Supplier Codes of Conduct (such as Cisco Systems, 2009) are used to ‘give pref-
erence to suppliers who are socially and environmentally progressive’. In other
words, sustainability has become a competitive advantage in its own right. Case
study 1.5 outlines the operation of the Marks and Spencer ‘Plan A’.
Plan A at Marks and Spencer
In January 2007 Marks and Spencer (M&S) launched ‘Plan A’, its five-year strategy to
improve the retailer’s social and environmental impact. Plan A currently sets out 100
commitments – goals to be achieved by 2012 – covering climate change, raw materials,
waste, health and fair partnership. €300 million has been set aside to fund the plan
over the five years, and 14 staff applied to its delivery. Noted in particular for its
comprehensive approach and willingness to use the company’s influence with
customers, suppliers, investors and politicians, the plan has been praised as an example
of best practice as well as a means by which other agents may join M&S to change the
way companies do business along more socially, environmentally and ethically
beneficial lines. Plan A has so far won 27 independent awards.
In June 2009 M&S reported on Plan A’s progress to date and revealed that 39 com-
mitments had been achieved, 24 of which have been extended. Another 50 are on or
ahead of target. Ten are behind, and only one commitment has been put on hold; to
make a 50 per cent switch to bio-diesel in its lorries, due to emerging concerns about
deforestation. Thus M&S can claim that, at the two-fifths mark, it is on track to deliver
its commitments, and furthermore stated that Plan A was cost positive by 2009.
It is not all plain sailing: carbon footprint reduction, as one example, has presented
several challenges to M&S. Its reported 18 per cent net reduction in greenhouse gas
emissions is largely based on the company’s switch to buying electricity under ‘green’
tariffs – reductions that have already been counted by energy suppliers. M&S now re-
port gross emissions excluding this saving – which show a 2 per cent growth. A factor
in the rise is a 10 per cent increase in store size, also, M&S international air travel has in-
creased. Mike Barry, head of sustainable business at M&S, points out that the company
has ‘decoupled’ emissions growth from commercial growth, and is firm on its commit-
ment to reduce emissions; nevertheless this marker alone shows the conflict between
business growth and a target of reduced environmental impact.
CASE STUDY
1.5
Competing through logistics 25
1.3.3 Soft objectives
There are other ways in which logistics advantage may be gained, but these are
not so readily measurable as those listed above. They are referred to as ‘soft’
objectives as distinct from the more easily measurable ‘hard’ objectives. Examples
of soft objectives are:
● confidence: queries answered promptly, courteously and efficiently;
● security: customer’s information and property treated in a confidential and
secure manner.
Soft objectives need to be measured in different ways to hard objectives, such as
customer attitude surveys.
Logistics is not the only way in which product competitiveness in the market-
place can be enhanced. The performance objectives listed above can be added to
(and in some cases eclipsed by) other ways in which products may win orders,
such as design and marketing features. No matter how good the logistics system
might have been, lack of an early ‘clam shell’ design led to the reduction of
Nokia’s market share for mobile telephone handsets in Europe. Superior product
or service design – often supported by brand image – may become the dominant
ways of achieving advantage in the marketplace. Here, the logistics task is to sup-
port the superior design. BMW’s supply chain is one of the most efficient there is,
mainly because its products are sold (at least in Europe) as soon as they have been
M&S maintains that Plan A is not just another CSR ploy. Jonathon Porritt, adviser to
M&S, agrees and points to its integration through the whole company, its detailed
measurement of non-financial data and its focus on outcomes. Porritt asserts that Plan A
‘really works’ for shareholders as well as other stakeholders.
So how has M&S made sure Plan A ‘really works’? Feedback tells the company that cus-
tomers discern and value the Plan A difference between M&S and other retailers, and this
translates into increased foot traffic and a wider customer base. And there are savings: in-
creased energy efficiency; reduced fuel use; cutting food waste by discounting short shelf-
life products; recycling internally, including coat hangers; innovation in recycling/re-use
and purchasing, e.g. using PET plastic for home product filling as well as clothes; reducing
water consumption; and being a good employer, thus reducing staff turnover and max-
imising payback on investment in training and good working conditions. All this, plus a
name for encouraging customers and suppliers to change their behaviour, being a fair
partner with suppliers, raising money for charity and promoting healthy lifestyles, makes
customers want to buy more from M&S. Richard Gillies, Director of Plan A and Sustain-
able Business at the company, sums it up with ‘As well as savings costs, Plan A differentiates
our business and brings more customers into our stores.’
(Source: Barry, M. and Calver, L. (2009), ‘Backing the future’, Marketing (00253650), pp. 16–17.
Question
1 How has M&S made the social and environmental impacts of Plan A acceptable to its
shareholders?
26 Chapter 1 • Logistics and the supply chain
made. Finished cars do not accumulate in disused airfields across Europe, like
those of the mass producers. Finished product storage adds cost, with no value
added from an end-customer perspective.
1.3.4 Order winners and qualifiers
The relative importance of the above logistics performance objectives is usually
different for a given market segment. A helpful distinction is that between order
winners and order qualifiers (Hill, 2000):
● Order winners are factors that directly and significantly help products to win
orders in the marketplace. Customers regard such factors as key reasons for
buying that product or service. If a firm raises its performance on those factors,
it will increase its chances of getting more business. Thus a product that
competes mainly on price would benefit in the marketplace if productivity
improvements enabled further price reductions.
● Order qualifiers are factors that are regarded by the market as an ‘entry ticket’.
Unless the product or service meets basic performance standards, it will not be
taken seriously. An example is quality accreditation: a possible supplier to
major utilities such as PowerGen in Britain and EDF in France would not be
considered seriously without ISO 9000 certification. And delivery reliability is
a must for newspapers – yesterday’s news is worthless. Note that, in both ex-
amples, order qualifiers are order-losing sensitive: loss of ISO 9000 accreditation
would make it impossible to supply to major utilities, and late delivery of
newspapers would miss the market.
Order winners and qualifiers are specific to individual segments, a point we develop
in the next chapter. Table 1.1 provides an example of how two different products
made by the same manufacturer and passing through the same distribution chan-
nel have different performance objectives. The first product group comprises stan-
dard shirts that are sold in a limited range of ‘classic’ colours and sizes. The second
product group comprises fashion blouses that are designed specially for each
season in many colours and a choice of styles with associated designer labels.
Analysis of the order winners and qualifiers shows that the two product ranges
have very different performance criteria in the marketplace. Of the two, the range
of fashion blouses presents more logistics challenges because demand for individ-
ual skus are much more difficult to forecast. It is not until the season is under way
that a picture begins to emerge about which colours are selling most in which re-
gion of the market. The logistics challenge is therefore concerned with speed of
response and flexibility to changing demand. The logistics challenges between
the two ranges are quite distinctive.
Not only can order winners and qualifiers be different for different products
and services. They can also change over time. Thus, in the early phase of a new
product lifecycle, such as the launch of a new integrated circuit, the order win-
ners are availability and design performance. Price would often be a qualifier:
provided the price is not so exorbitant that no one can afford it, there is a market
for innovators who want the best-performing chip that is available. But by the
maturity phase of the lifecycle, competitors have emerged, the next generation is
Logistics strategy 27
Table 1.1 Different product ranges have different logistics performance objectives
Classic shirts Fashion blouses
Product range Narrow: few colours, standard
sizes
Wide: many colours, choice of
styles, designer labels
Design changes Occasional Frequent (at least every season)
Price Everyday low price Premium prices
Quality Consistency, conformance to
(basic) spec
High grades of material, high
standards of workmanship
Sales volumes Consistent sales over time Sales peak for given fashion season
Order winners Price Time-to-market
Brand/label
Quality
Order qualifiers Quality
Availability
Price
Availability
Logistics priorities Cost
Dependability
Quality
Speed
Flexibility
Quality
already on the stocks, and the order winners have changed to price and product
reliability. The former order winners (availability and design performance) have
changed to become order qualifiers. The logistics challenge is to understand the
market dynamics and to adjust capabilities accordingly.
The actions of competitors are therefore a further influence on logistics perform-
ance objectives. For example, low-price competitors are a feature of most mar-
kets, and attempt to differentiate themselves from the perhaps higher-grade
but pricier incumbents. Thus competitors such as Matalan have sparked funda-
mental changes in logistics strategy at M&S (see Case study 1.5). In response to
loss of sales to cheaper new entrants, M&S ditched long-standing agreements
with local UK suppliers and sourced garments from new, lower-priced suppliers
in the Far East.
While the above helps to show some of the thinking in setting logistics strategy,
there are limitations to the use of order winners and qualifiers. They are subjec-
tive, and so provide perceived relative priorities. While this creates useful debate
between marketing and logistics, it lays the foundation for more informed strat-
egy setting in the context of the values of other variables in Table 1.1 such as
volumes. We develop this point in section 2.4. It is also important to share under-
standing of these priorities with partners, a point which we develop next.
1.4 Logistics strategy
Key issues: What is ‘strategy’? How can competitive criteria be aligned within a
supply chain? How can logistics strategies be tuned to different product needs?
28 Chapter 1 • Logistics and the supply chain
Strategy process
Day-to-day Planned
Accommodate Systemic
Evolve Classical
S
tr
at
e
g
y
g
o
al
s
P
ro
fit
Se
ve
ra
l
Figure 1.10 Four options for crafting strategy
1.4.1 Defining ‘strategy’
Strategy is about planning as distinct from doing. It is about formulating a long-
term plan for the supply chain, as distinct from solving the day-to-day issues and
problems that inevitably occur. Extending the concept of ‘strategy’ from Hayes
and Wheelwright (1984):
Logistics strategy is the set of guiding principles, driving forces and ingrained atti-
tudes that help to coordinate goals, plans and policies, and which are reinforced
through conscious and subconscious behaviour within and between partners across
a network.
All too often, logistics ‘strategy’ is set using few such characteristics: decisions
are made piecemeal by accident, muddle or inertia. We need, however, to recognise
that strategic decisions may indeed be made by such means.
Whittington (2000) proposes four approaches to setting strategy. He starts by
suggesting different motivations for setting strategy:
● How deliberate are the processes of strategy setting? These can range from clearly and
carefully planned to a series of ad hoc decisions taken on a day-to-day basis.
● What are the goals of strategy setting? These can range from a focus on maximising
profit to allowing other business priorities such as sales growth to be included.
If we make these two considerations the axes of a matrix, Figure 1.10 suggests
four options for crafting strategy.
What are the implications for the way in which supply chain strategy is approached
in different organisations? Following is a brief description of the four options:
● Evolve. ‘Strategy’ is not something that is formally undertaken at all. ‘Our strat-
egy is not to have a strategy’ is a typical viewpoint. Operating decisions are taken
in relation to the needs of the moment, with financial goals as the main guiding
principle.
Logistics strategy 29
● Classical. While financial goals are again the main guiding principle, these are
achieved through a formal planning process. This is called ‘classical’ because it
is the oldest and most influential option.
● Accommodate. Here, decisions are back to the day-to-day mode, but financial
objectives are no longer the primary concern. Strategy is accommodated
instead to the realities of the focal firm and the markets in which it operates.
● Systemic. This option for strategy setting sees no conflict between the ends and
means of realising business goals. While goal setting takes place across all
major aspects of the business (including human resources, marketing and
manufacturing policies), these are linked to the means by which they will be
achieved in practice.
Logistics strategy usually demands systemic strategy setting between network
partners, who may have to coordinate order winners and qualifiers across
different market segments.
1.4.2 Aligning strategies
In section 1.1 we showed the supply chain as a network of operating processes. In
section 1.2 we emphasised the need to ‘integrate’ these processes to maximise
flow and focus on the end-customer. And in section 1.3 we saw how supply
chains can choose to compete on a range of different competitive priorities. Now
it is time to put these ideas together and show how strategies need to be aligned
across the supply chain.
If different links in the supply chain are directed towards different competitive
priorities, then the chain will not be able to serve the end-customer as well as a
supply chain in which the links are directed towards the same priorities. That is
the basic argument for alignment in the supply chain (Cousins, 2005). Where the
links are directed by a common and consistent set of competitive criteria, then
that supply chain will compete better in the marketplace than one in which the
links have different, conflicting priorities. This is the concept of ‘focus’.
Focus is based on the view that you cannot be good at everything. For exam-
ple, it is difficult to handle high volume, low cost products in the same channel
to market as low volume, high variety products, for which flexibility is the name
of the game. While the assembly line is the method of choice for manufacturing
cars in volume, development of prototypes for new models is kept well away
from the factory in special facilities until close to launch. This is because the de-
velopment process demands quite different technical skills and equipment that
are better physically separated from the more routine, efficient and repetitive
assembly line. In the example of the standard shirts and fashion blouses in
section 1.3, the associated operations processes would be kept separate (‘focused’)
for similar reasons. And the separation could be thousands of kilometres. ‘Classic’
shirts could be sourced from China, where prices are low, and long delivery lead
times are not so important. ‘Fashion’ shirts may be sourced nearer to home, be-
cause response time is key and cost is less important (see Case study 8.1).
What happens when the processes are not aligned within a supply chain? Let
us address that question with Case study 1.6 to show the problems that can arise.
30 Chapter 1 • Logistics and the supply chain
Talleres Auto
Talleres Auto (TA) is an SME based in Barcelona. TA attends to broken-down vehicles,
providing a roadside repair and recovery service. Two of the parts that TA frequently
uses are starters and alternators, which were obtained from a local distributor. In turn,
the local distributor ordered parts from a prime distributor. Starters and alternators were
obtained from a remanufacturer, who replaced the windings and tested the products
using parts bought from a component supplier. A diagram of this part of the supply
chain is shown in Figure 1.11.
Most of TA’s customers made ‘distress purchases’ – their car had broken down and
they wanted it to be fixed quickly. So TA needed a fast replacement service from the
local distributor. While the distributors both recognised the need for fast replacements,
the performance of the purchasing department at the remanufacturer was measured
on cost savings. Thus the component supplier thought that the name of the game was
low cost.
(Source: Harland, 1997)
Questions
1 What were the order winners and order qualifiers at TA?
2 What were the order winners and order qualifiers at the component supplier?
3 What impact on customer service was this lack of alignment likely to cause?
CASE STUDY
1.6
Component
supplier
Remanufacturer Prime
distributor
Local
distributor
TA: installer
• Talleres Auto is the installer
• TA buys starters and alternators from a local distributor
• The local distributor buys from a prime distributor
• The prime distributor buys from the remanufacturer
• The remanufacturer buys components from a component supplier
Figure 1.11 The Talleres Auto supply chain
1.4.3 Differentiating strategies
A supply chain, then, may choose to compete on different criteria. Such criteria
need in turn to be recognised and form part of the business strategies of all the
members of a given network. The choices so made have major implications for
the operation of each member. Failure to recognise competitive criteria and their
implications for a given product or service by any member means that the supply
chain will compete less effectively. It is like playing football when the goalkeeper
makes an error and lets in a goal that should not have happened – he or she lets
the whole side down.
Logistics strategy 31
What makes a successful strategy? Five principles of strategic positioning, related
to logistics strategy, are as follows (after Porter, 1984):
● A unique value proposition: determining what makes the product/service differ-
ent from its competitors.
● A tailored supply chain: governed by consistent order winning and qualifying
criteria.
● Identify the trade-offs: by choosing not just the priorities but also what not to
do. A responsive supply chain is not compatible with an efficient supply chain
(Fisher, 1997).
● Align logistics processes: so that processes are mutually reinforcing.
● Continuity: logistics processes are continually and consistently improved over time.
1.4.4 Trade-offs in logistics
To reinforce the issue of differentiating strategies, let us look at two commonly
used strategies that have very different logistics implications. Consider products
with different logistics priorities, such as those in Table 1.1:
● Cost: a high volume product for which demand is relatively stable throughout
the year. While subject to occasional enhancements, these are usually small
scale: the lifecycle is comparatively long. Forecast error is relatively low.
● Time: a high variety product, which is designed for a given season and which is
completely redesigned for the next season. Often, it is impossible to predict
which colour or style will sell best. The product lifecycle is short, and forecast
error is relatively high.
Cost and time have quite different logistics implications. The very actions that
help to reduce costs, such as Far East sourcing, are completely the wrong strategy
when speed and responsiveness are top of the agenda. Similarly, investing in high
volume, low variety equipment in the factory may create efficiency and low cost,
but limit a firm’s ability to offer variety and fast response times. Developing the
capability to support more of one priority (cost) hobbles the capability to support
another (time). This is the principle of trade-off in logistics: more of one thing means
less of another. Ideally, we want two separate supply chains, one focused on cost, the
other on time. This may not be fully practical because of the need to maintain a sin-
gle European distribution centre. But logistics operations within the DC may well be
kept separate to avoid product lines where the priority is low cost from interfering
with time sensitive product lines. The same thinking may also apply within a given
product range, when everyday (‘base’) demand may need to be kept separate from
promotional (‘surge’) demand. These are two examples of the various ways in which
trade-offs may apply in practice. We return to these concepts in the next chapter.
1 Using the concepts from this section, analyse the supply chain support for both of the
products you analysed in Activity 1.2. What should the supply chain be (functional-efficient or
innovative-responsive)? What is the reality, and why are the two different?
2 To what extent is there alignment of strategy in the supply chains for these two products?
Activity 1.3
32 Chapter 1 • Logistics and the supply chain
Summary
How does logistics work within the supply chain?
● Supply chain management is defined as ‘SCM encompasses the planning and
controlling of all processes involved in procurement, conversion, transporta-
tion and distribution across a supply chain. SCM includes coordination and
collaboration between partners, which can be suppliers, intermediaries, third
party service providers and customers. In essence, SCM integrates supply and
demand management within and between companies in order to serve the
needs of the end-customer.’
● Logistics is defined as ‘the task of coordinating material flow and information
flow across the supply chain to meet end-customer needs’.
● In a supply chain, materials flow from upstream to downstream. Demand in-
formation from the end-customer flows in the opposite direction. A focal firm
is positioned within a supply ‘network’, with tier 1 suppliers and tier 1 cus-
tomers its immediate neighbours. Material flow measures the quantity of
material that passes through a given network per unit of time.
● A supply network is a system in which each organisation is linked to its imme-
diate neighbours. Therefore the overall performance of the network results
from the combined performance of the individual partners.
● Logistics supports competitiveness of the supply chain as a whole by meeting
end-customer demand through supplying what is needed when it is needed at
low cost.
What are the performance objectives of the supply chain, and how does logistics
support those objectives?
● ‘Hard objectives’ are quality, speed and cost because they are easy to measure
and relatively obvious to the end-customer. Briefly, quality is about doing
things right, speed is about doing things fast, and cost is about doing things
cheaply. Supporting capabilities are concerned with controlling variability (the
dependability advantage), dealing with uncertainty (the rapid response advan-
tage) and acting responsibly (the sustainability advantage). Uncertainty can be
addressed by flexibility in logistics processes – either proactively or reactively.
Sustainability is concerned with addressing the ‘triple bottom line’ – social, en-
vironmental and economic values. ‘Soft objectives’ are service-oriented, such as
security and confidence. They are less easily measurable than hard objectives.
● Such performance objectives can, and often are, augmented by other objec-
tives that are outside logistics. These include product superiority, innovation
and brand. Here the logistics task is to support such performance objectives in
the marketplace.
● The relative importance of logistics performance objectives varies from one sit-
uation to another. It can also vary over time. The concept of order winners and
qualifiers helps to prioritise the logistics task. Key influences on relative impor-
tance are individual product needs in the marketplace, position in the product
lifecycle and competitor activity.
References 33
● Logistics strategy is the set of guiding principles, driving forces and ingrained
attitudes that help to communicate goals, plans and policies, and which are re-
inforced through conscious and subconscious behaviour within and between
partners across a network.
Discussion questions
1 Bill Gates of Microsoft describes the 2000s as ‘business @ the speed of thought’. Dis-
cuss the importance of speed in the supply chain. How can speed be increased
within the supply chain?
2 Suggest logistics performance priorities for the following, explaining why you have
come to your conclusions:
a a low fare airline such as Ryanair;
b a fast food chain such as McDonald’s;
c an overnight parcels service such as DHL.
3 What is meant by the term alignment in relation to supply chain processes? Why is
alignment important in setting a strategy for a given supply chain?
4 What does flow mean in a supply chain context? Explain how material flow relates to
information flow in a supply network.
References
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http://blogs.hbr.org/cs/2010/03/no_big_quality_problems_at_toy.html
Cousins, P. (2005) ‘The alignment of appropriate firm and supply strategies for competitive
advantage’, International Journal of Production and Operations Management, Vol. 25, No. 5,
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CSMP (2010) http://csmp.org/aboutcsmp/definitions.asp
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34 Chapter 1 • Logistics and the supply chain
Harland, C., Lamming, R., Zheng, J. and Johnsen, T. (2001) ‘A taxonomy of supply
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C H A P T E R 2
Putting the end-customer first
Introduction
In Chapter 1 we looked at the logistics task from the perspective of material flow
and information flow. We also saw how logistics contributes to competitive strategy
and the performance objectives by which we can measure this contribution. But
what is it that drives the need for flow in the first place? The key point to recog-
nise here is that it is the behaviour of the end-customer that should dictate what
happens. The end-customer starts the logistics response by buying finished prod-
ucts. It is this behaviour that causes materials to flow through the supply chain.
Only end-customers should be free to make up their minds about when they want
to place an order on the network – after that, the system takes over.
Quality of service addresses the process of handing over products and services
to end-customers. It is after this process has been completed that a product/service
reaches its full value. And the handover process offers many opportunities for
adding value. Instead of picking up a product from a distributor who is remote
from the focal firm, there are opportunities during the sales transaction (for ex-
ample, help and advice in using the focal firm’s products), as well after the sales
transaction (for example, after sales service and warranty).
The intended objectives of this chapter are to:
● develop the marketing perspective on logistics and the need for close
coordination between the two functions;
● explain how customer segmentation works, and to emphasise its
importance to logistics;
● outline the role of demand forecasting and the links with marketing;
● explain the connection between quality of service and customer loyalty;
● show how current segmentation practice can be re-engineered to set
logistics priorities.
By the end of this chapter you should be able to understand:
● how supply chains should compete by aligning logistics strategy with
marketing strategy;
● how to use logistics strategy drivers to help redefine segments to achieve
this alignment.
Objectives
36 Chapter 2 • Putting the end-customer first
This chapter explores the link between marketing strategy and logistics strat-
egy. It introduces this link, and shows how it is possible to identify logistics prior-
ities – and hence the tasks at which logistics needs to excel.
Key issues This chapter addresses four key issues:
1 The marketing perspective: the impact of rising customer expectations and the
information revolution.
2 Segmentation and demand forecasting: and their implications for logistics
strategy.
3 Quality of service: the link between customer satisfaction and customer loyalty.
4 Setting priorities for logistics strategy: creating advantage by redefining
segments in logistics terms.
2.1 The marketing perspective
Key issue: What are the marketing implications for logistics strategy?
‘Marketing’ has traditionally been associated with anticipating, identifying and
satisfying customer requirements profitably. In our terms, such a definition em-
phasises the focal firm and outbound logistics. But a more current definition em-
phasises value in the context of the broader supply chain – and that includes
partners rather than just customers:
Marketing is the activity, set of institutions, and processes for creating, communi-
cating, delivering, and exchanging offerings that have value for customers, partners,
and society at large.
(American Marketing Association, 2007)
Marketing in practice comprises the plans and decisions that determine how
these processes will be carried out.
Ultimately, satisfied end-customers are seen as the only source of profit, growth
and security. Sir Terry Leahy, Chief executive of Tesco plc, talks of harnessing
customer power (2005):
The basic assumption that customers choose – that they know best what they want –
means that they have become the centre of the retailer’s universe. In the best busi-
nesses, their decisions drive everything. These choices are also judgements. They pick
the winners and losers in retail and in manufacturing. This is not theoretical: they
regularly pass verdicts, moving from product to product and store to store. These
judgements send strong feedback – shocks might be a better word – forcing change.
Louis Gerstner (2002: 47) explained that the amazing turnaround of IBM in the
1990s was about ‘a customer was now running IBM’.
In Chapter 1, we referred to ‘tier 1 customers’ with whom a focal firm deals di-
rectly, and to ‘end-customers’ who are the individuals or businesses that buy the
finished ‘product’ at the downstream end of the supply network. It is therefore
usual to refer to two types of customer:
● business customers: who represent the focal firm’s immediate trading environment
(see Figure 1.2);
● end-customers: who represent the ultimate customer for the network as a whole
(see Figure 1.4).
The marketing perspective 37
We refer to these types of relationships as ‘business to business’ (B2B) and
‘business to customer’ (B2C) accordingly. In section 1.2.2 of Chapter 1, we
referred to the need to integrate supply chain processes so that they are aligned
towards end-customer needs. In this sense, B2B integration should be aligned
towards the ultimate B2C process.
We also need to distinguish here between customers and consumers. Webster
(2000) defines them thus:
● consumers are people who use or consume the product;
● customers are individuals or businesses who buy the product, meaning that
they acquire it and pay for it.
It is usual in business today to refer to ‘customers’ as the next process down-
stream in a supply chain. This includes ‘all types of marketing intermediaries or
channel members who buy for resale to their customers’ (Webster, 2000).
But ‘satisfied customers’ are increasingly hard to find. This has been caused by
widespread changes that are affecting the world we live in. Two of the major
changes are rising customer expectations and the information revolution (Doyle,
2000). We expand on these below.
2.1.1 Rising customer expectations
Expectations have risen among customers in line with a general increase in the
wealth of developed countries over the last half century. This increase in expecta-
tions has many causes, including:
● better levels of general education;
● better ability to discern between alternative products;
● exposure to more lifestyle issues in the media.
These expectations have led to customers not only aspiring to more desirable
products, they are also demanding much better levels of service to be associated
with those products.
Businesses are also expecting more from their suppliers. Suppliers need to pay
increasing attention to the service aspects of their dealings with industrial cus-
tomers. This is especially true when the customer has implemented more
customer-centric management systems such as just-in-time (Chapter 6).
2.1.2 The information revolution
The explosion in applications of internet technology continues to have sweeping
effects on the way that business is transacted today. Applications that have
sprung from the world wide web have impacted both B2C and business to
business B2B relationships.
● Business to consumer (B2C): online retailing has developed rapidly in recent
years, and organisations such as Amazon.com continue to extend the range of
products they offer, Many retail firms based on the traditional ‘bricks and mor-
tar’ model have fought back by launching their own websites and online cata-
logues. The world wide web has become another channel to market for the
38 Chapter 2 • Putting the end-customer first
retail industry, as home shopping accelerates in industry sectors as diverse as
books, music and furniture.
● Business to business (B2B): here, the impact has been even greater than in B2C,
but perhaps less visible. Businesses increasingly use web portals, online mar-
ketplaces and other collaborative online applications to exchange informa-
tion, undertake transactions (such as buying and selling) and organise delivery
and payment. These forms of inter-firm collaboration are leading to closer in-
tegration of processes between businesses and helping to break down some of
the traditional barriers in buyer–supplier relationships.
● Supply chain implications: developments in B2B and B2C exchanges also have
an impact on how the supply chain operates. The ability to exchange informa-
tion more effectively and accurately should enable more reliability in supply
chain operations, as well as lowering the costs of ordering. The availability of
shared information also facilitates improved management of inventory, fore-
casts and use of assets. Web-enabled data exchange facilitates replacement of
inventory with information, resulting in lower working capital.
Faced with rising customer expectations and the information revolution, supply
chain partners are increasingly looking at how they can be more demand-led,
and respond more rapidly to market requirements. The starting point is to put
the end-customer first by analysing their needs and wants. The marketing
perspective has a well-known way to help in this analysis – segmentation.
2.2 Segmentation
Key issue: What is segmentation, and what are its implications to logistics strategy?
Segmentation describes how a given market might be broken up into different
groups of customers with similar needs. It means ‘describing the market as simply
as possible while doing our best to emphasise its variety’ (Millier and Palmer,
2000). We start by considering market segmentation from a customer perspective
in what are usually described as ‘fast-moving consumer goods (FMCG)’ markets.
For example, segmentation of the market for suntan creams and lotions would
begin with an understanding of:
● the benefits wanted (e.g. water resistance, oil/non-oil, sun factor);
● the price consumers are prepared to pay;
● the media to which they are exposed (television programmes, magazines,
Google ads, etc.);
● the amount and timing of their purchases.
Profiles of the segments and evaluation of their relative attractiveness to a focal
firm can then be developed.
There are many possible ways in which markets can be segmented, including:
● demographic: such as age, sex and education;
● geographic: such as urban v country, type of house and region;
Segmentation 39
● technical: the use that customers are going to make of a product;
● behavioural: such as spending pattern and frequency of purchase.
Of the various ways to segment markets, we have found that behavioural seg-
mentation, which ‘divides buyers into groups based on their knowledge of, atti-
tude towards, and use of or response to a product’ (Kotler and Keller, 2009) is a
powerful way to bridge marketing and logistics. For example, Finne and Sivonen
(2009) describe a study of behavioural segments in convenience stores in Europe.
Six segments were identified – main, top-up, impulse, distress, grab-and-go and
habitual shoppers. ‘Top-up’ shoppers may only value bread, milk and conven-
ience foods, while an ‘impulse’ shopper is attracted by special offers and displays.
It is vital that the definition of segments is not a marketing-only task, but that
logistics is involved. The key point is that defining segments that cannot be
served because logistics capability does not exist is unlikely to work. For example,
if most of the spending pattern is around Christmas, then logistics must be capa-
ble of supporting the huge surge in demand at that time. Case study 2.1 explains
how a retailer views its behavioural segments.
Managing events and promotions in the retail sector
If end-customers only purchased their requirements in line with their use, then it would
be relatively easy to reorganise the end-to-end supply chain from shelf to national ware-
house using lean principles (see Chapter 6). A simple demand–pull system replenishing
tomorrow that which has been sold today, direct to shelf, would streamline store oper-
ations and reduce inventories significantly. Retailers such as Wal-Mart in the US and
Tesco in Britain have pursued an everyday low price policy in an attempt to maximise
this ‘steady state’ replenishment policy. However, in Europe, most retailers have found
that customers enjoy promotions and that promotions boost sales. In any case, events
such as Christmas and back to school create huge surges in demand.
Events may be divided in two: seasonal events and promotional events, as shown in
Table 2.1.
Retailers have no control over the timing of seasonal events and it is usually very difficult
to forecast likely demand with normal levels of accuracy. In contrast, promotional events
are planned by retailers and their suppliers. Consequently, while demand may be unpre-
dictable, the timing of such events is known in advance. It is surprising, therefore, how
often consumers will find that items on promotion are not on the shelf and that display
aids and promotional material will be missing. The event that has the greatest effect is
CASE STUDY
2.1
Table 2.1 Example seasonal events and promotions
Seasonal events Promotions
● Valentine’ Day
● Mother’s Day
● Summer holidays
● Back to school
● Christmas
● Three for two
● Buy one get one free
● 10% off for a week
● Happy hour �20%
● Triple loyalty card points
● Gift with purchase
40 Chapter 2 • Putting the end-customer first
Christmas – where sales usually start growing in October, ramp up in November and peak
in December. This is the only profitable quarter for many retailers. The product is fre-
quently sourced from the Far East and once the order has been delivered there will be no
further shipments. Retailers need to plan for this activity months in advance and cross their
fingers that they will not miss sales through under-ordering or buy too much with the con-
sequent write-downs in the January sale. The position is further complicated in a national
chain where demand patterns will be different store by store and region by region.
Many retailers allocate their Christmas merchandise to individual stores on the basis
of previous year’s sales for the particular product category and hope for the best. A lean
design supply chain is unable to cope with such spiky demand, which will be affected
further by marketing efforts and the latest fad. Retailers therefore need to be particularly
agile in their approach in order to satisfy unknown demand.
Boots the Chemist (BTC) – the leading UK health and beauty retailer – has approached
this problem by outsourcing specific Christmas merchandise deliveries. These deliveries are
scheduled at different times of the day from ‘normal’ deliveries. In this way, while not deal-
ing with the issues created by unpredictable demand, store operations can apply appropri-
ate resources to unload vehicles and put away directly to shelf or indirectly to stockroom.
Historically, promotional events in BTC were a fairly hit and miss affair with hundreds of
products being promoted within a four-week window. There was a high reliance on good
luck for all the elements to come together prior to the start of the promotional period.
Inevitably some products, display aids and show material arrived late. Store operations at
the end of the supply chain then had to try and mount the promotions with what had been
delivered. Consumers were dissatisfied with the result and sales were lost.
The solution was to create a dedicated promotions team within the categories. The
team masterminded the overall promotional plan and were made responsible for the
delivery of products, display aids and show materials into the national distribution
centres (NDCs). A successful trial was then conducted whereby most of the work
required to mount the promotion was done by logistics staff in the regional distribution
centres (RDCs) for each of the individual stores.
The trial comprised sending allocations of all the promotional requirements to the
RDCs from the NDCs. Staff in the RDCs then picked products for a week’s anticipated
sales (based on historical data for that line by individual store) into totes for direct-
to-shelf delivery together with appropriate display aids and show material. The totes
were then placed on dollies, rolled on and off vehicles, and wheeled into the shop to
the correct gondola end (end of free-standing ‘island’ shelf in a store). After three
days, EPOS data were reviewed, and an accurate prediction of future sales to the end
of the promotion was made. This was then used to calculate future replenishment
requirements. Finally the merchandising teams were invited to devise clever ways to
make shelves look full at the end of the promotion without using a lot of stock. This
resulted in fewer ‘remainders’ from a promotion that had to be written down. BTC is
currently implementing its design for a transformed end-to-end supply chain and the
work described above is being gradually rolled out.
(Source: Philip Matthews, formerly Supply Chain Director, BTC)
Question
1 List the logistics challenges of mounting promotions and coping with events at a
retailer such as BTC.
Segmentation 41
Figure 2.1 shows a Pareto analysis of the annual sales to 886 customers in the portfolio of a book
stockist. What actions could the stockist take to segment its market? How could each segment
best be served? What are the operational implications for the stockist? (Check out Chris Anderson,
‘The Long Tail’ at http://www.thelongtail.com/about.html).
Activity 2.1
The important characteristics of segments (McGoldrick, 2002) are that they
must be:
● measurable: variables that can be easily identified and measured;
● economically viable: capable of producing the contribution that justifies the
effort and cost of marketing;
● accessible: geographically or in terms of media communications;
● actionable: can be attracted and served effectively.
The next step is to select target segments and identify how a focal firm is
going to win orders in each. In other words, to define differential advantage
that distinguishes our offerings from those of our competitors. In logistics
terms, the important issues here are the order winning criteria (OWC), and
qualifying criteria (QC) for the target segments. These help in turn to define
the marketing mix.
The marketing mix is the set of marketing decisions that is made to implement
positioning strategy (target market segments and differential advantage) and to
achieve the associated marketing and financial goals. The marketing mix has
Figure 2.1 Annual sales per customer for a book distributor, shown as a Pareto diagram
B
o
o
ks
s
o
ld
p
er
c
u
st
o
m
er
0
1 250 500
Customers
750 1,000 1,250
50, 000
100, 000
150, 000
200, 000
250, 000
350, 000
300, 000
42 Chapter 2 • Putting the end-customer first
been popularly termed the ‘4 Ps’ (McCarthy, 1964):
● product: range, sizes, presentation and packaging, design and performance;
● price: list price, discounts, geographical pricing, payment terms;
● promotion: sales force, advertising, consumer promotion, trade promotion,
direct marketing;
● place: channel selection, market coverage, distribution systems, dealer support.
Logistics contributes fundamentally to the ‘place’ decisions, as well as support-
ing ‘product’ and ‘promotion’ decisions. All too often, ‘place’ activities are viewed
as the bit bolted to the back of production that gets inventory away from the fac-
tory and into stock-holding points such as warehouses. In order to achieve the
goal of ‘the right product in the right place at the right time’, logistics systems and
processes need to be designed to support products in the marketplace.
Segmentation principles can also be applied to industrial marketing. But ‘there
are distinct differences between the marketing of industrial products and con-
sumer goods’ (Millier and Palmer, 2000: 60), as summarised in Table 2.2.
Table 2.2 Comparison between consumer and industrial marketing
Consumer Industrial
Customers Many, widely dispersed Few, concentrated
Market Consumers directly served by
retailers and distributors
Derived demand
Industrial chain, long and complex
Buying
behaviour
Individual and family decision Group decision
Formal procedures
High buyer power
Relationships Low individual buying power Formal procedures
High buyer power
Product Standard
Positioned on emotional and
perceptual factors
Technical complexity
Specification important
Bespoke and customised
Price Low unit price
Take it or leave it
No negotiation
High unit price
Tender and negotiation
Standard items from price list
Promotion Mass media advertising
Role of the brand
Emphasis on personal selling
Reputation important
Place Established retail chain
Stock availability, Seasonality
Direct made to order
Standard items in stock
Let us turn to an industrial marketing example to illustrate how new segments
can impact on logistics capability.
Powerdrive Motors
Tom Cross took over as Managing Director at Powerdrive Motors in South Africa three
years ago. At the time, the company was an established manufacturer of small electric
motors with a strong reputation for product reliability and technical leadership. On the
CASE STUDY
2.2
Segmentation 43
downside, it was also regarded in the trade as having high prices and variable delivery.
Tom’s first task was to tackle the huge product variety on offer. He saw this as the major
problem in addressing the negative views in the marketplace, and also saw opportuni-
ties in streamlining design and production. The product range was replaced with a new
generation of designs based on a few hundred ‘modules’, which could be assembled in
many different combinations to give variety at low cost. This meant the loss of some
customers who had gone to Powerdrive because they could rely on the company’s
technical leadership to produce designs that suited their particular needs. This was not
considered important because the combined sales volume of such customers was under
5 per cent.
Using the new designs, Tom was now able to reorganise the factory into cells that
produced major subassemblies such as rotors and stators. The work flow was trans-
formed, and manufacturing throughput time was reduced from six weeks to just four
days. Cost improvements meant that average price reductions of between 10 and
15 per cent could be offered.
Powerdrive’s customer service policy was redrafted to offer quotations within a
maximum of one hour of any enquiry, and for deliveries of finished product to be
made within one week ‘anywhere in northern Europe’. This new policy was explained
to internal sales staff, and to sales representatives and agents employed by the organ-
isation. If ‘old’ customers wanted special designs that were no longer in the range,
the sales staff were instructed to explain Powerdrive’s new policy and politely decline
the order.
At first, business soared. Impressed by the lower prices and short delivery times,
customers flocked to Powerdrive and sales jumped by 50 per cent. But then things
began to go sour. First, the factory could no longer cope with the demands being
placed on it. The addition of a large order for lawnmower motors blocked out a lot of
production capacity from January to June. Order lead times during this period in par-
ticular slid back to former levels. Second, a Brazilian supplier spotted the opportunity
to enter the market with prices that undercut Powerdrive by 20 per cent. While only
half of the product range was covered by this new entrant, it was the high volume
products that were especially threatened. Further, the new competitor offered three-
day lead times from stock that had been established in the country. Third, some of
the former customers who could no longer obtain their bespoke designs from Power-
drive were complaining within the industry that Powerdrive’s technical leadership
had been sacrificed. Although small in number, such customers were influential at
trade fairs and conferences.
Questions
1 Evaluate the changes that took place in the segmentation of Powerdrive’s market.
2 Characterise the changes using the concept of order winners and qualifiers.
Segmentation is often undertaken by adopting the easy way to group
customers – by account size. While this is easily measurable, it fails on the
fourth of McGoldrick’s criteria listed above: it is not actionable in logistics
terms. An example from our research in the fast-moving consumer goods
(FMCG) sector illustrates the problems of poor alignment between marketing
and logistics.
Segmentation at CleanCo
CleanCo is a Polish manufacturer of cleaning products that serves the European grocery
retailing market. CleanCo currently segments its customers on the value of customer
accounts. The primary division is between national accounts, for which ten accounts con-
stitute 70 per cent of sales by value, and field sales, which comprise a long ‘tail’ of more
than 200 accounts that together make up only 30 per cent of sales. Due to the size of
the field sales structure, a secondary classification groups accounts by channel type:
neighbourhood retail, discount and pharmacy. CleanCo recognises the need to reduce
the long customer ‘tail’ and is introducing distributors for orders below a minimum
quantity. CleanCo’s current approach to segmentation is summarised in Table 2.3.
While CleanCo currently segments its retail customers by account size, its sales
organisation has identified two significant types of buying behaviour displayed by the
customer base, shown in Table 2.4:
● volume-driven buying behaviour;
● margin-driven buying behaviour.
Volume-driven customers are keen to capitalise on both product and supply chain cost
savings in order to pass them on to their customers to drive volume sales. There are two
variants of the volume-driven behaviour:
● everyday low price (EDLP);
● discount.
Retailers pursuing an EDLP strategy strive for continuous price reduction from suppli-
ers such as CleanCo to drive a fairly consistent, high volume of sales. This should result
in a relatively stable pattern of demand in the washing and bathing sector. Discounters,
on the other hand, are looking for bargains so they can ‘stack ‘em high and sell ‘em
cheap’, a strategy more likely to result in a volatile demand pattern. Margin-driven cus-
tomers are keen to add value for their customers by offering a wide selection of prod-
ucts and value-adding services. This strategy also results in a relatively stable demand
pattern in this sector.
A complicating factor when trying to deconstruct the buying behaviour of CleanCo’s
customers is that several secondary factors are used to support products in the marketplace.
44 Chapter 2 • Putting the end-customer first
Volume-driven Margin-driven
Everyday lowprice (EDLP)
Discount
CASE STUDY
2.3
National accounts Field sales
70% sales 30% sales, 200+ accounts
10 accounts Neighbourhood retail Discount sector Pharmacy
Table 2.3 CleanCo – current approach to market segmentation
Table 2.4 CleanCo – potential for behavioural segmentation
Segmentation 45
Such factors include product types (e.g. premium, mid, utilitarian), product range (e.g.
current products, end of lines, ‘b’ grade), merchandising requirements (e.g. category
captains) and promotions strategy (e.g. roll-back, 12-week, 4-week, Hi-Lo). Promotions
are by far the most disruptive of these factors. Although the promotions are generally
planned well in advance with the retailers, they cause significant disruption to the
supply chain operations due to the peaks and troughs in demand that they create.
Furthermore, the deeper the promotional activity the greater the volatility created and
the greater the disruption to the supply chain. This has the effect of masking what is
fundamentally a fairly stable demand pattern with somewhat artificial volatile demand.
Strategic alignment can only be achieved if the supply chain is aligned behind the
segmentation strategy that CleanCo has adopted. This is not currently the case with the
CleanCo supply chain. Each operation within the supply chain makes decisions or seg-
ments its customers based on the functional criteria that affect its part of the supply
chain. We have called this lack of alignment ‘matrix twist’, because the matrix of busi-
ness processes at each stage of the supply chain has been apparently twisted so that the
processes fail to fit with each other. As illustrated in Table 2.5, the decision criteria for
CleanCo and its suppliers and customers change at each stage. This not only compli-
cates material flows, but becomes a minefield if one considers it in terms of behavioural
segments.
(Source: Godsell and Harrison, 2002)
We develop the management processes ‘source’, ‘make’ and ‘deliver’ in the next
chapter.
Questions
1 What has caused the ‘matrix twist’ between CleanCo and its retail customers?
2 What actions are needed to straighten out the ‘matrix twist’?
Management
process
Supply chain
decision
Determined by
Source Which suppliers? Raw material commodity type
Make Which
manufacturing site?
Product family type
Deliver Which manufacturer
order size?
Historically a function of warehouse?
In process of being divided by export
paperwork requirements and customer account
(arbitrary split)
Which customer
RDC?
Product type and location of store to serve
Which products to
which store?
Demographics of the store’s catchment area,
which drives layout and range decisions
Table 2.5 Supply chain segmentation criteria
46 Chapter 2 • Putting the end-customer first
2.3 Demand profiling
Marketing people want to forecast demand in order to plan broad goals such as
allocating the salesforce, setting sales goals, promotions planning and advertis-
ing campaigns. But logistics people need to know how many to deliver, where
and when to do so, for each sku in the product range and for each channel – not
just for the range as a whole. This leads to a common perception of the two
functions – marketing dealing in the abstract and logistics dealing in the day-to-
day realities. The two business functions must be careful not to talk past each
other, for both have important insights into what the end-customer wants. For
many firms, of course, this is not an issue, and the two functions collaborate ex-
tensively. The aim is to combine forces and produce the most accurate profile of
future demand.
It is impossible to predict the future with certainty, so it is necessary to forecast
what will happen. Accurate forecasts of demand are one of the key starting points
for achieving competitive supply chains, reflected in such measures as high on-
shelf availability (the percentage of a trading day for which a given sku is avail-
able ‘on the shelf’ to be purchased by an end-customer) and low inventories. The
key approaches to forecasting demand are explained at length in such texts as
Wild (2002) and Waters (2003). Here, we will stick to some of the broad principles
that apply to forecasting: first when there are limited or no historical data
available, and second when such data are available.
First, consider the demand profiles in Figure 2.2 when forecasting demand for
a new product during the early stages of its lifecycle (introduction and growth).
Introduction Growth
Stage in product lifecycle
V
o
lu
m
e Actual demand
Excess unsold stock
Missed sales
opportunities
Maturity Decline
Figure 2.2 The impact of uncertainty
Demand profiling 47
A forecast which over-estimates the way that demand takes off results in too
much inventory too early in the product lifecycle. If this situation is allowed to
continue, it will result in the need to get rid of the surplus unsold stock by mark-
downs or by disposal. On the other hand, a forecast which under-estimates actual
demand results in insufficient stock to meet what the end-customer wants. If al-
lowed to continue, this results in lost sales opportunities and hence loss of market
share to competitors who can better meet demand. Both scenarios are familiar
challenges for grocery (such as managing promotions) and planning fashion goods
for a new season when there is no directly usable history of demand, and forecast-
ing relies on judgemental methods such as historical analogy, perhaps augmented
by market research. New drugs (called ‘new pharmaceutical entities’, NCEs) are es-
pecially problematic because of the uncertainties of approval from the Food and
Drug Administration (FDA) – which takes five years on average – and the take-up
by physicians after launch. Lifecycle curves and growth functions can be used to
model demand by incorporating ‘market based evidence, uncertainty and judge-
ments about what might happen during the drug’s lifetime’ (Latta, 2007).
When historical demand data such as point of sale (POS) are available, various
modeling techniques can be used to produce projective forecasts. Consider the de-
mand profile in Figure 2.3, which shows actual demand for years 1–3, and forecast
demand for years 1–4. It is based on the profile of sales of a product called ‘barbecue
sauce’, which is produced in many flavours and is sold mainly in the summer.
Differences between actual A and forecast demand F (Case study 1.3 uses sched-
uled demand, S) for each period n of years 1–3 are termed the error, E:
En � An � Fn
Year 1
Actual Forecast
Sa
le
s
vo
lu
m
e
Year 2 Year 3 Year 4
Forecast
Actual
Figure 2.3 Modelling trend and seasonality (continued)
(a)
48 Chapter 2 • Putting the end-customer first
If data are collected over a number of periods n (here, n = 36), then the mean
absolute deviation (MAD) is a widely used measure of forecast error:
In practice, the MAD may be exponentially weighted to give higher weightings to
the most recent demand data (Wild, 2002: 176).
The sidebar on Figure 2.3 shows how the total (aggregate) demand for this
product can be broken down into four components:
● Base: the level demand that needs to be adjusted for trend and seasonality.
● Trend: the long-term trend, which shows a healthy increase year-on-year from
base.
● Seasonality: the periodic increase and reduction in demand as a result of consumer
behaviour – in this case between summer and winter. This can be measured by
MAD � 1/n* a
N
n � 1
|An � Fn|
Base and trend
Seasonality
Uncertainty
Base
Year 1 Year 2 Year 3 Year 4
Year 1 Year 2 Year 3 Year 4
Year 1 Year 2 Year 3 Year 4
Tren
d
Figure 2.3 Continued
(b)
Demand profiling 49
means of a seasonal index – which is the seasonal value divided by the trend, calcu-
lated for each period.
● Uncertainty: sometimes called ‘randomness’, this is the balance of demand due
to effects we cannot explain. These effects may include short-term weather
variations, which mean that the consumer is put off barbecuing because it is
too cold, wet or windy. Other demand ‘spikes’ may be due to special causes like
the promotion of a particular flavour of sauce by a chef in a popular television
programme.
Base and trend demands can be found by linear regression analysis, and a sea-
sonality index can be found by dividing the original data by the trend for each
period. Uncertainty is usually allowed for by increasing the forecast to provide a
safety margin to make it unlikely that there are missed sales opportunities (see
Figure 2.2). Forecast demand for a future period n is then calculated from;
So forecast demand for year 4 was based on projecting historical data for these
four components into the future.
So far, the forecast has been carried out at the aggregate level, ‘barbecue sauce’.
And this is what forecasting professionals often encourage you to do – forecast
accuracy is best at aggregate level and worst at sku level. But there are many
flavours in the range – such as sweet hickory, Cajun and peri-peri. And there are
different pack sizes and territories that are supplied. So the aggregate plan has to
be disaggregated into individual skus. This is often achieved by calculating the
percentage of the total demand for each sku from historical data, and then apply-
ing a seasonality index to refine the forecast for each period (see, for example,
Ogrodowczyk, 2008). We return to the issue of disaggregation in section 6.1.1.
Forecasting is a major factor in logistics today, and we have only touched on
some of the key issues in this section. We address further issues in other sections
of this book as follows:
● Because of uncertainty, it is better to rely less on forecasting by shrinking lead
times and engaging more closely with actual demand (section 5.1.3).
● Several management approaches can be used to improve forecast accuracy
(section 7.1.3).
● Forecasting should be recognised as a key business process (section 7.2.4).
● Poor internal coordination compounds forecasting problems (section 6.1.3).
● External coordination with partners in a supply chain can be used to develop
better forecasts through collaborative planning, forecasting and replenishment
(CPFR, section 8.3).
Fn � (base � trendn) � seasonality indexn � uncertaintyn
Explain how marketing and logistics functions should work together to develop segmentation
plans that can more easily be made to work in practice, and to create more accurate forecasts of
demand.
Activity 2.2
50 Chapter 2 • Putting the end-customer first
Supplier Customer
Gap 1
Gap 4
Gap 2 Gap 3
Service
specification
Expected
service
Service
delivery
Perceived
service
Figure 2.4 Simplified service quality gap model
(Source: After Parasuraman et al., 1991)
2.4 Quality of service
Key issues: How do customer expectations affect logistics service? How does satis-
faction stack up with customer loyalty?
Most supply chains that involve physical products end with service processes such
as retailing (grocery or apparel), healthcare (pharmaceutical and other medical
goods) and distribution (motor cars). Service processes mean that the customer is
present in some way, although distribution through web-based shopping, tele-
phone and mail order mean that customers do not have to be physically present.
Performance of service processes often differs between employees, between cus-
tomers and from one hour to the next. If you want good service from the local su-
permarket, do not go on Saturdays or near to Christmas when the service is under
severe capacity pressure: on-shelf availability is at its lowest, and queues at the
checkout are at their longest. The key point is that ‘service is the combination of
outcomes and experiences delivered to and received by the customer’ (Johnston
and Clark, 2008).
Quality of service takes place during service delivery, which is the interaction
between the customer (B2B or B2C) and the service process. ‘Gaps’ can emerge
between what the service is supposed to be, what the customer expects it to be,
and how the customer perceives it when it is delivered (Zeithaml et al., 1988;
Parasuraman et al., 1991). We can illustrate these gaps as a simplified gap model
(Figure 2.4):
● Gap 1 refers to differences between customer expectations and how these have
been developed into a service specification by the supplier.
● Gap 2 refers to differences between how the specification was drawn up and
how it was delivered.
● Gap 3 refers to differences between what the customer expected and what he
or she perceived was delivered.
● Gap 4 refers to differences between how supplier and customer perceived the
service delivery.
Gaps in quality of service can arise, as seen in Case study 2.4 on IKEA.
Quality of service 51
Tears at teatime at IKEA
Next week, Jane Fillimore will move into a new flat. You can tell something about the
28-year-old music-industry publicist from Kilburn, north-west London, from the list of
furniture she is buying. There is the Pax Brivic wardrobe, the Norden dining table and
the Bonde media storage combination. Fillimore wants style – but on a budget. She is
part of Generation IKEA.
Not that she wants to be. She hates the Swedish retailer, and only last Sunday had
her worst shopping day ever at the firm’s superstore in a drab retail park near the new
Wembley stadium in London.
She wanted to pick up the Pax Brivic wardrobe she had ordered the week before.
Easy, you might think, but just getting served was an ordeal. When she entered the
store, an assistant told her to ‘walk the mile of hell’ past wannabe-stylish urban living
rooms to the giant storage zone.
The store did not have her wardrobe and a salesman sent her back through road
works to IKEA’s nearby distribution centre. The distribution centre had the wardrobe,
but could not give it to her without a receipt. To get one, she had to go back to the
main store. But the main store had lost her order, so she had to go to customer service.
This department is not called customer service at IKEA, it’s called customer returns, and
it took her half an hour to find.
By 4.30 pm, Fillimore was right back where she started. Exasperated, she put her head
in her hands and burst into tears. ‘I don’t even like the wardrobe’, she sobbed. ‘I bought
it because it’s cheap. That’s the only reason I come here.’ By 5.00 pm, the store is clos-
ing, and she can only dream of getting her wardrobe by Friday. She could walk back
through the little sets that represent the nation’s living rooms to try one last time to find
her wardrobe, but she can’t face it. As she walks out, I ask her if she knows that Argos
and Sainsbury’s (two other UK retailers) are selling furniture. For the first time all day,
she breaks into a smile.
‘Really?’ she grins. ‘I’ll go there tomorrow. I never want to come back to this place again.’
(Source: Based on an article by John Arlidge, Sunday Times, 26 October 2003)
Question
1 When IKEA was founded 60 years ago by Ingmar Kamprad, he realised that cus-
tomers did not mind queuing, collecting their purchases and assembling the furni-
ture themselves as long as the price was right. Suggest why gaps in quality of service
have opened up.
CASE STUDY
2.4
2.4.1 Customer loyalty
While plugging gaps in service quality helps to improve customer satisfaction,
this is a ‘qualifier’ for long-term customer loyalty. The two concepts are not the
same. Piercy (2009) distinguishes them as follows:
● Customer satisfaction is what people think of us – quality of service, value for
money. It is an attitude (how does a customer feel about our product/service?).
● Customer loyalty is how long we keep a customer (or what share of his or her
business we take). It is a behaviour (does he or she buy from us more than once?).
52 Chapter 2 • Putting the end-customer first
Relatively easy for competitors to imitate
Perceived
value
Customer
loyalty
Product
quality
Service
quality
Price
Figure 2.5 Key drivers of customer loyalty
(Source: After Parasuraman and Grewal, 2000)
Nevertheless, the attitude of customer satisfaction is key to the behaviour of
customer loyalty. Parasuraman and Grewal (2000) link the two concepts by pro-
posing the ‘key drivers of customer loyalty’, shown in Figure 2.5. Also, note the
connection to Tesco’s core purpose on page 6. There is a purpose to this beyond
the words: Tesco seeks actively to extend its relationships with customers by
offering a broad range of services such as optician, pharmacy, non-food, and
bank and insurance products. All purchases in these diverse categories and its
core grocery business are rewarded by the firm’s loyalty programme, which pro-
vides Tesco with further detailed insights into the behaviour of its customers.
This data can be used for sophisticated segmentation that allows all customers to
be ‘scored’ in one or more segments to allow accurate measurement and targeting
(Finne and Sivonen, 2009).
The benefits of customer loyalty are potentially huge. The loyal customer
should be viewed in terms of lifetime spending potential. Thus, a customer of
VW Audi Group could be viewed as worth €300k rather than the €30k of today’s
sales transaction. As Johnston and Clark (2005) put it, loyal customers:
● generate long-term revenue streams (high lifetime values);
● tend to buy more than new customers;
● tend to increase spending over time;
● may be willing to pay premium prices;
● provide cost savings compared with attracting new customers.
The logistics challenge is to support the development of customer loyalty by
designing and delivering quality of service. Of the three drivers of customer
loyalty shown in Figure 2.5, quality of service is ‘essential for excellent market
performance on an enduring basis’ (Berry, 1999: 8–9). The rationale for this is
that ‘service quality is much more difficult for competitors to copy than are prod-
uct quality and price’. Supporting product availability through such means as
channel selection, market coverage, distribution systems and dealer support
all help to nourish customer loyalty. So does logistics support of product charac-
teristics (such as variety or product range) and of marketing initiatives (such as
promotions).
Quality of service 53
2.4.2 Value disciplines
Figure 2.5 refers to ‘perceived value’. A development of the service quality–product
quality–price model is that of value disciplines. Instead of competing on all of these
fronts equally, Treacy and Wiersema (1997) argue that companies taking leadership
positions do so by narrowing their competitive focus, not by broadening it. They
propose three strategies, or ‘generic value disciplines’ that can be followed:
● Operational excellence. Here, the strategy centres on superb operations and exe-
cution, often by providing a reasonable quality at low price. The focus is on ef-
ficiency, streamlining operations, supply chain management and everyday low
price. Most large international corporations use this discipline.
● Product leadership. Here, the leaders are very strong in innovation and brand
marketing and operate in dynamic markets. The focus is on development, in-
novation, design, time-to-market and high margins in a short timeframe. ‘It
was the ability of Apple to innovate in many spaces – getting the music compa-
nies to agree to 99 cent pricing, creating wonderful iTunes software, making a
terrific physical product, the iPod, that just works in your hand – that gave Steve
Jobs his success. It was building an ecosystem of innovation, not just the iPod,
that did it’ (http://www.businessweek.com/innovate/NussbaumOnDesign/).
● Customer intimacy. Here, leaders excel in customer attention and customer service.
They tailor their products and services towards individual or almost individual
customers. The focus is on customer relationship management (next section):
they deliver products and services on time and above customer expectations. They
also look to lifetime value concepts, reliability and being close to the customer.
While most organisations are under pressure to reduce prices, speed up delivery
and improve customer service, the best will have a clear focus (page 29) as a key part
of their competitive strategy. This focus needs to be improved and adapted over time.
Evaluate Treacy and Wiersema’s value disciplines based on Porter’s views on differentiating
strategies (section 1.4.3).
Activity 2.3
2.4.3 Relationship marketing and customer relationship
management (CRM)
A development of customer intimacy is relationship marketing. Here, the aim is
to develop long-term, loyal customers through ‘bonding’ with them. This devel-
opment can take place at three levels (de Chernatony and McDonald, 2003):
● Financial incentives: such as frequent flyer schemes and reward cards.
● Social and financial bonds: from a dentist making personal notes about clients
that can be used on subsequent visits to accountants taking their clients to
rugby matches.
● Structural bonds: such as IT systems that bind client and customer together,
sometimes called ‘electronic handcuffs’.
54 Chapter 2 • Putting the end-customer first
Supplier Customer
Bow-tie relationship:
Limited to sales and buying
Supplier Customer
Diamond relationship:
Extended across all functions
of both firms
Logistics
R&D
Sales Purchasing
Information
systems
R&D
Information
systems
Marketing
Information
systems
Marketing
Information
systems
Operations
Logistics Operations
Relationship
management
Supplier
development
Figure 2.6 Customer relationship management: bow tie and diamond
(Source: After Payne et al., 1995)
This development process becomes a strategic task. The principle behind cus-
tomer relationship management (CRM) is that marketing strategies are continu-
ously extended in order to strengthen customer loyalty. Eventually, customer and
supplier are so closely intertwined that it would be difficult to sever the relation-
ship. In other words, the exit barriers become higher and higher. CRM ‘provides en-
hanced opportunities to use data and information to both understand customers
and co-create value with them. This requires a cross-functional integration of
processes, people, logistics and marketing capabilities that is enabled through infor-
mation, technology and applications’ (Payne and Frow, 2005). Figure 2.6 compares
CRM thinking with traditional relationships that are limited to buying and selling
functions of the organisations concerned (Payne et al., 1995). We explore the issue
of partnerships in the supply chain further in Chapter 9. Case study 2.5, Batman,
illustrates the evolution of diamond-type relationships in an industrial setting.
Batman – adding value through quality of service
Everglo Battery, the premier battery manufacturer and service provider in South Africa,
looked back on the development of its marketing strategy in four stages. Each had been
signalled by advancing the concepts of what is meant by ‘quality of service’. Stage 1
had been the basic product: a sealed lead-acid battery for use in mining applications.
Batteries were regarded by customers as a mature product and as a ‘grudge buy’.
CASE STUDY
2.5
Quality of service 55
Each year, the basic product was under heavy downward price pressure. Stage 2 had
been the industry reaction to customer service: the addition of warranty replacement of
defective products, of quality assurance (QA) audits of a supplier’s design and manufac-
turing processes, and of parts and service provision.
Stage 3 had recognised the need to go much further in terms of customer service. A
whole raft of additional services had been conceived with a view to adding value.
Breakdowns were fixed at short notice by means of field service engineers. Everglo
products could now be delivered and installed at customer premises. Price lists were
simplified by including peripheral equipment, such as contactors, that had to be added
to a battery rack in order to make it work. Advice and tips were added to help cus-
tomers warm to Everglo products. In a proactive move, Everglo introduced charts and
advice about the application of battery products in general, and the resulting tables be-
came an industry standard. Parts and service in the field were upgraded to a ‘24-hour,
no-nonsense back-up service’. And customer training built on Everglo’s position as an
industry leader. Rather than sales seminars, Everglo’s were customer training seminars,
where the company spoke on behalf of the industry rather than as a supplier.
In spite of having reached a pre-eminent position in mining power supply, Everglo
recognised that the centre of Figure 2.7 was in effect a ‘black hole’. Each year,
Warranty
Field
product
knowledge
Delivery
and
installation
Basic
product
Parts
and
service
Customer
training
Quality
assurance
Charts,
advice
Features
24-hour, no-nonsense
back-up
‘Black box’
that gives power for life
Figure 2.7 Adding value by quality of service
56 Chapter 2 • Putting the end-customer first
2.4.4 Measuring service quality
Going back to the start of this section, it is helpful to have in place measures of
performance of service processes. These can be used to monitor performance over
time and to compare (‘benchmark’) the processes with others. Table 2.6 lists ex-
amples of service level measures used in retail supply chains.
2.5 Setting priorities for logistics strategy
Key issues: How can we segment our market to make it easier to supply? How can
we use such knowledge to improve logistics strategy?
Setting priorities to assure quality of service leads to establishment of performance
measures. Priorities should be used to help ensure that:
● partners in a supply network focus on providing end-customer value;
● partners in that network can see how well the network as a whole is performing
against this yardstick.
In this way they can judge whether performance is improving or declining, and
assess the effect that changes to the system may have on quality of service.
In order to set priorities for quality of service, we begin by putting the end-
customer first. The aim is to identify groups of end-customers whose needs can be
serviced in focused, targeted ways. The needs define groups and give them an
identity, as we explained in section 2.2 on segmentation. Because segments there-
fore have different characteristics, it is usually a mistake to take a ‘one size fits all’
competitors added more services to their basic products too. In effect, the second
and to some extent the third circles were being absorbed into the ‘commodity’ cate-
gory, and customer expectations increased all the time. A new stage 4 strategy was
conceived to take Everglo into a position that competitors would find even more dif-
ficult to follow. The new strategy was coined ‘Batman’: battery management for life.
The aim was nothing less than a total, customer-oriented product management serv-
ice that provides ‘power for life’. The supplier takes over the task of managing the
customer’s assets, including problem identification, training and managing cash
flow. The objective of ‘Batman’ is to look at the product the way the customer does,
performing best at what the customer values most rather than at what the supplier
values most.
Questions
1 Has Everglo reached the end of the line in terms of its quality of service strategy?
2 As a competitor to Everglo, what would be your options in response to Everglo’s
latest moves?
Setting priorities for logistics strategy 57
Inventory/availability Physical and accounting correspondence: number of orders with mistakes divided by the total
number of orders in the warehouse in the same period of time
Stock turnover: quantity delivered or shipped divided by the average stock in the warehouse
in the same period of time
Stockout: number of orders out of stock divided by the total number of orders placed in the
same period of time.
Flexibility Flexibility: number of special/urgent/unexpected orders confirmed to the customer divided
by the total number of special/urgent/unexpected orders required by the customer
multiplied by 100 in the same period of time
Service care Punctuality: number of orders delivered on time divided by the total number of orders
delivered multiplied by 100 in the same period of time
Regularity: number of orders delivered with a nt of delay/advance divided by the total
number of orders delivered multiplied by 100 in the same period of time
Completeness: number of full orders delivered divided by the total number of orders
delivered multiplied by 100 in the same period of time
Correctness: number of orders with mistakes dispatched divided by the total number of
orders dispatched multiplied by 100 in the same period of time, or
Number of codes/articles sent back divided by the total number of codes/articles sent
multiplied by 100 in the same period of time
Harmfulness: number of damaged orders dispatched in a period divided by the total
number of orders dispatched in the same period multiplied by 100
Delay: number of days of delay (or number of days of delay divided by the number of
days promised) multiplied by 100
Supply conditions Delivery frequency: number of orders delivered in a certain period of time
Shipped quantity: quantity shipped in a certain period of time or quantity dispatched for
each shipment
Presentation: method of packaging and of shipment, alignment with customer process
Lead time Total order cycle time: occurring from the arrival of a customer order to the receipt of
goods or cycle time of the single activities (order transmission, order processing, order
composition, order transfer to the production plant, article production, warehouse
delivery, final delivery to the customer)
Response time: to order tracking requests, etc.
Marketing Range completeness, information on products and selling assistance
Order management Documents management (invoices and orders), client contacts and order advancement
state, etc.
After sales Speed of response: to back orders, claims management, use assistance and payment
management, fulfilment of warranty conditions, etc.
e-information Web site completeness, ease of making orders by network and data transmission security, etc.
(Source: After Rafele, 2004)
Table 2.6 Selected service level measurements in retail supply chains
58 Chapter 2 • Putting the end-customer first
approach to servicing them. Our research has shown that the starting point for
segmentation is often conceived by marketing in isolation, and does not make any
sense in logistics terms (Godsell et al., 2006). Logistics is therefore left with an im-
possible task. Since logistics is actually part of the marketing mix (see ‘place’ under
section 2.2 above), ability to provide quality of service is off to a bad start!
Our framework for creating logistics advantage (Harrison, 2010), shown in
Figure 2.8, therefore starts by reviewing and re-engineering the current approach
to market segmentation in a focal firm and its immediate supply chain partners.
Typically, this re-engineering takes place in collaboration with strategic suppliers
two tiers upstream and strategic customers two tiers downstream.
Diagnose current approach
to market segmentation
A: Identify key
buying behaviours
B: Customer value
analysis
Measure logistics
strategy drivers
Specify future approach to
market segmentation
Step 1
Step 2
Step 3
Step 4
Figure 2.8 Creating logistics advantage: a four-step process
Source: (Harrison, 2010)
2.5.1 Step 1: Diagnose current approach to market segmentation
Current approaches to segmentation may drive elements of logistics strategy to a
limited extent, or they may have no relevance in logistics terms. Segmentation in
the CleanCo case (Case study 2.3) was based on national accounts and field sales,
that is, by account size. This was in line with the way that sales and marketing
functions were organised. There were no effective links between marketing
and logistics – in logistics terms, only the distribution function was differentiated
according to channel.
Another example from our research is AutoCo, a manufacturer of automotive
seat subassemblies which supplies seat manufacturers such as The Lear Corpora-
tion, and automotive assemblers such as BMW. AutoCo currently segments its
customers first by the country from which customers purchase, and second by
customer within that country. Customer facing teams (CFTs) comprise a sales
manager, an engineer and a product designer. These teams deal with each of the
segments, and place orders on manufacturing units (based in England, Poland,
Norway and Sweden). While this made sense in marketing terms, CFTs were not
Setting priorities for logistics strategy 59
coordinated between customer countries. The supply network was therefore
fragmented, and manufacturing units were left to compete with each other for
business.
2.5.2 Step 2a: Understand buying behaviour
The sales organisation in the CleanCo case (Case study 2.3) had identified two
significant types of buying behaviour by its retail customers: volume driven and
value driven.
● volume-driven behaviour is driven by the retailers who want to offer low prices
to end-customers in order to drive high volumes. The EDLP variant of this be-
haviour places pressure on supply partners such as CleanCo for continuous
price reduction. In turn, this generates a relatively stable demand pattern for
the supply chain – unlike a retailer who regularly promotes the same product
by means of special offers.
● margin-driven behaviour is driven by offering a wide selection of products and
value adding services. Cost savings were not necessarily passed on to the cus-
tomer but could be used to invest in additional value adding activities. This
strategy also resulted in a relatively stable demand pattern.
Other behaviours by retailers are also possible – such as discounting and pro-
motion. But the key point is that the different behaviours must be characterised
and specified in terms of their logistics implications, along the lines of Table 1.1.
Using order winners and qualifiers helps to bridge marketing and logistics per-
spectives. While there are dangers in a ‘one size fits all’ logistics strategy (low cost
but low service) in the same way that there are dangers in over-customisation
(high cost and complexity), the compromise solution is to specify three or four
substantive segments (Gattorna, 2006).
Discussing the characteristics of customer behaviour within a cross-functional
group in a workshop setting helps to spawn ideas on patterns. It is often easier to
make sense of the data if they are used to plot graphs and charts. Venn diagrams
such as the one shown in Figure 2.9 are helpful to illustrate patterns that may
appear among the analysed data.
On-time
delivery
Minimum
cost
Intensive technical support
Figure 2.9 Analysing the influence of demand characteristics
60 Chapter 2 • Putting the end-customer first
2.5.3 Step 2b: Customer value analysis
Customer value is the customer-perceived benefit gained from a product/service
compared with the cost of purchase. In order to measure customer value, we need to
understand what aspects of a product or service a customer values (Johnson and
Scholes, 2008). Here, we are primarily interested in aspects of customer value which
impact on logistics strategy. Three aspects in particular relate to buying behaviours:
● demand profile: the characteristics of demand in terms of volume and variety,
and of demand variability and uncertainty (section 2.3);
● competitive profile: how the focal firm chooses to compete in the marketplace
(section 1.3);
● product profile: the extent to which the product is customised to specific cus-
tomer requirements.
Customer value is assessed by means of a questionnaire to measure customer
views of these aspects in terms of:
● importance (on a 0–100 scale);
● performance of the focal firm and a key competitor (0–5 Lickert scale);
● price level of the focal firm relative to the key competitor (0–5 Lickert scale).
Examples of customer value profiles for two customers of AutoCo (referred to in
step 1 above) are shown in Figure 2.10
We return to the concept of ‘value’ in Chapter 3. Meanwhile, we will continue
to use the AutoCo example to illustrate steps 3 and 4.
2.5.4 Step 3: Measure logistics strategy drivers
Here, we examine demand profile and competitive profile as drivers of logistics
strategy (based on Godsell et al., 2006):
● Demand profile. The time that the customer is prepared to wait to have his or her
order fulfilled is defined as ‘D time’, which is further explored in section 5.2. D
time may be measured in time-related measures from months to seconds. Essentially,
this sets time objectives for the supply chain. Response in seconds means that there
is no time to procure materials or to process them. Therefore, inventories of finished
product are inevitable. However, as D times reduce in turbulent markets, holding in-
ventories becomes an increasingly risky option, and in turn places increasing pres-
sure onto supply capabilities. A focal firm may decide to respond to such pressure by
reducing the range on offer, and by increasing the commonality of parts between dif-
ferent skus. At the other end of the scale, if the customer is prepared to wait for a long
enough period to enable design and procurement processes to be completed, a rela-
tively high level of customisation may be possible.
Forecast error (section 2.3) ties in with the logistics need to align mid- to
longer-term capacity decisions with demand. In Chapter 5, we argue that re-
ducing the total supply chain throughput time (P time) reduces the need to
rely on forecasts. But clearly there is a limit to how far this ideal can be pushed.
Being able to respond immediately to actual demand means that logistics
Setting priorities for logistics strategy 61
AutoCo customer A:
high volumes, short lead times
Coping with demand
uncertainty and short order
lead times are most important
Most
Importance
Least
D
em
an
d
u
n
ce
rt
ai
n
ty
O
rd
er
le
ad
ti
m
e
D
el
iv
er
y
re
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ty
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em
an
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it
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AutoCo customer B:
uncertain demand, lower volumes
Product quality and delivery
reliability are most important
Most
Importance
Least
P
ro
d
u
ct
q
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al
it
y
D
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y
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em
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fr
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P
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1
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Figure 2.10 Customer segmentation using order winners
62 Chapter 2 • Putting the end-customer first
capabilities have been put in place to do so. In particular, it is still necessary to
make mid- to longer-term forecasts – for example to allow for advanced orders
to suppliers, long cycle time production processes and to expand facilities.
It is also tough in logistics terms to support high levels of volume variation of
demand across a given time period in a given supply chain. Constraints such
as capacity limitations and fixed order quantities and lead times inhibit what
may be done. Building buffer capacity into the supply chain (in the form of in-
ventories or spare production capacity) may be too costly. Instead, it helps to
analyse the causes of volume variation. Two main factors are the differences
between peaks and troughs of demand, and the frequency with which peaks
and troughs occur. A standard seasonal pattern may have just one peak (sum-
mer for garden furniture, for example), whereas fashion industries may have
six seasons or more. Retail promotions may create peaks every other week,
which lead to volume variations of 60 to 70 per cent of ‘normal’ demand.
Figure 2.11 shows how demand characteristics can be analysed.
● Competitive profile. This is based on the competitive factors we introduced in
section 1.3 – hard objectives (quality, time and cost), supporting capabilities
(controlling variability, dealing with uncertainty in logistics processes and
sustainability) and soft objectives (such as confidence and security). For exam-
ple, Ford chooses to compete on low price and delivery speed (by making to
stock), while BMW chooses to compete by making more expensive and highly
specified cars to customer order while the customer waits. While they also
appear in the demand profile as characteristics, we refer here to variability and
uncertainty in terms of a focal firm’s capability to cope with them better than
competition.
High
D times
Months Weeks Days Hours Minutes Seconds
Forecast accuracy
Low
LowHigh
90% forecast accuracy 50% forecast accuracy
Volume uncertainty
HighLow
Low peaks/troughs,
limited occurrence
High peaks/troughs,
frequent
Figure 2.11 Customer value profiles for two AutoCo customers
Source: (Harrison, 2010)
Setting priorities for logistics strategy 63
● Product profile. Determining the level of customisation requires analysis at two
levels. First, the proportion of products and sourced components that are cus-
tomised is measured for each sku supplied to the final process in the supply
chain (e.g. retailer or distributor). This analysis can result in the categorisation
of skus on the basis of levels of customisation: high, medium and low. Second,
we need to understand which processes or components are customised and
where they are positioned in the supply chain. For high levels of customisation,
particularly where it occurs early in the supply chain, the complexity that is
caused may be reduced in two ways. The relevance to customers may be ques-
tioned – is this extra variety giving value to the end-customer? Or, different op-
tions could be built in as standard. While some redundancy is created, greater
standardisation of supply chain processes and shorter lead times are gained.
All three of these profiles have profound implications for logistics strategy,
some of the key implications for which are summarised in Figure 2.12.
Logistics strategy drivers Implications for logistics strategy
Demand profile
• volume
• variety
• demand variation
• demand uncertainty
Competitive profile
• hard objectives
• supporting capabilities
• soft objectives
Product profile
• customisation v
standardisation
Buffers in the supply chain:
• amount and position of excess capacity
• amount and position of inventory
• how long the customer waits
How much of the supply chain is
customer order driven?
• which processes are speculative?
• which processes are order driven?
How is material controlled?
• centralised planning and control
• decentralised planning and control
Figure 2.12 Strategy drivers and their implications for logistics strategy
For example, the higher the demand variability and uncertainty, the greater
the need for buffers. Buffers can be in the form of spare capacity, inventory and
order lead times. If we want to shorten the time the customer has to wait, then it
is necessary to make speculatively – perhaps finishing off (customising) the prod-
uct once the final order details are known. Finally, planning and controlling the
flow of materials across the supply chain needs to be carried out centrally, when
in high demand variability and uncertainty conditions in order to coordinate the
response of supply partners. In more stable demand conditions, it is possible to
relax controls and allow more local flexibility.
2.5.5 Step 4: Specify future approach to market segmentation
Using logistics strategy drivers it is now possible to revisit the customer value pro-
files in Figure 2.11 and develop a fresh approach to segmentation that makes
sense in logistics terms. In Figure 2.13, the two customers (A and B) in Figure 2.11
are analysed in terms of their key demand and competitive profiles. Customers
A and B both want 100 per cent on time – in full – on quality delivery. However,
64 Chapter 2 • Putting the end-customer first
C
o
m
p
et
it
iv
e
p
ro
fil
e
D
em
an
d
p
ro
fil
e
More
efficient
L
L
L
S
L
L
H
H
H
H
H
H
H
H
L
L*
L
H
L
L
More
responsive
Approximate average
for AutoCo
Key:
Customer A
Customer B
H = high
L = low
S = short
L* = long
9sku 18sku
1 car 3 cars
17,760 4,524
100%
2–4 day 1 day
4/5 per week 1/2 per week
25PPM
Variety
Demand variability
Demand uncertainty
Volume
Delivery reliability
Order lead time
Delivery frequency
Product quality
Product innovation
Product customisation
Figure 2.13 Strategy drivers and their implications for segmentation
Source: (Harrison, 2010)
customer A places priority on higher volumes on shorter delivery lead times with
higher delivery frequencies. Customer B places priority on AutoCo’s capability to
meet uncertain demand, and on higher levels of customisation. It is now possible
to describe the segments typified by customers A and B in terms of:
● buying behaviour relevant to logistics strategy;
● customer-perceived value;
● profile of logistics strategy drivers.
All other major customers at AutoCo then need to be evaluated in similar terms
so that an overall segmentation strategy for the focal firm can be developed and
refined. As indicated earlier, the aim is to develop a ‘compromise’ strategy that –
like segmentation itself – seeks to describe logistics strategy ‘as simply as possible
while doing our best to emphasise its variety’ (Millier and Palmer, 2000). Case
study 2.6 gives you an opportunity to try out these concepts in the setting of a
food supply chain.
Bacalao – two supply chains for two markets
Bacalao is fish that has been salted and dried, traditionally in the open air on rocks; today
it is done in a drier. It has been produced in Norway since about 1640, can be kept refrig-
erated for several years, and is said to improve over time. It has developed a strong posi-
tion in the food cultures of many Latin countries – such as Brazil, the Dominican Republic
and Portugal – where consumers often follow the Catholic tradition of eating more fish on
Fridays and in the run-up to Easter. Marketing over many years has created the association
with Norway as ‘the land of bacalao’, or ‘bacalhau da Noruega’ as it is called. It is a matter
of great pride among consumers to master a variety of recipes for serving bacalao.
The overall supply chain is illustrated in Figure 2.14. It takes at least four weeks to
make the end product. The best fish is wild and taken by line, but trawled fish is also
CASE STUDY
2.6
Setting priorities for logistics strategy 65
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66 Chapter 2 • Putting the end-customer first
good, while nets give the lowest quality because the fish can be dead for a while before
being hauled up. Today, the fish is increasingly farmed as well. The raw material is the
major cost item: prices are set by the Råfiskelaget (the Norwegian raw fish association).
Prices can vary a lot – for example from NOK 26/kg to NOK 15/kg within a year. Electricity
and insurance are the other two major cost items. The fish is slaughtered (and bled on
boat for the best quality), then matured in salt for two to three weeks. After salting it is
dried, sorted, packed and distributed. There are no reliable ways of measuring salt and
water content, so manual methods of touching and feeling the fish during each stage
are used to ensure consistent quality and weight.
Bacalao is mainly produced from cod, which is preferred by Portuguese customers.
But consumers in the Dominican Republic prefer pollock, which is a darker-fleshed fish
that is more abundant in the North Atlantic. Cod is up to three times more expensive
than pollock. The Norwegian fish industry is highly fragmented, with many small-
scale fish farmers, fishermen and producers. Marketing activities are coordinated by the
Norwegian Seafood Export Council.
Consumers are very quality conscious when buying bacalao. Quality is determined by
colour, texture and firmness, as well as water content and size. Portuguese consumers
prefer smaller cod around 2.5 kilos, while consumers in the Dominican Republic are less
concerned with size. Note that quality here refers to grade of fish rather than to confor-
mance quality: both grades are fit for purpose in the markets they serve.
Bacalhau da Noruega
Company Noruega (CN) company has 150 employees, and built its bacalao production
facility in 1997 in the port of Ålesund – which has one of the largest harbours in Norway
and one of the most modern fishing fleets in Europe. The company focuses on volume
in order to benefit from the economies of scale. Production is stabilised through the
year by ensuring a stable supply of fish through sourcing a combination of frozen and
fresh fish, creating a buffer of some three to four months supply. The company only
trades in full truckloads, which are distributed via Hamburg or Rotterdam. Product is
sold under the generic brand name of Bacalao da Noruega in standard transport pack-
aging. While CN serves most Latin markets, 80 per cent of its sales go to the Dominican
Republic as pollock bacalao. This market is relatively stable throughout the year, which
matches CN’s stable production policy. CN is experimenting with pollock farming
further to improve supply reliability.
Bacalao Superior
Company Superior (CS) is also based in the Ålesund area, and accounts for 15–20 per
cent of Norwegian bacalao exports to Portugal. Only cod bacalao is exported to this
market, which commands a 10–15 per cent price premium over other Norwegian ba-
calao. The product is popular with consumers, which creates a strong relationship with
the single supermarket chain that sells it. Fish are sold whole, with a CS tag showing
guarantee of origin from fresh Norwegian cod, which was an idea that came from the
supermarket customer. This ensures that CS bacalao stands out from other offerings.
Joint marketing campaigns are funded by both CS and its supermarket customer, and
include TV promotions. Only fresh cod is used in bacalao superior, caught by the coastal
fleet in small boats. Supply is heavily dependent during the winter on quotas that are
Setting priorities for logistics strategy 67
permitted in the famous Lofoten fishing field in the far north. CS buys from three fresh
cod suppliers, and from 15–20 suppliers of salt fish. Processing follows traditional
routes, but some technology has been introduced into cutting and drying. Finished
product is transported to Portugal in 22-tonne truck loads three times per week. Storage
of finished product is in Lisbon at the customer’s warehouse.
Comparing da Noruega and superior
Table 2.7 summarises some of the major differences between these two products.
CN accepts more variation in its raw material source to enable continuous supply.
This applies to type of fish as well as where and how it is caught. Farming and a healthy
stock of frozen fish help to reduce further supply variations. On the other hand, CS
seeks the best quality with minimum variation. The only inbound stock that is permitted
is small quantities of salted cod.
While the raw materials and end-product have many similarities, there are substantial
differences in inbound and outbound logistics as well as processing and distribution
strategies. These differences are fundamental to the need to support the brand (raising
consumer expectations) by means of logistics strategy (meeting consumer expectations).
We can conclude as follows:
● Two fundamentally different inbound strategies: CN focuses on secure, continuous
supply and accepts greater variation in terms of type of fish, where and how caught –
so farming is encouraged. They buffer and store extensively. CS goes for consistently
high quality by not accepting much by way of variation: size, line catching and loca-
tion are all important requirements. They do not store fresh fish or use frozen.
● Internally consistent marketing and logistics: CN matches the low price, continuous
availability marketing mix by means of efficient sourcing and continuous availability,
and of ‘lean’ (see Chapter 6) production and distribution methods. This enables
Table 2.7 Comparing da Noruega and superior
Characteristic da Noruega (Dominican Rep) Superior (Portugal)
Raw material ● Fresh/frozen pollock
● Different sizes
● Line/trawl/net/farm
● Continuous supply
● 3–4 months inbound stocks
● Fresh cod, some salted
● Size specific
● Mostly line
● Seasonal supply
● Small inbound stock
Production
process
● High volume
● Single facility
● All types of fish processed in a single
factory: more efficient
● Undifferentiated packaging
● Customised
● Many dedicated facilities
● Cod only in single, focused
factory
● Fish individually tagged
Marketing ● Continuous consumption
● Generic marketing through Seafood
Export Council
● Low price
● Generic packaging
● Little differentiation
● Special occasions
● Joint promotion with
supermarket customer
● Premium price
● Tragged to show origin
● Differentiated by market
68 Chapter 2 • Putting the end-customer first
Summary
What is customer service in the context of logistics?
● Marketing is defined as ‘the activity, set of institutions, and processes for creat-
ing, communicating, delivering, and exchanging offerings that have value for
customers, partners and society at large’. Loyal customers are seen as the
source of profit, growth and security. Marketing in practice starts with
analysing segments, evaluating those segments and targeting them. Segments
need to be measurable, economically viable, accessible and actionable. Market-
ing in practice continues by market positioning, which requires differential
advantage to be defined, and the marketing mix to be formulated.
● The key logistics contribution to the marketing mix is in the ‘fourth P’, place.
This includes decisions about factors such as channel selection, market cover-
age, distribution systems and dealer support. Logistics also supports product
decisions (for example, product range) and promotion activity.
● An important logistics contribution to putting the end-customer first is to fore-
cast demand. This can be undertaken using judgemental forecasting (where no
demand history exists) or by causal forecasting (where historical data are
available).
● Business to business (B2B) refers to upstream relationships between members
of a network. Business to customer (B2C) refers to handover to the end-
customer. B2B relationships therefore need to be aligned towards B2C.
high and consistent production volumes supported by a flexible product mix. There
is less to go wrong in terms of supply, but the generic nature of the product militates
against better margins or customer loyalty. CS matches the high price, seasonal
availability marketing mix by means of highly selective sourcing and by focused fac-
tory production that is seasonal and relatively inefficient. Production is possible only
when high-quality, line-caught fresh fish are available. Limited and sporadic avail-
ability mean that the product has to reassert itself following supply interruptions, so
the marketing pull must be consistent and strong. Traceability through tagging rein-
forces the superior quality image in consumers’ minds, supported by joint marketing
with the major retail customer.
The way that the two supply chains have evolved illustrates the tradeoffs at stake: more
of one thing means less of another. The CS supply chain has become focused on top
quality (grade) product, but at relatively high cost and sporadic availability. The CN
supply chain has become focused on the opposite: low cost and continuous availability,
but at average quality (grade).
Sources: Jahre and Refsland Fougner, 2005; Harrison, 2010
Question
1 Using Figures 2.12 and 2.13, summarise the key strategy drivers for products from
CN and CS as far as you can with the information given in the case.
Discussion questions 69
● Supply networks end with service processes, where the end-customer is present
in some way. ‘Gaps’ can emerge between what the service is supposed to be,
what the customer expects it to be, and how the customer perceives it when it
is delivered. The size of these gaps has implications for quality of service, a
major driver of customer loyalty.
How do we win and retain customers through logistics?
● The principle here is that loyal customers have many advantages over new
ones. The logistics challenge is to reinforce loyalty by exceeding customer ex-
pectations via superior quality of service.
● Customer relationship management is based on the principle that marketing
strategies should be continuously extended to strengthen customer loyalty.
Phases of logistics development are needed, each phase placing increasing de-
mands on the development of logistics capabilities.
● Setting logistics priorities should be carried out with market segments in mind.
This is a joint task between marketing and logistics functions. Order winners
and qualifiers by segment help develop a common language to assist this task.
● Often, the current approach to segmentation is unsatisfactory in logistics
terms. We present a four-step model to diagnose the current approach, and to
re-engineer that approach using the concept of logistics strategy drivers
(demand profile and competitive profile).
Discussion questions
1 suggest ways in which logistics can play a part in the marketing mix for:
a a manufacturer of cleaning products like CleanCo (Case study 2.4);
b a retailer such as Tesco (Case study 1.1);
c an automotive repair and recovery firm such as Talleres Auto (Case study 1.6);
d food suppliers such as CN and CS (Case study 2.6).
In each case, specify the organisation you have in mind and explain the reasons for
your suggestions.
2 The ‘Batman’ case (Case study 2.5) presents what might be described as a ‘market-
ing wish list’. Analyse the likely logistics challenges at each stage of development,
and suggest how these might be addressed.
3 While top companies such as IBM and Tesco say that the customer is king, will cus-
tomer choice continue to be unrestrained in a) 2020 and b) 2050? Explain your
thinking in each future state scenario.
4 Explain what is meant by uncertainty in demand forecasting.
The barbecue sauce focal firm described in section 2.3 has manufacturing facilities in
the Netherlands which are described as ‘high on quality and reliability, but low on
responsiveness’. In order to maximise production efficiency, large batches of each
flavour are made so that process cleanouts (each lasting � four hours) are kept to a
minimum. After manufacturing, each batch of a given flavour is transported to an
70 Chapter 2 • Putting the end-customer first
off-site finishing operation, where bottles of the different flavours are packed into a
display box for attractive presentation to the end-customer at the firm’s retail cus-
tomers. This process takes an average of two weeks because of the need to ensure
that all flavours are available. Finally, the display boxes are distributed through ware-
housing operations which have been situated in six carefully selected locations
around the product’s major European market in Germany.
Management of the focal firm is under pressure to reduce inventories and stock
write-offs (the sauce has a shelf life of three months). Propose what actions could be
taken to improve the supply chain to permit improved responsiveness to end-
customer demand.
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Heinemann.
C H A P T E R 3
Value and logistics costs
Introduction
In section 1.3 we reviewed the way in which different products may have differ-
ent logistics strategies. While the range of classic shirts compete on price and
brand, and demand is relatively stable over the year, fashion blouses compete on
style, responsiveness to market and brand. For a fashion product, the logistics
challenge is to be able to support highly uncertain demand in the marketplace.
The logistics task for the two supply chains is essentially different, and some com-
panies refer to a ‘supply chain for every product’ to emphasise this difference. In
Chapter 2, we stated the need for compromise here – between ‘one size fits all’ on
the one hand, and endless customisation of the supply chain on the other.
Here, we develop the information flow aspects of our model in Figure 1.4. We
also show how there is another flow in supply chains – funds flow. Funds flow in
the opposite direction to materials. Funds – in the form of cash – originate from
the end-customer, and are used to pay the bills progressively from one supply
chain partner to the next upstream.
While funds flow has not yet been formally included in the logistics domain,
the integration of finance and logistics is an increasingly important aspect of
logistics in the 21st century. The acquisition of Vastera (a third party logistics
company) by JP Morgan Chase Bank (a financial institution) to form JP Morgan
The planned objectives of this chapter are to:
● explain the concept of value and its implications for managing the supply
chain;
● explain how total costs can be divided up in different ways, and how they
can be applied to managing the supply chain;
● identify how better cost information can be used to create more value.
By the end of this chapter you should be able to understand:
● what is meant by the term ‘value creation’;
● how logistics costs can be managed for better value creation;
● how activity-based management can be used to identify the cost drivers in
your business.
Objectives
74 Chapter 3 • Value and logistics costs
Chase Vastera is aimed at ‘driving cost savings and global supply chain efficien-
cies while providing best-in-class compliance with government regulations’.
This chapter probes the financial implications of different logistics strategies.
While it may be clear that cost must form a central plank of supply chain strategy
for classic shirts, the product team for fashion blouses cannot ignore the cost
implications of their actions (see Table 1.1). The common theme is the concept of
value, and the extent to which both management teams are creating value for the
end-customer. Here, we advance the concept of ‘value’ beyond the mainly end-
customer view that we took in Chapter 2, and extend it to other stakeholders in
the supply chain.
While value is based on cost from the point of view of the company account-
ant, the concept of value may have different interpretations outside the com-
pany. In section 2.5.3, we stated that value from the end-customer’s point of view
is the perceived benefit gained from a product/service compared with the cost of
purchase. From the shareholder’s point of view, value is determined by the best
alternative use of a given investment. In other words, value is greatest where the
return on investment is highest.
Key issues This chapter addresses five key issues:
1 Where does value come from?: different views of value, and how it can be
measured using return on investment.
2 How can logistics costs be represented?: three different ways to divide up total
costs.
3 Activity-based costing (ABC): a process-based alternative to allocating overheads.
4 A balanced measurement portfolio: balancing the needs of all stakeholders.
5 Supply chain operations reference (SCOR) model: a further process-based
approach to measuring supply chain costs and performance.
The chapter assumes a basic knowledge of a profit/loss account and balance
sheet. If finance is not your long suit, then a helpful accompanying financial text is
Management Accounting for Non-specialists (Atrill and McLaney, 2008). We acknowl-
edge the assistance from our colleague at Cranfield, Sri Srikanthan, for his help
with sections 3.1 and 3.2. Figures 3.2 and 3.7 and Table 3.2 are from his lectures.
3.1 Where does value come from?
Key issue: How can shareholder value be defined? What is economic value added,
and how does it help in this definition?
Creating shareholder value is widely used today to describe the main objective
of a business. In its simplest form, shareholder value is created when the share-
holder gets a better return by investing in your business than from a comparable
investment. A comparable investment is one that has a similar level of risk. You
might make the same return on €100,000 from playing roulette as you do
from buying a house, but the risk profiles are very different! In order for a business
Where does value come from? 75
to create superior shareholder value, it must have a competitive advantage.
Return on investment is an important measure that is widely used to assess
shareholder value.
3.1.1 Return on investment (ROI)
One way of looking at the creation of shareholder value is to end the year with a
lot more money than at the start. If this extra money results from profitable trad-
ing, then management has been successful in improving the productivity of capital.
Return on investment (ROI) is measured as profit (in €) before interest and tax as
a percentage of capital employed (also in €):
The term ‘investment’ is used because capital employed is equivalent to the
money invested in the business. ROI can also be seen as the outcome of prof-
itability and asset utilisation:
Let us look at the detail behind each of these ratios, and the way they fit in
with each other. Figure 3.1 provides a family tree of the way ROI is made up. Let
us look at the potential for improving each from a point of view of managing the
supply chain better.
% ROI � 100
Profit
Sales
:
Sales
Capital employed
% ROI � 100 : € Profit>€ Capital employed
Sales
revenue
Costs
– Profit
Capital
employed
Inventory
Return on
capital
employed
Cash and
debtors
+
÷
Working
capital
Creditors
–
Fixed
assets
+
Figure 3.1 The make-up of return on capital employed (investment)
(Source: Courtesy of Sri Srikanthan)
76 Chapter 3 • Value and logistics costs
Sales
Superior customer service improves sales, and makes a focal firm more valued by
the customer in the long term.
● Improving customer responsiveness is a key goal for managing the supply chain.
Costs
The supply chain is a potential gold mine for making bottom line improvements
to business performance. But directors of many businesses are impatient for cost
improvement, and consider that cutting stocks and headcount is the primary
task – as in the ‘evolution’ strategy in Figure 1.10. This may achieve short-term
margin improvement, but strategic supply chain management is more impor-
tantly concerned with process improvement over the long term.
● Supply chain modelling shows that manufacturing and distribution costs to-
gether with inventories can be optimised while customer service is maximised.
● Studies in efficient consumer response (ECR) have shown that cutting out
non-value-added products and inefficient promotional activity can reduce
overall costs by 6 per cent. (ECR is discussed in Chapter 8.)
Working capital
Note that the combination of inventory, cash and debtors less creditors is called
working capital. Each of the elements of working capital is considered in turn.
Inventory
This is a major asset in many businesses. It is there to buffer uncertainty of supply
and demand, and to permit immediate availability when replenishment times are
too lengthy. However, inventory is often regarded as a hindrance rather than a
help: it ties up cash, it needs resources to be stored and it becomes obsolete.
● A primary goal for supply chain management is to replace inventory with
information. Try to minimise the use of forecasts and to increase the use of real
demand.
● Question any means for automatically replenishing inventory (such as the re-
order level used in stock control, described in section 6.2).
Cash and debtors
The key task here is to make the time between receipt of customer order and re-
ceipt of the cash as short as possible. Progress against this ideal not only makes
the company more competitive by reducing lead times, but also improves its cash
position. This means that business processes from sales order processing to distri-
bution should be integrated and free from waste.
● Debtors (customers who owe us money) can be minimised by basic controls
such as regular review and problem resolution. Sending out incomplete or
inaccurate invoices is an invitation for delays or even non-payment!
Where does value come from? 77
Creditors
Creditors are people we owe money to. In supply chain terms, this term applies
mainly to our suppliers. Many organisations think that lengthy payment terms
to suppliers maximise credit and therefore improve the balance sheet. The down-
side of this thinking is that suppliers factor in the credit terms to their prices, and
their own balance sheets become saddled with debt.
● Plan material requirements and distribution requirements to maximise flow of
parts through the supply chain as needed.
● Discipline goods inwards to check delivery date, quality and correct prices.
There is no point in starting the credit cycle early by accepting goods before
they are due.
● If the supplier is a smaller company, it may be that the cost of capital is higher
than it is for your company. It may then be worthwhile to consider negotiating
with the supplier to pay early, and therefore getting a share of the money that
the supplier is paying in interest to the bank.
Fixed assets
The value-generating assets of a business that form the focus of supply chain
management are a heavy drain on capital. They include manufacturing facilities,
warehousing and distribution. They contribute to high fixed costs for an opera-
tion: that is, costs that do not change much with throughput. Such costs are
therefore highly volume sensitive, as we shall see.
● Many organisations respond by a ‘maximum variable, minimum fixed’ policy.
This refers to keeping fixed costs to a minimum, and is helped by outsourcing
all but the core capabilities, which are retained in-house. Outsourced processes
can then be cut more easily in the event of a downturn such as the recession of
2009/10. Thus transport and warehousing are today often outsourced to spe-
cialist ‘third party logistics providers’ such as DHL Exel and UPS.
1 Review the categories in Figure 3.1 and compile your own list of the way in which these
categories can be influenced (made better or worse) in an organisation.
2 What are the implications for logistics strategy?
Activity 3.1
3.1.2 Financial ratios and ROI drivers
ROI is an important measure for assessing shareholder value and is underpinned
by two main drivers:
● increased profitability;
● increased asset utilisation.
78 Chapter 3 • Value and logistics costs
As discussed section 3.1.1, these two supporting drivers are the key determi-
nants for increasing ROI and hence shareholder value. An understanding of the
financial ratios that affect these two drivers is essential when formulating a focal
firm’s supply chain strategy. While financial ratios are based on historical infor-
mation, and therefore have limitations, they have a number of advantages for an
organisation. They can be:
● a benchmark for comparing one organisation with another;
● used as a comparator for a particular industrial sector;
● used to track past performance;
● a motivator for setting performance targets;
● an early warning indicator if the organisation’s performance starts to decline.
Table 3.1 provides a guide to linking ROI and its drivers with the financial ra-
tios for a manufacturing company (CIMA, 1989).
Table 3.1 ROI and its key drivers
Level 1 Level 2 Level 3 Level 4
Return on
investment
Net profit
Sales
Production costs
as % of sales
Labour costs as % of
sales
Materials as % of
sales
Selling costs as % of
sales
Labour costs as % of
sales
Administration costs
as % of sales
Labour costs as % of
sales
Sales
Total assests
Fixed assets as % of
sales
Property as % of sales
Plant as % of sales
Vehicles as % of sales
Current assets as % of
sales
Inventory as % of sales
Debtors as % of sales
Cash as % of sales
Section 3.2 of this chapter tackles the issues concerning the visibility of costing
information. This form of analysis can be applied to benchmark an existing oper-
ation with a competitor, or it can be used to assess the implications on ROI
against potential trade-offs (see section 1.4.4), such as comparing an in-house
operation with a third party outsourcing alternative.
The use of financial ratios in relation to time is key to monitoring working
capital and the ‘cash to cash’ cycle. Key time-related ratios include:
● average inventory turnover: the number of times inventory is turned over in rela-
tion to the cost of good sold;
● average settlement period for debtors: the time taken for customers to pay their
invoices;
● average settlement period for creditors: the time taken for an organisation to pay
its creditors.
How can logistics costs be represented? 79
Reductions in working capital will have a beneficial effect on an organisation’s
ROI. For example, inventory reductions increase both profitability (reduced
costs) and capital (increased asset utilisation). Supply chain decisions have an
impact on costs and assets, so they affect both the drivers of ROI. Understanding
the trade-offs involved is key to increasing value.
3.2 How can logistics costs be represented?
Key issues: What are the various ways of cutting up the total cost ‘cake’, and
what are the relative merits of each?
We all have a pretty good idea of what the total costs of a business are in prac-
tice. The costs of such items as materials used, power and wages all lead to bills
that have to be paid. What is not so clear is how these costs should be allocated
to supply chain processes – or even to products for that matter. Figure 3.2
shows a breakdown of the costs of producing a bottle of mineral water against
In store cost
Retailer DC
NDC-Retailer
Bottling
plant-NDC
NDC
Retailer gross profit
Sales price
Supplier profit
Logistics
Water extraction, bottle, label
Bottling plant costs
Figure 3.2 Cost breakdown of a bottle of mineral water
80 Chapter 3 • Value and logistics costs
its total sales price, showing the approximate proportions of each. Starting at
the bottom:
● Manufacturing costs: of extracting the water from source, testing and purifying.
Add on the costs of plastic and labels for the bottles.
● Transport costs: from bottling plant to the supplier’s national distribution
centre (NDC) in a given territory.
● Processing costs: in the supplier’s NDC.
● Transport costs: from supplier’s NDC to retailer’s regional distribution centre
(RDC).
● Processing costs: in the retailer’s RDC.
● Processing costs: in the retailer’s store.
The balance of the sales revenue-costs is shared between supplier and retailer as
profit (or ‘margin’). But how are costs allocated to product lines (for example, plastic
bottles, glass bottles, facial spray) and individual skus (for example, 1.5 litre, 500ml)?
This section reviews three commonly used ways of representing costs: fixed
and variable, direct and indirect, and engineered and discretionary. If you are
already familiar with the concepts of variable and fixed costs and break-even
charts, then start at section 3.3. Bear in mind that the total cost picture is the
same: the three different ways of allocating them to products are simply different
ways of ‘cutting the cake’. Let us look at total cost as a cube instead of a cake.
Then the three different ways of representing costs can be shown as different
ways of cutting up the cube (Figure 3.3).
Variable
Fixed
Direct
Engineered
Indirect
Discretionary
Figure 3.3 Three ways to cut the ‘total cost cube’
(Source: Courtesy of Sri Srikanthan)
The important point here is that the total cost is constant: it is the ways we
analyse that cost that are different. Why analyse it in different ways? To gain bet-
ter information about our cost basis so that we can manage the business better.
Let us look in turn at each of these ways to cut the total cost cube.
How can logistics costs be represented? 81
3.2.1 Fixed/variable
One popular way of analysing costs is to consider the effect of volume of activity
on them. Costs tend to respond differently as the volume changes:
● fixed costs tend to stay the same as volume of activity changes, or at least
within a given volume range;
● variable costs change as the volume of activity changes.
Fixed costs include items such as warehouse rental, which is charged on a time
basis (€/month). As volume of activity increases, additional warehouses may be
added around Europe, and we get the familiar stepped fixed costs, as shown in
Figure 3.4. The same relationship would apply if volumes were reduced and a
warehouse closed.
R
en
t
co
st
(
= C
)
Volume of activity
Figure 3.4 Rent cost against volume of activity
Variable costs include things such as direct materials, which are ordered in
line with demand. If demand increases, we buy more. Starting with zero cost at
zero activity, variable costs increase roughly in line with volume, as shown in
Figure 3.5.
If we add the variable costs to the fixed costs against a given range of volume
(so that the fixed costs remain completely fixed), and add in the sales revenue
(which also increases in line with volume), we arrive at the break-even chart
shown in Figure 3.6. The sloping line that starts at O is the sales revenue. The
total cost line starts at F, and represents the sum of fixed and variable costs.
The point at which the sales revenue line crosses the total cost line is the
break-even point. Below this point, a loss will be incurred; above it a profit will
be made.
A helpful concept in evaluating break-even charts is that of contribution:
Contribution = Sales less variable costs
82 Chapter 3 • Value and logistics costs
Therefore contribution is the fixed costs plus the profit. Contribution is useful
in decision making. High contribution per unit indicates a more volatile busi-
ness: that is, one that is more risky. Therefore we should expect a business with
high contribution/unit to provide a higher return on investment in the longer
term. Look at the two break-even charts in Figures 3.7 and 3.8. What are the
differences between the two situations? What has happened to the break-even
point and why?
Chart A (Figure 3.7) shows a situation with high variable costs and low fixed
costs. In chart B (Figure 3.8), the situation is reversed. The break-even point has
moved well to the right: that is, chart B requires a higher volume to break-even
D
ir
ec
t
m
at
er
ia
l c
o
st
(
= C
)
Volume of activity
Figure 3.5 Direct material costs against volume of activity
R
ev
en
u
e
o
r
co
st
(
= C
)
Volume of activity
Variable cost
Total cost
Break-even point
Sales revenue
Fixed cost
O
F
Figure 3.6 Break-even chart
How can logistics costs be represented? 83
than A. This is because a much higher volume of sales is needed to cover the high
level of fixed costs.
Furthermore, additional volume has a small impact on chart A, whereas it has
a much higher impact on chart B. So high fixed costs and low variable costs lead
to greater volume sensitivity. Accordingly, profitability (the area above the
break-even point) is affected much more by volume changes in chart B. In terms
Break-even
volume
Total cost
High variable cost
Area of profit
Sales revenue
Area of loss
Small contribution
per unit
O
F
Low
fixed
cost
Volume
Fixed cost
C
o
st
/r
ev
en
u
e
(= C
)
Figure 3.7 Break-even chart A
(Source: Courtesy of Sri Srikanthan)
Profit-making
volume
Break-even
volume
Loss-making
volume
Fixed cost
Low variable
cost
Sales revenue
Large contribution
per unit
O
High
fixed
cost
Volume
Area of loss
Area of profit
C
o
st
/r
ev
en
u
e
(= C
)
Figure 3.8 Break-even chart B
(Source: Courtesy of Sri Srikanthan)
84 Chapter 3 • Value and logistics costs
of contribution, chart A represents a situation with low contribution/unit, and
therefore low risk in comparison with chart B.
The supply chain implications of such considerations are that we are most
often faced with chart B situations. For example, core resources such as ware-
housing and distribution systems create little opportunity to reduce investments
in line with reducing sales volumes other than the step changes shown in
Figure 3.4. We are back to the advice for increasing ROI given in section 3.1.1
above: to increase sales and reduce costs. The reassuring point is that every 1 per
cent increase in sales or 1 per cent reduction in costs has a leveraged effect on
profits.
Bond SA – a marginal costing example
Bond SA is planning to manufacture a new product with an initial sales forecast of 3,600
units in the first year at a selling price of €800 each. The finance department has calcu-
lated that the variable cost for each truck will be €300. The fixed costs for the manufac-
turing facility for the year are €1,500,000. Using the information provided by the sales
forecast and the finance department, it is now possible to calculate the planned profit,
the contribution and the break-even point for this venture by leveraging the nature of
fixed and variable costs.
If Bond SA achieves its sales forecast of 3,600 units then the company will make a
planned profit before tax of €300,000. Crucially the company’s break-even point is
3,000 units, at which point Bond SA makes no profit but also no loss, because sales rev-
enue (€2,400,000) equals all the variable costs (€900,000) and all the total fixed costs
associated with production process (€1,500,000). Any additional unit sold after this
point will provide Bond with profitable sales revenue. The difference between the
planned profit and the break-even point is called the margin of safety. In the case of
Bond SA, this equates to 600 units.
(Source: Simon Templar, Cranfield)
Questions
What happens to the break-even point if:
1 Fixed costs increase by 10 per cent?
2 The sales price reduces by 5 per cent?
CASE STUDY
3.1
Planned profit € Planned break-even point €
Sales revenue 2,880,000 Fixed costs 1,500,000
Less variable costs 1,080,000 Contribution per unit
Contribution 1,800,000 Sales value – variable cost 500
Less fixed costs 1,500,000 Break-even point (units)
Profit 300,000 Fixed costs/contribution per unit 3,000
How can logistics costs be represented? 85
3.2.2 Direct/indirect
Another way to cut up the total cost ‘cube’ is to analyse costs in terms of whether or
not they can be directly allocated to a given product. Two further categories emerge:
● Direct costs can be tied to specific products. The most obvious examples are
direct labour and direct materials. Thus we can allocate exactly the cost of
bought-in parts to the products into which they are built.
● Indirect costs are whatever is left over after direct costs have been allocated. Indi-
rect costs are also called ‘overheads’, and include everything from the manag-
ing director’s salary to the rent rates paid for the distribution centre – anything
that cannot be allocated directly to a given product.
Directness of costs is concerned with the extent to which costs can be allocated
directly to given products. This is a completely different concept from that of
fixed/variable costs. While there is a tendency to associate fixed costs with indi-
rect and variable with direct, there is no necessary relationship at all. Thus direct
labour costs tend to be fixed, at least in the short term.
As stated above, the reason for analysing costs differently is to gain better infor-
mation about our cost basis so that we can manage the business better. Direct and in-
direct costs help us to decide the full cost of a product or service when more
than one is offered. If there were just a single product, life would be easy, be-
cause all of the costs could be allocated to that one product. Most businesses are
much more complex than that, and are faced with the issue of how indirect
costs should be apportioned to products. The most popular way to spread indi-
rect costs is on the basis of direct labour. This is not the ‘correct way’, nor is it
the only way.
A closer view of how fixed costs behave by product is achieved by using a
method called direct product profitability (DPP). This method has been widely used
in the retail industry to understand the way in which logistics costs behave for
each product. The understanding is achieved by allocating fixed costs by making
assumptions about how these are incurred by a product as it moves through the
logistics system.
A good DPP system should take account of all the significant differences in the
ways products are developed, sourced, produced, sold and distributed. In order to
make this analysis practical, products will normally need to be grouped together.
Product groups need to recognise shared technologies, processes, fixed assets, raw
material inputs and packaging methods. The key objective of product groupings
is to remove the need for apportioning costs, and thereby not to apportion profit
across the products.
An example DPP is shown for a manufacturing company in Table 3.2. Note
that not all of the fixed costs have been assigned. DPP assumes that only those
costs that can rationally be allocated may be deducted. Thus DPP may be viewed
as a development of direct/indirect costing in that it attempts to convert into di-
rect costs logistics costs that would otherwise have been regarded as fixed. In this
way, DPP seeks to provide more accurate information about which products are
contributing most to profitability – and which are contributing least.
86 Chapter 3 • Value and logistics costs
The principle at stake here is that good accounting and financial analysis force
us to ask more questions about what is going on in our business. DPP can have a
role to play here: it attempts to allocate logistics costs more specifically to prod-
ucts (and, in this case, orders as well) than is possible by spreading ‘fixed’ costs on
the basis of an assumption such as direct labour. The assumption would otherwise
be that direct labour actually ‘drives’ the overheads, which is highly doubtful.
Table 3.2 Direct product profitability (DPP)
€ €
Gross sales for product group X
● Less product-specific discounts and rebates X
Net sales by product X
● Less direct costs of product X
Gross product contribution X
● Less product-based marketing expenses X
Product-specific direct sales support costs X
● Less product-specific direct transportation costs:
Sourcing costs X
Operations support X
Fixed-assets financing X
Warehousing and distribution X
Inventory financing X
Order, invoice and collection processing X X
● Less product-attributable overheads X
Direct product profitability X
(Source: Courtesy of Sri Srikanthan)
Direct product profitability
Filmco makes two thin film (gauge = 12µm) products for packaging applications in the
food industry. Product A is coated so that it can subsequently be printed on; product B
is uncoated. There is no changeover time on the production line, because all that needs
to happen is that the coating drum is switched on or off. Once produced on the film-
making lines, the film is slit to width and length to customer order. Roughly 40 per cent
of Filmco’s output is A, and 60 per cent B, and film-making takes place 360 days/year
on a continuous basis because of the high capital cost of the process.
A DPP study was carried out at Filmco to determine the relative profitability of the
two products A and B by major customer. The method was adapted from that shown in
Table 3.1 because Filmco is a manufacturing environment. Here is how it was done:
1 Invoice price: this was the total sales value invoiced to the customer.
2 Cost of placing orders: the total cost of the sales office (salaries, etc.) was divided by
the number of orders dispatched that month. This cost per order (€150) was allo-
cated to each order placed by each customer.
3 Manufacturing cost: a variable cost for each product was found by collecting raw
material, labour, power, packaging and waste costs. Manufacturing overheads
CASE STUDY
3.2
How can logistics costs be represented? 87
(fixed costs) were allocated on the basis of direct labour. Because of the small differ-
ence in manufacturing methods, the manufacturing costs for the two products were
similar. They were €2,107 for A and €2,032 for B.
4 Storage costs: the total cost of the warehousing operation is €800k/year. There are
8,300 pallet locations, and the cost/day for a pallet was calculated as €0.30 assuming
360 working days. The storage cost for a given order was calculated as the number of
pallets × the number of days × €0.30.
5 Opportunity costs: orders must wait in the warehouse until the last reel has been pro-
duced. An order with a value of €3,000 that stays for seven days in the warehouse
with an interest rate of 14 per cent is said to have an opportunity cost of €8.20.
6 Transport cost: this was based on a price per tonne delivered to a given customer.
7 Total cost: this was the sum of b to f for a given order.
8 DPP: this was sales price less total cost g.
Table 3.3 gives a sample of the DPPs for four orders for customer P. The average DPP
for customer P over all orders shipped over a given month was 19.6 per cent, while that
for customer Q was 23.1 per cent and customer R was 33.0 per cent.
Question
1 What can we tell from the above analysis in Table 3.3 and the average DPPs per
customer? (Consider in particular the differences in DPP between the four orders
shown, and between the three customers P, Q and R.)
3.2.3 Engineered/discretionary
A third way of analysing costs is to consider the ease of allocating them. Some
things are easy to cost; others may require considerable thought and analysis
because they are difficult to cost under current methods. This line of thinking
creates a third way of cutting the total cost cube:
● Engineered costs have a clear input–output relationship. In other words, the ben-
efit of a given cost is measurable. For example, if it takes ten hours to produce
ten boxes of product A in the factory, then we have a clear output benefit (one
box) for the cost of each hour of input.
● Discretionary costs do not have a clear input–output relationship. Here, the
input cost is clear but the output benefit is unclear. For example, the cost of the
contract cleaners who clean the factory is clear, but the benefit they produce is
not easily quantifiable.
Table 3.3 DPP for customer P for a sample of four orders in a given month
Order no. Film Weight (t) a b c d e f g h(%)
186232 A 482 1,210 150 876 1.08 1.88 79 1,108 8.4
185525 A 2,418 5,997 150 4,344 7.83 9.33 190 4,702 21.6
185187 B 4,538 13,000 150 8,402 20.80 30.33 343 8,946 31.2
185351 B 2,615 7,576 150 4,897 14.58 17.68 198 5,277 30.3
88 Chapter 3 • Value and logistics costs
The challenge is to convert discretionary costs into engineered costs, so that we
can better quantify the competitive impact of a given course of action. A classic
example of converting discretionary costs into engineered costs has been the
conversion of ‘quality’ as a discretionary concept into engineered ‘quality costs’
(Dale and Plunkett, 1995). This was achieved by breaking down the concept of
quality into three cost drivers:
● Prevention. This comprises the costs of measures to prevent defects from taking
place, such as training and process capability studies.
● Appraisal. This comprises the costs incurred in detecting defects, which would
include testing and inspection.
● Internal and external failure. Internal costs are scrap, rework and the associated
costs of not getting it right the first time. External failure costs are rectification
after products have reached the final customer, such as warranty claims, returns
and repairs.
In this case, it was argued, greater investment in prevention would result in the
overall cost of quality being reduced over time.
The principle is to convert discretionary costs into engineered costs where pos-
sible. As indicated in the above examples, it is usually possible to make an esti-
mate of what the engineered costs are, perhaps accompanied by a sensitivity or
risk analysis. Without such guidelines, decisions would have to be taken on ‘gut
feel’ – or, as usually happens, not taken at all! In other words, the logistics team
may have an excellent project for increased flexibility in the distribution centre,
but because they have not quantified the outputs (for example, the cost savings)
the application for funding is rejected.
Glup SA
Glup SA supplies a range of household soaps to supermarkets in northern Europe. There
are 12 stock-keeping units (skus) in the range. The logistics manager has determined
that an investment of €0.5 million on improved material handling equipment would
convert the main distribution centre into a more flexible facility. A number of benefits in
improved product availability has been identified – but current information is largely in
the form of discretionary costs. Glup’s assessment of the benefits and its plans to con-
vert the justification into engineered costs are outlined below.
Improved in-store availability
This is the percentage of time for which a product is available on the shelf. If the prod-
uct is not available on the shelf, then it will lose sales to competitive products that are
available, such as supermarket own brands. (Availability is a classic ‘order losing sensi-
tive’ qualifying criterion as described in section 1.3.) Current available data at Glup are
scant, but suggest that average in-store availability is as low as 85 per cent for a given
sku. In order to convert this discretionary benefit into an engineered cost, Glup intends
to measure the time for which each of the 12 product lines is unavailable each week.
One way to do this is to use a market research agency to conduct sample studies of
product availability in selected stores at random times across the working week.
CASE STUDY
3.3
Activity-based costing (ABC) 89
This will yield an availability guide, such as the 85 per cent figure referred to. The new
system will, it is believed, reduce this unavailable time. Glup then plans to model the
new material-handling equipment methods using simulation, and to calculate the new
in-store availability. The reduced non-availability time could then be converted into
additional contribution for each sku to give an engineered cost saving.
Reduced transportation costs
The new equipment would also allow lower transportation costs, because trays of differ-
ent skus could be mixed together on the same pallet. Glup again intends to use simula-
tion modelling to identify the opportunities for savings using this method. It is
considered that this will offer the opportunity to reduce overall transport costs by more
flexible loading of the trailers used to distribute the products to Glup’s customers.
Promotions and new product launches
It is considered that the new equipment will enable promotions and new product
launches to be delivered to selected stores more accurately and more quickly. Demand
uncertainty in such situations is very high: for example, a recent ‘three for the price of
two’ promotion created a fivefold increase in sales. In order to launch a new product it is
first necessary to drain the pipeline of the old product, or to ‘write it off’ as obsolete stock.
If the more flexible warehouse system can reduce the length of the pipeline from factory
to supermarket, it is argued, then a real saving in time or obsolete stock is possible. Glup
again intends to measure this by simulation. It will then be necessary to determine by how
much sales will increase as a result of the new product advantages. This will be estimated
by Glup marketing people, who will use experience of previous promotions and new
product launches. The engineered cost will be the additional time for which the new
product is available multiplied by the additional estimated sales volume multiplied by the
contribution per unit. Alternatively, it will be the reduction in obsolete stocks multiplied
by the total cost per product plus any costs of double handling and scrapping.
Question
1 Comment on Glup’s plans to create engineered costs from the perceived benefits of
the new material-handling equipment.
3.3 Activity-based costing (ABC)
Key issues: What are the shortcomings of traditional cost accounting from a
logistics point of view? How can costs be allocated to processes so that better
decisions can be made?
The driving force behind activity-based costing (ABC) is that the traditional way of
allocating indirect costs by spreading them to products on the basis of direct
labour is becoming difficult to manage. While direct labour used to constitute a
substantial portion of product costs, today that rarely applies. Therefore overhead
rates of 500 per cent or more on direct labour are not uncommon. Just a small
change in direct labour content would lead to a massive change in product cost.
90 Chapter 3 • Value and logistics costs
Cooper and Kaplan (1988) explain the problem by referring to two factories,
which we here refer to as Simple and Complex. Both factories produce 1 million
ballpoint pens each year; they are the same size and have the same capital equip-
ment. But while Simple produces only blue pens, Complex produces hundreds
of colour and style variations in volumes that range from 500 (lavender) to
100,000 (blue) units per year. A visitor would notice many differences between
the factories. Complex has far more production support staff to handle the nu-
merous production loading and scheduling challenges, changeovers between
colours and styles, and so on. Complex would also have more design change is-
sues, supplier scheduling problems, and outbound warehousing, picking and
distribution challenges. There would be much higher levels of idle time, over-
time, inventory, rework and scrap because of the difficulty of balancing produc-
tion and demand across a much wider product range. Because overheads are
allocated on the basis of direct labour, blue pens are clobbered with 10 per cent
of the much higher Complex overheads. The market price of blue pens is deter-
mined by focused factories such as Simple, so the blue pens from Complex ap-
pear to be unprofitable. As a result, the management of Complex considers that
specialist products such as lavender – which sell at a premium – are the future of
the business, and that blue pens are low priority. This strategy further increases
overheads and costs, and perpetuates the myth that the unit cost of each pen is
the same. Traditional cost systems often understate profits on high-volume
products and overstate profits on low-volume, high-variety products. ABC prin-
ciples would help the management of Complex to make more informed product
decisions. The management of Simple has no need for another costing system;
the current one works well for them.
ABC recognises that overhead costs do not just happen, but are caused by activ-
ities, such as holding products in store. ABC therefore seeks to break the business
down into major processes – such as manufacture, storage and distribution – and
then break each process into activities. For example, the distribution process
would include such activities as picking, loading, transport and delivery. For each
of these activities, there must be one cost driver: what is it that drives cost for that
activity? For example, the cost driver for the storage activity may be the volume
of a case, whereas the transport activity may be driven by weight. Once we know
the cost driver, we need to know how many units of that cost driver are incurred
for that activity, and the cost per unit for the cost driver. For example, the cost
driver for the transportation activity may be the number of kilometres driven,
and therefore cost per kilometre would be the cost per unit of the cost driver. This
yields the cost of the activity and, when summed across all of the activities in a
process, the total cost of that process.
ABC is difficult to implement because we need first to understand what the
discrete processes are in a business where the existing links between functions
are not well understood. There is then the issue of identifying the cost driver,
which requires a fresh way of looking at each activity. For example, the cost
driver for a warehouse fork-lift operator would be the number of pallets moved.
The cost driver for stocking shelves would be the number of pieces that must be
stacked in a given time period. A further problem occurs if there is more than
one cost driver for a given activity. You are then faced with the same problem as
Activity-based costing (ABC) 91
with overhead allocation: on what basis should the cost drivers be weighted?
Usually, this problem shows that activities have not been broken down into suf-
ficient detail, and that more analysis is needed. ABC can therefore become
resource-intensive to implement.
In spite of the implementation challenges, logistics and ABC go hand in hand
(van Damme and van der Zon, 1999). It is a very rational way to analyse costs,
and logistics practitioners recognise that providing a service is about managing a
sequence of activities. Logistics or supply chain managers are particularly well
placed to understand, analyse and apply ABC. They understand business
processes and the activities that go with them. Theirs is a cross-functional task.
The value chain stares them in the face.
The procedure of determining cost drivers is often considered to be more valu-
able than the ABC system itself. Activity-based management enables the cost
structure of a business to be examined in a new light, allowing anomalies to be
resolved and sources of waste highlighted. It may also help in better targeting
investment decisions.
3.3.1 ABC example
Komplex GmBH has four production lines, which each operates for 8,000 hours a
year. Each line makes a number of products, which are based on size and colour.
Many changeovers are therefore required, each incurring set-up and mainte-
nance costs. Traditionally the maintenance costs have been allocated on the basis
of machine hours, so each production line is charged equally. This year, the
maintenance budget of €1 million has been divided into four, so each line is
charged with €250,000.
Sales and marketing are concerned that certain products are losing market
share, and this is due to prices relative to the competition. All departments have
been instructed to investigate costs and suggest improvements. How can activity-
based costing improve this situation? By identifying the cost driver for mainte-
nance, in this case the number of changeovers, costs can be allocated to each
production line on this basis. Costs are then matched to the activity that gener-
ates them, so avoiding cross-subsidies.
The results are illustrated in Table 3.4. Maintenance costs have now been
transferred to the production lines that incur the activity. For example, costs on
Table 3.4 Different ways of allocating maintenance costs
Production lines A B C D Total
Machine hours 8,000 8,000 108,000 258,000 1,032,000
No. of changeovers 50 30 15 5 100
Equal allocation 250,000 250,000 250,000 250,000 1,000,000
Allocation by activity 500,000 300,000 150,000 50,000 1,000,000
Difference 250,000 50,000 –100,000 –200,000 1,000,000
92 Chapter 3 • Value and logistics costs
Table 3.5 Cumulative time and cost data by activity
Activity A B C D E F
Cumulative time (%) 14 64 65 67 97 100
Cumulative cost (%) 25 45 83 85 95 100
line A have doubled to €500,000, while costs on line D have reduced to €50,000.
ABC in this example has not taken cost out of the process, but has reallocated
the costs to give a better understanding of the cost base. Complex is now in a
better position to make decisions that affect the cost competitiveness of the
product range.
3.3.2 Cost–time profile (CTP)
A key benefit of being able to cost logistics processes is that cost information can
be used in conjunction with time information. The synergies of the two can then
provide opportunities for identifying activities which create either value or waste.
The cost–time profile (CTP) (Bicheno, 2005) is a graph, which plots cumulative
time against cumulative cost for a set of discrete activities that together form a
process or a supply chain. The CTP utilises outputs from two sources:
● activity times: from the time-based process mapping (TBPM) process time
recording system (see Chapter 5);
● activity costs: from a process costing system that is underpinned by activity-
based costing.
As discussed earlier, ABC strives to achieve an equitable distribution of over-
head costs to activities. Table 3.5 illustrates cumulative time and cost for a process
comprising six activities.
Such data can be used to construct a cost–time profile. Bernon et al. (2003)
record the process in terms of time and cost for a poultry product from receipt of
live bird to delivery of finished product to the retailer. Overall, the process takes
an average of 175 hours to complete. The profile shows areas that consume time
and cost within the supply chain, highlighting those for future investigation that
could yield savings. For example, distribution accounts for 35 per cent of process
time, but only 3 per cent of total cost. Slicing and packaging are more in line,
since they account for 25 per cent of total cost and are responsible for 28 per cent
of the total process time. Figure 3.9 shows the time–cost profile for this process.
The profile shows that time and cost are not related linearly. Bicheno and
Holweg (2008) stresses the importance of interpreting both the horizontal and
vertical lines of the CTP:
● Long, horizontal lines tend to occur when there is a relatively small increase in
total cost as a result of an activity that runs over a relatively long period of
time. An example is storage of finished product after slicing and packing.
Activity-based costing (ABC) 93
● Steep, vertical lines tend to occur when costs are consumed over a relatively
short period of processing time. An example is deboning, where the cumula-
tive cost rises sharply.
A focus on the long, horizontal sections of the CTP graph may help reduce cumu-
lative time (see Chapter 5). A focus on steep, vertical lines may help reduce cumu-
lative cost. The CTP can be used to prioritise improvement processes, as shown in
Figure 3.10:
Company
overheads
Cleaning
100
90
80
70
60
50
40
30
20
10
0
C
u
m
u
la
ti
ve
c
o
st
(
%
)
Cumulative time (hours)
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180
Live cost
Deboning
primary
Distribution
Deboning
secondary
Preparation
& cooking
Slicing and
packing
Customer
marketing
Figure 3.9 Cost–time profile for poultry product
(Source: After Bernon et al., 2003, reprinted by permission of EIASM)
Cost
opportunities
High cost and
responsiveness opportunities
Packaging
Distribution
Low cost and
responsiveness opportunities
Responsiveness
opportunities
Blending Sterilising Warehousing
<20% >20%
%
o
f
to
ta
l c
o
st
<20%
>20%
Sourcing raw
materials
% of total non-value-adding time
Figure 3.10 Cost–time grid
(Source: Whicker et al., 2009)
94 Chapter 3 • Value and logistics costs
Processes in the top right-hand box are prime candidates for savings in both time
and cost. Processes in the bottom left-hand box are low on the list of priorities.
A further conclusion of the Cranfield study shown in Figure 3.8 was that
decisions to optimise cost in one area could have a detrimental effect down-
stream (Whicker et al., 2009). Large batch sizes reduced the need for machine
changeovers in manufacturing. But this meant that the NDC was often running
over capacity, and that overspill inventories had to be extracted and sent to third-
party warehouses. Savings in manufacturing efficiency were causing extra costs
and lead times in distribution.
3.3.3 Cost-to-serve (CTS)
So far, we have focused on manufacturing costs, but what about the cost of
distributing products to customers? ‘Putting the end-customer first’ (Chapter 2)
includes the need to serve customers in different ways. Cost to serve (CTS) is defined
(Guerreiro et al., 2008) as:
the cost of the administrative, commercial and logistics activities related to cus-
tomer service delivery, as measured through ABC methodology.
Identical manufactured products may be distributed in many different ways,
each of which affects CTS. Examples of factors that may influence CTS are:
● Distribution channel used (for example, wholesalers, supermarkets, hypermar-
kets – see Case study 2.3).
● Delivery frequency (for routinely planned replenishment deliveries – daily,
weekly, etc.).
● Customised deliveries (requiring special planning).
● Promotional activity (see Case study 2.1).
● Contractual terms used (for example, pricing by full truck loads, full pallet
loads, pallet layers).
Recognising and allocating these costs to specific products and customers means
re-balancing total costs better to reflect the actual CTS (Braithwaite and Samakh,
1998). Results of the re-balancing on customer profitability – made on the basis of
margin after CTS – can be astonishing. In place of the traditional Pareto curve, a
‘whale curve’ may result, where 80 per cent of the margin after CTS comes from
only 6 per cent of customers (Cooper and Kaplan, 1988; Guerreiro et al., 2008) as
shown in Figure 3.11.
This reveals a large proportion of loss-making customers for this Brazilian food
business. Axing the loss-making customers needs to be undertaken with great
care, because ‘a significant proportion of service activity costs are fixed costs’
(Guerreiro et al., 2008). Such action would remove the contribution that these
customers provide, thus reducing the margins of the remaining customers.
Rather, knowledge of the causes of higher and lower margins and of relatively
high CTS costs for certain customers can lead to better decisions regarding prices,
commercial terms and investment.
A balanced measurement portfolio 95
3.4 A balanced measurement portfolio
Key issues: Who are the key stakeholders in a business, and what needs to be
achieved in order to satisfy them? How can a balanced set of measures of per-
formance be developed in order to address stakeholder satisfaction and stake-
holder contribution?
Many organisations have suffered from undue emphasis on particular measures
of performance within the firm. For example, a preoccupation with labour pro-
ductivity may lead to excessive stocks of inbound parts (‘do not run out of raw
materials otherwise bonuses will suffer’). Such a preoccupation may also lead to
excessive stocks of outbound products, because the most important priority is to
keep workers busy, whether the product can be sold or not. While this priority
may be good for productivity, it may well disrupt flow in the supply network: in-
bound parts are ordered too early, and outbound products are made too early.
What is good for one measure (productivity in this case) is bad for others (inven-
tories and material flow).
In reality, management today is faced with the challenge of performing across
a whole range of objectives. Different groups of stakeholders in a firm include
shareholders, employees, customers, suppliers, the local community and govern-
ment. This is not a comprehensive list, and industries such as pharmaceuticals
have other important stakeholders, including regulators such as the Drug
Enforcement Agency. The challenge for the directors of a firm is to balance the
140%
120%
100%
80%
60%
40%
20%
0%
0% 14% 28% 43% 57% 71% 85% 99%
C
u
m
u
la
ti
ve
m
ar
g
in
a
ft
er
C
T
S
[%
]
Customers [%]
Figure 3.11 Customer profitability curve
(Source: After Guerreiro et al., 2008)
96 Chapter 3 • Value and logistics costs
diverse interests of these groups of stakeholders. We review the interests of each
group in turn:
● Shareholders typically have a passing interest in a firm in which they invest.
They will keep their shareholding as long as it provides a return that is compet-
itive with other investments. Shareholders are impressed by high dividends
and share appreciation resulting from profitability and growth of the business.
Failure to deliver adequate returns often turns shareholders against the man-
agement of the day.
● Employees often have a long-term commitment to a firm, and are concerned
with employment stability, competitive wages and job satisfaction. Failure to
deliver on such goals may create negative reactions such as loss of motivation
and loyalty, difficulty in recruitment, and various forms of industrial action.
● Customers are, in theory, the most important stakeholders in a free market
economy. It is their demand that draws material through the supply network.
Customers can choose from whom they buy, and failure to keep them satisfied
creates the risk of loss of business.
● Suppliers are interested in such benefits as long-term business, involvement in
new product development and, of course, payment on time. Failure to meet
such benefits leads to sanctions such as disruption of supply and higher
prices.
● Local community. Here, the interests are in the firm as a local employer, with a
reputation for civic responsibility and long-term commitment to the region as
an employer and as a ratepayer. Failure to deliver against such interests may lead
to environmental disputes and difficulty in obtaining planning permission.
● Government is interested in the firm as a contributor to employment and value
creation in the economy, and as a source of revenues. Failure to meet govern-
ment laws, on the other hand, may lead to prosecution or even closure of the
business.
Thus the directors of a business are faced with the need to manage the poten-
tially conflicting interests of the stakeholders, keeping each within what Doyle
(1994) refers to as a tolerance zone. Each stakeholder has a limit beyond which the
risk of disruption to the business increases rapidly. An upper limit exists as well.
For example, a preoccupation with profits may please shareholders for the time
being, but may result in negatives from labour exploitation and low levels of in-
vestment. While bumper profits appear in year 1, these are rapidly eroded as the
negatives cut in during later years. In the end, the whole business suffers. And
customers can disrupt the business too: a preoccupation with customers at the
expense of everything else can lead to shrinking margins and loss of focus. The
challenge for the directors is to keep all stakeholders just satisfied, keeping each
within the tolerance zone.
3.4.1 Balanced measures
While balance between stakeholders is one issue, another is the balance between
financial and operational measures of performance, and between history and the
A balanced measurement portfolio 97
future. Kaplan and Norton (1996) point to the shortcomings of traditional cost
accounting systems. Traditional systems are geared to the needs of the stock mar-
ket, and are essentially historical and financial in emphasis. Modern systems,
they argue, need to be balanced between financial and operations, and between
history and the future. A way of showing the relative emphasis between tradi-
tional measures and balanced measures is to show relative priorities by means of
circles, where larger circles imply a greater priority and number of measures in
use, as shown in Figure 3.12.
Past
Operational
Traditional
Financial
Future
Balanced
Past
Operational
Financial
Future
Figure 3.12 Traditional and balanced priorities
In developing a modern performance measurement system it is necessary to
take all of these factors into account, and to create a balanced performance meas-
urement system. That is the objective of the ‘balanced scorecard’.
In practice, Kaplan and Norton propose that the balanced scorecard should
balance the financial perspective (goals for future performance and measures
of past performance) with similar goals and measures for the underlying driv-
ers of long-term profitability. These drivers are identified as the business
process perspective, the innovation and learning perspective, and the customer
perspective.
3.4.2 Supply chain management and the balanced scorecard
Extending the balanced scorecard into the context of the supply chain, Brewer
and Speh (2000) consider that performance measurement systems must be aligned
to supply chain practices:
If firms talk about the importance of supply chain concepts, but continue to evalu-
ate employees using performance measures that are . . . unaffected by supply chain
improvements, then they will fail in their supply chain endeavours.
Traditional performance measurements within a focal firm have a number of sig-
nificant deficiencies. They often track individual activities within functions: this
98 Chapter 3 • Value and logistics costs
can promote the optimisation of the function rather than of the supply network as
a whole.
As a general rule, effective cross-supply chain measures should have the follow-
ing characteristics (Derocher and Kilpatrick, 2000):
● simple to understand;
● no more than ten in total number;
● representative of a significant causal relationship;
● have an associated target;
● capable of being shared across the supply chain.
The following are eight such measures, which can be adapted to focus on spe-
cific sectors:
● on time in full, outbound: a measure of customer orders fulfilled, complete and
on time, conforming to specification;
● on time in full, inbound: a measure of supplier deliveries received, complete and
on time, conforming to specification;
● internal defect rates: a measure of process conformance and control (rather than
inspection);
● new product introduction rate: a measure of supply chain responsiveness to new
product introduction;
● cost reduction: a measure of sustainable product and process improvement;
● stock turns: a measure of supply chain goods flow. This measure is useful when
applied to supply chains focused on segments: as a ‘blanket’ measure, it can be
misleading;
● order to delivery lead time: a measure of supply chain process responsiveness;
● financial flexibility: a measure of how easy it is to structure the supply chain for
financial advantage (with international supply chains, channelling operations
through low-tax locations for purposes of gaining supply chain cost benefits
should be considered).
The main benefits of these measures are that they can be applied to all partners
in a supply chain, and can thereby help to improve visibility and control between
partners. Consistent with our view that different supply strategies are needed to
support different product needs in the marketplace, the aim should be to identify
consistent groups of measures that support specific supply strategies.
Just as important is the need to coordinate measures to improve visibility and
control within a focal firm. The challenge is especially tough when there are
many operating units in a large, decentralised organisation. Tesco provides an
example of the communication needed by means of its ‘corporate store steering
wheel’ (shown in Figure 3.13). Case study 1.1 describes the sheer scale of the
Tesco operation – manned by some 400,000 employees in many countries. How do
you keep so many people in such a large organisation ‘facing the same direction’ –
that is, pursuing corporate strategy consistently? Tesco’s answer has been to focus
on 20 measures within five key areas – customer, finance, people, operations and
community (Tesco, 2010).
A balanced measurement portfolio 99
Throughout all our businesses across the world we measure our performance
through the Steering Wheel, whether we work in distribution, head office or in
stores. This helps maintain focus and balance in what counts to run each of our
businesses successfully, be it wage costs or whether customers can get everything
they want.
For example, each store receives a monthly update of its performance against
each of the measures. ‘Shopping lists’ are selected extracts from Steering Wheel
measures which direct individual groups of employees in their everyday jobs.
3.4.3 Supply chain financial model
Similar arguments can be made about linking supply chain practices to financial
performance. Authors such as D’Avanzo et al. (2003) conclude that there is a strong
link between supply chain performance and financial performance: ‘supply chain
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Figure 3.13 Tesco’s corporate store steering wheel
(Source: Tesco, 2010)
100 Chapter 3 • Value and logistics costs
leaders are showing market capitalization growth rates significantly higher than
the industry growth rate’.
We have been working on a model which links decisions about the supply
chain (such as inventory holding, outsourcing and supplier reduction) with a
focal firm’s financial performance (Johnson and Templar, 2007, 2010). The model
is shown in Figure 3.14, and starts off with two ratios for a given financial period.
These are adaptations of the ROI model we considered in 3.1.1 above (see, for
example, Ellram and Liu, 2002):
● cash generation is the net cash inflow (operating profit before deducting depre-
ciation) adjusted for changes in working capital divided by sales;
● asset efficiency is the sales divided by the value of the firm’s total assets less
current liabilities.
The product of these two ratios is the supply chain ratio.
Any tactical decision in the supply chain (five are shown) influences these
ratios either positively or negatively. As a result, we can predict the impact of
tactical supply chain decisions on financial performance. Equally, we can use the
model to predict the impact of top-down decisions (for example, ‘cut working
capital’, or ‘increase sales through promotions’) on supply chain positives and
negatives. The link between positives and negatives – for example, reducing
inventory improves liquidity but places adverse pressure on relationships with
customers and suppliers – is a further example of trade-offs (section 1.4.4) at work.
Balanced scorecardSCM
Business process
perspective
Customer
perspective
Financial
perspective
Innovation and
learning perspective
SCM goals
• Reduce waste
• Compress time
• Flexible response
• Reduce unit cost
Customer benefits
• Improve product/service quality
• Improve timeliness
• Improve flexibility
• Improve value
Financial benefits
• Higher profit margins
• Improve cash flow
• Grow revenue
• Higher return on assets
SCM improvement
• Product/process innovation
• Manage partnerships
• Information flows
• Threats/substitutes
Figure 3.14 Linking supply chain management to the balanced scoreboard
(Source: After Brewer and Speh, 2000)
102 Chapter 3 • Value and logistics costs
chain performance and opportunities for improvement, a cross-industry frame-
work has been developed by the Supply Chain Council. You can visit the Council
website at http://www.supply-chain.org.
This section gives an introduction to SCOR based on publicly available mate-
rial; in order to obtain detailed benchmarking data from the model, your organi-
sation would need to become a member. In common with ABC, the SCOR model
uses a process-based approach to the supply chain.
The supply chain operations reference model (SCOR) is founded on five dis-
tinct management processes. The supply chain is viewed in terms of overlapping
management processes – source, make, deliver and return – within an integrated
planning framework that encompasses all of the organisations in the chain, as
shown in Figure 3.16. It is a process-based version of Figure 1.1 in Chapter 1. The
management processes of the ‘focal firm’ are seen as linked with corresponding
processes within supplier and customer organisations. The five distinct manage-
ment processes can be described as follows:
● Plan: the tasks of planning demand and supply set within an overall planning
system that covers activities such as long-term capacity and resource planning.
● Source: the task of material acquisition, set within an overall sourcing system
that includes activities such as vendor certification and vendor contracting.
● Make: the task of production execution, set within an overall production sys-
tem that includes activities such as shop scheduling. Any added value activity
(e.g. material repackaging at a distribution centre; quality control at a produc-
tion line) falls under this process type as well.
● Deliver: the day-to-day tasks of managing demand, orders, warehouse and
transportation, and installation and commissioning. These tasks are set within
an overall delivery management system that includes order rules and manage-
ment of delivery quantities.
● Return: the return of non-conforming goods for replacement or rectification,
and the recycling of materials no longer needed by the customer.
There are three levels to the SCOR model:
● Level 1: a broad definition of the plan, source, make, deliver and return man-
agement processes, which is used to set competitive objectives.
● Level 2: defines core process categories that are possible scenarios of a supply
chain (e.g. make to stock; make to order; engineer to order).
Make
Plan
Focal firmSupplier:
internal or external
Su
p
p
lie
r’
s
su
p
p
lie
r
C
u
st
o
m
er
’s
cu
st
o
m
er
Customer:
internal or external
Plan
Deliver Source
Return Return Return
DeliverMake Make SourceSourceDeliver Deliver Source
ReturnReturn Return
Figure 3.16 Five distinct management processes
(Source: After Supply Chain Council www.supply-chain.org)
Supply chain operations reference model (SCOR) 103
● Level 3: provides the process breakdown needed to describe each element that
comprises the level 2 categories. Detailed performance metrics are set at this
level.
Table 3.6 shows 13 metrics at level 1 in the SCOR model, and is taken from the
SCOR website (http://www.supply-chain.org). As with processes, the model’s
hierarchical structure is repeated also for the metrics. This means that the SCOR
model provides a breakdown of level 2 and level 3 subcomponents of the level 1
performance metrics. The intention is that an individual company should not
attempt to be ‘best in class’ in all areas. Rather, a given company should target
its strength in four to six selected areas to create differentiation in the market-
place. The company will also need to ensure that it stays competitive in the other
areas. Note that the customer-facing measures are what we referred to in section 3.2
as ‘discretionary costs’, while the internal-facing measures are ‘engineered costs’.
By drilling down into levels 2 and 3 of the SCOR model, the aim is to identify
the cost drivers and so convert discretionary costs into engineered costs: that is,
to convert supply chain performance directly into revenue, cost and margin.
Also note that the internal-facing metrics encourage improvement of ROI
(section 3.1) by reducing costs and maximising asset turns. Participating compa-
nies in the Supply Chain Council may obtain benchmarking information on
how their organisation’s performance compares with others: see the website
given above.
In order to illustrate how such concepts could be applied in practice, Table 3.7
shows actual performance against the SCOR level 1 metrics for a given company.
It also shows how those metrics compared with the SCOR database in terms of
what was needed to achieve parity with the ‘competitive population’, what was
needed to gain advantage and what was needed to show superior performance.
Where is this supply chain positioned in terms of its competitive performance?
Table 3.6 Supply chain performance is tied to measurements that can be
benchmarked
Customer-facing Internal-facing
SCOR Level 1 supply chain
management
Supply chain
reliability
Flexibility and
responsiveness
Cost Assets
Delivery performance �
Order fulfillment performance �
Fill rate
Order fulfillment lead time
Perfect order fulfillment �
Supply chain response time �
Production flexibility �
Total logistics management cost �
Value-added productivity �
Warranty cost or returns processing cost �
Cash-to-cash cycle time �
Inventory days of supply �
Asset turns �
(Source: http://www.supply-chain.org)
104 Chapter 3 • Value and logistics costs
Not very well, it seems! All of the level 1 metrics are below parity with the excep-
tion of order fulfillment lead times. External metrics such as delivery perform-
ance and perfect order fulfillment are seriously adrift. Production flexibility is
way behind the competitive population, suggesting that the master schedule is
‘fixed’ for too long a period – and there will no doubt be underlying causes of
that. Internal measures are not in good shape either, with a poor cost perform-
ance and a seriously uncompetitive asset utilisation record. The model associates
level 2 and 3 process elements to the various metrics, so that, once the worst
performing metrics have been identified, the user has an indication of what are
the processes to look after in order to reduce the gap.
Table 3.7 Supply chain performance evaluated within the context of the competitive
environment
Supply chain scorecard v 3.0 Performance v competitive
population
Overview
metrics
SCOR level 1
metrics
Delivery
performance to
commit date
Actual
50%
Parity
85%
Advantage
90%
Superior
95%
EXTERNAL Supply chain
reliability
Fill rates 63% 94% 96% 98%
Perfect order
fulfillment (on
time in full)
0% 80% 85% 90%
Order fulfillment
lead times
(customer to
customer)
7 days 7 days 5 days 3 days
Flexibility and
responsiveness
Production
flexibility (days
master schedule
fixed)
45 days 30 days 25 days 20 days
INTERNAL Cost Total logistics
management
costs as % of
revenues
19% 13% 8% 3%
Warranty cost,
returns and
allowances
NA NA NA NA
Value-added
per-employee
productivity
$122K $156K $306K $460K
Assets Inventory days
of supply
119 days 55 days 38 days 22 days
Cash-to-cash
cycle time
196 days 80 days 46 days 19 turns
Net asset turns
(working
capital)
2.2 turns 8 turns 12 turns 28 days
Discussion questions 105
Summary
What is ‘value’ in the context of the supply chain?
● Return on investment (ROI) is a widely used method for measuring share-
holder value. ROI encourages logistics management to control costs, working
capital and fixed assets.
● Logistics is increasingly concerned with funds flow as well as material flow and
information flow (Chapter 1). It is a cross-functional discipline that addresses
management processes of plan, source, make, deliver and return. These pro-
cesses are repeated across the supply chain.
● Traditional cost accounting is unhelpful in making logistics-related decisions
because it is insensitive to processes and cost drivers. Traditional cost account-
ing tends to understate profits on high-volume products and overstate profits
on low-volume/high-variety products.
How can logistics costs be better represented?
● Logistics costs can be better described by using a variety of methods of allocating
costs to products. The purpose of such a variety of allocations is to gain better
information about the cost base of logistics operations, and hence to take better
decisions. For example, direct product profitability (DPP) attempts to allocate
logistics costs more specifically to products by considering how they use fixed re-
sources. Another principle is to convert discretionary costs such as product avail-
ability into engineering costs such as profit contribution from increased sales.
● Activity-based costing (ABC) seeks to understand what factors drive costs, and
how costs are incurred by logistics processes that span the organisation – and the
supply chain in general. It is essentially a process-based view of costing, and
again seeks to enhance the quality of logistics decision making. Cost-to-serve
(CTS) is an extension of ABC thinking that seeks to identify how distribution
and service costs vary between customers.
● Financial measures that are rooted in the past are insufficient for taking logistics
decisions in today’s fast-moving environment. A balanced measurement portfo-
lio is called for, one that takes into account the needs of different stakeholders
in a business. A balanced measurement portfolio is extended into the supply
chain by means of the supply chain operations reference model (SCOR).
Discussion questions
1 Explain what is meant by the term value in a supply chain. How can value best be
measured in a supply chain context?
2 Why are processes important in terms of managing logistics? Suggest how the
processes of plan, source, make, deliver and return might differ in the case of the two
factories Simple and Complex described in section 3.3.
3 What are the advantages of cutting the ‘total cost cube’ in different ways? Sum-
marise the different perspectives on logistics costs provided by fixed/variable,
direct/indirect and engineered/discretionary costs, and by activity-based costing.
106 Chapter 3 • Value and logistics costs
4 Suggest balanced measurement portfolios for the two factories Simple and Complex
described in section 3.3. In particular, suggest key performance measures in the
areas of strategy, process and capability.
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Production Economics, Vol. 121, No. 2, pp. 641–50.
Suggested further reading
Camerinelli, E. (2009) Measuring the Value of the Supply Chain. Farnham: Gower.
Ellram, L. (2002) ‘Strategic cost management in the supply chain: a purchasing and sup-
ply management perspective’, Center for Advanced Purchasing Studies, Arizona State
University.
P a r t Tw o
LEVERAGING LOGISTICS
OPERATIONS
Part Two uses the foundation of logistics management and strategy developed in
Part One to concentrate on key tasks for logistics operations. This covers the centre
panel of our logistics model: the flow of materials, lead times and the network of
operations in a global context.
Despite its role in corporate success, the logistics task ultimately boils down to
orchestrating the flow of materials and information in the supply chain. The aim is to
support products and services in the marketplace better than competitors. You could
say that the logistics task is about making strategic objectives a reality by executing
against demand and making value propositions to customers a reality. Logistics
delivers value. Increasingly, this means improving sustainability, reducing operational
risks in the international pipeline and considering a focal firm’s social responsibilities in
an international context.
Chapters 4 and 5 look at the basic dimensions of logistics operations: their
international reach and their contribution to a timely response to demand. Chapters 6
and 7 then take that thinking a level higher by introducing key managerial concepts
that support logistics operations. Chapter 6 addresses the immense amount of detail
that is needed to plan and control material flow – both in the focal firm and more
broadly in the supply chain. Chapter 7 reviews the role of just-in-time and lean
thinking in reducing waste in the supply chain, and in improving coordination of
material movements. We also review the role of agility in elevating the speed of
response to uncertain end-customer demand.
Material flow (supply)
Information flow
Time
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C H A P T E R 4
Managing logistics internationally
Introduction
The early roots of logistics are in international transport, which was a central ele-
ment of many fundamental models in economic theory. In traditional location
theory, for example, transport costs were optimised in relation to distance to
market and production locations. The origins of internationalisation can be
traced back to the expanding trade routes of early civilisations. Discoveries made
in excavations from Europe, Asia, Africa and the Americas reveal artefacts made
hundreds or even thousands of miles away from the site, at the edges of their
respective known worlds. Developments in transport, navigation and communi-
cation have progressively expanded our horizons. Measured in transport time
and costs, the world has shrunk to the dimensions of a ‘global village’. Many take
for granted the availability of products from around the world and safe, fast inter-
continental travel on container carriers and aircraft. It is in this context that a
clear link exists between logistics and economic development. The connectivity
of all regions of the world is essential for international trade. As a result, many
projects aimed at supporting regional economic development focus on the infra-
structure needed to support integration into the global economy.
The logistics dimension of internationalisation conjures up a vision of parts
flowing seamlessly from suppliers to customers located anywhere in the world,
and a supply network that truly spans the entire globe. Often basic products such
as deep-freeze pizzas combine a multitude of locations from which ingredients
are sourced, and an international transport network that links production
The intended objectives of this chapter are to:
● identify challenges that internationalisation presents to logistics
management;
● analyse the structure and management of a global logistics network.
By the end of this chapter you should be able to:
● understand the forces which are shaping international logistics;
● understand challenges of international logistics networks;
● understand how to begin to balance these in organising for international
logistics – bearing in mind risks and sustainability considerations
Objectives
110 Chapter 4 • Managing logistics internationally
locations to warehouses and multiple stores. The enormous geographical span of
this logistics system cannot be recognised in the price of the product. This can be
explained by transport having become just a commodity in the global village. At
the micro level of the individual company, however, the reality is that there are
few examples of truly global supply chains. There are many barriers to such a
vision. For example, local autonomy, local standards and local operating proce-
dures make the integration of information flow and material flow a challenging
task. Local languages and brand names increase product complexity. Global
supply chains are made more complicated by uncertainty and difficulty of con-
trol. Uncertainty arises from longer lead times and lack of knowledge over risks
and local market conditions. Coordination becomes more complex because of
additional language and currency transactions, more stages in the distribution
process, and local government intervention through customs and trade barriers.
But there are many instances where a truly globalised logistics system is not
necessary, and where ‘internationalisation’ is a more accurate description.
Internationalisation is an increasing feature of the majority of supply chains.
International sourcing of component parts and international markets for
finished goods are extending as world trade increases. The move of supply and
production to ‘off-shore’ locations has been steady and stable. However, this does
not mean that internationalisation is without risks. Challenges in migrating
supply to remote locations, breakdowns in product flow, environmental consid-
erations resulting from greater shipping distances and corporate social responsi-
bility considerations are added challenges and considerations.
The factoring in of risks, environmental and social considerations into the
design of international logistics operations has made longstanding logistics formu-
las more problematic to apply. And it has helped the mindset of logistics managers
to move beyond ‘available everywhere at low cost’ towards a more qualified
approach of ‘available at a certain price and within a defined risk/reliability’.
Within the context of this changing global landscape for logistics, the overall
aim of this chapter is to analyse the internationalisation of logistics, and to
explore how to begin to organise international supply chains. Figure 4.1 shows
the framework for this chapter: drivers and enablers need to be countered by risk
• Commoditised
transportation
• Information and
communication
technology
• Factor costs
• Economies of scale
• Local responsiveness/time to market
• Inventory and handling costs
• Transportation breakdowns
• Geopolitical threats (war, terror)
• Network design
• Risk management
• Governance
Management of
international logistics
Enablers
Drivers Risks
Activities
Figure 4.1 Decision framework for international logistics
Drivers and logistics implications of internationalisation 111
factors in organising logistics internationally. Essentially, this means developing
and designing an international logistics network, managing risks and developing
international governance structures, while keeping social responsibility and envi-
ronmental concerns in mind.
Key issues This chapter addresses seven key issues:
1 Drivers and logistics implications of internationalisation: the trade-off facing
internationally operating businesses.
2 The tendency towards internationalisation: three strategies for improving the
transition to global supply chains.
3 The challenges of international logistics and location: barriers to international
logistics.
4 Organising for international logistics: proposes principles by which international
logistics networks can be organised, including offshoring considerations.
5 Reverse logistics: developing the ‘returns’ process.
6 Managing for risk readiness: two levels of risk readiness and several specific steps
to take.
7 Corporate social responsibility in the supply chain: the need to include social
responsibility in supply chain design.
4.1 Drivers and logistics implications of internationalisation
Key issue: What are the trade-offs between responsiveness to local markets and
economies of scale?
The business approach towards internationalisation is not taking place according
to any common pattern. In assessing the nature of cross-border logistics, three
questions can be asked:
● Does internationalisation imply a universal global approach to supply chain
management?
● Does internationalisation require a ‘global’ presence in every market?
● Does internationalisation distinguish between the companies that globally
transfer knowledge and those that do not?
The arguments presented in this section suggest that the answer to each of these
questions is ‘no’.
The ‘single business’ concept of structuring the supply chain in the form of
uniform approaches in each country is losing ground. ‘McColonisation’ was effec-
tively abolished when McDonald’s announced localisation of its business in such
areas as marketing and local relations. In response to local crises in quality, and
suffering from local competition, the corporate headquarters were downsized to
help empower the local organisation. (This also means localising the focal firm’s
human resource practices, a point we return to in Chapter 8.) The same applied
to the Coca-Cola Company, which abandoned ‘CocaColonisation’ – based on a
112 Chapter 4 • Managing logistics internationally
universal product, marketing, and production and distribution model – for the
same reasons. In favour of local brands and product varieties, Procter & Gamble is
doing the same. In supply chains we find regional variations in the application of
international principles.
This does not mean to say that localisation is the new mainstay. Unilever, a tra-
ditionally localised competitor of Procter & Gamble, has announced a decrease in
the number of brands, and has rationalised operations away from strict localisa-
tion over the past decade, and probably will continue to do so for a while. Some-
where between local and global extremes, Procter & Gamble and Unilever will
meet each other in a new competitive area.
Looking at the different drivers of internationalisation, three basic global shifts
in international investment and trade have been identified, with a possible
fourth coming to the forefront in modern markets, as listed in Table 4.1. Such
shifts of course have an impact on international trade and the flow of goods. In
particular, destinations change as well as logistics requirements. The ‘fourth gen-
eration’ recognises the logistics trade-off between responsiveness to local mar-
kets, environmental and risk concerns with the benefits of internationalisation.
Table 4.1 The fourth-generation global shift in Europe
Generation First Second Third Fourth
Period 1950s–1960s From 1960 From 1980 Emerging now
Primary drivers Labour shortage Labour costs and
flexibility
Market entrance Responsiveness to
customer orders, risk
reduction, and social
and environmental
responsibility
Shift of labour and
investment towards
European countries
without labour
shortage
Newly industrialised
countries, low labour
cost countries
Eastern Europe,
China, Latin America
Market region for
responsiveness and
lower risk. To low-
cost region for social
responsiveness
initiatives
Transport routes Still significantly
continental
Increasingly
intercontinental
Adding additional
destination regions
Beginning to refocus
on continental
Nature of
international flow of
goods
Physical distribution
of finished products
from new production
locations
Shipping parts to
production locations
and exporting
finished products
Physical distribution
towards new market
regions
Shipping (semi-)
finished products to
markets, reduction of
eco footprint and risk
exposure where
possible
At a company level, generic drivers of internationalisation include:
● a search for low factor and supply costs (land, labour, materials);
● the need to follow customers internationally in order to be able to supply
locally and fast;
● a search for new geographical market areas;
Drivers and logistics implications of internationalisation 113
● a search for new learning opportunities and exposure to knowledge (such as by
locating in Silicon Valley – a ‘hot spot’ in development of international elec-
tronics, software and internet industries).
The importance of these drivers varies by company and with time. Considering
the sequence of global shifts, proximity to production factors such as labour and
low material costs can be considered more basic than market- or even knowledge-
related drivers. Furthermore, the importance of the respective drivers is depend-
ent upon the internationalisation strategy of the company involved. Table 4.2
provides examples of strategic contexts, and – in the bottom row – the logistics
implications of those strategies. The multi-domestic and global strategies repre-
sent two extremes, while the integrated network strategy represents a balance be-
tween them. The consequences of this ‘balancing act’ for logistics are analysed
below. Case study 4.1 about Airbus offers illustrations of how complex and com-
prehensive supply chain management in an international context can be and
how hard it can be to manage against risks for service and value.
Table 4.2 Dimensions of different internationalism strategies
Dimension Setting in a pure multi-
domestic strategy
Setting in a pure global
strategy
Setting in an integrated
network strategy
Competitive moves Stand-alone by country Integrated across countries Moves based on local autonomy
and contribution of lead
subsidiaries, globally coordinated
Product offering Fully customised in each
country
Fully standardised
worldwide
Partly customised, partly
standardised
Location of value-
adding activities
All activities in each
country
Concentration: one activity
in each (different) country
Dispersal, specialisation, and
interdependence
Market participation No particular pattern;
each country on its own
Uniform worldwide Local responsiveness and
worldwide sharing of experience
Marketing approach Local Integrated across countries Variation in coordination levels
per function and activity
Logistical network Mainly national; sourcing,
storage and shipping
on a national level and
duplicated by country
Limited number of
production locations that
ship to markets around the
globe through a highly
internationalised network
with limited localised
warehouse and resources
Balanced local sourcing and
shipping (e.g. for customised
products and local specialities)
and global sourcing and shipping
(for example for commodities)
(Source: Based on Yip, 1989, and Bartlett and Ghoshal, 1989)
Launching a new aeroplane at Airbus
When Airbus introduced its Airbus A380 double decker superplane in January 2005 to
the press and the world it was an impressive show that brought out government
leaders and made headlines all over the world. A little while later, however, delays to the
CASE STUDY
4.1
114 Chapter 4 • Managing logistics internationally
4.1.1 Logistical implications of internationalisation
Internationalising logistics networks holds consequences for inventory, handling
and transport policies.
Inventory
Centralising inventories across multiple countries can hold advantages in terms
of inventory-holding costs and inventory levels that are especially relevant for
high-value products. On the other hand, internationalisation may lead to prod-
uct proliferation due to the need for localisation of products and the need to
respond to specific local product/market opportunities.
actual delivery of the first planes were announced. The causes for this were largely
found in the international supply chain and its design.
In October 2006, the then Airbus president and CEO Christian Streiff said: ‘This is a very
long and complex value chain. While everyone on board was on top of their job, the pro-
duction process . . . not the aeroplane . . . but the production process has one, big flaw –
one weak link in the chain: that of the design of the electrical harnesses installation in the
forward and aft fuselage. To be clear: this is the weak link in the manufacturing chain, this
is the reason why ramping up the production is hampered. But the electrical harnesses
are not the root causes why we at Airbus are in a crisis. The issue of the electrical harnesses
is extremely complex, with 530 km of cables, 100,000 wires, and 40,300 connectors.’
This quote clearly points to the supply chain and design as the cause for delays. In ad-
dition to the wiring issues there were some further supplier-related challenges as well. A
lot of different locations are an inherent aspect of the supply chain, not least because
customers and sponsoring countries require a share of the production process to be
located in their countries. So many locations, and design and make tasks are involved.
This created a lot of challenges that needed detailed coordination. For example, one
small component was supposed to be built in a plant in Italy for which a location was
selected, but no permit had been granted by local authorities. It turned out that there
were some very old olive trees on this site that had protected status. This is just one
example of how local considerations can be specific and detailed, hard to predict yet
potentially having a big impact on the supply chain. Additionally a Japanese supplier of
seats was said to have caused further delivery delays. A complex project such as devel-
oping and building a new plane across multiple countries and locations can be very
challenging in terms of scale and scope.
When Airbus launched the A380, the early signs of supply chain shortfalls already
existed, but they were well hidden. Under the paint, screws were missing. Behind the
panels, lots of parts were missing. The launch was a great spectacle, but you cannot
hide a supply chain that is not working behind some paint for long . . . .
(Source: quote from: http://blog.seattlepi.com/aerospace/archives/107302.asp)
Question
1 Brainstorm in groups how locating parts of the supply chain around the world might
be more difficult than locating it on a single site and location.
Drivers and logistics implications of internationalisation 115
Handling
Logistics service practices may differ across countries as well as regulation on
storage and transport. Adjusting handling practices accordingly is a prerequisite
for internationalisation. Furthermore, the opportunity to implement best prac-
tice across various facilities may also be possible. Both of these practices assist the
process of internationalisation.
Transport
Owing to internationalisation, logistics pipelines are extended and have to cope
with differences in infrastructure across countries, while needing to realise deliv-
ery within the time-to-market. This may drive localisation. On the other hand,
the opportunity for global consolidation may drive international centralisation.
Within this final, central, consideration in the globalise–localise dimension of
logistics, global businesses face a challenge that can be summarised in terms of a
simple trade-off between the benefits of being able to consolidate operations
globally on the one hand, and the need to compete in a timely manner on the
other.
4.1.2 Time-to-market
Time-to-market has particular significance for the management of the global
logistics pipeline. The subject of time is considered in depth in Chapter 5,
although we shall touch on the following issues here:
● product obsolescence;
● inventory-holding costs.
Product obsolescence
The extended lead time inherent in international logistics pipelines means that
products run the risk of becoming obsolete during their time in transit. This is
especially true for products in industries with rapid technological development,
such as personal computing and consumer electronics, and for fashion goods
such as clothing and footwear.
Inventory-holding costs
Lead time spent in the logistics pipeline increases the holding cost of inventory.
In addition to the time spent in physical transit, goods travelling internationally
will incur other delays. These occur at consolidation points in the process, such
as in warehouses where goods are stored until they can be consolidated into a full
load, such as a container. Delay frequently occurs at the point of entry into a
country while customs and excise procedures are followed. We review these
issues in more depth in Chapter 7.
116 Chapter 4 • Managing logistics internationally
4.1.3 Global consolidation
Global consolidation occurs as managers seek to make best use of their assets and
to secure lowest-cost resources. This approach leads to assets such as facilities and
capital equipment being used to full capacity, so that economies of scale are max-
imised. Resources are sourced on a global scale to minimise cost by maximising
purchasing leverage and to pursue economies of scale. The types of resource ac-
quired in this way include all inputs to the end-product, such as raw materials
and components, and also labour and knowledge. Familiar features of global con-
solidation include:
● sourcing of commodity items from low-wage economies;
● concentration at specific sites;
● bulk transportation.
Sourcing commodity items from low-wage economies
Two sourcing issues are used by internationally operating organisations:
● consolidation of purchasing of all company divisions and companies;
● sourcing in low-wage economies.
Internationally operating organisations seek to consolidate the purchasing
made by all their separate divisions and operating companies. This allows
them to place large orders for the whole group, which enables them to min-
imise costs by using their bargaining power and by seeking economies of scale.
At its extreme, a company may source all of its requirements from its range of
a given commodity, such as a raw material or a component, from a single
source.
Internationally operating companies are on a constant quest to find new,
cheaper sources of labour and materials. This trend led to the move of manufac-
turing from developed industrial regions to lower-cost economies. Examples of
this are:
● Western Europe to Eastern Europe;
● USA to Mexico;
● Japan to China, India and Vietnam.
These developing economies have seen impressive growth over recent years.
This has led to increased prosperity for their people and rising standards of living.
However, these advances in social standards raise the cost of labour and other
resources. Therefore, the relentless search for the lowest production cost has led
to some companies re-sourcing commodity items to lower-wage countries in
Asia, North Africa and South America.
In some cases this movement of facilities around the globe has come full circle,
with Asian companies setting up plants in the UK not only to gain access to the
EU market but also to take advantage of lower overall costs.
Drivers and logistics implications of internationalisation 117
Logistics in the news
The subject of air miles appears regularly in media headlines today. Here are two contrasting
views of what is happening.
Supermarkets and food producers are taking their products on huge journeys, despite
pledging to cut their carbon emissions. Home-grown products are being transported
thousands of miles for processing before being put on sale back in Britain. Jason Tor-
rance, campaigns director of Transport 2000, the environmental transport group, said
‘we are producing food in one corner of the world, packing it in another and then ship-
ping it somewhere else. It’s mad.’
Dawnfresh, a Scottish seafood company that supplies supermarkets and other large
retailers, cut 70 jobs last year after deciding to ship its scampi more than 8,000km to
China to be shelled by hand, then shipped back to Scotland and breaded for sale in
Britain. The company said it was forced to make the move by commercial pressures.
‘This seems a bizarre thing to do but the reality is that the numbers don’t stack up any
other way’, says Andrew Stapley, a director. ‘We are not the first in the industry that has
had to do this. Sadly, it’s cheaper to process overseas than in the UK, and companies
like us are having to do this to remain competitive.’
(Source: Jon Ungoed-Thomas, Sunday Times, 20 May 2007)
Commissioned by World Flowers, a study was carried out by Adrian Williams of Cranfield
University’s Natural Resources Department to establish the actions needed to reduce
Sainsbury’s [a retailer] carbon footprint regarding Kenyan roses. Results have provided a
fresh challenge to much current thinking on local sourcing and the impact of air freight.
The high environmental cost of heating and lighting for growing roses in the Netherlands
outweighed emissions caused by flying them in from Kenya, with its naturally warm
all-year temperatures. It also indicated that carbon dioxide (CO2) emissions from Kenyan
roses were just 17 per cent of Dutch roses, including the larger impact of CO2 emissions to
high altitude by air freighting. The study found that 6kg of CO2 was produced per dozen
Kenyan roses, as opposed to 35kg for production in the Netherlands. Whereas 99 per cent
of the Dutch emissions were caused by producing the roses, only 7 per cent of the emis-
sions from the Kenyan flowers were accounted for by growing them there. In contrast,
nearly 99 per cent of the CO2 emissions from the Kenyan roses were accounted for by the
6,000km clocked up by air freighting them to the UK.
(Source: http://www.cranfield.ac.uk/cww/perspex)
Question
1 What are the pros and cons of sourcing commodity items in low wage economies?
CASE STUDY
4.2
Concentration at specific sites
Consolidation of purchasing applies not only to commodity goods but also to high-
value or scarce resources. Research and development skills are both high value and
scarce. Therefore there is an incentive to locate at certain sites to tap into specific
pools of such skills. Examples of this are ‘Silicon Valley’ in California and ‘Silicon
Fen’ near Cambridge as centres of excellence in IT. Companies originally located in
these areas to benefit from research undertaken in the nearby universities.
118 Chapter 4 • Managing logistics internationally
Companies become more influential in directing such research and benefiting
from it if they have a significant presence in these locations. This is helped if
global research is consolidated onto a single site. While this may mean missing
out on other sources of talent, consolidated R&D gives a company a presence that
helps to attract the bright young minds that will make their mark in these indus-
tries in the future, and it allows synergies to develop between research teams.
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An international logistics pipeline is represented in Figure 4.2 as a set of logistics processes
that are connected together like sections of a pipe. However, the sections may be in different
countries – requiring planning and coordination of the processes on a global scale. The interna-
tional pipeline therefore has a number of special characteristics, some of which are suggested in
Case study 4.2 on the previous page. Use Table 4.3 to make a list of the characteristics that you
believe make a global logistics pipeline different from one that operates only nationally.
Activity 4.1
Bulk transportation
One of the more obvious advantages of operating a company in a global manner
is the cost advantage of consolidated transportation. Taking Procter & Gamble as
an example, 350 ship containers, 9,000 rail car and 97,000 truck loads are trans-
ported every day. The opportunity for cost saving by coordinating these move-
ments and maximising utilisation is significant.
Table 4.3 Characteristics of the international pipeline
Elements of the pipeline Special characteristics of the international pipeline
Research and development
Material/component sourcing
Inbound supply
Assembly
Distribution
Selling/retailing
Figure 4.2 The international logistics pipeline
Drivers and logistics implications of internationalisation 119
4.1.4 Risk in international logistics
In addition to time-to-market and inventory risks, events of recent years have
forced companies to adapt to the new supply chain reality of expecting the unex-
pected. Companies are not only responding to current volatility and geopolitical
risks, they are also developing new risk management approaches based upon the
realisation that decades of globalising supply chains has come at a price: a height-
ened and different risk profile.
Geopolitical threats
The 2003 SARS crisis and the second Gulf War were major events in and of them-
selves; they were also consecutive and had huge impacts on supply chain continu-
ity and execution feasibility. Major trade routes had to be altered and global travel
was limited. In addition, structurally heightened government security measures and
screening are indicators of risks involved in international logistics. Logistics making
the global economy a reality can never be a given that deserves no second thought.
Transportation breakdowns
Transportation may be a commodity, but that does not mean that nothing can go
wrong. A several-week strike in the US west coast ports in 2002 lasted long
enough to almost cripple the US economy. With hundreds of cargo ships floating
outside the ports, shipments were not arriving at US destinations. This meant
that factories were shut down and stores were emptying. It also had a ripple effect
on global trade overall. For example, return shipments were delayed because no
ships were leaving the ports either. In addition, with so many ships and contain-
ers tied up, other routes could not be served. And in fact a resulting global short-
age of containers caused a slowdown of shipments in many other port regions. So
shipments on other routes, in different harbours and even shipments using dif-
ferent modalities were affected.
Risk and security concerns are not a one-time issue but require continuous risk
management. Helferich and Cook (2002) found that this is necessary because, for
example:
● only about 61 per cent of US firms had disaster recovery plans;
● those that do typically cover data centres, only about 12 per cent cover total
organisational recovery;
● few plans included steps to keep a supply chain operational;
● only about 28 per cent of companies have formed crisis management teams,
and even fewer have supply chain security teams;
● an estimated 43 per cent of businesses that suffer a major fire or other major
damage never reopen for business after the event.
According to Helferich and Cook (2002) this can partially be explained by the fact
that there are competing business issues, managers might not recognise their vulner-
ability and might assume that the government will bail them out. Peck (2003) has
published a self-assessment for supply chain risk and an operational-level tool kit.
120 Chapter 4 • Managing logistics internationally
4.2 The tendency towards internationalisation
Key issue: How can we picture the trade-offs between costs, inventories and lead
times in international logistics?
In order to remain competitive in the international business environment, com-
panies seek to lower their costs while enhancing the service they provide to
customers. Two commonly used approaches to improve the efficiency and effec-
tiveness of supply chains are focused factories and centralised inventories.
4.2.1 Focused factories: from geographical
to product segmentation
Many international companies, particularly in Europe, would have originally
organised their production nationally. In this situation, factories in each country
would have produced the full product range for supply to that country. Over
time, factories in each country might have been consolidated at a single site,
which was able to make all the products for the whole country. This situation, in
which there is a focus on a limited segment of the geographical market, is shown
in Figure 4.3a.
The focused factory strategy involves a company’s consolidating production of
products in specific factories. Each ‘focused factory’ supplies its products interna-
tionally to a wide market and focuses on a limited segment of the product assort-
ment. This situation is shown in Figure 4.3b.
(a) (b)
Figure 4.3 (a) Focused markets: full-range manufacture for local markets
(b) Focused factories: limited range manufacturing for all markets
The tendency towards internationalisation 121
Traditional thinking is that this organisational strategy will deliver cost advan-
tages to a global company. While this is true for production costs, the same is not
necessarily true for inventory-holding costs and transport costs.
4.2.2 Centralised inventories
In the same way that the consolidation of production can deliver cost benefits, so
can the consolidation of inventory. Rather than have a large number of local dis-
tribution centres, bringing these together at a small number of locations can save
cost. Savings can be achieved in this way by coordinating inventory management
across the supply pipeline. This allows duplication to be eliminated and safety
stocks to be minimised, thereby lowering logistics costs and overall distribution
cycle times. Both may sound contrary to the fact that the transport pipeline will
extend, owing to the longer distribution legs to customers from the central ware-
house in comparison with a local warehouse. Nevertheless, through centralising
inventory, major savings can be achieved by lowering overall speculative inven-
tories, very often coupled with the ability to balance peaks in demand across
regional markets from one central inventory. Figure 4.4 characterises the differ-
ent operating environments where centralised inventory may be a more relevant
or a less relevant consideration, based upon logistics characteristics.
In product environments where inventory costs are more important than the
distribution costs, centralised inventories are a relevant concern. This is typically
the case for products of high value (measured in costs per volume unit).
Microchips are an extreme example: these products are of such high cost per vol-
ume unit that distributing from the moon could still be profitable! Distribution
costs have a marginal impact on logistics costs per product, assuming of course
that transport costs are mainly a function of volume and weight. Products that
require special transport, such as antiques, art, confidential documents or dan-
gerous chemicals, may represent a different operating environment.
A second dimension that needs to be taken into consideration is that of dis-
tribution lead times. Here, we focus on physical distribution from warehouse
to customer, and not on the inbound pipeline. Centralising inventory may lead
to lower factory-to-warehouse distribution costs because shipments can be
Focused factories have an impact on the important trade-off between cost and delivery lead
time. Make a list of the advantages and disadvantages of focused factories. One example of each
has been entered in the table below to start you off.
Activity 4.2
Cost Lead time
Advantages Lower production costs through
economies of scale
Specialised equipment may be
able to manufacture quicker
Disadvantages Higher transport cost Longer distance from market
will increase lead time
122 Chapter 4 • Managing logistics internationally
Distribution costs
most important
Inventory costs
most important
Local
inventories
International
Shorter
delivery
time
Longer
delivery
time
Continental
level of
centralisation
Lower
demand
volatility
Greater
demand
volatility
Figure 4.4 Inventory centralisation against logistics costs and service dimensions
consolidated into full container loads. Where service windows to customers are
very compressed there may not be sufficient time to ship products from a central
warehouse and allow for the required transit time within the service window.
This is why, for example, hospitals and pharmacies retain in-house stocks of
products, almost irrespective of their inventory costs. Critical medicines and
surgical appliances need to be available instantly and locally, regardless of
inventory costs.
In general, transport costs have continued to decline over time as a relative cost
item because of innovations in transport technology, the commoditisation of
transport (such as container ships), and the oversupply of transport capacity for
basic transport. These factors in themselves contribute to the increasing interna-
tionalisation of logistics: physical distance becomes less important, even for
bulky products. However, the lead-time dimension loses some of its relevance,
from a transport point of view. Customer demand can be very volatile and unpre-
dictable. Accuracy of delivery (the right quantity) can therefore be a more de-
manding challenge than speed (the right time). Speed is available through
different transport modes (container ship, air cargo, express, courier, for exam-
ple) at reasonable prices. In very volatile markets, control over international in-
ventories by means of centralised inventories can be crucial. Overall delivery
reliability (‘on time in full’) tends to increase significantly, to the benefit of an
organisation’s performance in terms of service requirements. The ability to balance
peaks across market regions from a central inventory is among the additional
advantages. Different levels of inventory centralisation can be applied according
to different dimensions. Taking the European market as an example, the range is
The tendency towards internationalisation 123
from local inventories (by country or even by location) through international
(a selection of countries) to the complete continent. Many companies now
include the Middle East and Africa as a trading bloc (Europe, Middle East and
Africa–EMEA).
Centralised inventory management and focused factories enable different de-
livery strategies to be combined. Figure 4.5 depicts a simple distribution network
that enables three different delivery strategies (listed in Table 4.4) to be applied as
appropriate. For example, an opportunity to think globally arises where the key
product relies more on the designer label and its promotion and marketing and
less on its manufacturing origins. The key to success in clothing is often about
fashionable design and labelling. Low labour costs (rather than material costs) of
production can then be achieved by outsourcing to low-wage economies, often
in the Far East.
Delivery strategy
C
B
A
Factory/vendor
Regional distribution centres
Local transshipment point
Figure 4.5 Delivery strategies in a global network
Table 4.4 Three different delivery strategies
Delivery strategy Description Pros Cons
A Direct shipment of fast-moving,
predictable lines. Held locally,
probably pre-configured
Short lead time to customer Multiple inventory
points leading to
duplication of stocks
B Inventory of medium velocity, less
predictable demand lines held at
generic level awaiting final
configuration
Lower overall levels of inventory,
consolidated shipments to
distribution centres and
concentrated handling
Longer lead time to
customers
C Slowest-moving lines, least
predictable. Perhaps one shared
global inventory or make to order
Low overall inventory levels Long lead time to
customers
Centralised distribution at Nike
‘centralised and specialised, but not standardised’
Nike has a central customer service centre (distribution centre) located at Laakdal in
Belgium. The centre is 200,000 square metres in size and serves 45,000 customers in
EMEA with footwear, apparel and equipment. The centre receives products from supplier
CASE STUDY
4.3
124 Chapter 4 • Managing logistics internationally
4.3 The challenges of international logistics and location
Key issues: What are the risks in international logistics in terms of time and inven-
tories, and how can they be addressed?
International logistics is complex, and different from localised logistics pipelines.
The main differences that need to be taken into consideration are:
● extended lead time of supply;
● extended and unreliable transit times;
factories around the world for distribution to retail clients both before the start of all
four seasons each year, as well as during a given season. Prior to the start of a season,
when work is at a peak, the workforce stands at some 2,300 operational staff. Off peak,
that drops to 1,350 staff. Deliveries are very time critical, given the seasonal nature of
the business. Retailers demand in-store availability on day one of a new season. The
centre is a clear example of a company deciding to centralise receiving, storage and
shipment to customers at one location in Europe. The benefits including consolidation
of inbound shipments, lower inventory levels and better delivery service (in comparison
to fragmented warehouses scattered around Europe). This does not mean, however,
that the logistics operations are standardised for all flows of goods and all customers.
Not every shipment is handled in a standard way through a single distribution
pipeline:
● About a quarter of the volume of shipments is shipped to customers directly. These
are larger shipments such as full pallets for larger customers – for which there is no
need to consolidate with other shipments. As a result it is cheaper and quicker to
make these shipments directly.
● New growth areas that are served from the centre are Russia, Turkey and South
Africa. For Russia, the first satellite centre with small inventories was recently opened
to enable faster local replenishment of selected products.
● Selected shipments to selected retailers are dealt with by a materials handling
operation at the centre. This mainly involves labelling and re-packing operations.
● Some retailers share weekly point of sale data with Nike, enabling it to replenish
inventories based upon actual sales.
Questions
1 What are the reasons for a company, such as Nike, with a centralised distribution cen-
tre to ship some products directly to customers, not through the distribution centre?
2 What are the reasons to start satellite centres when a company such as Nike has a
centralised distribution centre?
3 What are the pros and cons of locating materials handling operations such as labelling
and packing in a distribution centre, as opposed to in the factory?
4 What are the pros and cons for a company such as Nike to take on these materials
handling services as opposed to leaving them to retail customers?
The challenges of international logistics and location 125
● multiple consolidation and break points;
● multiple freight modes and cost options;
● price and currency fluctuations.
Information technologies can help to circumvent these challenges in general,
and the proper location of international operations in particular can help to re-
solve some of these challenges. Another key point is that the benefits of sourcing
from low-cost locations could be lost by the operating costs and challenges of in-
ternational logistics. Hence it is key to consider these prior to making decisions
about global sourcing and offshoring.
4.3.1 Extended lead time of supply
In an internationally organised business most products produced in a particular
factory will be sold in a number of different countries. In order to manage the in-
terface between the production and sales teams in each territory, long lead times
may be quoted. This buffers the factory, allowing it to respond to the local varia-
tions required in the different markets.
4.3.2 Extended and unreliable transit times
Owing to the length and increased uncertainty of international logistics
pipelines, both planned and unplanned inventories may be higher than optimal.
A comparison of the length of domestic and international product pipelines and
their associated inventories is shown in Figure 4.6, which uses a similar ‘pipeline’
illustration to activity 4.1. Variation in the time taken for international transport
will inevitably lead to increased holding of inventory with the aim of providing
safety cover.
4.3.3 Multiple consolidation and break points
Consolidation is one of the key ways in which costs in pipelines can be lowered.
Economies of scale are achieved when goods produced in a number of different
facilities are batched together for transport to a common market.
The location of consolidation points depends on many factors that are not
really appropriate to consider in a simple assignment such as this. That said, the
following is one solution. Products manufactured in India should be consoli-
dated at the site on the east coast (near Madras) for shipping to Singapore. Here
they are combined with the output from the Thai and Singapore factories and
shipped to Hong Kong. Products are consolidated at a Chinese port, possibly
Shanghai, and transported by rail or sea to Hong Kong. All the other manufactur-
ing sites deliver direct to Hong Kong, where products from all the various facili-
ties are consolidated and shipped to Los Angeles.
It is worth noting that, after arrival in LA, this process runs in reverse. The
consignment will be broken down at various ‘break points’ throughout North
America and the goods distributed to market via hubs.
126 Chapter 4 • Managing logistics internationally
Domestic pipeline
= 90 units inventory
Plant
30
Transit
20
Transit
10
Distribution
centre
30
Plant
30
Global pipeline
= 170 units inventory
Transit
20
Ocean
transit
20
Destination
forwarder
20
Transit
20
Distribution
centre
30
Transit
10
Origin
forwarder
20
Figure 4.6 Comparison of domestic and international logistics pipelines
(Source: After van Hoek, 1998)
4.3.4 Multiple freight modes and cost options
Each leg of a journey between manufacture and the market will have a number
of freight mode options. These can be broken down in simplistic terms into air,
sea, rail and road. Within each of these categories lies a further range of alterna-
tive options. Each of them can be assessed for their advantages and disadvan-
tages in terms of cost, availability and speed. When the journey along the supply
chain involves multiple modes, the interface between them provides further
complication.
4.3.5 Price and currency fluctuations
When operating around the globe, fluctuations in currencies along the supply
chain can have an impact on how the supply chain is configured. While it can
The challenges of international logistics and location 127
take years to develop a global supply chain structure and operational footprint,
currencies fluctuate daily – and sometimes wildly. Such fluctuations do not
favour operations in countries with an unstable currency, and explain why
some countries and industries do most of their business in a single currency,
even if not their own. For example, price fluctuations of fuel have impacted
the feasibility of international shipping against the benefits of lower, cen-
tralised inventories. Figure 4.7 shows that inventory holdings become less
cost justifiable as the costs of shipping increase. Essentially, global transport is
not free.
Transportation cost increases due
to rising fuel costs
Inventory costs; more
interesting to increase
inventory due to higher
fuel prices or increase
lead times
Short lead time Long lead time
C
o
st
s
Figure 4.7 The trade-off between cost and lead time for international shipping
A footwear company has a number of manufacturing facilities around Asia, as shown in
Figure 4.8. There are five manufacturing sites in China, three in India, and one each in
Thailand, Singapore and Taiwan. Singapore and Hong Kong also have the facility to act as
regional consolidation sites.
Draw arrows on the map showing where the flow of exports to the North American market
could be consolidated. Write a brief description that explains your reasons for choosing these
consolidation points and the flows between them.
Activity 4.3
128 Chapter 4 • Managing logistics internationally
4.3.6 Location analysis
A structural component of international logistics pipeline design is the location
design, or, in other words, deciding where operations are going to be performed.
As Figure 4.9 shows, there is a sequence to the decision-making process involved
that incorporates the business (left-hand side) and geographical decision making
(right-hand side). Business decision making evolves from a strategic commitment
through a decision support analysis project to implementation of the resulting
plan at a selected location. In parallel, the location analysis starts at the level of
relevant continent, through consideration of relevant countries and regions, to
the selection of a location.
Key:
China
Thailand
India
Taiwan
Hong Kong
Singapore
Regional consolidation site
Manufacturing site
Figure 4.8 Location of Asian facilities
Consider each of the four freight modes in terms of their cost, speed and availability, and write
in the respective box in the table ‘high’, ‘medium’ or ‘low’. Explain your answers in the ‘Ratio-
nale’ box on the right.
Activity 4.4
Note that these comparisons are fairly subjective, and your answers will reflect your experi-
ence of the different freight modes in your industry, product type and geographic location.
The challenges of international logistics and location 129
Phase Geographical scope
Strategic decision to
restructure and invest
in plant network
Continent
(e.g. Europe)
Project plan 3 to 4 countries
Specification of
project plan
Regions within
selected countries
Implementation
of plan
Location
within regions
Selected location
Figure 4.9 Phases in the location selection process
Freight mode Cost Speed Availability Rationale
Air
Sea
Rail
Road
The typical four-phase decision-making process can be structured using the
following steps:
1 Deciding upon the appropriate level of centralisation–decentralisation using,
for example, Figures 4.4 and 4.9.
2 Selecting relevant location criteria.
130 Chapter 4 • Managing logistics internationally
3 Selecting criteria weightings.
4 An economic trade-off analysis of structures and relevant locations.
Table 4.5 displays a representative trade-off table for two locations by relevant
weighted criteria.
Table 4.5 Trade-offs between two locations
Location criteria Weight Score region A Score region B
Railways 1 4 1
Water connections 1 4 1
Road connections 2 2 4
Site availability 2 2 3
Central location 3 1 2
A . . . . . .
Total 19 22
Key: Score on a five-point scale ranging from poor to excellent.
4.4 Organising for international logistics
Key issue: How can supply chains be better organised to meet the challenges of
international logistics?
There are at least three elements in organising for international logistics. These are:
● layering and tiering;
● the evolving role of individual plants;
● reconfiguration processes.
These will be outlined in the following subsections.
4.4.1 Layering and tiering
Internationalisation is often looked at from the point of view of asset centralisa-
tion and localisation. However, the wider organisational setting needs to be taken
into account as well.
A commonly used maxim is global coordination and local operation, which relates
to laying out the flow of information and coordination differently from the map
of the physical operations. For example, Hewlett-Packard (HP) operates a globally
consistent and coordinated structure of product finalisation and distribution in
contrast to its continental operations. The company runs a final manufacturing
and central distribution operation in Europe, the US and Asia for each continent.
Organising for international logistics 131
The operations are structured and run exactly the same, with the only difference
being the way that products are configured to suit end-customers in the specific
regions. This final configuration process (which in the case of HP may include fit-
ting power leads and local instructions) is referred to as postponement, which we
review in more detail in Chapter 6. Regional facilities are often owned and oper-
ated on a dedicated basis by a contract manufacturer and third party logistics
providers (3PL, reviewed in Chapter 7). HP brings only limited management
expertise to these regional operations to assure global coordination. Thus,
although HP operates in a globalised way, its products are tuned to local markets
by means of local logistics operations. Therefore developments in ICT do not
eliminate the need for such local operations.
Another example can be found in the automotive industry. In this industry,
major original equipment manufactuers (OEMs) structure their plant networks
globally, while making suppliers build their plants in the immediate vicinity of
the OEM plant. The distance or broadcasting horizon between the two plants is
defined by the time between the electronic ordering of a specifically finalised sin-
gle module on the online system and the expected time of delivery in sequence
along the assembly line. Time horizons for order preparation, finalisation, ship-
ment and delivery tend to be in the area of an hour and a half or less. This causes
localisation of the supplier or co-location, while the OEM plant services a conti-
nental or even global market.
4.4.2 The evolving role of individual plants
Ferdows (1989) projects the theories by Bartlett and Ghoshal (1989) onto the role
of individual plants/factories in achieving the targeted international capabilities
of global efficiency, local responsiveness and worldwide learning, or a combina-
tion of the three. Using the same type of approach, with location considerations
on the horizontal axis and performed activities on the vertical axis, van Hoek
(1998) adjusted the model for distribution centres. The model indicates the way
in which the growth of performed activities changes the demands placed on the
capabilities of the plant and changes the location requirements. Location is con-
cerned with the response of governments to globalisation: adjusting local taxes,
incentives and infrastructure to favour selection of their territory.
In Figure 4.10 a traditional warehouse is projected to possibly develop into a
semi-manufacturing operation with product finalisation among its responsibili-
ties and added value. This also contributes to the creation of a flexible facility for
responding to local markets. The model also indicates a possible downgrading of
the plant, with its two-way arrows showing development paths. These develop-
ments could be driven by poor location conditions, an inability to reach supply
chain objectives, or the ability to reach the supply chain objectives more easily at
other plants in the company’s network. This suggests that the role of individual
plants could be seen as an internal competitive issue for plant management.
Most relevant, the evolutionary roles and functions of individual plants within
the evolving supply chain are specific issues of concern for the realisation of
global objectives.
132 Chapter 4 • Managing logistics internationally
4.4.3 Reconfiguration processes
Related to this last point, the achievement of the required changes in interna-
tional logistics pipelines is a central issue. In the research presented in Figure 4.6
(van Hoek, 1998), it was found that, across companies, large differences can be
found in reconfiguration paths. This was found even in cases where the same sup-
ply chain structure (a traditional factory warehouse, as displayed in Figure 4.10)
was targeted. Differences included:
● Supply chain scope/activities involved. Was only final manufacturing relocated, or
did sourcing undergo the same treatment?
● Focus. Were activities moved into the market, e.g. localised or centralised
within the market? Did the move have a single or multiple focus?
● Tendency. Were activities moved out of the (European) market or vice versa,
with single or multiple tendencies?
Technical activities
at the site
• Product assembly
and product
improvement and
recommendations
Postponed
manufacturing
Access to
qualified
suppliers
• Product
customisation
EDC/
logistics
postponement
• Product
packaging
National
warehouse and
deferred packaging
• Warehousing
and shipment
Factory
warehouse
National
warehouse
Proximity
to markets/
customers
Access to
production supplies
and inputs
Primary strategic
contribution
of the plant
Figure 4.10 Changing role of distribution centres
Organising for international logistics 133
● Timetable. Was it a single-step process or did it involve various steps spanning
out the process over a longer period of time?
● Pace. Was it an overnight change or the result of a gradually changing process?
● Authority. Was it directed from a global base (top down) or built up region by
region (bottom up)?
The differences can be explained through differences in the supply chain char-
acteristics of companies, among which are:
● Starting point: Is the base structure localised or globalised?
● Tradition: Does the company have a long preceding history with the baseline
in the market, or can it be built up from scratch, in supply chain terms (brown-
field or greenfield)?
Table 4.6 summarises the differences found in companies implementing post-
poned manufacturing as an example of a reconfiguration process. The same argu-
ment could be applied to the difference between a central European warehouse
and a country-based, localised distribution network.
Table 4.6 Differences in reconfiguration processes for companies depending
upon starting point (global or local)
Starting point Global structure Localised structure
Heritage in market Little, greenfield approach Extensive, brownfield approach
Supply chain scope Narrow, involving inventory and
final manufacturing
Broad, involving inventory,
manufacturing, and sourcing
Focus Decentralising final manufacturing
and inventory into market
Centralising inventory and final
manufacturing at continental level
and globalising manufacturing
and sourcing
Tendency Single, placing activities into
market
Multiple, relocating within market
and moving outside market
Timetable Short (1–10 months) Long (number of years)
Authority Global, top-down directions Local, bottom-up iterative process
Figures 4.11 and 4.12 represent the reconfiguration process from local distribu-
tion through logistics centralisation to postponed manufacturing (final manufac-
turing in the warehouse). The differences in the implementation path are based
upon the different starting points. The path with a localised starting point goes
through centralisation within Europe starting from autonomous, duplicated local
structures. The path with a global starting point builds a small European presence
and then migrates through the increase of European presence centrally (repre-
senting a further location into Europe, rather than a further centralisation from
within Europe).
134 Chapter 4 • Managing logistics internationally
Stage 1 National organisations
Sourcing Manufacturing Inventory Distribution Sales
Country 1
Country 2
Country n
Stage 2 Cross-border integration and logistics centralisation
Sourcing Manufacturing Inventory Distribution Sales
Country 1
Country 2
Country n
Stage 3 Postponed manufacturing
Sourcing
Activities
outside Europe
Activities
in Europe
Primary
manufacturing
Inventory,
final manufacturing,
distribution
Sales
Country 1
Country 2
Country n
Figure 4.11 Stages in the implementation of postponed manufacturing: local
starting point
(Source: van Hoek, 1998)
Organising for international logistics 135
Stage 1 Direct export
Sourcing Manufacturing Inventory Distribution Sales
Country 1
Country 2
Country n
Stage 3 Logistics centralisation
Sourcing Manufacturing Inventory,
distribution
Sales
Country 1
Country 2
Country n
Stage 4 Postponed manufacturing
Sourcing and primary
manufacturing
Inventory,
final manufacturing,
distribution
Sales
Country 1
Country 2
Country n
Stage 2 National warehouses
Sourcing Manufacturing Inventory Distribution Sales
Country 1
Country 2
Country n
Activities in home country Activities in Europe
Figure 4.12 Stages in the implementation of postponed manufacturing: global
starting point
(Source: van Hoek, 1998)
136 Chapter 4 • Managing logistics internationally
Case study 4.4 explores issues and trade-offs found in developing competitive
solutions when organising for international logistics.
The trade-off between time and cost in global supply chains:
lessons from the apparel industry
Vertical integration v outsourcing
The enormous success of vertical retailers such as H&M, Zara, Gap and Next in the
apparel industry in the last ten years has forced manufacturers of brand labels such as
Esprit and Levi, and department stores such as El Corte Ingles and Marks & Spencer,
to speed up their supply chains. Partly, this has been achieved by integrating their
processes and systems upstream (towards their suppliers) and for wholesale brands
downstream (towards their wholesale customers) in the supply chain.
The competitive environment in the apparel industry is increasingly tough. Retail
prices are under pressure; there is increasing polarisation of pricing, with growth in the
premium luxury brands at one end and low cost segments at the other, resulting in a
constriction in the middle ground, driven by vertical retailers such as Primark and Matalan;
competition is extending from products that were traditionally limited to upper, middle
or lower segments of the market – and increasingly with ‘fashion’ product from the
sports industry; gross margins are shrinking; retail store costs and personnel costs are
going up. Those who do not manage their assortment planning and inventories well
are continuously under pressure to mark down their merchandise. Vertical retailers have
found an answer to this hostile environment by:
● increasing the probability of designing a bestseller product by dramatically shorten-
ing its time-to-market, designing and delivering product closer to the on-market
trend (see Chapter 5);
● piloting products in the stores and then replenishing the best sellers within two to
three weeks by utilising new types of make-to-order processes;
● driving the inventory sales productivity (as measured by stock turn, sales per square
metre and mark down percentage) by keen assortment planning, sales performance
feedback and delivery planning;
● integrating the IT systems from point of sale back into garment production factories
and from there towards fabric suppliers, using product lifecycle management sys-
tems that incorporate data and workflow along the supply chain;
● identifying a product category mix that, where possible, can take advantage of
longer lead time, higher margin products;
● focusing on quality of workmanship through fitting and process quality.
Brand label manufacturers traditionally do not own their retail stores, and depart-
ment stores do not have own their factories. This easily leads to competitive disad-
vantage in comparison with the vertical retailers, who have their own retail stores and
have tight control over their manufacturers. To survive in today’s marketplace against
the vertical retailers, brand labels and department stores need to integrate their
processes and systems from point-of-sale back into the factory. How can this be
done?
CASE STUDY
4.4
Organising for international logistics 137
Core competencies and time-to-market
Companies such as Esprit have initiated strategies to become vertical retailers them-
selves. They have also set up their own e-commerce website, a direct distribution chan-
nel to their consumers. This strategy not only generates additional revenue but also
supports direct and immediate product performance feedback. Elements of this strat-
egy are to focus on core competencies and to offload all non-core activities to special-
ists who can such activities better and at a lower price. Another element of the strategy
is to increase the number of collections from four to between six and twelve per year.
This enables them to be closer to market and thus to forecast and fulfil product demand
more accurately. Of course, closeness to market increases the pressure on faster, timely
product development and product delivery. The product lifecycles of the individual col-
lections are shorter, which leads to enhanced requirements for responsiveness on all
supply chain partners. There can be no buffers, and deliveries have to be on time and in
full. As a result of this each partner in the chain has increased needs for information,
flexibility and transparency. Therefore, vertical retailers must have an excellent supply
chain that is fast, flexible, reliable and which provides full transparency at low cost.
That’s in addition to having good products and closeness to market!
Developing a global SCM network
Re-engineering supply chain processes as part of the verticalisation strategy forces ap-
parel and sports companies to focus on outsourcing all non-core activities and develop-
ment of a global supply network. Outsourcing of non-core activities, such as managing
warehousing and distribution centres, frees up management time which can be utilised
for managing the supply chain end-to-end. The development of a global supply net-
work consists basically of four components:
● enforcing end-to-end supply chain thinking within the focal firm, its suppliers and its
logistics service providers;
● setting up a physical infrastructure with selected lead logistics providers (LLPs) who
manage the logistics hubs at sourcing origin and market destination (see Figure 4.13);
● using central databases on the internet (SCM portal and Supplier portal) where all
logistics partners, suppliers and buyers can view order status and workflow, product
specifications and development in real time;
● empowering LLPs to manage selected service level agreements on behalf of the focal
firm in terms of cost and time
Besides development of the above components of the supply chain, it is important to
consider trade-offs. These are decisions that have to be made for each step in the supply
chain. Figure 4.14 provides an overview of the steps and trade-offs in the supply chain
from sourcing areas in Asia, Eastern Europe and South America towards a European
market destination.
The trade-off between time and cost
Which trade-offs are to be made? For example, when sourcing in Asia whilst selling in
Europe, what process set ups are possible? When focusing on cost the focal firm needs
to make sure that shipments are in full container loads, shipped by sea, packed as cross-
138 Chapter 4 • Managing logistics internationally
Hamburg
Bremerhaven
Rotterdam
Le Havre
Southam
pton
Gioia Tauro
Aden
Colombo
Singapore
Hong Kong
Yantian
Xlam
en
Shanghai Kobe
Tokyo
Hakata
Kw
angyang
Pusan
N
agoya
Port Kelang
Antwerp
Consolidation hubs
LLP: offices and warehouses
Carrier shipping lines
Tokyo
Yokohama
KobeSeoul
Pusan
DalianBeijing
Tianijn
Qingdao
Nanjing Shanghai
Ningbo
Taipei
Kaohsiung
Manila
Cebu
Surabaya
Jakarta
Kelang
Penang
Chennai
Bangkok
HCMC
Hanoi
MacauHong Kong
Huangpu
Shenzhen
Yantian
Colombo
Pt. Louis
Mumbai
Karachi
New Delhi
Dhaka
Chittagong
Fuzhou/Xiamen
Osaka
India
Pakistan
Mauritius
Sri Lanka Philippines
Vietnam
Thailand
Korea
Japan
Taiwan
China
Bangladesh
Singapore
Malaysia
Indonesia
Figure 4.13 Example of physical infrastructure set-up with LLP origin in Asia
(Source: Leeman, 2007)
Consolidator
ASIA EUROPE AMERICA
Hubs,
consolidation
Hubs,
consolidation
Hubs,
consolidation
Carrier Sea>land>air Land>air>sea Sea>air>land
Warehousing Cross-dock
Pick/pack,
cross-dock
Pick/pack,
cross-dock
SCM tools to manage the time, dependability and cost of the network infrastructure
Transport Express, pallets Express, pallets Express, pallets
Figure 4.14 SCM tools and trade-offs in the supply chain
Organising for international logistics 139
dock shipments which are then transported to retail stores via a cross-dock warehouse
as consolidated shipments once a week. However, this slows down the process time
substantially to approximately 20 days. Also, different countries of manufacture
have considerably different levels of duty tariff when landing product in Europe and this
needs to be considered in the total acquisition cost. When focusing on time, the focal
firm needs to ensure that shipments are packed by retailer store at the factory, shipped
by air and transported directly to stores upon arrival without going through a cross-
dock warehouse. Of course, this process is fast (two–five days) but it is also very costly,
and can only be justified with exclusive branded products with high gross margins.
Also, Asian manufacturing is in developing countries and therefore local infrastructure
and the time required to move product to the hub needs consideration. The product
category mix, levels of assortment and replenishment product volumes also require
that logistics managers plan for timely availability of capacity at suppliers. It is also
becoming important to global brands to plan for how quickly they can manufacture
and replenish for growing local Asian markets from the same supply base. Therefore,
companies such as Esprit and Nike have a range of supply chain solutions. Some of
these set delivery windows which focus on time, while others organise supply chain
processes to focus on minimising cost.
(Source: Based on Leeman 2007; updated by Mark Baker, 2010)
Questions
1 What are the strategic drivers that are forcing focal firms in the apparel industry to
change their supply strategy?
2 Why is time-to-market so important in the apparel industry? How does it impact
supply chain processes?
3 Which trade-offs must be made when setting up a global SCM network for the
apparel industry? Also discuss the trade-offs regarding sourcing countries versus
quality.
Case study 4.5 offers an example of an approach to outsourcing that provides
an insight into the hidden difficulties that may be faced when moving from
‘local’ to ‘low cost’ supply.
Moving offshore – not so easy or straightforward:
the experience of Smiths Aerospace
Smiths Aerospace is a largely UK-based supplier to both military and civilian aircraft
and engine manufacturers, and is owned by General Electric of the US. Several years
ago, Smiths launched an initiative to outsource production of parts from UK suppliers
to Chinese suppliers in a drive to benefit from lower costs. Among the beneficiaries of
CASE STUDY
4.5
140 Chapter 4 • Managing logistics internationally
the new initiative was the Mechanical Systems division, which intended to source
high volume, low cost products from lean, low cost suppliers in China. The remain-
ing volume was to be sourced from domestic suppliers which could operate more
flexibly (section 1.3.2). The scope of the restructuring included machined civilian air-
craft parts from four UK sites under the Mechanical Systems Division: based in four
locations in the UK: Wolverhampton, Cheltenham, Hamble and Dowty Propellers
(Gloucester).
Global supply chain teams based in the UK and the US, in conjunction with each of
the Smiths Aerospace divisions, were given responsibility for the deployment of the
outsourcing programme. The reconfigured supply chain will result in the transition
of approximately 5,000 to 15,000 parts from traditional suppliers to low cost econ-
omy suppliers over a five-year period. Plans state that, on average, 40 per cent of the
spend will remain within the UK because of high switching costs. As the long-term
contracts expire, the parts will either be manufactured internally or outsourced
depending on intellectual property rights and technology protection. However, sev-
eral years into the initiative, only parts of the original plans have been accomplished.
Much of the delay was attributable to the change process, which was not so simple
as originally envisioned. There were also challenges with how that change was being
managed. For example, in the words of one company executive:
‘Failure to manage exit from the existing supplier, and failure to coordinate the
transition, led to catastrophic failure of supply’.
In this restructuring initiative, several keys to a successful supply chain initiative have
been met:
● The initiative directly relates to corporate strategic priorities and there is top execu-
tive recognition of its importance.
● There are clear considerations for switching production to China.
● There is a clear business (four units two of which serve as pilots) and operating scope
defined (those that require less flexibility).
● There is a launch point for ‘quick wins’ (high volume, labour intensive parts)
● Teams around the world have been allocated to the initiative.
However, as is also clear from the above quote from the executive, there are real risks
involved. As much as there have been many companies moving supply chain opera-
tions to China, there are also clear negative impacts on supply chain performance that
need to be considered and incorporated into the change plan.
Questions
1 Which are risks in relocating parts of the supply chain and how can they be incorpo-
rated into the plan for change?
2 Despite the recognised need to coordinate the transition process, the sites lacked a
documented method to specify how this would take place. There were also chal-
lenges with the change process itself. Propose what steps might have been included
to address these shortcomings.
Reverse logistics 141
4.5 Reverse logistics
Key issue: factoring in the return flow of goods when designing international
networks.
Reverse logistics deals with the flow of goods that go back up the supply chain for
a number of reasons, including: product returns, repairs, maintenance and end-
of-life returns for recycling or dismantling. Reverse logistics has both a service
(repair, recalls, etc.) and an environmental component. Corporate social responsi-
bility considerations will be covered in more detail in section 4.7. Meanwhile,
Table 4.7 – from the Reverse Logistics Executive Council – compares reverse logis-
tics with forward logistics.
Table 4.7 Comparing forward and reverse logistics
Forward logistics Reverse logistics
Forecasting relatively straightforward Forecasting more difficult
One to many distribution points Many to one distribution points
Product quality uniform Product quality not uniform
Product packaging uniform Product packaging often damaged
Destination/routing clear Destination/routing unclear
Pricing relatively uniform Pricing dependent on many factors
Importance of speed recognised Speed often not considered a priority
Forward distribution costs easily visible Reverse costs less directly visible
Inventory management consistent Inventory management not consistent
Product lifecycle manageable Product lifecycle issues more complex
Negotiation between parties straightforward Negotiations complicated by several factors
Marketing methods well known Marketing complicated by several factors
Visibility of process more transparent Visibility of process less transparent
(Source: Reverse Logistics Executive Council, http://www.rlec.org)
Reasons why reverse logistics is often only partially incorporated into interna-
tional network design include:
● no infrastructure: companies often try to use the same outbound distribution
system to handle returns without considering whether it is fit for purpose;
● reverse logistics is often a ‘corner-of-the-desk concern’, and does not receive
sufficient resources;
● much attention on the subject is driven by legislation, not yet by recognised
business value;
● focal firms see reverse logistics as a cost of doing business;
● the subject is intuitively not popular: it means something has gone wrong, so
people are tempted to ignore it or hide it;
● it is hard to forecast the reverse flow and composition – what is going to come
back.
Opinions indicate that there are operational shortcomings such as using the
same infrastructure for the return flow, and the difficulty of forecasting reverse
flow. These might be explained by a lack of management attention, and by lack
142 Chapter 4 • Managing logistics internationally
of appreciation of the full costs of reverse logistics. On the other hand, potential
downsides of a reactive approach include image risks, service shortfalls and being
a nuisance to customers. Suggested ways forward include considering the full
impact of reverse logistics and approaching it as a business:
● consider reverse logistics for its full cost and negative potential market impact;
● seek green as a business (‘green is green’);
● design for disassembly and recycling;
● outsource reversed operations to a specialist 3PL;
● create dedicated (parts of) operations.
Cisco Systems offers a good case example of the migration from reversed logis-
tics as a burden to it as a business opportunity.
Cisco Systems value recovery programme
In 2005, Cisco Systems dealt with US$500 million of returned products and parts
through a cost centre whose annual operating cost was just US$8 million. All returns
were treated as defective product and service returns with the rationale being that all
returns were without value. Furthermore, 95 per cent of all returns were scrapped. The
5 per cent of returns that were re-used were therefore more accidental than by design.
The US$500 million in scrap products and parts was equal to a volume of 12 football
fields covered knee high with defective products and parts.
Cisco Systems made the transition towards a profit-making value recovery operation
by setting criteria for value recovery and screening all returns for embedded value. The
criteria include:
● Can a cosmetic ‘touch up’ or software upgrade be performed?
● Can they be broken down into spares or parts or go into the secondary market or
even be donated to philanthropy?
The lessons learned from this programme for Cisco Systems included:
1 Do not treat all returns the same. There are products and parts that are beyond sav-
ing but more often than not things can be used in different ways to generate value.
2 Uncovering this value requires getting into the details of the product to identify possi-
ble ways to recover value and assess the opportunity to do this with a specific product.
3 Most returns are not defective but are returned for other reasons.
4 Take a broad view of the opportunity. Think of reverse logistics as a business and ap-
proach it like a general manager, not looking only for pennies or operational issues,
but instead looking for what value can be brought to other parts of the organisation
such as the corporate social responsibility (CSR) department and social efforts.
5 Learn from other functions. It may require you to take pages from the service
manual, learn from finance on quantifying value (returns can provide a tax write-
off when they are donated to philanthropic causes) and learn from the sales de-
partment in running a value recovery programme effectively (focus on solution
selling, segment the business for opportunities, establish return quotas and value
recovery targets).
CASE STUDY
4.6
Managing for risk readiness 143
4.6 Managing for risk readiness
Key issue: developing appropriate responses to risk in both the short and long
term.
Supply chain disruptions such as transportation breakdowns and geopolitical
risks can have many impacts: empty distribution channels, stores and goods
stuck upstream leading to lost sales, revenue and customers. And they can be the
result of plant shutdowns due to supplier discontinuity or collapse, bottlenecks
in the transportation system or many other events in the supply chain. There are
at least two levels at which companies are responding to risk in international
logistics; preparing for immediate response to risks and structurally preparing for
risk in international supply chains.
4.6.1 Immediate risk readiness
Recent events have shown that immediate responses to risks can include four
things:
● raised inventory levels to assure a cushion for supply disruptions of key parts
and supplies;
● redrawing transportation scenarios in the light of the possible logistics melt-
down of global trade routes;
● supplier hedges are put into place; and
● global sourcing and supplier rationalisation efforts are being reconsidered
actively.
Inventory policies to reflect volatility levels
Shortly before the second Gulf War, GM and Toyota asked their just-in-time sup-
pliers to raise inventory levels in order to avoid early and extensive plant shut-
downs. It added short-term costs but as a hedge against supply disruptions it can
be a real money saver down the line while assuring service to the customer that
As a result of the programme, 44 per cent of returns are now re-used and returns
have moved from a cost centre to a net contribution of US$85 million. This is on top of
the non-financial environmental and social benefits.
Note: A further description of this programme is available from the CSCMP website,
http://cscmp.org It contains a further write-up of this supply chain innovation award win-
ning case.
Question
1 Do you consider Cisco’s value recovery criteria can be applied to any supply chain?
Consider a supply chain for fashion goods (illustrated in Case study 4.4) as an example.
144 Chapter 4 • Managing logistics internationally
competitors might not be able to offer. LaCrosse Footwear raised its safety stock
sixfold for certain products in order to ensure the ability to ship to customers on
short notice.
Re-do transportation network redesign
Based upon possible risks or a real situation, scenarios for transportation routes at
risk can be developed together with contingency plans on a route-by-route and
plant-to-plant basis. Airlines altered services to the Middle East before the Gulf
War, for example. Here are three other examples:
● Hewlett Packard maintains the ability to shift production between assembly
facilities in Europe, North America, South America and Asia as part of a formal
continuity plan to be implemented in a crisis.
● Chrysler quickly shifted component shipment from air to express truck service
in response to transportation bottlenecks after 9/11.
● Continental Tyres’ crisis team put together a list of all customers’ orders, parts
and suppliers outstanding, identified critical shipments by the afternoon of
9/11, and expedited those critical parts by land transport and through contin-
gency relationships with transport firms.
Reconsider sole and global sourcing arrangements
Despite the benefits of supplier rationalisation and focused factories, risk man-
agement does imply there is real rationale for lining up alternative suppliers in
different locations, and for manufacturers to develop a thorough understanding
of their suppliers’ capabilities and vulnerabilities. Companies are responding in
two ways: considering alternative and back-up sources; and proactively auditing
the supply base for financial and operational sustainability in these tough times.
Hewlett Packard, for example, has secondary suppliers for all critical components
as part of its continuity plan.
4.6.2 Structural risk readiness
Because risk needs to be an ongoing focus, companies are increasingly devoting
dedicated teams to risk management in the supply chain. These teams can do
several things:
● develop contingency plans and risk protocols;
● audit preparedness;
● train plant management and staff;
● report to senior management on risk profiles and preparedness.
Most important, however, is not to leave risk management in the supply chain
solely the responsibility of a team, but to use the team to create an ongoing
organisation-wide focus and effort. Most often teams help plant management
and various functions in the organisation, instead of telling them what to do.
Henkel, the German consumer goods company, for example, has appointed risk
Corporate social responsibility in the supply chain 145
teams to work with various departments in assessing risk. It raises fundamental
awareness across the organisation, and is the basis for developing contingency
plans proactively.
4.7 Corporate social responsibility in the supply chain
Key issue: Companies operating international or global supply chains need to
incorporate social responsibility into their supply chain design.
In Chapter 1, we included corporate social responsibility (CSR) under the overall
concept of sustainability and the ‘triple bottom line’. CSR has developed a mo-
mentum of its own, and now largely overlaps sustainability. Here, we explore the
concept of CSR as it is being developed by various focal firms, especially in the
context of international logistics. Broadly defined, CSR in the supply chain deals
with the social and environmental consequences of supply chain operations.
Making a global supply chain environmentally sustainable and socially consider-
ate is harder than just doing so for a focal firm. This is due to global reach and the
fact that multiple companies are involved. As a result, it is harder to assess and
improve operating policies across the entire supply chain. Yet this is a key oppor-
tunity to bring CSR to life.
Two examples illustrate the issues:
● In 2006 the ship Probo Koala was redirected from the port of Amsterdam in the
Netherlands to Côte d’Ivoire, where it dumped its waste. But a Dutch inquiry
found the ‘waste’ was more than 500 tonnes of a mixture of fuel, caustic soda
and hydrogen sulphide. The waste was dumped in 12 sites around the capital
of Côte d’Ivoire, Abidjan. The gas released by these chemicals was blamed by
the United Nations and the government of Côte d’Ivoire for the deaths of 17
and the injury (ranging from mild headaches to severe burns of skin and
lungs) of over 30,000 Ivorians. A November 2006 Ivorian government report
into the incident said that Trafigura was to blame for the dumping of waste,
and was aided by Ivorians. A government committee concluded that Trafigura
knew that the nation had no facilities to store such waste and knowingly
transported it from Europe to Abidjan. In late 2008 a criminal prosecution was
begun in the Netherlands by the Dutch Public Prosecutors office: Trafigura
(the ship’s owner), the captain of Probo Koala and the port of Amsterdam
authorities were charged with ‘illegally transporting toxic waste into and out
of Amsterdam harbour’ and falsification of the chemical composition of the
ship’s cargo (Leigh and Hirsch, 2009).
Review the evidence for this disaster which is detailed at:
http://en.wikipedia.org/wiki/ 2006_C%C3%B4te_d’Ivoire_toxic_waste_dump
Who was to blame for the Probo Koala disaster in Côte d’Ivoire in 2006? What are the CSR impli-
cations of what happened?
Activity 4.5
146 Chapter 4 • Managing logistics internationally
● Nike came under heavy scrutiny from customers in the 1990s for its use of low
cost labour, predominantly in Asia. There were suspicions of use of child labour
(Case study 4.7), and other unethical labour practices among Nike suppliers.
Nike launched a comprehensive CSR effort – including the appointment of a
vice-president for CSR – and now is considered to be a leader for improving sup-
plier practices and for responsible behaviour along the supply chain.
CSR has caught both public and political attention, and companies are devel-
oping approaches that span the spectrum displayed in Figure 4.15. Worst practice
in CSR is for companies to publish a CSR report and to engage in PR efforts to
make the company look responsible, yet hide behind the approach:
I can’t see everything in my supply chain that happens on the other side of the
globe in another company, so I can’t manage that.
So not much changes in day-to-day operations – other than telling suppliers
that they ‘need to be responsible for their actions’.
Telling suppliers to ‘shape up’ cannot be expected to have much of an impact.
One example of a weak response to CSR is that of a focal firm which said, ‘we ask
our suppliers to adhere to the rules, and if we have a continued suspicion of
improper conduct we send them a letter’. Not only does that not help suppliers
to develop, it also does not take active ownership of the challenge. Even worse –
while this was happening – the firm continued to award business based on sup-
plier price levels, with no consideration for the impact of these price levels on
labour practices. But progress can be made in comparatively difficult circum-
stances, as Case study 4.7 illustrates.
Eliminating child labour from the Sialkot soccer ball industry
Nearly 75 per cent of soccer balls were produced in Pakistan, mostly in the Sialkot district,
Pakistan’s ‘export capital’ close to the border with India. However, an International Labour
Organisation (ILO) study in 2002 showed that more than 7,000 children aged between
seven and 14 were stitching footballs on a full-time basis, working between ten and
11 hours/day and earning between PKR 20 and 22 per ball (€1 = PKR 81). Production
ranged from three to five balls/day per person. An article in Life magazine appeared in
June 1996, featuring Tariq, a 12-year-old, stitching balls in Sialkot. This resulted in pres-
sure on international brands such as Adidas, Reebok and Nike to ensure that their prod-
ucts were not produced with child labour. The ILO brokered the Atlanta Agreement (2001)
to eliminate child labour from the soccer ball industry through improved monitoring.
However, monitoring was difficult to implement. Local ‘manufacturers’ outsourced
work to middlemen, who in turn dealt with home-based stitchers. These could be
whole families, including children. Payment was on a ‘fixed price’ basis, so there was no
cost advantage whether the worker was adult or child. The anonymous nature of the
network meant that manufacturers had no idea what age of worker was involved.
An independent monitoring committee was set up, and manufacturers were invited to
register. Once registered, manufacturers had to declare details of their entire network –
including the number of stitchers, daily production, location of stitching centres and names
of the middlemen. This was to be done gradually over a period of 18 months. And, once de-
clared, stitching centres were to be subject to random visits. If child labour was discovered,
CASE STUDY
4.7
Corporate social responsibility in the supply chain 147
Weaker… Stronger…
Why do it?
For PR reasons;
annual report
As a market lever;
to grow the company
How to approach it?
Can’t see it, can’t
control it attitude
Active management
effort (VP appointment)
Degree of involvement
Set base requirements
for suppliers, hands-off
Supplier development
and collaboration
Figure 4.15 CSR practices in the supply chain
the manufacturer was instructed to fix the situation. Repeated violations resulted in the
manufacturer being withdrawn from the register and reported to international buyers and
retailers. Within a few years, practically all of the manufacturers had registered.
Saga Sports, the largest manufacturer, decided to go a step further. It would stop the
use of child labour completely by eliminating outsourcing and concentrating produc-
tion in custom-built stitching facilities which Saga would manage. While Pakistani law
allowed children to start work at the age of 14, Saga decreed that it would only employ
workers aged 18 or over. Age would be verified against national identity cards and birth
certificates. Once confirmed, employees benefited from a pay structure ‘equivalent to
university teachers in Pakistan’. Employee benefits, such as free health checks and med-
ical help, meals and transport, were introduced. Saga saw these benefits as compensa-
tion to families who had lost income as a result of the elimination of child labour.
While Saga’s actions have helped to purge child labour from the football stitching in-
dustry in an exemplary way, there are other sectors in which children can earn money.
Sialkot is also famous for leather goods and surgical goods, where international pres-
sures are more difficult to focus. Easy availability of work, lack of meaningful education
opportunities and a ‘poverty of thought’ prevalent in the community could mean that
the problem may only be transferred elsewhere.
(Source: Adapted from Hussain-Khaliq, 2004)
Question
1 What further changes are needed for there to be a sustainable change in the inci-
dence of child labour in developing countries such as Pakistan?
More progressive firms are now beginning to use CSR as a market lever – not
only to make them look good in the eyes of the consumer, but to expand the firm
with new products at premium prices. An example is ‘fair trade’ products. Such
firms are taking active ownership over the challenge – for example, NEC goes
into considerable detail to specify CSR actions for suppliers in a lengthy hand-
book it has published. Nike has appointed a CSR vice-president, as noted above.
Finally, companies such as NEC, Nike and HP invest time and resources in help-
ing suppliers develop into more CSR-adept firms. They visit suppliers, conduct
148 Chapter 4 • Managing logistics internationally
audits to identify improvement opportunities and proactively carve out opportu-
nities to collaborate on achieving improvements.
Examples of CSR efforts include:
● incorporating CSR standards and suggested efforts in purchasing policies (see
the NEC example above and Table 4.8);
Table 4.8 NEC CSR supplier requests
Risk management priority Action item
CSR general requirement Promote positive CSR activities
Contribute to the society and community
Product quality and safety Ensure product safety
Establish and apply a quality management system
The environment Control hazardous chemicals in products
Control hazardous chemicals in manufacturing
Establish and apply an environmental management system
Minimise environmental pollution (water, soil, air)
Obtain environmental permits
Promote resource and energy saving by reusing, reducing
and recycling
Promote greenhouse gas reduction
Promote waste reduction
Disclose environmental preservation activities
Information security Secure computer networks against threats
Prevent the leakage of personal information
Prevent the leakage of confidential information of the customer
and third party
Fair trading Prohibit corruption and bribery
Prohibit abuse of a superior position
Prohibit the offering and receiving of inappropriate profit and
advantage
Prohibit impediment to free competition
Provide correct information on products and services
Respect intellectual property
Use appropriate company information
Detect injustice promptly
Occupational health and
safety
Apply safety measures for equipment and instruments
Promote safe activities in the workplace
Promote hygiene in the workplace
Apply appropriate measures for occupational injuries and illnesses
Properly manage disasters and accidents
Be careful about physically demanding work
Promote safety and hygiene in all company facilities
Promote health maintenance programmes for employees
Human rights Prohibit forced labour
Prohibit inhumane treatment and infringements of human rights
Prohibit child labour
Prohibit discrimination
Pay appropriate wages
Control working hours
Respect the right to freedom of association
(Source: NEC Group CSR Guideline for Suppliers, http://www.nec.co.jp/purchase/pdf/sc_csr_guideline_e )
Corporate social responsibility in the supply chain 149
● conducting supplier audits to identify improvement opportunities, and fol-
lowing up on issues that are found (do not say you can’t see it when you can
go and look);
● taking ownership of CSR initiatives by running supplier development sessions,
and by collaborating on improvement projects.
Embedding CSR at Akzo
Akzo, the Dutch-based chemicals and coatings company, owner of ICI and many other
brands, has appointed a CSR officer to drive and coordinate CSR efforts across the com-
pany. To drive ownership, consideration and focus broadly across the company and in
all the decisions it makes, two simple things are done:
1 Every proposal that the Board is asked to decide upon must be accompanied by a
CSR and sustainability evaluation otherwise it will not be considered by the Board.
2 Personal targets for senior management across the company include as a KPI the
company’s position in the Dow Jones sustainability index.
CASE STUDY
4.8
As (a) the largest company in the world by revenue taking sustainability seri-
ously, (b) doing so in a cost effective manner and (c) on an international scale,
Wal-Mart is setting some challenging targets with its supply chain partners, as
described in Case study 4.9.
Wal-Mart’s sustainability programme
Wal-Mart has set three ambitious goals for sustainability:
1 To be supplied by 100 per cent renewable energy.
2 To create zero waste.
3 To sell products that sustain the environment.
In moving towards these goals several key projects have been rolled out, including
changing store design to use more natural light as opposed to electrical light, and
catching rain from store roofs and AC units for watering the landscape.
On its fleet the company has introduced auxiliary power units so that when waiting
idle for more than three minutes the main engine turns off. It is estimated that this
alone will lead to US$23 million in fuel savings per year.
Furthermore, the company worked with its supplier of private label toys to remove
excess packaging from 277 children’s construction toy skus and to reduce the size of
the package. This alone will lead to 727 fewer shipping containers and a US$3.5 million
saving in transportation costs. Additionally the company recognises a marketing advan-
tage as customers frequently ask for sustainability improvements.
CASE STUDY
4.9
List possible CSR concerns in the supply chain, and the possible impact on the focal firm making
and selling the end product (a) if they go wrong and (b) if they go right.
Activity 4.6
150 Chapter 4 • Managing logistics internationally
Summary
Why international logistics?
● A major driver of the internationalisation of business has been labour shortages
and costs in established markets, and the availability of low cost production in
newly industrialised regions. A further driver has been the need to follow cus-
tomers into new local markets, and to create new learning opportunities.
● This has created phases in internationalisation of operations, and hence of the
logistics pipelines that are associated with them. Logistics pipelines differ from
market to market and from company to company over time.
● Global sourcing can create economies of scale for transportation through mul-
tiple consolidation as organisations orchestrate their global networks, and
focus key areas such as manufacturing and R&D.
What are the logistics implications of internationalisation?
● Despite the obvious benefits of global sourcing, firms should not ignore the
logistical complexities and operational costs associated with sourcing globally
(including longer shipment times and higher shipping costs) when deciding
their internationalisation strategies. Increased complexities and costs are
often ignored or only partially recognised in the rush to obtain lower piece
part prices.
How do we organise for international logistics?
● New solutions for layering and tiering the supply network are being tried out,
such as co-location of suppliers with OEM plants in the auto industry. Mean-
while, the role of individual plants may be modified to allow more flexible re-
sponse to local markets, for example by carrying out final assembly in local
distribution centres.
● The key to success of internationalisation strategies is the rationalisation of
sourcing, production and distribution. At the same time, the organisation
needs to be sensitive to local markets and preferences. Crucial also is to ensure
risk preparedness in international supply chains and to factor in corporate
social responsibility policies proactively.
Discussion questions
1 What are the benefits and limitations of international logistics? Illustrate your re-
sponse by referring to sourcing of standard shirts and fashion blouses (shown in
Table 1.1 in Chapter 1) from manufacturers in the Far East. Also, refer to the time v
cost trade-off illustrated in Case study 4.4.
2 Tiering of the supply network is referred to in section 4.4.1, and in Chapter 1,
section 1.1. Describe the advantages of tiering in terms of globalisation, touching on
areas such as outsourcing and the focused factory.
References 151
3 Identify six potential sources and causes of risk in global supply chains. Use the refer-
ence to Peck (2003) below to propose counter measures.
4 What is meant by the term ‘corporate social responsibility’ as it applies to interna-
tional logistics? Illustrate your answer by referring to the Probo Koala disaster and the
issue of child labour in the Sialkot soccer ball industry described in section 4.7.
References
Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders. Boston, MA: Harvard Busi-
ness School Press.
Ferdows, K. (1989) ‘Mapping international factory networks’, in Ferdows, K. (ed.),
Managing International Manufacturing, pp. 3–22. Amsterdam: Elsevier Science.
Helferich, O.K. and Cook, R.L. (2002) Securing the Supply Chain. Oak Brook, IL: Council of
Logistics Management.
Hussain-Khaliq, S. (2004) ‘Eliminating child labour from the Sialkot soccer ball industry’,
The Journal of Corporate Citizenship, Spring, pp. 101–7.
Leeman, J. (2007) Supply Chain Management: Integrale ketenaansturing. The Hague: Pearson
Benelux.
Leigh, D. and Hirsch, A. (2009) Papers prove Trafigura ship dumped toxic waste in Ivory
Coast. The Guardian, Thursday 14 May.
Peck, H. (2003) Creating Resilient Supply Chains: A practical guide, and Understanding Supply
Chain Risk: a self-assessment work book. Available for free download, courtesy of the UK
Department for Transport, at http://www.som.cranfield.ac.uk/som/scr
van Hoek, R.I. (1998) ‘Reconfiguring the supply chain to implement postponed manufac-
turing’, International Journal of Logistics Management, Vol. 9, No. 1, pp. 95–110.
Yip, G.S. (1989) ‘Global strategy . . . in a world of nations?’, Sloan Management Review, Fall,
pp. 29–41.
Suggested further reading
Dicken, P. (2003) Global Shift: Reshaping the global economic map in the 21st century. London:
Sage Publications.
Dyckhoff, H., Reese, J. and Lackes, R. (2004) Supply Chain Management and Reverse Logistics.
New York: Springer.
Gourdin, K.N. (2006) Global Logistics Management: A competitive advantage for the 21st cen-
tury, 2nd edn. Oxford: Blackwell Publishing.
Grayson, D. and Hodges, A. (2004) Corporate Social Opportunity!: Seven steps to make corporate
social responsibility work for your business. Sheffield: Greenleaf Publishing.
Rubman, J. and del Corral, D. (2009) Creating Competitive Advantage through Integrated PLM
and Sourcing Systems. New York: Kurt Salmon Associates.
C H A P T E R 5
Managing the lead-time frontier
Introduction
This chapter takes a strategic and a managerial view of time, and of the impact of
time on logistics performance. It provides an introduction to the nature of time-
based competition and how time can provide competitive advantage in logistics.
As we saw in section 1.3, logistics supports the competitiveness of the supply
chain as a whole by meeting end-customer demand through supplying what is
needed, when it is needed and at low cost. Because logistics supports time and
place commitments in the supply chain, it can be argued that the lead-time fron-
tier accounts for at least half of logistics success.
Competing on time is the principle of taking timely completion of supply
chain tasks to a higher level: that of compressing cycle times for supply chain
operations for internal and external benefits. External benefits include:
● lowering overall cycle time and providing services faster;
● outrunning competition.
These benefits are especially important in the context of improving responsive-
ness to customers and volatile markets. Chapter 7 will return to these points.
The intended objectives of this chapter are to:
● introduce time-based competition definitions and concepts;
● show how the lead time needs to be managed to serve customer
expectations;
● explain how organisations compete through responsiveness.
By the end of this chapter you should be able to understand:
● how organisations compete through managing lead time;
● how time can be used as a performance measure;
● P-times and D-times and the consequences when they do not match;
● different solutions to reduce P-times;
● how to apply a methodology for implementing these solutions.
Objectives
154 Chapter 5 • Managing the lead-time frontier
Internal benefits include:
● shorter cash-to-cash cycles, thereby releasing working capital and reducing asset
intensity of the supply chain;
● lowering inventories in the pipeline and storage by speeding up turnover times
for work in progress and inventory.
These benefits are especially important within lean or waste elimination
approaches, as will be developed in Chapter 6. This chapter focuses on how time-
based solutions link with competitive strategy.
Key issues This chapter addresses five key issues as follows:
1 The role of time in competitive advantage: using time in logistics management
and strategy.
2 P:D ratios and differences: the gap between the time it takes to get the product
to the customer (P-time) and the time the customer is prepared to wait (D-time).
3 Time-based process mapping: how to create visibility of time across the network.
4 Managing timeliness in the logistics pipeline: strategies and practices for coping
when P-time is greater than D-time.
5 A method for implementing time-based practices: implementing time-based
practices across the network.
6 When, where and how? Tactical considerations in planning a time-based strategy.
5.1 The role of time in competitive advantage
Key issues: What is time-based competition, how does it link to other initiatives,
and what is the purpose of it?
5.1.1 Time-based competition: definition and concepts
Many attempts at business improvement focus on cost reduction and quality
improvement. While a great deal of benefit has been achieved by many organisa-
tions through these efforts, most of the obvious opportunities for improvement
have now been taken. This has led to time emerging as a fresh battleground in the
search for competitive advantage. A working definition of competing on time is:
The timely response to customer needs.
The emphasis in this definition is on ‘timely’. This means responding to cus-
tomers’ needs on time – neither early nor late. The implication of this definition
is that the organisation must focus its capabilities on being responsive to the
customer.
Traditionally, people often have the opinion that you cannot have low cost
and high quality, or low cost and fast delivery, or fast delivery and high quality.
The belief is that some kind of trade-off is necessary, meaning that more of one
The role of time in competitive advantage 155
advantage means less of another. For example, better quality means putting in
more inspectors, which increases costs. Such thinking was shown to be flawed
when the quality movement of the 1980s demonstrated that good quality actu-
ally reduces costs (Crosby, 1979). The trade-off between cost and quality can be
altered by preventing defects from happening in the first place through such
measures as:
● designing the process so that defects cannot occur (error proofing);
● designing products so that they are easy to make and distribute;
● training personnel so that they understand the process and its limitations.
This leads to savings in detecting defects, by removing the need for inspection,
and in avoiding the failures that lead to scrap and the cost of resolving customer
complaints. The result is that overall quality costs (prevention � detection � failure)
can be reduced by spending more on prevention.
Understanding trade-off relationships lies at the heart of a focal firm’s ability to
achieve competitive advantage. Relationships that need to be understood and
harnessed include recognising that:
● costs do not have to increase in order to improve quality, they can reduce;
● costs do not have to increase when lead times are reduced. It may be possible
to reduce both in some processes (see Figure 3.10);
● costs do not have to go up as product variety increases and times reduce, they
can also reduce.
Each of these trade-offs has important links with strategy. A focus on respon-
siveness to the customer means that a focal firm needs to change the way it goes
about its business. This involves redesigning systems and processes to give prior-
ity to time. In these circumstances, cost plays a supporting role – since time and
cost have distinctive strategy implications (section 1.4.3) and are not linearly
related (section 3.3.2).
5.1.2 Variety and complexity
One of the first challenges we have in describing logistics systems is to under-
stand the terms variety and complexity. Complexity is often used casually to refer
to things that we do not understand: as we understand more about a system, the
boundary of ‘complexity’ recedes. Thus Galbraith (1977) defines complexity as
the difference between the information needed to perform a task and the infor-
mation actually possessed. A more helpful definition for logistics purposes
(Edmunds, 1999) is:
A system is complex when it is difficult to formulate its overall behavior, even when
given almost complete information about its components and their relationships
In logistics terms, we start to lose control as a system becomes more complex.
And the less complete the information, the more rapidly that control is lost.
Eventually, the system may descend into chaos, the potential supply chain im-
pacts of which we explore in section 6.1.4. Mercedes offers 3.3 × 1024 possible
156 Chapter 5 • Managing the lead-time frontier
variations on its E class model, which is ‘far more than the company could ever
sell in its entire existence’ (Pil and Holweg, 2004). Only 17,000 of these variations
are said to matter to the end-customer, a situation which appears to be making
the logistics challenge unnecessarily complex. Here, the complexity of the E class
is being driven by variety, and it is useful to distinguish two types of variety:
● External variety: is the choice offered to the end-customer, or potential finished
product skus. Choice soon builds up – an automotive example would be:
● 2 body styles × 15 power train combinations × 19 painted body colours × 15 trim
colours × 70 factory fitted options ≈600,000 variations
● Internal variety: converts external variety into the internal requirements placed
onto the supply chain. Holweg and Pil (2004) measured internal variety at
three levels in the product structure (for an example of a product structure, see
Case study 6.1): the basic product (models and body styles), intermediate (such
as power trains, wiring harnesses and body colours), and peripheral (number and
variety of components used).
These authors have used variety as a measure of complexity. Complexity makes
it progressively more challenging to plan and control the supply chain. Cooper
and Griffiths (1994) state that ‘issues of variety and complexity are strongly
linked’, and list three rules for managing complexity:
● Increased variety tends to add to the complexity of logistics operations, and so
increases both direct and indirect costs (section 3.2.2).
● Variety should only be increased when it contributes to added value.
Heineken, the Dutch beer manufacturer, has 10 skus today compared with
2,500 across Europe a few years ago. The ‘right’ level of product variety starts
with consumer research (Mahler and Bahulkar, 2009) rather than ‘tail cutting’
(Activity 2.1).
● System redesign can enhance added value through reducing the cost impact of
an increase in variety. The antidote to complexity is simplicity, so auto manu-
facturers have implemented several ways to offer external variety without
making internal operations too complex (see Case study 8.3).
Let us now return to the main theme of this chapter – time. Speed and depend-
ability can both be improved by simplifying logistics processes.
5.1.3 Time-based initiatives
When a company attacks time directly, the first benefits to show up are usually
shorter cycle times and faster inventory turns. Lower overhead costs usually fol-
low, as the costs of dealing with breakdowns and delays begin to disappear from
the system. So by seeking time reduction, both time reduction and cost reduction
are often the rewards.
Attacking the sources and causes of delays helps reduce quality defects in prod-
uct and service. Thus, by focusing on time, customers’ needs are met more
quickly and a quality benefit will often accompany the time benefit.
The role of time in competitive advantage 157
5.1.4 Time-based opportunities to add value
There are several ways in which a company can use time to help meet customer
needs better and therefore add more value. The most common examples of this are:
● increased responsiveness to customer needs;
● managing increased variety;
● increased product innovation;
● improved return on new products;
● reducing risk by relying less on forecasts.
We deal with each of these opportunities in turn.
Increased responsiveness to customer needs
Increased responsiveness to customer needs is the most common reason for
organisations to invest in time-based approaches to performance enhancement.
Many elements of customer service are dependent upon time. These include how
long it takes to deliver a product or service, achieving on-time delivery and how
long it takes to deal with customer queries, estimates and complaints.
High levels of responsiveness to customers tend to correlate to greater loyalty
from them and therefore more business over time. Such responsiveness is also
addictive to the customer, creating customer lock-in. Once they get used to short
lead times they often reorganise their own products and services to customers to
make use of responsiveness from their suppliers, such as by holding less inven-
tory and promising their own customers shorter lead times. Once they start to do
this they find it hard to accept longer times again.
Customers of time-based organisations do not have to carry as much raw material
or component stock and therefore benefit from a cost saving. In order to profit from
the service they provide, a time-based organisation needs to demonstrate to cus-
tomers that the total cost of doing business is lower, and then recover some of this
value. This can be achieved by winning more business and/or by charging more.
Managing increased variety
We discussed the impact of variety on complexity of logistics operations in
section 5.1.2. Shortened lead times in product development, the supply chain
and manufacturing help factories deliver a variety of products without the tradi-
tional cost penalty. The same is also true of service organisations that can design
and supply a range of new offerings in line with changes in market needs. By
reducing overall lead time, product complexity and process set-up times, the
production of a particular product can be scheduled more frequently with
smaller production batches. This improves the variety of products available to a
customer over a given time.
Increased product innovation
Time-based organisations are more likely to meet customer needs accurately by
using short product development times to produce new products that meet
158 Chapter 5 • Managing the lead-time frontier
customer needs. The shortening of product development lead time means that
innovations can be capitalised on to maximum effect. If a company innovates
through product design faster than its competitors it will become increasingly
competitive. Conversely, if your competitors are innovative then reducing the
time to develop imitations will underpin a ‘fast follower’ strategy to keep up.
Improved return on new products
Reducing product development lead time means that a product can get to market
earlier. This has a number of important advantages:
● the sales life of the product is extended;
● a higher price can be charged;
● new customers can be won;
● a high market share can be won through building upon the initial lead.
Each of these benefits can add to the other. Therefore, being first to the market
allows a higher initial price to be charged, helping to recoup development costs
quicker. This revenue will support investment into further developments neces-
sary to retain these initial customers. Meanwhile, the initial product can con-
tinue to be sold, generating cash through its high market share. Being first in the
market maximises the product life until the time when it becomes obsolete.
An impressive approach to the issue of obsolescence is attributed to Akio
Morita, the co-founder of Sony and inventor of the Walkman. He believed that it
was his job to make his own products obsolete before competitors did so. In effect,
not only was his aim to make innovative products, he also sought to build on this
success in the knowledge that if he did not then someone else soon would.
The related argument here is that of break-even time rather than the break-
even volumes discussed in Chapter 3. Traditional break-even analysis focuses
on the volume of product needed to be moved before the investment pays off.
Given shortening times-to-market and compressed product lifecycles (e.g. from
six months to 45 days of shelf-life for Nike footwear) the analysis shifts
towards the question ‘how long before break-even is reached?’ Figure 5.1 illus-
trates the point.
As product lifecycles shrink, so the time window of opportunity for making
profits also shrinks. This consideration means that a new product must achieve
its break-even time more quickly.
Reducing risk by relying less on forecasts
There is a saying in industry that there are only two types of forecast: wrong ones and
lucky ones, and there are precious few of the latter! It is certainly true that the further
ahead a company tries to forecast, the less likely the forecast is to be correct.
One of the aims of a time-based initiative is often to minimise how much
forecasting is needed. By reducing the production lead time, the period when
demand is uncertain becomes shorter. Forecasting over a shorter time period
results in a more reliable forecast and therefore less risk of stockouts or obsolete
stock. It also reduces the amount of finished goods stock needed, which frees up
working capital.
The role of time in competitive advantage 159
Product life end
Cost
Profit
Revenue
Product life
shrinking
In
it
ia
l i
n
ve
st
m
en
t
Time
Break-even time
Life profit
Eu
ro
s
Figure 5.1 Break-even time
In product development, risk is also reduced by shortening lead times. This is
achieved when the specification for the new product can be fixed with more
certainty, thus improving the chances of market success.
The ultimate goal is to reduce production time so it lies within the lead time it has
been given by the customer to deliver. In this situation, no forecasting is needed
and all production is done in line with actual customer orders. The implications of
reducing production time in relation to the demand time of customers are very
significant and we have devoted the whole of section 5.2 to addressing them.
5.1.5 Time-based opportunities to reduce cost
The second key element of time-based competition is to reduce cost and there-
fore improve productivity through the elimination of non-value-added time in
processes. This means that wasted lead time and unnecessary tasks that are not
actually adding any value in the customers’ eyes should be identified and elimi-
nated. Stopping unnecessary tasks and removing wasted time from those that
remain lowers cost by:
● reducing the need for working capital;
● reducing the need for plant and equipment capital;
● reducing development costs;
● reducing quality costs.
We address each of these in turn.
Reducing working capital
Increasing the speed of flow through processes by eliminating unnecessary steps
and wasted time reduces the amount of money tied up in the system. In the
160 Chapter 5 • Managing the lead-time frontier
short term the focus will be upon inventory. Here, manufacturing lead time is
inversely proportional to work-in-progress levels. By focusing on time we de-
crease raw material, work-in-progress and finished good stocks. Lowered inven-
tory levels result in reduced working capital. As already mentioned, returns on
working capital will be improved by reducing obsolescence caused by making to
stock and not to order.
Reducing plant and equipment capital
Over the longer term, processes become more visible, inventory levels reduce and
opportunities to minimise capital expenses become more visible. These opportuni-
ties include the removal of equipment not employed in activities that add value.
Initial items to remove will include the racking and pallets formerly used to store
inventory. Next will be a purge of unnecessary equipment in offices, stores and pro-
duction, including the jigging for unnecessary operations of obsolete parts.
In terms of what to do with superfluous items, some may be sold and capital re-
covered. The remaining items should just be skipped. While it may seem stupid
to simply throw away equipment given how much some items have cost, these
are sunk costs. If the equipment can no longer be used to generate revenue, all it
does is incur further costs, such as maintenance, and the floor space it occupies
will have many better uses.
As a company embraces time-based competition then success in the market-
place will increase demand for products and services that the customer really val-
ues. To make way for these means that space will be at a premium in the
company. This is just the driver needed to replace the old with the new.
Reducing development costs
Shortened lead times in product development are achieved in part by more effec-
tive use of development resources through elimination of rework and reduction
of distracting superfluous projects. This leads to cost reductions as the time spent
on a given project is less.
Reducing quality costs
One of the main elements in improving quality is to reduce the time between an
error being made and the problem being detected. The sooner the error is detected
the smaller the amount of the product affected by it. Reducing lead times has a
positive effect on the speed of feedback and hence quality costs are reduced.
In keeping with the total quality movement, time-sensitive organisations will
only become consistently responsive if they strive to maintain quality processes.
This means that as defects and errors arise they are detected quickly, root causes
identified and effective solutions installed to ensure they cannot recur.
List six applications of responsiveness in an organisation; for example, ‘external phone calls an-
swered within five rings’. How many organisations can you think of that compete overtly on
time, such as the Vision Express example given in Chapter 1?
Activity 5.1
The role of time in competitive advantage 161
5.1.6 Limitations to time-based approaches
Despite the clear benefits of time-based approaches to logistics management de-
scribed above, there are often barriers to its application, as well as limitations to
its relevance.
Two basic limitations to the need for time-based logistics management are the
need for speed and the degree of speed required. Not all operating environments
require speed. Product demand that is very predictable such as high-volume, low-
value commodity products can be planned well in advance and processed with-
out a particular speed. Not all customers value speed as they may be able to order
well in advance of delivery. Delivery before the parts are needed creates unneces-
sary inventories. In particular, when there are costs involved in creating speedy
delivery, customers may trade that off against ordering in advance. Only selected
parcels need to be shipped with express carriers, for example.
A particular issue with the costs involved in speeding up logistics processes in the
supply chain is the distribution of those costs between companies in the supply
chain. It is well known that JIT deliveries, for example, may generate significant
costs for suppliers whereas the customer may experience most of its benefits (such
as low process inventories and rapid delivery). Toyota is capable of manufacturing a
car in five days but has decided not to do so because of the pressure it would place
on its suppliers and its distribution processes, creating costs that are not expected to
be outweighed by revenue opportunities in current market circumstances.
An additional issue is that time-based approaches might lead to superior per-
formance only being achieved on a limited number of occasions. An illustration
of this situation is shown in Figure 5.2. In this example a supplier demonstrates
that it is able to deliver in only one day. However, it is clear that this was achieved
for only a minor portion of shipments, which does not mean that customers can
depend on shipments being consistently completed within a day. Rather cus-
tomers will order seven days in advance, where the required 99 per cent service
level for deliveries is achieved. Time-based approaches are not about managing
exceptions but managing for speed reliably.
8 5 2
P
er
ce
n
ta
g
e
o
f
sh
ip
m
en
ts
Number of days for delivery arrival
Figure 5.2 Distribution of shipment cycle times in days
162 Chapter 5 • Managing the lead-time frontier
5.2 P:D ratios and differences
Key issues: What are P- and D-times, and why are they important to logistics
strategy?
P-time and D-time are measures of performance of the supply pipeline. They are
explained in section 5.2.2, but let us first look at the importance of time as a
performance measure.
5.2.1 Using time as a performance measure
One of the major advantages of a time-based approach to managing processes
over one based on cost or quality is the ease with which time is understood as a
measure. While cost and quality are open to differences in interpretation, time is
an absolute measure. Stalk and Hout (1990) refer to the ‘time elasticity of price’,
where the price that customers are prepared to pay is often related to the deliv-
ery speed. For example, Talleres Auto in Case study 1.4 was able to charge pre-
mium prices for spare parts in breakdown situations because these were ‘distress
purchases’.
Cost is a more subjective measure that is open to interpretation, three exam-
ples of which we saw in section 3.2. Many people have a poor grasp of how costs
work in practice, and do not understand how the actions they take affect others.
An all too frequent example is saving costs in one part of the supply network
only to cause extra costs elsewhere. While quality is an important area for organ-
isations to improve, there is a number of different ways to interpret ‘quality’.
Garvin (1988) lists eight dimensions of quality, which depend on the perspective
taken, such as product quality (design), conformance quality (manufacturing)
and fitness for use (customer). In order for quality measures to be useful they
often require a statistical approach that can easily be misunderstood by those
who have not been explicitly trained. Deming’s famous Monte Carlo experi-
ments with a funnel and glass marble (Deming, 1986: 327) illustrate the perils of
interfering with a stable process:
If anyone adjusts a stable process to try to compensate for a result that is undesir-
able, or for a result that is extra good, the output that follows will be worse than if
he had left the process alone.
Frequent interference in a stable process increases the variability of its output!
Time, on the other hand, is a measure that everyone understands. Every person
has access to the exact duration of a second, minute or hour, thanks to clocks
using the same units of time. Time allows people across an organisation, with
very little training, to measure the performance of a process or activity. Using this
measure anyone can answer the key question:
By comparing this measure with one taken for the performance of competitors,
we can easily answer the next key question:
How good are we compared with the competition?
Do we meet the target the customer has set for us?
P:D ratios and differences 163
If we take a reason for measuring performance as being to understand the effect
of making changes to a process, we can more easily answer the question:
Is our performance getting better or worse?
By using measures that are simple to understand, people can see the big issues
more easily. They can measure and quantify the flow of activities directly, and ask
themselves whether each of the steps in a process is adding real value or just
adding cost. By following the flow through a process we can see where time is lost
(see Chapter 3). This allows us to translate the data into time-reduction and cost-
reduction opportunities. Looking at cost analyses alone does not tell anyone
where to save time.
5.2.2 Using time to measure supply pipeline performance
In the same way that time can be used to measure the performance of a process
within a company so it can be used to measure the supply pipeline. Two meas-
ures are presented below that are key to understanding supply pipeline perform-
ance: P-time and D-time.
P-time
The first measure of performance for the total supply process is to determine how
long it takes for a product or service to pass through it. This measure is used to
identify the total logistics lead time, also known as the P-time or production time.
Just to be clear, the P-time is a measure of the total time it takes for a product to
go through a pipeline. Thus it includes source, make and deliver lead times: it is
not just the time it takes to supply from stock.
The measure starts the moment a new order is raised. It includes all the time
needed to take a product through all the processes necessary to make and deliver
that product. It is important to be clear about when these activities start and end
in order for the measure to be consistent should you want to measure perform-
ance for a number of processes, including those of competitors. For a first at-
tempt at this measure take the starting time as the point when an order is raised.
Consider the total time needed to make and deliver a new product or batch of
products. This includes the time needed to procure the longest lead parts and the
total manufacturing time. The end of the process is the time when you fulfil an
order and send the product to the customer.
When you are competent in measuring this time and creating useful data
you should improve the measure you take. Instead of measuring from when
you receive the order, measure from when the person in the customer’s com-
pany realises they have a need. The end point is not when you send the prod-
uct but when it is received by that person. This measure incorporates the
internal process of the customer’s company for informing you of the order
and the steps they take to receive your delivery and get it to where it is
needed. Exploring this process will reveal useful opportunities where you can
help the customer to help themselves, thus strengthening your competitive
position.
164 Chapter 5 • Managing the lead-time frontier
D-time
The time for which customers are willing to wait to have their demand fulfilled is
the D-time or demand time. D-time varies considerably. For example, the time a
customer is willing to wait for ‘fast food’ is comparatively short. Assuming you
are in a city with plenty of options, once you realise you are hungry you will
probably want to be eating within ten minutes. This D-time will include the time
it takes to walk to the cafeteria/restaurant, wait in a queue, sit at a table and be
served. By contrast, as a customer of an up-market restaurant, you may have trav-
elled for an hour, spent 20 minutes in a reception area over an aperitif and study
the menu for 15 minutes, before happily waiting for a further half an hour for the
meal to be cooked and served.
In addition to the obvious differences in grade and choice of food, the impli-
cation from a supply chain point of view is that the two restaurants must be
organised in totally different ways to deliver the food within their customers’
D-time. Interestingly, the same customer may visit both restaurants on the same
day and accept the two different delivery systems. You do not expect to wait at a
fast-food counter, but you do expect to linger over a meal in a high-quality
restaurant.
Similar examples can be found in other industries. Buyers of new premium cars
expect to wait a month or two for delivery when they place an order. Some peo-
ple are not prepared to wait so long, but are prepared to accept a second choice of
colour instead of their first, especially if the dealer gives a discount! Manufactur-
ers of vehicles for customers with short D-times face increased supply chain chal-
lenges compared with those who have long ones. If it is not possible to make a
car to order within the expected D-time, then the manufacturer is forced to carry
out some or all of the logistics processes speculatively. The most risky scenario is
to make the whole car for stock, hoping that the forecast mix of diesel and petrol,
of left- and right-hand drive and so on is correct. But taking such a risk is neces-
sary to cope with the customer who wants to drive away a vehicle the same day
he or she enters the dealer’s showroom.
It is worth pointing out the parallels in new product development. Some new
product development is a race to get new ideas and innovations to market.
However, others involve hitting specific customer-defined windows of opportu-
nity for getting products to market. This is particularly true for lower-tier sup-
pliers in supply chains. These two concepts have different objectives, as shown
in Table 5.1.
Suppose your customer announces their intention for the launch of their new
product. They usually give a number of deadlines to would-be suppliers, including:
● date for tenders;
● date for first-off samples;
● date for volume launch.
These are the D-times for each stage of product development. As a potential
supplier, you must be able to meet all of these windows. Indeed, each supplier
must be capable of meeting all of these deadlines for the product to meet its
launch date successfully.
P:D ratios and differences 165
5.2.3 Consequences when P-time is greater than D-time
P-time should be measured for each separate product group, because each will
have different internal processes. D-time should be measured for each different
market segment that is served, because customers may have different needs (e.g.
prepared to wait/not prepared to wait).
Armed with this data, P-times and D-times should be contrasted for each product/
customer group to see if P-time is more than D-time. A simple way to do this is by
drawing them on a graph as time lines, as shown in Figure 5.3. The length of the
arrows shown in Figure 5.3 represents time. The arrow for the P-time represents
the time taken for buy, make and sell processes. The D-time arrow represents the
time the customer is prepared to wait for an order to be fulfilled.
Comparing the length of the two arrows, it can be seen that the time it takes
to respond to an order is longer than the customer is prepared to wait. Thus the
P-time is greater than D-time. The consequence is that this focal firm is not able
fully to make to order. On the other hand, it may be possible to complete the
final ‘make’ processes such as assembly and test within the customer-required
D-time. Such a strategy is called assemble to order (ATO). This is basically how Dell
manages to supply the computer you want so quickly.
Table 5.1 Getting ideas to market
Idea to market Meet window of opportunity
Objective Reduce lead time for turning
idea into cash
Delay commitment of cash
Develop fresher, more fashionable product
Operate within shorter, less unstable
forecast period
Examples Electronics – maximise
advantage in a new market
segment before competitors
respond
Summer clothing – delay outlay on raw
materials to improve cash flow and delay
commitment to particular designs until last
possible time
Pharmaceuticals – get new drug
to market to (1) save life and
(2) begin to recover
development spending
New car launch in four years’ time – delay
spend on tooling and delay design freeze
so latest technologies can be incorporated
Logistics lead time: P-time
Order fulfillment: D-time
P-time–D-time
CODP
Make
Customer’s order cycle
DeliverSource
Figure 5.3 When P-time is > D-time
166 Chapter 5 • Managing the lead-time frontier
The vertical broken line which separates D-time from P–D time in Figure 5.3 is
the customer order decoupling point (CODP). This divides the point to which a focal
firm carries out processes to known customer orders from the processes it has to
carry out speculatively. We return to the importance of the CODP in terms of
planning and controlling materials in the next chapter.
Assess the benefits and concerns that may arise as a result of the relative sizes of P-time and
D-time. Compile your views in the table below:
Activity 5.2
P-time greater than
D-time
P-time � D-time P-time less than D-
time
Benefits ●
●
●
●
●
●
●
●
●
Concerns ●
●
●
●
●
●
●
●
●
Wiltshire Distribution Transformers
Sid Beckett, the Managing Director of Wiltshire Distribution Transformers (WDT), had
concentrated on a new generation of simplified, modular designs that used proven US
technology. He had energetically exploited the market advantages this had given. WDT
now has two major product ranges:
● TR 100: 3-phase, oil-cooled transformers with a power rating from 200 to 2000 kVA;
● PS 300: packaged substations that utilise TR 100 transformers with appropriate
switchgear and LV control panels.
Judging by the number of enquiries, the market for both product ranges was now
increasing.
The new JIT system
Each product must be individually engineered to order (ETO). Formerly, this process
had taken two weeks, because a design engineer had to develop an entirely new de-
sign from scratch based on the customer order. Designs have now been modularised
as a result of the new system: that is, a new design is produced from a few hundred
standard ‘modules’ that are held on file. This can be done by a sales engineer in a
matter of hours. If a tender is accepted by a customer, it had formerly taken another
two weeks to convert the tender information into specifications and drawings for
CASE STUDY
5.1
P:D ratios and differences 167
manufacture. Today, it is possible simply to send the accepted tender information to
the shop floor, and to use the set of standard engineering information already held on
file to act as manufacturing instructions. The following is a list of the main features of
the new JIT system.
Enquiry processing
The engineer enters major design details (kVA rating, voltage ratio, product classifica-
tion and quantity) into a computerised estimating program. From a list of 700 possible
options, the selected ones to suit the tender requirements are added. From a library of
material, labour and overhead costs, a tender price is calculated.
Should the customer accept this price, then a customer delivery date is agreed and
the tender becomes the works order.
Engineering instructions
WDT’s efforts had resulted in the completion of a comprehensive library of standard
drawings and instructions that covered all major options. The works order simply calls
these up by reference number and description. The one exception is the fabricated cubi-
cle that houses the packaged substations. This has to be individually designed. A simple
CAD/CAM system enables the design and associated manufacturing instructions to be
completed quickly. Presentations of the panels can be separately worked on and de-
signed. The output is a set of computer numerical control (CNC) tapes for the relevant
machines in the fabrication shop, and a set-up schedule indicating sheet size, clamp
positions, list of tools, etc.
Master production scheduling (MPS)
Standard networks are kept on file. Activity durations for each manufacturing process
vary according to specific designs, and are picked up from the works order. Only bottle-
neck operations are scheduled, and can be loaded only up to 100 per cent of their
capacity. Given the customer requirement date, the scheduling programme works back-
wards and loads activities to key resources so that the final assembly date will be met.
The MPS acts by pulling demand through the manufacturing system (a process called
pull scheduling).
Material requirements for each work centre for each order are calculated by means
of a modular bill of material, which has been simplified as a result of the modular
designs.
Shop scheduling
The MPS generates operation release tickets (ORTs) for each scheduled process. The
type and quantity of units required by the next process are withdrawn from the previ-
ous one as they are needed. When a work square becomes empty, an ORT is passed
back to the preceding work centre to trigger a manufacturing operation. This serves as
168 Chapter 5 • Managing the lead-time frontier
5.3 Time-based process mapping
Key issue: How do you go about measuring time in a supply network?
The purpose of supply chain mapping is to generate visibility of the processes
within the supply chain. Once this visibility has been achieved it is possible to
benchmark similar processes. The processes we need to map are the actual
processes that are taking place, not what is supposed to happen. Quality stan-
dards based on ISO 9000 require processes to be documented, but within the
organisation the actual process undertaken may often differ considerably.
When undertaking a supply chain mapping exercise it is the actual process that
we need to focus on. The key is to track one order, one product or one person
through the process with respect to time. A map is a snapshot taken during a
given time period. Workloads may vary during the course of a month, and so
may the individual process times. Record the actual times that you observe.
Most processes take place in batches, so if you are mapping a trailer being filled
with tyres, record the time that the median (middle) tyre waits before being
moved. The method of documentation of the process and the symbols to use
are illustrated in Table 5.2.
Key operations and the subprocesses that can consume the most time and gen-
erate the greatest inefficiencies (e.g. waiting for transport) are revealed, enabling
problem solving and improvement of the supply chain.
a signal (kanban) to the previous process to produce just enough units to replace those
withdrawn.
Work is performed in sequence of ORTs, and is carried out only when an output
square is available. Completed operations are marked up on the hard copy of the
MPS, which is pinned to the wall of the works manager’s office by the supervisors at
the end of each shift. The MPS is updated for completed operations and new orders
each week.
A combination of four weeks’ reduction in the time taken to tender and the time
taken to produce a manufacturing design, and a further two weeks’ reduction in man-
ufacturing times, has placed WDT in a pre-eminent position in the marketplace.
Customers want to place orders for this type of equipment later and later in their own
projects, so short lead times are a major benefit to WDT in the marketplace.
Questions
1 Sketch out the main processes between a customer placing an enquiry and receiving
delivery of a WDT transformer. Where has WDT really scored in terms of reducing
this time?
2 What are the potential negatives of WDT’s new JIT system in terms of limiting
customer choice and short-circuiting the design process?
Time-based process mapping 169
The following sections give an overview of the key stages involved in the time-
based mapping process.
5.3.1 Stage 1: Create a task force
Before the mapping process can be undertaken it needs to be recognised
that supply chain processes cross all functions of the organisation. It is there-
fore important to have all key functions represented. The task force must be
assured of top management support. A project champion may also need to be
appointed.
5.3.2 Stage 2: Select the process to map
It may not be feasible to map the total supply chain initially. Take an overview
of the core processes within the organisation and the time they take before de-
ciding on the priorities for detailed mapping. To get the organisation to ‘buy in’
to the project, a subprocess may be identified that has been a particular problem.
This can act as a pilot for the task force, enabling them to prove that their meth-
ods really work. When selecting the process, ensure that there is a generic cus-
tomer or group of customers that the process serves. A clear start (or trigger) and
finish to the process should also be present.
Table 5.2 Example of process document
Step Description Symbol Time Notes
1 Machine complete ❍ 1:37
2 Inspect ❒ 0:45
3 Wait transport D 5:53
4 Transport to heat treat ➪ 0:08
5 Wait heat treat D 3:34
6 Heat treat ❍ 4:15
Symbol Description
➪ transport
▼ store
❍ operation
❒ inspect
D delay
170 Chapter 5 • Managing the lead-time frontier
5.3.3 Stage 3: Collect data
The most effective way to collect the data is to follow an item through the
process. This is often referred to as walking the process. An actual component or
order will be followed through all the stages of the process. Identify someone
who is actively involved in each part of the process and knows what is really
happening within the process: interview these key individuals. Get the inter-
viewee to describe each movement of the item with respect to time. It can be
useful to ask the interviewee to describe ‘a day in the life of’ that product or
order. Remember the steps an item goes through are not just those where
something is done: for example, items could be waiting or being moved, or
may be sitting waiting for a decision to be made. Identify an appropriate level
of detail at which to map the process. Initially it might be better to map at a
high level to gain an overview of the process; one can always map in more
detail if needed later.
5.3.4 Stage 4: Flow chart the process
Use the data collected by walking the process and the interviews with operators
to sketch a flow chart so linkages and dependencies between steps can be clarified
before constructing the time-based process map. This flow chart is used by the
task force to ensure they have not missed any steps in the process.
5.3.5 Stage 5: Distinguish between value-adding
and non-value-adding time
A rough definition of value-adding time is time when something takes place on
the item that the end-customer is willing to pay for. The definition of value-
adding time requires due consultation, and should be aligned with the overall
business strategy. The business strategy should define the markets and segments,
and the accompanying order qualifiers and order winners (see Chapters 1 and 2).
Once the value-adding criteria at the strategic level have been defined, these can
be translated into value-adding criteria at an operational level. The time data col-
lected in stage 3 can then be analysed to identify the value-adding time. Value-
adding time is characterised using three criteria:
● whether the process (or elements of the process) physically transforms the
material that forms the input to that process;
● whether the change to the item is something that the customer values or cares
about and is willing to pay for;
● whether the process is right the first time, and will not have to be repeated in
order to produce the desired result that is valued by the customer.
Non-value-adding activity can be split into four categories: delay, transport,
storage and inspection, using the categories from Table 5.2.
Time-based process mapping 171
5.3.6 Stage 6: Construct the time-based process map
The purpose of the time-based process map is to represent the data collected
clearly and concisely so that the critical aspects of the supply network can be
communicated in an easily accessible way. The ultimate goal is to represent the
process on a single piece of paper so that the task force and others involved in the
project can easily see the issues. A simple Gantt chart technique can be used to
show the process, and different categories of non-value-adding time can be repre-
sented on this. These categories will be dependent on the nature of each process.
Figure 5.4 shows three operations processes (delivery, production and goods in),
with the last one magnified to show four types of waste.
From the interviews and data from walking the process, extract the relevant data.
It is sometimes useful to sketch a flow diagram so that linkages and dependences
between steps can be clarified before constructing the map. This flow diagram can
be used to approximate the total time that the business process consumes.
5.3.7 Stage 7: Solution generation
Once the time-based process map has been produced, the opportunities for
improvement are generally all too obvious. The task force can collect ideas and
categorise causes of non-value-adding activity using problem-solving approaches
such as cause-and-effect diagrams. (A helpful condensed guide to problem-
solving tools and techniques will be found in Bicheno and Holweg, 2008.)
Business
processes
Consumer
Delivery
Production
Goods in
Time scale
Management
in decision
Value
adding
Queue
time
Re-work
time
Figure 5.4 Process activity mapping and sources of waste
172 Chapter 5 • Managing the lead-time frontier
Electro-Coatings Ltd
Electro-Coatings Ltd electroplates parts for the automotive industry; for example, the
marque badges fitted to the front of prestige cars. Customers were becoming increas-
ingly demanding, resulting in Electro-Coatings’ undertaking a review of its internal sup-
ply chain. The initial analysis by walking the process identified 12 key processes, as
shown in Figure 5.5.
Once this initial map has been produced, each step was mapped in detail and some 60
steps were identified. These steps have been summarised as a flow diagram in Figure 5.6,
showing every process step.
An initial analysis of value-adding and non-value-adding time was undertaken. This is
shown in Table 5.3, which summarises the total time, wasted time and value-adding
CASE STUDY
5.2
The Electro-Coatings case study (Case study 5.2) describes how the above prin-
ciples were applied to a focal firm that produces electroplated parts for the auto-
motive industry.
Goods in
Book job in
Job set up
Degrease
Etch
Plate
Heat treat
Polish
Inspect
Book out
Pack
Dispatch
Figure 5.5 Walk the process (12 steps)
time for each of the 12 steps. These data were then used to produce a map with the
value-adding (activity) time and non-value-adding (wasted) time shown as the series of
11 steps (etch and plate were combined) against total elapsed time in hours (Figure 5.7).
Time-based process mapping 173
Goods in
• Take good off lorry
• Put job on goods-in counter
• Sign for goods
• Give goods a works order number
• Write out route card
• Move goods to inspection
’goods-in’ shelf
Book job In
• Give job a job card
• Put route card into progress rack
• Move job to ‘awaiting
processing’ shelf
Job set up
• Plan who will do the job
• Move job on to shop floor
• Sign off job card
• Go to jig store
• Check jigging
• Clean jigging
Degrease
• Wash all 300
components in basket
• Place in ‘tric’ vat
• Wait to cool
• Rinse
• Put 50 on to bar
• Wet blast
• Rinse
• Put 10 on to blasting jig
• Wet blast
• Rinse
• Move on to plating jig
• Put in to oven to dry
Etch
• Connect etching anode
• Place jig in HCI bath
• Dip rinse
• Hand rinse
• Remove etching anode
Plate
• Connect plating anode
• Strike and plate
• Drag out
• Rinse
• Remove plating anode
• Check chrome thickness
• Wait until near
end of shift
• Remove staining
• Hot water rinse
• Air blast dry
Heat treat
• Wait for oven to
become available
• Deembrittle job in oven
• Remove job from oven
• Wait to cool down
Polish
• Wait for polish
• Polish
• Load on to peg board
Inspection
• Take to inspection
• Wait for inspection
• Micrometer and
visual inspection
Book out
Pack
• Note packaging job
on whiteboard
• Wait for packager
• Pack
Dispatch
• Weigh package
• Fill in TNT documentation
• Place package on
TNT pallet
• Enter TNT number
on to system
• TNT collects at 5pm
(60 steps)
Figure 5.6 Identify every process step
174 Chapter 5 • Managing the lead-time frontier
The total process took approximately 70 hours. The project team held an afternoon
meeting with those involved in the process, and the results of this brainstorming session
produced the cause-and-effect diagram shown in Figure 5.8. This was then used to
identify opportunities for improving the process. For example, the analysis revealed that
jobs arriving goods inwards at 9.00am might not be input into the system until 5.00pm
because the operator would undertake the computer inputting in one go at the end of
the day. This resulted in manufacturing not having visibility of the updated order book
until 9.00am the following morning. This was easily addressed by combining the book-
ing-in process with the good inwards process, removing a further lead time. Figure 5.9
depicts the re-engineering process.
Table 5.3 Time-based analysis data
Total time/hours Wasted time/hours Activity time/hours
Goods in 0.00 3.91 0.41
Book job in 4.32 20.00 0.41
Job set-up 24.73 5.50 1.77
Degrease 32.00 1.00 0.60
Etch and plate 33.60 8.75 2.20
Heat treat 44.55 0.00 4.50
Polish 49.05 1.95 1.95
Inspect 52.95 9.50 1.00
Book out 63.45 0.00 0.40
Pack 63.85 4.00 0.85
Dispatch 68.70 0.00 0.40
Elapsed hours
Activity time
Wasted time
Pack
0 10 20 30 40 50 60 70 80
Book out
Inspect
Polish
Heat treat
Etch and plate
Degrease
Job set up
Book job in
Goods in
Dispatch
Figure 5.7 Time-based process map: current
Time-based process mapping 175
People
No one books in
late deliveries
Lack of job
ownership
Lack of knowledge
of doing job
Skill level
Limited
number of
people who
can do job
Inspectors
busy on
other jobs
One person
to pack orders
Lack of
communication
Rectifier availability
Changing the etchShortage
of jigs
Vat space
Dirty jigs
Poor material
spec. from
customer
Solution
control
Jobs late
in to factory
Solutions changed
reactively, not
proactively
Changes in priorities
Priority of other jobs
Processing to
no specific
delivery date
Job pecking order
Looking for jigs
Non-value-
added time
(the effect)
Rework
Doing 2
jobs at once
‘Custom and
practice’
Jobs wait for
decisions
Inspection
Process route
Machines
Material Methods
Figure 5.8 Cause-and-effect diagram
1 Jobs quickly dealt with
2 Jobs booked in at goods-in
3 Operators multi-skilled to pick up any job
4 Same basic set of operations
5 No separate inspection,
operators self-inspect
Elapsed working hours
Pack
0 10 20 30 40 50 60 70 80
Book out
Inspect
Polish
Heat treat
Etch and plate
Degrease
Job set up
Book job in
Goods in
Dispatch
Activity time
Wasted time
Figure 5.9 Time-based process map: re-engineered
176 Chapter 5 • Managing the lead-time frontier
5.4 Managing timeliness in the logistics pipeline
Key issue: When P-time is greater than D-time, what time-based strategies and
practices can help to improve competitiveness?
Two basic strategies for managing timeliness in the logistics pipeline are make to
stock (MTS) and make to order (MTO). In between, we have assemble to order
(ATO). We begin with a brief description of each:
● Make to stock (MTS). Here, the key task is to offer products for customers to buy
from available inventory. Customer service is determined by this availability,
so a key performance measure in supermarkets is on-shelf availability (OSA).
Achieving 100 per cent OSA would mean holding infinite inventories, so in
practice a compromise of say 98.5 per cent OSA across most products at most
times is targeted. MTS firms have to plan the availability of their inventory by
means of a distribution network which may involve several levels (regional,
national and local). In turn, this requires that models are determined for stock
replenishment – how much, when and where.
● Assemble to order (ATO). By shifting the decoupling point (CODP, Figure 5.3)
upstream, it is possible to greatly reduce risk – of holding inventories of fin-
ished products that do not sell, and of missing out on sales opportunities be-
cause the desired product was unavailable at the time. Thus Dell computers
and BMW cars use ATO as their basic strategies. A BMW 3-series is available
in around a million finished vehicle specifications, and it would be risky and
impractical to have all of these available in the distribution pipeline. This
means that the vehicle must be designed flexibly in terms of components,
options and modules.
● Make to order (MTO). Here, the CODP is moved to product design, thus reduc-
ing the need for speculative processes even further. In the Wiltshire Distribu-
tion Transformers case (Case study 5.1), we saw how a focal firm had moved
from an engineered to order (ETO) to a MTO strategy. It had achieved this by
developing standard modular designs which meant that customer orders could
be configured by the sales engineer, rather than having to be designed from
scratch.
Let us now consider the strategies and practices that can be used to cope when
P-time is greater than D-time.
The simple actions undertaken by the company resulted in the total process taking
37 hours. This led to a more responsive service being offered to its customers and
increased business.
(Source: Based on a study by Dr Paul Chapman and Professor Richard Wilding, Cranfield Centre for Logistics
and Supply Chain Management)
Managing timeliness in the logistics pipeline 177
5.4.1 Strategies to cope when P-time is greater than D-time
When faced with a D-time shorter than the corresponding P-time, a company has
a number of options. In the short term it can attempt to make to order, or it can
forecast demand and supply from stock (MTS). Making to order in these circum-
stances is likely to dissatisfy customers. If competitors exist that can deliver
within the customer’s D-time, or there are substitute products available that will,
then the customer is likely to select them. If there are no alternatives then it may
be possible to continue supplying to order for the short term. In the longer term it
is likely that the customer will seek to develop alternative suppliers, or re-engineer
its products to remove the need for yours.
The more common solution is to forecast customer demand, make products
to stock and supply from there. This stock may be held as finished goods if the
D-time is very short, or it could be work-in-progress held in the manufacturing
process that can be finished in time. This option incurs a number of penalties.
The stocks of goods will need to be financed, as will the space needed to store
them. There is also the risk that the customer may not order those goods already
made within their shelf-life, causing them to become obsolete.
Both make to order and make to stock have associated costs and risks, so a com-
pany should look at ways to reduce these costs and risks in the longer term. Reduc-
ing risks can be grouped into three inter-linked areas. These are marketing, product
development and process improvement. Each of these areas is analysed below.
Marketing
There are various ways in which you could reduce risk, with customer help. For
example, ask the customer to cooperate by supplying more detailed demand infor-
mation at an earlier stage. Speed up the access to demand data, perhaps by locat-
ing one of your people in the customer’s scheduling process. Perhaps the customer
is prepared to wait longer than stated, if you can guarantee delivery on time.
Product development
There are only so many improvements to the reduction of production time that
can be made when a process is based around existing products. With time-based
thinking in mind, next-generation products can be designed for ‘time to market’.
Such thinking aims for products that can be made and distributed quickly, and
which offer product variety without unnecessary complexity.
Process improvement
Time-based organisations come into their own by changing the way they go about
their business. They engineer their processes to eliminate unnecessary steps, and
take wasted time out of those that remain. Engineering your key processes means
focusing on those things the customer cares about and getting rid of all the rest. Hav-
ing done this once, the best organisations go on to do it again and again as they learn
more about their customers and grow in confidence in what they can change.
178 Chapter 5 • Managing the lead-time frontier
5.4.2 Practices to cope when P-time is greater than D-time
There are a number of ways to reduce P-time. These can be summarised as follows:
● Control by optimising throughput and improving process capability.
● Simplify by untangling process flows and reducing product complexity.
● Compress by straightening process flows and reducing batch sizes.
● Integrate by improving communications and implementing teams.
● Coordinate by adding customer-specific parts as late as possible.
● Automate with robots and IT systems.
Control
In any process, lead time depends on the balance between load and capacity. If
demand rises above available capacity, lead times will increase unless resource is
also increased, for example through overtime or subcontracting work. Therefore,
in order to maintain or reduce lead time it is necessary to balance this equation
effectively by optimising throughput. Similarly, if a process is out of control, and
we are never sure whether a conforming product will be produced, the focus will
be on improving the capability of that process.
Simplify
Simplification is concerned with cutting out sources of process complexity and
of product complexity. Process complexity is often caused by many different
products sharing the same process. This process becomes a bottleneck, and process
flows become tangled because they all have to go through this single, central
process. In manufacturing, the solutions are based on cellular manufacturing: in
distribution, the solutions are based on different distribution channels. Product
complexity is often related to the number of parts. The more parts there are in a
product the more difficult it is to plan, to make and to sell. One way to reduce
product complexity is to reduce the number of parts, by integrating several
components into one. The other is to reduce the number of parts by standardis-
ing them between products.
Compress
Compressing P-time is concerned with squeezing out waste in each process step.
There are two main ways to achieve this. First, straighten the process flow by
making a linear flow for each product. Second, reduce the batch size so that flow
is improved and queuing time is minimised.
Integrate
Integrating different value-adding activities so that they work more closely
together helps to reduce P-time. Integration is in turn helped by improving the
speed and accuracy of information to the process owner. Important issues are
A method for implementing time-based practices 179
demand information (what to do next?), product information (what is it?) and
process information (how is it done?). Ways of speeding up information range
from simple, paperless systems such as kanban, through simple IT systems such as
email, to more complex systems such as making EPOS data available in real time
through the internet. Integration is also helped by forging relationships between
departments or organisations that need to communicate. Teams and partnerships
help to integrate activities that are otherwise disconnected.
Coordinate
Other approaches to reducing P-time aim to reorganise value-adding activities so
that they are done in parallel and/or in the best order. Thus running activities at
the same time (in parallel) instead of one after another (in series) will reduce lead
times. Sometimes it is possible to reduce lead times by doing the same activities
in a different order. This may make it possible to combine activities or allow them
to be done in parallel. It may also make better use of resources by fitting an extra
job into a shift, or by running long tasks that need no supervision overnight.
Automate
This approach should be used last, once all the others have delivered their im-
provements (do not automate waste!). Chiefly it is concerned with reducing lead
time through the use of robots and IT systems to speed up processes. Such ap-
proaches are best focused on bottleneck steps in the overall process. The aim is to
improve process capability and reliability as well as speed.
5.5 A method for implementing time-based practices
Key issue: How can time-based practices be implemented?
Becoming a time-based company means that a systematic approach is essential to
improve all three measures of cost, quality and time. This approach means iden-
tifying and removing the sources and causes of waste in the supply network,
rather than merely treating the symptoms. The method shown here will give you
a starting point for implementing a time-based strategy.
First, you need to understand the ways in which customers value responsive-
ness. Then the method (shown in Figure 5.10) takes you through a series of steps
that help you to change your processes to be able to deliver what the customer
wants.
5.5.1 Step 1: Understand your need to change
The first step in implementing a time-based strategy is to understand whether you
need to change. This need to change depends on how important responsiveness is
180 Chapter 5 • Managing the lead-time frontier
5.5.2 Step 2: Understand your processes
While you may think you already know your current processes, the only way to
make sure is to walk the process in the way described in section 5.3. Mapping a
process involves creating a very simple flow chart. This is best done with a pad of
paper, a pencil – and a smile. Start at the point where a customer order comes
into the company. This could be with a salesman in the field, over a phone,
through the fax or via a computer. Write down the name of this step and draw a
box around it. Ask whoever picks this order up what happens next. Very probably
it gets reviewed, logged in or put on someone’s desk. Any of these options is a
step. Write this down on your pad of paper below the first step. Draw a box
around it too, then join the boxes with an arrow. Keep going, throughout the
company, following that order until a product is finally delivered to the cus-
tomer. Write down every step you encounter.
Understand your need to change
Understand your processes
Identify unnecessary process steps and large amounts of wasted time
Understand the causes of waste
Change the process
Review changes
Figure 5.10 A methodology for time-based process improvement
to your customers. Here are five key questions that will help to identify the strate-
gic importance of time:
● Is supply responsiveness important to your customers?
● How important is it to them?
● What is the supply D-time target that customers have officially or unoffi-
cially set?
● What happens if you do not meet this target?
● What is the total P-time, i.e. the lead time taken from an order arriving in the
company until it is fulfilled and finally leaves the company?
A method for implementing time-based practices 181
During your expedition following the process through the company ask the
people who undertake each step how long it takes to work on a single, typical
order. You need to find out the activity time – the time they spend physically
working on it, not the time it spends on their desk or next to their machine.
When you have mapped the whole process, compare the total lead time (the
P-time) with the time in which your customers are demanding you respond
to them (their D-time). How well did you do? If the P-time is greater than the
D-time you have a challenge.
Now add up the activity times for all of the steps in the process. How does
this compare with the overall lead time (the P-time)? It is likely to be consider-
ably smaller? How does it compare with the D-time? Possibly it is also smaller.
If so, you have a real opportunity to improve your responsiveness and get your
lead time within that demanded by the customer through applying the ideas
listed above, and without the need for extensive investment in technological
solutions.
5.5.3 Step 3: Identify unnecessary process steps and large
amounts of wasted time
Using your process flow chart you should work with the other members of the
company involved in the process to identify those steps that do not add value to
the customers. Also, identify where large amounts of wasted time are added to
the overall lead time.
5.5.4 Step 4: Understand the causes of waste
Once again, work with your colleagues and identify the causes of the unnecessary
process steps and wasted time. Why do they exist?
5.5.5 Step 5: Change the process
Having understood the process, and the causes of waste in it, choose from the
generic solutions, described above, those approaches that will make the process
more responsive. Apply these solutions with vigour, going for easy ones that deliver
early results first to give everyone confidence that you are doing the right thing.
5.5.6 Step 6: Review changes
Having altered the way you go about your operations, measure the performance
of the process again and find out whether there have been any changes to your
performance. Have you become more responsive? If not, why not? Find out and
try again. If you have, tell as many people as you can, and have another go at
building on your success.
182 Chapter 5 • Managing the lead-time frontier
5.5.7 Results
The likely result of the above change programme is a situation such as that
graphically displayed in the basic four-step supply chain shown in Figure 5.11.
Through the implementation of time-based practices or initiatives, cycle times
are compressed throughout the supply chain. As a result, delivery can take place
in a timely manner more reliably and faster, while more operations can be per-
formed to order within the service window. As a result, lower asset intensity is
coupled with enhanced delivery service as possible input to both lean thinking
and agility efforts (see Chapters 6 and 7 respectively).
Note that this approach assumes a supply chain point of view, not just a focus
on manufacturing or any other segment of the supply chain. A well-known illus-
tration of the importance of this point is that lean approaches have resulted in
automotive manufacturing cycle times being compressed to a matter of hours.
After manufacture, however, cars are stored in the distribution pipeline or in
dealer outlets for weeks, if not months. Lack of supply network thinking results
in all of the cycle time investments in manufacturing being wasted.
This does not mean to say that all operations in the supply chain need to be
subject to time compression. In the example shown in Figure 5.11, the new deliv-
ery cycle times (shown with a broken rule) actually increase in the new structure.
But this suboptimisation is allowable, as traditional distribution from local ware-
houses here is replaced with direct delivery from the factory, where products are
made to order. The transition to make to order replaces the need for inventory-
holding points, where goods typically are stored for extensive periods of time. Of
course this basic example also indicates how time-based initiatives can require
structural supply chain redesign, such as the reconfiguration of distribution
channels and the adjustment of manufacturing systems and policies.
Supply
Delivery
Storage
Manufacturing
Supply
Operations
performed to order
Time spend
Figure 5.11 Results of time-based change initiatives
Summary 183
5.6 When, where and how?
There are several tactical considerations to be made when planning a time-based
strategy. We have grouped these in the form of three questions to be asked:
● When? Time-based competition is only as relevant as the customer perceives
it to be. Speed for the sake of speed can create unnecessary costs, and can cut
corners, leading to poor quality.
● Where? D-times are a measure of the importance of speed as a competitive fac-
tor, while P-times measure the ability to deliver. The integration of the two
measures the point at which the customer order penetrates the supply chain.
In Chapter 5 and Chapter 6, we develop this issue in terms of the customer
order decoupling point.
● How? The more predictable and lower-priority products and components can
be delivered from inventory with less priority given to speed. Shipments of
customised products can be assembled from stocks of standard components
and modules within the D-time demanded.
Summary
What is the lead-time frontier?
● Competing on time demands a fast response to customer needs. Time-based
approaches to strategy focus on the competitive advantage of speed, which
helps a network to cope with variety and product innovation, while also im-
proving returns on new products. Speed also means less reliance on long-term
forecasts.
● Speed of response helps to lower costs by reducing the need for working capi-
tal, and plant and equipment. It also helps to reduce development costs and
the cost of quality.
● The lead-time frontier is concerned with reducing P-time (time needed to pro-
duce a product or service) to less than D-time (time for which the customer is
prepared to wait).
● Differences between P-times and D-times are referred to as the lead-time gap.
The gap has strategic implications for marketing, product development and
process development. P-time can be reduced by a six-stage process: control,
simplify, compress, integrate, coordinate and automate.
How do we measure and implement time-based strategies?
● Time-based mapping aims to generate visibility of time in the supply network.
A six-step approach to mapping involves creating a task force, selecting the
process, collecting data, distinguishing between value-adding and non-value-
adding activities, constructing the time-based process map and generating
a solution.
184 Chapter 5 • Managing the lead-time frontier
● Implementing time-based practices can be accomplished using another six-
step process involving understanding the need to change, understanding the
processes, identifying non-value-adding processes, understanding the causes
of waste, and reviewing what has been done.
Discussion questions
1 Why is time important to competitive advantage? Identify and explain six key contri-
butions that speed can make to logistics strategy.
2 ‘Variety yes, complexity no’. Discuss the implications of this statement to logistics
strategy.
3 Explain the significance of P:D ratios. How can the production lead time be reduced?
4 Sections 5.3, 5.4 and 5.5 all contain step-by-step models for reducing waste and
implementing improved logistics processes. Explain why such models are useful in
implementing logistics strategy.
References
Bicheno, J. and Holweg, M. (2008) The Lean Toolbox – the essential guide to lean transformation,
4th edn. Buckingham: Picsie Books.
Cooper, J. and Griffiths, J. (1994) ‘Managing variety in automotive logistics with the rule of
three’, The International Journal of Logistics Management, Vol. 5, No. 2, pp. 29–40.
Crosby, P.B. (1979) Quality is Free: The Art of Making Quality Certain. New York: McGraw-Hill.
Deming, W.E. (1986) Out of the Crisis. Cambridge, MA: MIT.
Edmunds, B. (1999) ‘What is complexity?’, in The Evolution of Complexity, F. Heyhighter,
J. Boller and D. Riegle (eds). Dordrecht: Kluwer Academic Publishers.
Galbraith, J. R. (1977) Organisation Design. Reading, MA: Addison Wesley.
Garvin, D.A. (1988) ‘The multiple dimensions of quality’, in Managing Quality, Ch. 4. New
York: Free Press.
Holweg, M. and Pil, F. (2004) The Second Century-reconnecting the customer and value chain
through build-to-order. Cambridge, MA: MIT.
Mahler, D. and Bahulkar, A. (2009) ‘Smart complexity’, Strategy and Leadership, Vol. 37, No. 5,
pp. 5–11.
Pil, F. and Holweg, M. (2004) ‘Linking product variety to order-fulfillment strategies’,
Interfaces, Vol. 43, No. 5, Sept–Oct, pp. 394–403.
Stalk, G. and Hout, T. (1990) Competing Against Time. New York: Free Press.
Suggested further reading
Galloway, D. (1994) Mapping Work Processes. Milwaukee, WI: ASQC Quality Press.
Hammer, M. (2007) ‘The process audit’, Harvard Business Review, April, pp. 111–23.
Rother, M. and Shook, J. (1999) Learning to See, Version 1.3. Brookline, MA: The Lean
Enterprise Institute Inc.
C H A P T E R 6
Supply chain planning and control
Introduction
In Chapter 3, we introduced the simple framework for coordinated processes
across the supply chain that has become known as the ‘SCOR model’ (Figure 3.15).
This model creates a vision of integration of supply chain processes both upstream
and downstream. A shared planning process – that coordinates movements seam-
lessly from one process to the next – orchestrates material flow.
The reality of supply chain management today – summarised in our paper on
theory, practice and future challenges (Storey et al., 2006) – shows a very different
picture. We conducted a three-year detailed study of six supply chains, which en-
compassed 72 companies in Europe. The focal firms in each instance were sophis-
ticated, blue-chip corporations operating on an international scale. Managers
across at least four echelons of the supply chain were interviewed and the supply
chains were traced and observed. We showed that ‘supply management is, at
best, still emergent in terms of both theory and practice. Few practitioners were
able – or even seriously aspired – to extend their reach across the supply chain in
the manner prescribed in much modern theory.’
The factors behind the gap between vision and reality are many, reflecting the
sophisticated web of processes and coordination that lie behind the vision and
the almost endless ways of corrupting it. UK retailer Marks & Spencer (M&S)
The intended objectives of this chapter are to:
● explain the processes by which material flow is planned and executed
within a focal firm and between partners in a supply chain;
● explain the initiatives that have been developed to overcome poor
coordination in retail supply chains.
By the end of this chapter you should be able to:
● appreciate the sophistication that lies behind an integrated model of
material flow in a supply chain, and why this model is so easily corrupted;
● understand how corruption of flow causes loss of focus on ability to meet
end-customer demand;
● develop sensitivity for the initiatives that have been developed to restore
flow.
Objectives
186 Chapter 6 • Supply chain planning and control
introduced vendor managed inventory (VMI – described in Chapter 8) to its
clothing range, and achieved high levels of coordination with its tier 1 suppliers,
low costs and high on-shelf availability. However, events unravelled after a few
years due to a number of factors (Storey et al., 2005). Two of the major factors were:
● A change in management structure as M&S created a new category team, many
of whom did not like the idea of sharing sales data with suppliers. The method
used to generate sales data was changed, and resulted in loss of access to the
flow of sales data on which the VMI system depended.
● Suppliers began to outsource their production to new factories in South-East
Asia and Morocco to reduce costs, but this resulted in six-week replenishment
cycles and loss of responsiveness. Complementary sets of clothes were sourced
to different countries, and it proved hard to coordinate deliveries.
Decisions based on advantages internal to a focal firm, and on the search for
cheaper prices, are but two common factors in corrupting the flow of materials
and information and the focus on the end-customer. Corruption is displayed by
poor customer service, stock write-offs or mark-downs, and a lot of resource de-
voted to ‘fire fighting’.
This chapter aims to summarise the detail of an integrated planning and con-
trol system. The most comprehensive models originate from manufacturing, and
link key activities such as resource planning, demand management and capacity
planning into a holistic framework. Individual firms have been quite successful
not only in developing effective manufacturing planning and control (MPC) sys-
tems, but also in integrating them with other business functions such as finance
and human resources through enterprise resource planning (ERP). However,
linkages between the MPC systems of supply chain partners are relatively weak
(Vollman et al., 2005: 578). And linkages between MPC systems at manufacturers
and ‘service’ processes such as distribution and back of store are even weaker. Skim
the detail at your peril! Far too many logistics ‘decisions’ are made on the basis of
lack of understanding of the sheer scale and scope of the intricacies of balancing
load and capacity, of coordinating marketing wants and supply chain realities.
In section 6.1, we begin by showing how the linkages between manufacturing
firms should develop. We then turn to the management of inventory in the sup-
ply chain. Finally, we examine the planning and control processes in retail,
and explain the implications for integrating material flow across the supply
chain. Retail supply chains are of particular interest because end-customer
demand is tracked continuously through POS data. There should accordingly be
every opportunity to develop a seamless coordination between demand and sup-
ply, as envisaged in Figure 1.7. There are challenges enough to cope with, notably
the integration of manufacturing, distribution and service processes. However –
historically at least – retailers have given priority to the market and have ex-
pected manufacturers to keep pace without investing much in terms of coordi-
nating demand and supply. This has resulted in such problems as amplification
of demand upstream – the so-called ‘bullwhip effect’ – high inventories and
lengthy P-times. The second part of this chapter therefore continues by reviewing
some of the key initiatives that have been developed in recent years to improve
planning and control of materials in retail supply chains.
The supply chain ‘game plan’ 187
Key issues This chapter addresses two key issues as follows:
1 The supply chain ‘game plan’: planning and control in manufacturing. Managing
independent demand items. Retail supply chains – driven by the market rather
than by the supply chain. Implications for supply chain planning and control.
2 Overcoming poor coordination in retail supply chains: initiatives to improve
coordination in retail supply chains. Efficient consumer response (ECR). Collaborative
planning, forecasting and replenishment (CPFR). Vendor managed inventory (VMI).
Quick response (QR).
6.1 The supply chain ‘game plan’
Key issues: What are the key steps in planning and executing material flow and
information flow within the focal firm? What are the key steps in planning and
executing material flow and information flow between partners in a supply net-
work? What are the implications for planning and controlling the supply chain as
a whole?
In this section, we consider planning and control processes across a simple supply
chain such as that shown in Figure 1.1. We start with planning and control
processes at the manufacturer, and the demands this generates on the supplier (well
documented in such publications as Vollman et al., 2005). Once it has been made,
a fresh batch of product turns into finished product inventory – initially stored in the
manufacturer’s national distribution centre (NDC). So next we turn to the manage-
ment of inventory in the supply chain, showing that different models are likely to
be used by manufacturers and retailers to determine how much and when to order.
We then explain planning and control from the retailer’s perspective, and conclude
with the implications for planning and controlling the supply chain as a whole.
6.1.1 Planning and control within manufacturing
The purpose of a manufacturing planning and control (MPC) system is to meet
customer requirements by enabling managers to make the right decisions. The
system coordinates information on key ‘source–make–deliver’ processes to enable
material to flow efficiently and effectively. Three time horizons are involved for
all of these processes:
● Long term: to support decisions about capacity provision. These decisions are
essentially strategic, and answer the questions how much capacity is needed,
when and of what type? Thus Mercedes-Benz may plan new model ranges for
20 years ahead – including outline volumes, internal and supplier capacities
and distribution strategies.
● Medium term: to match supply and demand. Here, Mercedes may plan in more
detail over the next 12 months to ensure that forecast demand can be met by
correct material provision, together with capacity and resource (such as
manpower) availability. The plan would be refreshed monthly.
188 Chapter 6 • Supply chain planning and control
● Short term: to meet day-to-day demand as it unfolds. Here, Mercedes makes
weekly production plans to meet specific customer orders. There may be nu-
merous changes that affect achievement of the medium-term plan. These in-
clude changes in customer demand, facility problems and supplier shortages.
The short-term plan helps managers to decide what corrective actions are
needed to resolve such problems, and would be refreshed daily or weekly.
Figure 6.1 shows the main modules in an MPC system. The top section is called
the ‘front end’, and provides an overall match of demand and resource. We here
summarise the main front-end modules, followed by a summary of engine and
back end:
● Demand management: collates demand from all sources – external (forecasts
and orders), internal (other firms within the organisation) and spares. Such
demand is called independent – that is, it is independent of the actions of the
focal firm. Referring to Figure 5.3, demand is independent up to the cus-
tomer order decoupling point (CODP). At this point, demand changes from
independent to dependent. Upstream from the CODP, in the area referred to
as ‘P-time–D-time’, the focal firm assumes responsibility for sourcing and
making speculatively – on the assumption that orders will eventually tran-
spire. Thus make to order (MTO, section 5.4) incurs less speculation than
assemble to order (ATO) and much less than make to stock (MTS). Speculation
implies that it is necessary to forecast demand for the relevant module. Thus,
forecasting for sales and operations planning is carried out monthly or quar-
terly and is at the level of the overall product line. Forecasts for master pro-
duction scheduling purposes are refreshed frequently for the next few days or
weeks, and are made at the level of the individual sku (stock keeping unit).
Source Make Deliver
Front end
Engine
Back end
En
te
rp
ri
se
r
es
o
u
rc
e
p
la
n
n
in
g
(
ER
P
)
sy
st
em
Resource planning
Sales and operations
planning
Demand
management
Master production
scheduling
Detailed capacity
planning
Detailed material
planning
Bill of
materials
Material and
capacity plans
Figure 6.1 The focal firm ‘game plan’
(Source: From Manufacturing Planning and Control for Supply Chain Management, 5th Ed., McGraw-Hill (Vollman, T.E.,
Berry, W.L., Whybark, D.C. and Jacobs, F.R. 2005), reproduced with permission of the McGraw-Hill Companies.)
The supply chain ‘game plan’ 189
Short-term projective forecasting (section 2.3) is carried out using techniques
such as moving averages and exponential smoothing, which are described in
Vollman et al. (2005: 32). Forecast accuracy (comparing forecast and actual
values) is measured by such techniques as mean average deviation (MAD,
section 2.3). It is only necessary to forecast for independent demand items:
demand for dependent items can be calculated using material requirements
planning – described below.
● Resource planning: pooling demand and passing it on to manufacturing must be
moderated by capacity to deliver. Otherwise, a focal firm is at risk of being
unable to fulfil marketing plans that do not take into account the realities
of what can be done. Again, this would mean that marketing plans are not
actionable (section 2.2). Resource planning is concerned with manufacturing
capacity in the longer term (output measure), and with machine and man-
power loading (input measure) in the shorter term.
● Sales order processing (SOP): is the module concerned with matching of demand
management and resource planning. Therefore, it is crucial that compatible
measures of demand and capacity are used – for example, tonnes/week or
‘000 units produced/week. Sales and marketing must check with manufactur-
ing that new enquiries can be made and delivered within requested lead times.
This may well require coordination across several manufacturing units in dif-
ferent countries. The aim of SOP is to maintain balance between demand and
supply. Too much demand in terms of capacity, and manufacturing will be
under pressure to work overtime and to rush work through. Too little demand,
and margins will be under pressure from under-utilised resources, layoffs and
price cuts.
● Master production scheduling (MPS): is the disaggregated form of the SOP. This
means that the SOP is broken down from high level measures like product
families into the detail of skus by major production facility. The MPS is the link
between front end and engine of the MPC system. On the one hand, it receives
SOP data about sales and forecasts. On the other hand, it feeds data back to
SOP on orders and stock replenishment status so that customers and distribu-
tion can be kept up to date. The MPS handles the detail of what is planned and
what is happening. For MTS environments, the priority is inventory manage-
ment: for MTO environments, the priority is timely execution of all of the
processes from design through to delivery.
● Material and capacity planning (engine room): from overall demand by sku it is
next necessary to develop detailed plans by part number. For each part and
subassembly, detailed plans show how many and when each must be made.
Like the ‘big picture’ front end logic, not only must a detailed material plan be
devised, but it must also be moderated by capacity availability (resources) in
each production centre. The logic behind this is called material requirements
planning (MRP). This takes MPS data, and explodes it into detailed plans by
component and subassembly. Each of these plans must be checked and opti-
mised against available capacity by means of the detailed capacity planning
module. An impression of what is involved is given in Victoria SA, Case study 6.1.
Engine room logic is described in the form of a novel by Goldratt and Cox
(1984); further details are in Vollman et al. (2005).
Victoria SA
Victoria SA makes ‘fantastically good cakes’ from basic ingredients such as flour, eggs
and butter. Demand for Victoria sponge cakes comes from two sources. Some big retail-
ers place their order with the firm two days in advance, while other customers arrive at
Victoria’s own shops without prior warning and select from cakes that are on display.
This means that some cakes are made in line with orders, whilst a forecast is also re-
quired to predict day-by-day demand.
Whilst there are many varieties of cake, the bill of material for the famous Victoria
sponge cake is shown in Figure 6.2.
When overall demand across the range has been collated, Victoria SA is able to deter-
mine how much of each ingredient will be needed to make the right number of cakes.
Too many and cakes will have to be thrown away, because the shelf life is five to eight
days (Victoria does not use stabilisers such as potassium sorbate). Too few and sales will
be lost. Accurate planning is thus crucial to the efficiency of the whole operation. The
ideal situation is that cakes are made and delivered just-in-time to meet customer de-
mand because inventories will be low and freshness at its best.
In an effort to increase sales, Victoria SA decided to increase the product range. Straw-
berry jam is the traditional filling, but marketing considers that customers would also like
other types of filling and decides to try blackberry jam, apricot jam, lemon curd and choco-
late. Over the course of the next few months, the experiment appears to be working. Over-
all sales are up by 10 per cent, with each of the new varieties contributing well. The problem
however is that no stable pattern exists in the mix of sales. For example, some days the
chocolate-filled cakes sell out, while on other days hardly a single chocolate-filled cake is
sold. Major retail customers are complaining about wastage and lost sales opportunities.
The issue appears to be that offering increased variety has led to less stability in the
demand pattern as illustrated by the Master Production Schedule (MPS) in Table 6.1.
While total daily cake demand is reasonably stable, at around 200 cakes, the demand
for each variant is highly erratic. This leads to high inventory levels, due to inaccurate
sales forecasts, and increased complexity in the production operation, as shown by the
MRP calculation for gross and net requirements in Table 6.2.
190 Chapter 6 • Supply chain planning and control
CASE STUDY
6.1
Cake
Cake mix
Jam
(0.1kg)
Icing
Icing sugar
(0.1kg)
Water
(40ml)
Flour
(0.2kg)
Sugar
(0.2kg)
Eggs
(3)
Butter
(0.2kg)
Figure 6.2 Structured bill of materials for sponge cake
Table 6.2 Gross and net requirement calculations for one week demand for sponge cake
(before postponement). ‘Exploding’ is indicated by arrows
Component
BOM
quantity units Inventory
Scheduled
receipts
Gross
requirement
Net
requirement
Total finished cake n/a cakes 723 1406 683
Strawberry cake n/a cakes 188 338 150
Apricot cake n/a cakes 103 265 162
Blackberry cake n/a cakes 145 230 85
Lemon curd cake n/a cakes 212 343 131
Chocolate cake n/a cakes 75 230 155
Flour 0.2 kg 40 40 137 57
Sugar 0.2 kg 40 40 137 57
Eggs 3 eggs 600 600 2049 849
Butter 0.2 kg 40 40 137 57
Icing sugar 0.1 kg 20 20 68 28
Strawberry jam 0.1 kg 21 10 15 0
Apricot jam 0.1 kg 18 16 0
Blackberry jam 0.1 kg 14 9 0
Lemon curd 0.1 kg 14 10 13 0
Chocolate 0.1 kg 16 10 16 0
The supply chain ‘game plan’ 191
Table 6.1 Master production schedule (MPS) for sponge cakes
(before postponement)
Cake varient
Sales
Orders & forecast Forecast only
Mon. Tue. Wed. Thur. Fri. Sat. Sun. TOTAL
Strawberry 34 52 56 13 64 62 57 338
Apricot 58 39 33 43 7 57 28 265
Blackberry 36 43 9 49 39 37 17 230
Lemon curd 40 47 51 67 59 18 61 343
Chocolate 23 6 46 34 49 49 23 230
TOTAL 191 187 195 206 218 223 186 1,406
192 Chapter 6 • Supply chain planning and control
The MRP calculations, which are shown for the same 1 week period as the MPS, can
be explained as follows:
1 ‘Gross requirement’ for ‘total finished cakes’, and each cake variant, is taken from
the MPS.
2 ‘Net requirement’ of cakes is calculated by subtracting the existing inventory from
the gross requirement.
3 Inventory of finished cakes is high (equivalent to almost four days’ demand) because
demand for each variant is highly variable and therefore sales forecasts are inaccurate.
4 The net requirement for total finished cakes is exploded (by multiplying it by the BOM
quantity for each cake mix ingredient plus icing) to give the gross requirement for
each of the cake mix ingredients and the icing.
5 The net requirement for each of the cake ingredients is calculated by subtracting the
existing inventory and any ‘scheduled receipts’.
6 The inventory of ‘cake mix’ ingredients is low (equivalent to about one day’s demand
with another day’s demand scheduled for receipt). This is a result of the relatively sta-
ble demand for the total number of cakes leading to accurate sales forecasts.
7 The net requirement for each of the ‘finished cake variants’ is exploded (by multiply-
ing it by the BOM quantity for jam) to give the gross requirement for each jam flavour.
The net requirement of jam is calculated in the same way as for cake mix ingredients
(point 5 above).
8 Inventories of the various jams are high (they cover requirements for the coming
weeks without need for scheduled receipts), and therefore the net requirement is
zero. This is due to inaccurate sales forecasts caused by the erratic demand for each
cake variant.
To fix the unexpected problems, Victoria SA decided on a new way of working. It is
recognised that demand is not going to stabilise given the increased product range. The
firm decided to adopt a postponement strategy by making standard cakes and then post-
poning final assembly until known demand is available. The basic cake is a standard com-
ponent, while the filling is non-standard and represents the source of complexity and
variable customer demand. Cakes are therefore kept in the standard form and only
turned into the final form by adding the filling once customer orders have been re-
ceived. Victoria SA applied postponement to the supply chain and introduced a
decoupling point (section 5.2.3) at the end of the cake making process. Upstream of the
decoupling point, overall demand is forecasted to inform sourcing decisions. Standard
components are baked each morning. Downstream of the decoupling point, cakes are
assembled to order (section 5.4) in line with customer orders. The time this activity takes
has been minimised by setting up a workstation with cakes, filling and spreading tools
arranged in a mini flow-line. This brings the production time (P-time: see section 5.2)
within the time the customer is prepared to wait (D-time). Carrying out the operation in
view of the customer also helps engage them and extends their D-time to a minute or
so, long enough to complete the final assembly task.
The flexibility of the new operation means that customers no longer need to place an
order two days in advance. Victoria SA can now supply from the new process if orders
are received by major customers the day before. An unexpected benefit of the new
approach is the ease with which innovations can be test marketed and adopted.
(Source: Dr Heather Skipworth, after an original by Dr Paul Chapman)
The supply chain ‘game plan’ 193
● MPC execution systems (back end): the outputs from material and capacity plans
in the engine are sets of instructions to suppliers, manufacturing and distribu-
tion. These schedules are in the form of purchase orders, works orders (or sched-
ules for MTS) and shipping orders – hence the familiar ‘source–make–deliver’
processes at the bottom of Figure 6.1. The basic format is ‘how many’ and ‘when’
for each part number for each planning process for the relevant planning period
(for example the next two weeks, or the next four weeks). Achievement against
schedule has to be monitored by minute, by hour or by day. Failures to meet
schedule – as a result of for example breakdowns or quality problems – require
that remedial action is taken, such as overtime working or outsourcing. An
example here is the Nokia supply problem described in Case study 1.4.
Front end, engine and back end MPC modules are all connected to the enterprise
requirements planning (ERP) database. This enables MPC modules to be seamlessly
connected to human resource management, finance and sales and marketing
modules. SAP includes MPC systems as part of its supply chain software – supply
chain planning, execution, collaboration and coordination.
6.1.2 Managing inventory in the supply chain
Planning and controlling factory output is but part of the challenge of managing
material flow in the supply chain. A focal firm positioned in a network such as
that shown in Figure 1.2 is at the centre of many possible connections with other
supplier and customer companies. Upstream processes such as distribution and
retail for both finished products and spare parts are subject to independent, ran-
dom demand. Such demand is independent in that it is not affected by the ac-
tions of the focal firm (although demand may of course be stimulated through
promotions). Dependent demand, on the other hand, is fixed by the actions of
the firm – such as order acceptance and determining forecasts. This section is
concerned with the management of inventories of independent demand items
using order point methods. These are aimed at optimising the trade-off between
inventory holding costs and the preparation costs of changeover (manufactur-
ing) or of placing an order (retailing and manufacturing). While the concept of
‘economic’ batch sizes and order sizes has been widely superseded by other con-
siderations, as we shall see, its principles help us to grasp the nature of some of
the hidden costs of inventory decisions.
‘Economic’ batch sizes and order sizes
The question of how many parts to make at a time has traditionally been answered
by reference to a longstanding concept called the ‘economic’ batch quantity (EBQ)
Question
1 How do you think the MPS, the MRP gross/net requirements calculations and the
inventories (finished cake and ingredients) might be different after the implementa-
tion of postponement?
194 Chapter 6 • Supply chain planning and control
Time
St
o
ck
Lead time
Notes:
1 Re-order point = Demand during lead time + safety stock
2 Re-order quantity = Economic order quantity
3 Buffer stock = f(service level.lead time variability.demand variability)
Re-order point
Buffer stock
Usage rate
Re-order
quantity
Figure 6.3 When: the re-order point
formula. Similar principles are used to determine how many parts at a time to order
from suppliers in ‘economic’ order quantities (EOQs). Both EBQ and EOQ assume
that parts are used at a uniform rate (i.e. that demand is stable), and that another
batch of parts should be made or ordered when stock falls below the re-order point.
The principle behind reorder point, which sets out to answer the question when to
order, is shown in Figure 6.3:
A buffer (or safety) stock line is shown below the re-order level. Buffer stock
acts as a ‘safety net’ in order to cushion the effects of variability in demand and
lead times. Buffer stock is a function of the service level (risk of stock outs), lead
time variability and demand variability. The re-order point is therefore the sum
of the forecast demand during the lead time plus the buffer stock requirement.
There are various ways of calculating buffer stock (for a detailed coverage, and for
details of EBQ and EOQ calculations, see Vollman et al. 2005; Waters, 2003).
In the case of manufacturing batch sizes, the EBQ is determined by optimising
the trade-off between changeover cost between one batch and the next (for ex-
ample, cleaning out the process plant between one type of cheese and the next,
or re-setting the packing line from 250g to 500g carton sizes) and inventory
carrying cost:
● Changeover cost per unit, Cs. The cost associated with changing over a given
machine from the last good part from a batch to the first good part from the
succeeding batch.
● Inventory carrying cost, C. The cost of holding stock, calculated from the total
inventory cost and the annual rate charged for holding inventory.
To these assumptions we need to add that the usage rate z is known and con-
stant and that the manufactured cost of the sku c is also known and constant. A
little algebra applied to these assumptions leads to the so-called Wilson formula:
EBQ � 22zCs/cC
The supply chain ‘game plan’ 195
Total annual cost
Annual
carrying
cost
Annual setup
cost
EBQ Batch size
A
n
n
u
al
c
o
st
Figure 6.4 Economic batch quantity
Thus EBQ increases with usage rate and changeover cost, and reduces with manufac-
tured cost per unit and inventory carrying cost. Figure 6.4 shows how changeover
costs reduce as the batch size increases: the bigger the batch size, the lower the
changeover costs per unit. On the other hand, inventory carrying costs increase lin-
early with batch size: the bigger the batch size, the bigger the carrying costs. A total
cost line can be added, which is at a minimum when the two lines cross.
All too often overlooked when calculating the EBQ is that the higher the
changeover cost, the higher the EBQ. The key point here is that the EBQ can
therefore be reduced when the changeover cost is reduced. In the ideal case, the
changeover activity should be simplified so that it can be carried out in seconds
rather than in hours. Where this is achieved, the changeover cost becomes negli-
gible and the EBQ becomes one (Figure 6.5).
Given zero changeover costs, the EBQ formula obeys the JIT ideal of pull
scheduling – only make in response to actual demand (section 6.2). Actual demand,
of course, is likely to vary from one day to the next, unlike the assumption for
demand rate shown in Figures 6.3 and 6.4. Pull scheduling is more sensitive to
demand changes, because only what is needed is made. Note that annual costs
and demand have been quoted in Figures 6.4 and 6.5, but under current market
turbulence, this is unrealistic and much shorter history periods (perhaps two or
three months) should be used. A further major problem with use of EBQs in
manufacturing is that it leads to different stockholdings for different part
numbers. Synchronisation of parts movements becomes impossible.
196 Chapter 6 • Supply chain planning and control
The concept of the economic order quantity (EOQ) is based on similar assump-
tions to the EBQ. Here, the calculation addresses the question ‘how many parts
will we order?’ The trade-off this time is between the cost of placing an order and
inventory carrying cost, where:
● Cost of placing an order: All order related costs, including purchase department
costs, transportation costs from the supplier, and goods-in inspection and
receiving.
EOQ again increases in line with the cost of placing an order, and reduces in line
with the inventory carrying cost. Again the trade-off can be changed. If the cost
of placing an order can be simplified to a routine basis whereby parts are ordered
by paperless systems such as cards, and collected on regular pickup routes called
‘milk rounds’, the EOQ can again be reduced towards the JIT ideal. In retailing,
similar economies can be made by using POS systems and centralised (as opposed
to stores-based) ordering. EOQ principles are still widely used for ordering ‘inde-
pendent demand’ items that are not directly used to manufacture products, such
as automotive spare parts, class ‘C’ parts in retail and office supplies.
Periodic order quantity and target stock levels
Various methods have been adopted to overcome some of the deficiencies of
EOQ models, which mean that a set order size is placed on a supplier whenever
EBQ = 1 Batch size
A
n
n
u
al
c
o
st
Figure 6.5 As EBQ → 1
The supply chain ‘game plan’ 197
the inventory level falls below the re-order level. The effect upon suppliers is that –
although a regular amount is ordered – the time the order is placed can vary
enormously. An EOQ system finds it very difficult to cope if demand goes up or
down rapidly. If demand goes up rapidly, then an EOQ system would tend to
make replenishments that lag the demand trend.
To illustrate, let us assume a sequence of ten weeks where demand fluctuates
between 100 and 1,000 units. The economic order quantity (EOQ) has been es-
tablished as 1,000 units, and the safety stock at 100 units. Inventories at the start
and end of each week can then be calculated as shown in Table 6.3.
Table 6.3 Economic order quantity example
Week no. Demand Ord. quantity Inv. end Inv. start Inv. holding
1 100 1,000 900 1,000 950
2 100 0 800 900 850
3 200 0 600 800 700
4 400 0 200 600 400
5 800 1,000 400 200 300
6 1,000 1,000 400 400 400
7 800 1,000 600 400 500
8 400 0 200 600 400
9 100 0 100 200 150
10 200 1,000 900 100 500
Sum 4,100 5,000 5,100 5,200 5,150
Average 410 500 510 520 515
An alternative way to deal with variable demand is to use the periodic order
quantity. Here, the re-order quantities are revised more frequently. The method
uses mean time between orders (TBO), which is calculated by dividing the EOQ
by the average demand rate. In the above example, the EOQ is 1,000 and the
average demand 410. The economic time interval is therefore approximately 2.
An example shown in Table 6.4 illustrates the same situation as in Table 6.3 in
terms of demand changes and safety stock level. However, the re-order quantity
is based on total demand for the immediate two weeks of history. This re-order
method is called periodic order quantity (POQ).
POQ normally gives a lower mean inventory level than EOQ in variable de-
mand situations. In this example, the average inventory holding has fallen from
5,150 to 4,150. The same number of orders (Chase et al., 2005) have been used,
but the order quantity varies from 200 to 1,800.
198 Chapter 6 • Supply chain planning and control
Periodic review
A widely used model for inventory control in retailing is periodic review. This
works by placing orders of variable size at regular intervals – the review period. The
quantity ordered is enough to raise stock on hand plus stock on order to a target
level called the target stock level (TSL):
The TSL is the sum of cycle stock (average daily demand over the review period
and replenishment lead time) and the safety stock. An example of the way the
TSL is calculated is:
where D = average daily demand per sku, T = review period in weeks and LT =
lead time in weeks. Z = number of standard deviations from the mean correspon-
ding to the selected service level, and � = standard deviation of demand over
T + LT. D may be raised to weekly intervals for slow moving items, and lowered to
hours for fast movers.
6.1.3 Planning and control in retailing
Retailing is faced with planning and control challenges which are quite distinct
from manufacturing:
● A retailer cannot generate sales without stock, and stock that is bought for
sales that do not happen ‘constitutes a retailer’s nightmare’ (Varley, 2006).
� D*(T � LT) � Z*s*2(T � LT)
TSL � cycle stock � safety stock
Order quantity � Target stock level � Stock on hand � Stock on order
Table 6.4 Periodic order quantity example
Week no. Demand Ord. quantity Inv. end Inv. start Inv. holding
1 100 200 100 200 150
2 100 0 0 100 50
3 200 600 400 600 500
4 400 0 0 400 200
5 800 1,800 1,000 1,800 1,400
6 1,000 0 0 1,000 500
7 800 1,200 400 1,200 800
8 400 0 0 400 200
9 100 300 200 300 250
10 200 0 0 200 100
Sum 4,100 4,100 2,100 6,200 4,150
Average 410 410 210 620 415
The supply chain ‘game plan’ 199
Retailers are constantly walking the tightrope between too much stock and not
enough.
● The product range that has to be supported on the shelf is comparatively wide –
20,000 different products in the Tesco example in Case study 1.1, and perhaps
four times that number of individual skus. On-shelf availability (OSA) is a key
performance indicator. The aim is that OSA targets are maintained across all
skus at all times of the day and night so that every product is available at any
time that a customer visits a store. In practice, categories such as fresh fish and
bread are withdrawn from sale by 18:00 hours to avoid excessive stock write-
offs when demand is comparatively low.
● Several stages of the internal supply chain must be coordinated – depots, back
of store and front of store. Again, it matters less if a product is in stock at the
depot – it does matter that it is on the shelf, without which sales cannot be
generated.
● Retail profit margins in grocery are tighter (2–4 per cent) than for large,
branded manufacturers (8–10 per cent). Retail margins are prone to erosion by
shrinkage, which is caused by losses resulting from internal and external theft
and process failures such as damage and stocktaking errors. Average shrinkage
in grocery is 1.52 per cent (Chapman, 2010), and is much higher for cate-
gories such as health and beauty, pharmaceutical and floral.
● Demand can be affected by changes that are difficult to forecast, such as
seasonality (section 2.3), fashion (Case study 4.4), endorsements (such as the
impact of a famous TV chef on the sale of brown eggs) and promotions (Case
studies 2.1 and 2.3).
● ‘Best before’ and ‘use by’ dates for fresh produce increase obsolescence pres-
sures and inventory turns.
● Reverse logistics (section 4.5) is more complicated because product is
being reversed from one point (the store) to a multitude of supply chains
(suppliers).
As we have seen in Chapter 2, customers’ choices ‘drive everything’. Retailers be-
come more connected to the market than to the supply chain. The core capability
in retailing is trading – buying and selling goods at a profit. To a degree, manufac-
turing suppliers become the means to an end, and the constraints of manufactur-
ing are poorly understood by retailers.
Consider the demand series shown in Figure 6.6. This is for a high volume
ambient product – in this case a washing powder for which demand is compar-
atively stable.
Examination of this very typical retail demand series shows that the overall de-
mand pattern for each week is similar, but is by no means identical. Peak demand
is usually (but not always) on a Saturday, while lowest demand is on Sundays
when trading hours are restricted. There is a degree of uncertainty (section 2.3)
about the actual demand for each day. Retailers expect suppliers to cope with this
demand uncertainty – and other uncertainties in the supply chain caused by
problems such as shrinkage and variable transport times – by holding buffer
stocks. Case study 8.3 shows that these buffer stocks – often duplicated in the
retailer’s depots – can be equivalent to several days of demand.
200 Chapter 6 • Supply chain planning and control
How does the manufacturer cope with such retailer expectations? Washing
powders are manufactured in Europe at Procter & Gamble’s (P&G’s) factory near
London. The process involves mixing the ingredients of individual products
(such as Ariel and Bold) in batches and then drying and granulating each batch
into powder in a ‘blowing tower’. While the tower is blowing Bold, it cannot
blow Ariel. Each brand has several different formulations, such as Bold Auto-
matic and Bold Low Temperature. This further constrains manufacturing capa-
bility (although some products can be finally formulated by clever use of
additives at the filling and packing stage). Blowing towers are expensive pieces
of capital investment, so the site only has two. It is therefore impossible for P&G
to produce each product formulation in line with demand. Therefore, P&G has
to manufacture its products in advance of retail orders, using the principles of
the re-order point shown on Figure 6.3, and must use forecasts to calculate the
batch sizes. Further allowance must be made for the time it takes to ship the
product from the National Distribution Centre (NDC, which is positioned close
to P&G’s packing lines on the London factory site), the retailer’s depots and its
stores. Fortunately, in the case of demand as shown in Figure 6.6, forecast accu-
racy should be high and it is then possible to plan production batch sizes and
buffer stocks accurately as well. But promotions can distort even this high fore-
cast accuracy demand.
In practice, retailers use projective forecasting for planning replenishment
quantities of stable demand items such as that shown in Figure 6.4 from suppli-
ers such as P&G. Using sales based ordering (SBO), retailers attempt to match
supply with POS demand as closely as possible. POS data from each of the stores
that it serves are sent to the depot, which collates sales data and so provides a
smoothing effect on demand forecasting. Even when a close logistics relation-
ship has been established with suppliers, coordination comes under strain be-
cause of pressures brought by the trading function of the retailer to squeeze
suppliers’ prices.
Let us next consider the challenges that are created by different processes be-
tween one stage of the supply chain and the next, whether caused by manufac-
turing and retail or by different process requirements between one process and
another.
M
o
n
Tu
e
W
ed
T
h
u Fr
i
Sa
t
Su
n
M
o
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Tu
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W
ed
T
h
u Fr
i
Sa
t
Su
n
M
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ed
T
h
u Fr
i
Sa
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Su
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ed
T
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u Fr
i
Sa
t
Su
n
M
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Tu
e
W
ed
T
h
u
Week 01 Week 02 Week 03 Week 04 Week 05
Figure 6.6 EPOS data for last five weeks
The supply chain ‘game plan’ 201
6.1.4 Inter-firm planning and control
Both section 6.1.1 on manufacturing MPC systems and 6.1.2 on managing inde-
pendent demand show that relatively sophisticated modelling data are needed to
enable accurate and timely planning and control of logistics in a focal firm. At-
tention to detail – both in planning and in execution – is key. The greater the
product variety, the more component parts and the greater the number of levels
in the BOM, the more challenging the task. When it comes to coordinating logis-
tics between supply partners, the challenges multiply because the number of
processes at stake is so much greater. There are many other factors that make life
even more challenging, resulting from differences between the partners:
● Differences in process technology: a supplier of aluminium cans to a soft drinks man-
ufacturer is positioned between producers of aluminium rolled sheet, and high
speed canning lines. At the can supplier, the sheet has to be deep drawn and
printed with increasingly sophisticated designs. High speed filling machines
(1,500 cans/minute) at the soft drinks manufacturer means that the lengthy
changeovers are carried out as infrequently as possible. During the peak summer
sales period – when sales can double during a hot spell of weather – the whole
logistics pipeline is under pressure. The can supplier – situated next to the factory
of the drinks manufacturer – supplies cans through a ‘hole in the wall’ conveyor
which enables just-in-time delivery. Coordinating these three quite different
manufacturing processes is a major challenge. The default solution is to hold
huge stocks at the can supplier – but, even then, you have to hope that the
forecasts were correct! If we move to the NDC for the drinks manufacturer, the
even tougher challenge is to interface manufacturing with service processes –
distribution and retail. Retail demand is not based on manufacturing batch sizes,
but on end-customer demand through the till – moderated by weather forecasts
and promotions.
● Differences in working routines: shift patterns, conditions of employment, holi-
days and shut-downs are but a few of the possible differences in working rou-
tines between partners in a supply chain. Retailers complain that they work
24/7, while manufacturers may only work five days/week. In turn, this means
that replenishments for weekend sales (the highest of the week) have to be
made up by extra quantities delivered on Monday and Tuesday.
● Priority planning: while an order for a major customer may be priority number
1 for the focal firm in Figure 1.3, the existence of the order may not be visible
to upstream partners. Each has different priorities to manage – and each has a
different perspective about what order should be processed next.
● Inadequacies in MPC systems design: we document the case of a manufacturer of
electrical cables (‘ElectriCo’) to specific customer orders against very short lead
times (Skipworth and Harrison, 2004). Orders from the customer – a distributor
of power leads – were placed daily against generic stocks held at ElectriCo
(MTS). Attempts to cut out these stocks at ElectriCo by changing to MTO were
frustrated by weekly MRP planning intervals, and by the fact that each plan-
ning run took 36 hours to complete. We have surveyed a number of firms to
identify best practice in demand planning and forecasting (Harrison et al., 2004).
202 Chapter 6 • Supply chain planning and control
This survey provided dozens of examples of good practice and bad practice in
these areas. Partners in a network who have weak MPC systems potentially
create problems for everyone else.
Implications of poor coordination
One consequence of poor coordination within a supply network is amplification
of changes in demand upstream. Amplification of demand changes has been
called the bullwhip effect. For example, a retailer may order only in full truck loads
from its suppliers. Instead of understanding the actual end-customer demand,
the suppliers see huge swings in orders that are essentially due to the retailer’s
desire to minimise transport costs. This has the unfortunate impact of increasing
manufacturing costs at the suppliers, because they are asked to make large quan-
tities at irregular time intervals. What may originally have been stable demand
through the till becomes heavily distorted.
Figure 6.7 shows an example of the bullwhip effect. Demand through the till is
relatively stable, but orders on the supplier are anything but stable! The original
range of variation has been amplified into something much worse. The only way
in which the manufacturer can respond is to hold stocks – and even those vary
enormously from one week to the next. Uncertainty about customer demand
leads to large up-and-down swings in the need for capacity and in inventory levels.
This effect ripples through the supply chain. Batching rules at the manufacturer
make things even worse for its own suppliers upstream. Lee et al. (1997) identify
four major causes of the bullwhip effect:
● updating of demand forecasts: resulting in changes to safety stock and stock in
the pipeline;
● order batching: while retail customers may buy mostly on Saturdays, MPC
systems may batch orders according to different timing rules;
250
200
150
100
50
0
Demand
Amplification:
Reduce or
Eliminate
• Enable stockless ops
• Improve availability
• Reduce cost
True
Variation
In demand
Week no.
3
9
4
1
4
3
4
5
4
7
4
9
5
1
5
3 2 4 6 8
1
0
1
2
1
4
1
6
1
8
2
0
2
2
2
4
2
6
2
8
3
0
3
2
3
4
3
6
3
8
Total RDC stock Supplier shipmentEPOS
‘000s
Figure 6.7 The ‘bullwhip effect’ at work
Overcoming poor coordination in retail supply chains 203
● price fluctuations: promotions most often result in lumping of demand into
peaks and troughs, when the ongoing pattern is stable;
● rationing and shortage gaming: when the latest games console is in short supply,
retailers are rationed by manufacturers. Customers place multiple orders on
different retailers and apparent demand amplification.
To make matters even worse, it is quite possible for material movements in sup-
ply chains to descend into chaos (Wilding, 1998). Chaos is characterised by:
● the same state is never repeated (‘aperiodic’);
● on successive iterations, the state stays within a finite range and does not
approach infinity (‘bounded’);
● there is a definite rule with no random terms governing the dynamics
(‘deterministic’);
● two points that are initially close will drift apart over time.
Wilding lists several implications for management, three of which are:
● supply chains do not reach stable equilibrium: small perturbations will always
prevent equilibrium being achieved;
● treat the supply chain as a complete system. Small changes made to optimise one
echelon of the supply chain can result in massive changes in other parts of the
chain. Driving down inventory and lead times may not always improve per-
formance. It could result in the system slipping into chaos;
● remove chaos by focusing on the end-customer: communicate demand informa-
tion as far upstream as possible.
Implications for planning and controlling the supply chain
Based on evidence from MPC systems in manufacturing, the intricacies of man-
aging independent demand and the conclusions of the bullwhip effect and chaos
theory, we can conclude that coordinating material flow across the supply net-
work requires attention to detail in both planning and execution on a grand
scale. So often, firms have ‘orchestrated’ (or did we mean ‘optimised’?) the supply
chain around their own interests – own up auto manufacturers, ‘big pharma’ and
retailers! And simplistic solutions to collaboration and partnership remain at the
partial level – especially if limited to dyadic (supplier–customer) relationships.
Making MPC systems work together requires hard work, not just a commitment
to ‘partnership’. We return to these issues in Chapters 9 and 10.
6.2 Overcoming poor coordination in retail supply chains
Key issue: How can collaboration be extended across the supply chain to focus on
meeting consumer demand?
As a result of the challenges listed in section 6.1.4 above, a number of initiatives
have been launched to promote better coordination between supply chain
processes in retailing (Barratt and Oliveira, 2002). The principle being aimed for
204 Chapter 6 • Supply chain planning and control
is that stock in a retailer’s stores is replenished in response to POS data. While
retailers initially wanted manufacturers to do this by imposition, more recent
initiatives recognise that collaboration is needed – at least between logistics
processes at each stage of the supply chain. There are potential benefits all
round – more accurate replenishment quantities mean lower inventories, faster
response to demand fluctuations and improved on-shelf availability (OSA).
They also mean improved sales. We start with efficient consumer response
(ECR) which has been targeted primarily in food and fast-moving categories,
and end with quick response (QR) which has been targeted primarily at non-
food categories.
6.2.1 Efficient consumer response (ECR)
Established as a grocery industry initiative, efficient consumer response (ECR) is de-
signed to integrate and rationalise product assortment, promotion, new product
development and replenishment across the supply chain. It aims to fulfil the
changing demands and requirements of the end-customer through effective col-
laboration across all supply chain members, in order to enhance the effectiveness
of merchandising efforts, inventory flow and supply chain administration (PE
International, 1997).
The origins of ECR can be traced back to work carried out by Kurt Salmon Asso-
ciates (in the US) for the apparel sector (Salmon, 1993), and subsequently in the
grocery sector (Fernie, 1998). Since then, ECR has increased industrial awareness
of the growing problem of non-value-added supply chain costs (section 5.3.5).
Originating within the consumer products industry, ECR emerged partly
because of the increased competition from new retail formats entering the
traditional grocery industry in the early 1990s, as well as through joint initiatives
between Wal-Mart and Procter & Gamble. In Europe, ECR programmes com-
menced in 1993 with the commissioning of a series of projects, for example the
Coopers & Lybrand survey of the grocery supply chain (Coopers & Lybrand, 1996).
The focus of ECR is to integrate supply chain management with demand man-
agement. This requires supplier–retailer collaboration – but in spite of the appar-
ent emphasis on the end-consumer, a lot of the early ECR studies focused on the
supply side. Subsequent increased focus on demand and category management,
however, has led to the adoption of a more holistic view of the supply chain
when discussing ECR initiatives. In addition, ECR has stimulated collaborative ef-
forts that have increased the emphasis on key areas such as EDI, cross-docking
and continuous replenishment.
Other examples of studies sponsored by ECR-Europe initiatives include an
Optimal Shelf Availability report (Roland Berger Strategy Consultants, 2003) and
the Shrinkage in Europe report (Beck, 2004). Generally, ECR initiatives aim to pro-
mote greater collaboration between manufacturers and retailers. Effective logis-
tics strategies as well as administrative and information technology are essential
for its successful implementation. These techniques are available within most
firms, but the most frequent issue is to ensure that existing tools are customised
in order to achieve their maximum potential.
Overcoming poor coordination in retail supply chains 205
The main areas addressed under ECR initiatives are category management,
product replenishment and enabling technologies. These can be broken down
into 14 areas where individual as well as well-integrated improvements can be
made in order to enhance efficiency (see Figure 6.8).
Category
management
Establish
infrastructure
Optimise
introductions
Optimise
assortments
Optimise
promotions
Enabling
technologies
Electronic data
interchange
(EDI)
Electronic
fund transfer
(EFT)
Item coding
& database
maintenance
Activity-based
costing
(ABC)
Product
replenishment
Integrated
suppliers
Synchronised
production
Continuous
replenishment
Reliable
operations Cross-docking
Automated
store ordering
Figure 6.8 ECR improvement categories
(Source: Fernie, 1998: 30)
Category management
As demand management principles have become more important to supply
chain initiatives, the category management process has increased in popularity.
With an objective of preventing stockout situations and improving supplier–
retailer relations, category management aims to balance retailers’ product volume
and variety objectives. Among activities included in the category management
process are the capture and utilisation of knowledge of the drivers behind con-
sumer attitudes and choices.
By focusing on category management and measuring promotional efficiency,
ECR enables organisations to utilise their joint resources to reduce supply chain
inventory levels, streamline product flows, and use cross-dock options where ap-
propriate. Thus category management represents a focus on the development of
at least some of the following capabilities:
● account management;
● demand management;
● multifunctional selling teams;
● price list restructuring;
● effective and customised promotions.
206 Chapter 6 • Supply chain planning and control
Continuous replenishment
Continuous replenishment offers both retailers and their suppliers the opportu-
nity to manage their inventory in a more efficient manner (Mitchell, 1997; PE
International, 1997). Each of the six stages that make up the product replenish-
ment process (illustrated in Figure 6.8) represents a link that integrates the supply
chain from product suppliers right through to end-consumers. In addition, effec-
tive replenishment strategies require development of the following capabilities:
● joint inventory management;
● cross-dock operations;
● continuous replenishment;
● effective logistics strategies and product flows;
● quick response.
Enabling technologies
Enabling technologies drive ECR and make it work. They include scanning data,
data warehousing and data mining, which have facilitated our understanding of
customer requirements. Examples include EDI, which is increasingly about syn-
chronising trading data among supply chain partners in advance of doing busi-
ness as it allows the transmission of forecasting data back up through the supply
chain. Other capabilities required by organisations in order to implement an ef-
fective ECR initiative include:
● effective information sharing;
● automated order generation;
● bar-coding and the use of other scanning technology.
In addition, the data to be shared and communicated at various stages in the
supply chain depend on what will provide the most overall benefit. These data
should include:
● demand/consumption/sales information;
● cash flow;
● stocks of finished goods/work in progress;
● delivery and output status.
However, many of the problems in sharing and using these data and imple-
menting EDI networks are related to difficulties in achieving a critical mass of
companies sufficient to generate substantial benefits.
Radio frequency identification devices (RFIDs)
Radio frequency identification (RFID) is a product tracking technology that is be-
coming applied widely in supply chains today (Angeles, 2005). An RFID device,
often called a tag, can be attached to a piece of merchandise and informs a reader
about the nature and location of what it is attached to. Figure 6.9 shows how
the reader can relay this information to a management system that can create a
Overcoming poor coordination in retail supply chains 207
picture of what merchandise is where at a level of detail that has not previously
been possible.
An active tag has a power source; a passive tag does not. Active tags use a bat-
tery, have a limited life and cost far more. The antenna is a device that uses radio
waves to read and/or write data to the tags. The reader manages the interface be-
tween antenna and management system. A big advantage of RFID technology
over bar-codes is that the tag does not have to be directly in the line of sight of
the reader. Tags can be detected by readers remotely because the radio waves can
pass through many materials (see, for example, http://www.ems-rfid.com). Trials
have been conducted across a range of frequencies – 125 Khz to 2.45 Ghz for
chip-based tags – but standards are still being debated in many sectors. The
management system enables data from tags to be collected and sorted for the pur-
poses of management information and action.
The key piece of information held on a tag is the electronic product code (EPC,
standards for which were developed by the Auto-ID Center). This ‘number plate’
is unique to each tag. The unique number can then be linked to information
about the product to which it is attached, for example about when and where the
product was made, where its components came from and shelf-life details. Some
tags may hold this additional information on board however the intention is that
most tags will only hold the EPC and additional information will be stored re-
motely, on a database linked to the management system.
Readers tell us what the product is and where it is located in the supply chain.
The management system compiles this information and allows us to know how
many products are present at that location for each time bucket. This translates
into dynamic data that allows us to know rates of consumption, and stock data
at a given point in time – together with what needs to be done. One can already
envision that such data will enable supply chain planning and control to be
transformed.
Product tagging allows for several interesting applications including:
● tracking products throughout the distribution pipeline (‘asset tracking’) to pro-
vide continuous quantities and position by sku in the supply chain;
● tracking products through back of store to the shelf;
Chip Antenna Frequency
waves
Transmits
receives
RFID Tag Radio Reader Management
system
data data
Figure 6.9 An RFID system
(Source: Beck, 2004)
208 Chapter 6 • Supply chain planning and control
● intelligent shelves, whereby ‘sweeping’ of product by thieves from shelves in
store shows up automatically and raises alarm signals;
● registering sales without involving a cashier: a fancied future state is one where
shoppers push their trolley past readers that automatically read EPCs for each
item in the trolley, and present the bill for credit card payment to the shopper
without the need for retailer personnel to be involved.
Benefits for manufacturers include the ability to understand when products
are in the store but not on the shelf (a source of lost sales that manufacturers
cannot control) and reducing the opportunities for theft. Retailer benefits in-
clude ability to track products in the pipeline against delivery schedules, au-
tomation of the checkout process and ability to expand customer information
on buying patterns.
Technically, products can be tracked all the way to the customer’s home and
into it. However, when Benetton planned to track products after the sale, with
an eye on returns, it was met with customer resistance on grounds of privacy.
This caused Benetton to delay plans for rolling out this idea. The other major
hurdle to implementation is the price of the tags. Price/margin levels in most
consumer packaged goods tags need to be low enough to be affordable at the
individual product level. While Wal-Mart has mandated tag application from
its major suppliers, technical issues with readers have so far kept RFID develop-
ment at pallet level. Beyond product-level tagging in retail channels, many
other applications are already in place at case-level, and in higher-value goods
such as automotive parts.
ECR in the UK
Dutchman Paul Polman, now CEO of Unilever, did a stint as General Manager of Proc-
ter & Gamble UK and Eire from 1995 to 1999. While admiring the UK’s advanced retail-
ing systems, he saw opportunities for all four of the ‘pillars of ECR’ – range, new items,
promotions and replenishment. The following is extracted from the text of a speech he
made to the Institute of Grocery Distribution.
Range
The average store now holds 35 per cent more than five years ago, yet a typical con-
sumer buys just 18 items on a trip. A quarter of these skus sell less than six units a week!
The number of skus offered by manufacturers and stores has become too large and
complex. My company is equally guilty in this area. No question, we make too many
skus. I can assure you we are working on it. Actually, our overall sku count in laundry is
already down 20 per cent compared to this time last year. What’s more, business is up.
Clearly, we have an opportunity to rationalise our ranges. As long as we do this in an
ECR way – focusing on what consumers want – we will all win. The consumer will see a
clearer range. Retailers and manufacturers will carry less inventory and less complexity.
The result will be cost savings across the whole supply chain and stronger margins.
CASE STUDY
6.2
Overcoming poor coordination in retail supply chains 209
New items
There were 16,000 new skus last year. Yet 80 per cent lasted less than a year. You don’t
need to be an accountant to imagine the costs associated with this kind of activity. And
look how this has changed. Since 1975, the number of new sku introductions has in-
creased eightfold. Yet their life expectancy has shrunk from around five years in 1975 to
about nine months now. We can hardly call this progress.
Promotions
In promotions it’s the same story. Take laundry detergents. This is a fairly stable mar-
ket. Yet we’re spending 50 per cent more on promotions than two years ago, with
consumers buying nearly 30 per cent more of their volume on promotions. This not
only creates an inefficient supply chain, or in some cases poor in-store availability,
but, more importantly, has reduced the value of the category and likely the retailers’
profit. We’re all aware of the inefficiencies promotions cause in the system, such as
problems in production, inventory and in-store availability. They all create extra costs,
which ultimately have to be recouped in price. But there’s a higher cost. As promo-
tions are increasing, they are decreasing customer loyalty to both stores and brands
by 16 per cent during the period of the promotion. We commissioned a report by
Professor Barwise of the London Business School. He called it ‘Taming the Multi-buy
Dragon’. The report shows us that over 70 per cent of laundry promotional invest-
ment goes on multi-buys. The level of investment on multi-buys has increased by 60
per cent over the last three years. There’s been a 50 per cent increase behind brands
and a doubling of investment behind own labels. Contrary to what we thought, most
of this volume is not going to a broad base of households. It is going to a small mi-
nority. Seventy-one per cent of all multi-buy volume is bought by just 14 per cent of
households. Just 2 per cent of multi-buy volume goes to 55 per cent of households.
We really are focusing our spending on influencing and rewarding a very small minority
of people indeed.
Replenishment
Based on the escalating activity I’ve just [referred to], costs are unnecessarily high. There
are huge cost savings also here, up to 6 per cent, by removing the non-value-added
skus and inefficient new brand and promotional activity.
Questions
1 Cutting down on range, new items and promotions is presumably going to lead to
‘everyday low prices’. Discuss the implications to the trade-off between choice and
price.
2 Procter & Gamble’s major laundry brand in the US is Tide. This is marketed in some
60 pack presentations, some of which have less than 0.1 per cent share. The prolifer-
ation of these pack presentations is considered to have been instrumental in increas-
ing Tide’s market share from 20 to 40 per cent of the US market in recent years.
Clearly, this is a major issue within P&G. What are the logistics pros and cons of sku
proliferation?
210 Chapter 6 • Supply chain planning and control
6.2.2 Collaborative planning, forecasting and replenishment (CPFR)
Collaborative planning, forecasting and replenishment (CPFR) is aimed at im-
proving collaboration between buyer and supplier so that customer service is
improved while inventory management is made more efficient. The trade-off
between customer service and inventory is thereby altered (Oliveira and Barratt,
2001).
The CPFR movement originated in 1995. It was the initiative of five compa-
nies: Wal-Mart, Warner-Lambert, Benchmarking Partners, and two software com-
panies, SAP and Manugistics. The goal was to develop a business model to
forecast and replenish inventory collaboratively. An initial pilot was tested be-
tween Wal-Mart and Warner-Lambert using the Listerine mouthwash product
and focusing on stocks kept in the retail outlets. The concept and process was
tested initially by exchanging pieces of paper. This generated clear visibility of
the process required and the requirements for the IT specification. The two com-
panies later demonstrated in a computer laboratory that the internet could be
used as a channel for this information exchange.
In 1998 the Voluntary Inter-industry Commerce Standards Committee (VICS)
became involved in the movement, which enabled it to make major strides for-
ward. VICS was formed in 1986 to develop bar-code and electronic data inter-
change standards for the retail industry. The involvement of VICS meant that
other organisations could participate in the validation and testing of the CPFR
concept. With VICS support, organisations including Procter & Gamble, Kmart
and Kimberly Clark undertook pilots to test the idea of sharing information to
improve inventory handling. One of the pilots in the UK grocery sector is de-
scribed in Case study 6.3.
CPFR trials in the UK grocery sector
CPFR pilots have been a popular diversion in the UK grocery sector. Often, they show –
as in this case – that considerable opportunities for improvement exist, but that the
problems of scaling up the pilot are too great. The scenario for this pilot, researched by
one of our Master’s students, Alexander Oliveira, was a manufacturer that supplied a
major grocery retailer in the UK. Figure 6.6 shows the typical demand series for one of
the ten products in the study, all of which were in the high-volume ambient category.
Total sales through the till (EPOS) for a given week were really quite stable. While there
is apparent high demand variation, most of this is due to predictable behaviour such as
that due to different store opening hours. The day-by-day demand for this product was
actually relatively stable over the course of a year. Figure 6.10 places the pilot in con-
text. The manufacturer’s national distribution centre (NDC) supplied one of the re-
tailer’s regional distribution centres (RDCs), which in turn served ten stores in the pilot
(it served a lot more stores in total – about 80).
The starting situation that Alexander found was that forecasting methods were based
on a history of the last two–three months. While this gave the correct day-by-day pattern,
it was insensitive to actual demand during a given week. As can be seen in Figure 6.6, the
actual demand pattern varies from day to day across the series due to a proportion of
CASE STUDY
6.3
Overcoming poor coordination in retail supply chains 211
randomness in the pattern. The replenishment cycle was unresponsive because daily de-
liveries were based on forecasts. This resulted in high safety stocks and poor on-shelf avail-
ability. Figure 6.11 provides an inventory profile across the supply chain. The sum of the
vertical (average days of stock) and horizontal (average lead time in days) gives the total
time for a new batch of product to progress from manufacturing site to shelf. This totals a
massive four–five weeks!
Alexander coordinated the provision of forecast data from both manufacturer and
supplier. Both forecasts were posted on a website, and he was asked to provide instruc-
tions as to how much product the manufacurer should supply each day. Stock for the
ten stores was ‘ring fenced’ at the retailer’s RDC – that is, it could not be supplied to any
other than the ten stores in the pilot.
1
2
3
4
5
6
7
8
9
10
Manufacturer’s
NDC
Retailer’s
RDC
Retailer’s
stores
Figure 6.10 A collaborative planning pilot
St
o
ck
h
o
ld
in
g
le
ve
l
Lead-time
2 days
2 days
7 days 7 days
3 days
1 day
6 days
Production
site
Manufacture
DC
Customer
DC
Stores
backroom
Shelves
3 days 1,5 days 1 day
Figure 6.11 Pipeline map at start
Alexander soon found that current forecast data did not take daily fluctuations into
account, and was based on far too long a history period. By tracking daily demand, it
was possible to allow for the randomness without anything like the current quantity of
safety stock in the system. He devleoped a new replenishment algorithm that was based
on the daily error between forecast and actual, and which added an extra day’s buffer
stock. It soon became obvious that it was possible to run the system on far lower stock
levels at the retailer’s NDC, as shown in Figure 6.12.
Alexander’s work had succeeded in reducing the stock level at the NDC from
seven days to 36 hours. In spite of the huge potential savings, the retailer did not go
ahead with scaling up the pilot. This can be attributed to several factors. First, many
other improvement initiatives were under way. The CPFR initiative would have needed
further scarce resources. Second, scaling up would have required a different operating
routine at all NDCs and the supporting IT infrastructure would need to have been
changed. Third, what worked with one relatively efficient manufacturer may not have
worked with others. Nevertheless, Alexander came up with the following five enablers
for CPFR implementation (Barratt and Oliveira, 2002):
1 Define single point of contact for each trading partner: to ensure that information is nei-
ther lost nor deteriorates during the exchange.
2 Define agenda for collaboration (short–medium–long term): to stabilise the collabora-
tive goals over time.
3 Expand collaborative projects (scope and complexity): to gain critical mass.
4 Ensure continuous sharing of information: a key enabler of collaborative planning.
5 Development of trust: this takes time. Smaller problems are gradually removed from
the CPFR process to help partners develop confidence that the long-term goal is
achievable.
Questions
1 Suppose that the retailer’s total sales were €20 billion, and that the ten skus together
accounted for 0.4 per cent of these sales. Calculate the approximate savings in
inventory to the retailer.
2 Do you consider that the reasons given for not scaling up the pilot are valid?
3 Would there be any benefits to the manufacturer?
212 Chapter 6 • Supply chain planning and control
Figure 6.12 Pipeline map: at end of pilot
St
o
ck
h
o
ld
in
g
le
ve
l
Lead-time
2 days
2 days
7 days
36 Hours
3 days
1 day
6 days
Production
site
Manufacture
DC
Customer
DC
Stores
backroom
Shelves
3 days 1,5 days 1 day
Overcoming poor coordination in retail supply chains 213
In autumn 1999 VICS published a tutorial for CPFR implementation. This is
available in hard copy, or can be accessed on its website at http://www.cpfr.org.
This ‘road map’ offers organisations a structured approach to CPFR implementa-
tion based on the experiences of the companies involved in the CPFR pilots.
Having shown that the CPFR concept can have bottom-line impact on their
businesses, companies are looking to expand the programmes from the handful
of items involved in the pilots to the hundreds or thousands of items covered in
most trading relationships. This has been a challenge for all organisations, in-
cluding the software providers, for whom a major focus has been to ensure that
software is scaleable; that is, that there are no barriers to the number of organisa-
tions and products involved in the CPFR network.
When implementing CPFR, a significant amount of time and effort is required
up-front to negotiate specific items such as goals and objectives, frequency of up-
dates to plan, exception criteria and key performance measures. The result is a
published document defining the relevant issues for each organisation that has
been jointly developed and agreed.
A nine-step business model has been developed that provides an insight into
the effort required by both supplier and customer. The model is as follows:
1 Develop front-end agreement.
2 Create joint business plans.
3 Create individual sales forecasts.
4 Identify exceptions to sales forecasts.
5 Resolve/collaborate on exception items.
6 Create order forecast.
7 Identify exceptions to order forecast.
8 Resolve/collaborate on exception items.
9 Generate orders.
In summary, CPFR focuses on the process of forecasting supply and demand by
bringing various plans and projections from both the supplier and the customer into
synchronisation. CPFR requires extensive support in the form of internet-based
products, which can result in major changes to the key business processes. An aca-
demic survey of the success of CPFR (Oliveira and Barratt, 2001) found a significant
correlation between companies with high information systems capabilities and the
success of CPFR projects. The firms with high levels of CPFR implementation use
information systems capable of providing timely, accurate, user-friendly and inter-
functional information in real time. Skjoett-Larsen et al. (2003) propose that CPFR
should be seen as a general approach to integrating supply chain processes, and not
as a rigid, step-by-step model as proposed by VICS. The electronic integration
aspects of collaborative planning are further reviewed in section 8.1.3.
Benefits of electronic collaboration
Nestlé UK states that the advantages of collaborative systems are significant, and
lists the following benefits:
● There is improved availability of product to the consumer, and hence more
sales.
214 Chapter 6 • Supply chain planning and control
● Total service is improved, total costs are reduced (including inventory, waste and
resources), and capacities can be reduced owing to the reductions in uncertainty.
● Processes that span two or more companies become far more integrated and
hence simple, standard, speedy and certain.
● Information is communicated quickly, in a more structured way, and is trans-
parent across the supply chain to all authorised users. All users know where to
find up-to-date information.
● An audit trail can be provided to say when information was amended.
● Email prompts can update users of variance and progress, and can confirm
authorisations.
● The data that are in the system can be used for monitoring and evaluation
purposes.
● The process can be completed in a quick timescale, at a lower total cost.
● All trading partners become more committed to the shared plans and objec-
tives. Changes are made with more care, and are immediately visible to all.
Many of these benefits are being experienced by those implementing the
CPFR philosophy. Wal-Mart and Sara Lee experienced sales increases of 45 per
cent and a decline in weeks-on-hand inventory of 23 per cent. The benefits
experienced by Procter & Gamble and its retail partners include a reduction in
replenishment cycle time of 20 per cent. The increased visibility of the supply
chain resulted in a reduction of in-store availability from 99 to 88 per cent
being detected with sufficient lead time to respond. This saved three to four
days of stockouts for the retailer. Forecast accuracy improvements of 20 per
cent have also been experienced.
6.2.3 Vendor-managed inventory (VMI)
Vendor-managed inventory (VMI), is an approach to inventory and order fulfil-
ment whereby the supplier, not the customer, is responsible for managing and re-
plenishing inventory. This appears at first sight to counter the principle of pull
scheduling, because the preceding process (the manufacturer) is deciding how
many and when to send to the next process (the retailer). In practice, the basis on
which decisions will be made is agreed with the retailer beforehand, and is based
on the retailer’s sales information. Under VMI, the supplier assumes responsibil-
ity for monitoring sales and inventory, and uses this information to trigger re-
plenishment orders. In effect, suppliers take over the task of stock replenishment.
Automated VMI originated in the late 1980s with department stores in the US as
a solution to manage the difficulties in predicting demand for seasonal clothing.
Prior to this manual VMI had been around for many years – particularly in the
food industry. Under manual VMI, the manufacturer’s salesman took a record of
inventory levels and reordered products for delivery to the customer’s store,
where the manufacturer’s representative would restock the shelves. As product
variety has increased and lifecycles have shortened, manual VMI has been replaced
by automated VMI.
Overcoming poor coordination in retail supply chains 215
How VMI works
The supplier tracks their customers’ product sales and inventory levels, sending
goods only when stocks run low. The decision to supply is taken by the supplier,
not the customer as is the case traditionally. The supplier takes this decision based
on the ability of the current level of inventory to satisfy prevailing market de-
mand, while factoring in the lead time to resupply. The smooth running of VMI
depends on a sound business system. It also requires effective teamwork between
the retailer and the manufacturer. In order for both parties to gain full benefit
from the system, appropriate performance measures need to be used. The top pri-
ority measure is that of product availability at the retailer. It is in both parties’ in-
terests to maximise product availability, avoiding lost sales in the short term and
building customer buying habits in the long term. By emphasising the supplier’s
responsibility for maximising product availability, VMI aims to achieve this with
minimum inventories. In order to combine both of these apparently conflicting
goals, it is necessary to have access to real-time demand at the customer.
The most widely used technology for broadcasting demand data from the re-
tailer customer is electronic data interchange (EDI). This provides the means for
exchanging data from customer to suppliers in a standard format. Internet-based
applications using EDI protocols are increasingly popular, providing the same fa-
cility at lower cost. Customer demand and inventory data are often processed
through software packages to automate the application of decision rules and
identify stock lines that need replenishment.
Potential benefits
The immediate benefit to a supplier engaged in VMI is access to data on:
● customer sales;
● inventory levels at the customer.
The assumption is that the supplier can use these data to provide better control
of the supply chain and so deliver benefits for both the customer and themselves.
Having the supplier take the decision on replenishment aims to minimise the
impact of demand amplification. This critical problem erodes customer service,
loses sales, and increases costs. The ability to dampen demand amplification
caused by infrequent, large orders from customers is key to the success of VMI.
The surplus capacity and excess finished goods held by suppliers to counteract
such variation can then be reduced.
In the longer term, suppliers should integrate demand information into their
organisation and develop the capability to drive production with it. This helps
to replace the traditional push scheduling, based on forecasts and buffer stocks,
with pull scheduling, based on meeting known demand instantaneously out of
manufacturing.
There are a number of different ways in which the use of VMI can benefit the supplier and the
customer. Make a list of those benefits you think exist under the headings of ‘supplier benefits’
and ‘customer benefits’.
Activity 6.1
216 Chapter 6 • Supply chain planning and control
Potential problems in setting up a VMI system
Other than the practical difficulties of setting up a VMI system, a number of
problems can prevent the attainment of the above benefits. Five of them are
listed below.
Unwillingness to share data
Retailers may be unwilling to share their marketing plans and product range
strategies with manufacturers. This is particularly true in the UK, where super-
markets have strong own brands that compete with those of the manufacturers.
Retailers continue to be the owners of information on actual demand passing
through their tills. An inability to forward this information, whether due to
reluctance or to procedural and technical problems, will prevent suppliers from
responding effectively, leading to the need for buffer stocks and increasing the
risk of stockouts.
Seasonal products
The benefits of VMI are quickly eroded in fashion and seasonal products, espe-
cially apparel. VMI in these cases can involve suppliers making to stock based on
a pre-season forecast with little scope for manufacturing in season. Small quanti-
ties are delivered from this stock to the retailers over the season. Naturally the
forecast is regularly at odds with actual demand, so products will be frequently
understocked or overstocked. In effect all that has happened is that the burden of
owning inventory and disposing of excesses has been moved onto the supplier.
Investment and restructuring costs
Adopting a VMI approach incurs a high investment by the customer and sup-
plier. Setting up the processes and procedures for undertaking this new way of
working takes time and effort. The customer will need to close their materials
management function if they are to make cost savings, while the supplier will
need to develop the capability to take over this task.
Retailer vulnerability
The process of outsourcing materials management to suppliers makes the retailer
more dependent on them.
Lack of standard procedures
The practicalities of the processes and procedures that underpin VMI may not be
transferable from one customer to another. Customers may ask for different tag-
ging methods or bespoke labelling. With many industrial products there is no
bar-code standard.
System maintenance
Errors creep into inventory records due to incorrect part counts, mislabelling,
damage, loss and theft. These records need to be maintained through manual
methods such as stock counts.
Overcoming poor coordination in retail supply chains 217
6.2.4 Quick response (QR)
Quick response (QR) is an approach to meeting customer demand by supplying
the right quantity, variety and quality at the right time to the right place at the
right price. This concept originated in the US textile and apparel industry in re-
sponse to the threat posed by overseas competitors. The concepts behind QR are
based on taking a total supply chain view of an industry. From this perspective it
is possible to understand overall performance and the causes of poor performance,
and to identify opportunities for improvement.
Understanding overall performance involves mapping the processes needed to
convert raw material into the final product (see Chapter 5). The performance of
the process is also assessed to determine its effectiveness. In the case of the ap-
parel industry, mapping followed the process of converting raw material into
fibre, then into fabric, then into apparel and finally delivery to the retailer. Key
measures of the process were lead times, inventory levels and work in progress.
This investigation found that the total process of converting raw material into
clothing took 66 weeks. A basic analysis of the process identified that 55 weeks
were taken up with products sitting in various stores as inventory. The principal
cause of the need for this inventory was identified as being lack of communication
between the organisations in the supply network.
Such analysis is similar to that described in Chapter 5, with the process consid-
ered in this case being the whole supply chain from end to end. There are two
main differences between QR and a time-based approach to improvement. First,
there is an emphasis on using actual customer demand to pull products through
the distribution and manufacturing system. Second, there is extensive use of
information technology as the preferred way to achieve pull. These two issues are
explored in more detail below.
Role of enabling technologies
High variety in clothing markets – due to different sizes, styles and colours – and
in grocery markets has led these industries to use information technologies as a
means of enabling QR. These technologies are based around the use of uniform
product codes and electronic data interchange (EDI). The process involves col-
lecting merchandise information at the point of sale from the product bar-code.
Data are sent to the supplier via EDI, where they are compared with an inventory
model for the store concerned. When appropriate, production is ordered for the
specific items needed to restock the store to the requirements of the model. Once
these items have been made, the cycle is completed when they are packed,
shipped to the store and delivered to the shelf.
This process has enormous implications for links across the supply chain. With
each retailer having a range of suppliers and each supplier servicing a number of
retailers there is the need for common bar-code standards across the industry.
The retailer needs to have a scanning and data capture system to identify the
item being sold. It will need to have a reordering system that links the item to its
manufacturer, and which places an order. Information needs to be exchanged be-
tween the parties in a common data format, which can be read by different IT
218 Chapter 6 • Supply chain planning and control
systems. The high volume of transactions means that the systems handling the
data exchange need to be robust and reliable. Having been informed of the sale,
the supplier inputs this information to its manufacturing planning system in
order to schedule production and the ordering of supplies.
It is hardly surprising that it is extremely difficult to achieve this integration
across the whole of a supply network. There are significant implications for small
businesses, which have difficulty justifying the cost of the IT system and the as-
sociated training. These set-up costs can deter new companies with innovative
products from being able to supply. Recent developments in internet-based appli-
cations are helping to resolve this situation because the implementation and data
transfer costs are much lower.
Summary
How is material flow planned and controlled in the supply chain?
● Material planning and control in manufacturing is based on three time periods –
long term, medium term and short term.
● The focal firm ‘game plan’ comprises a set of inter-linked modules ranging
from ‘front end’ (demand management, resource planning, sales and opera-
tions planning and master production scheduling) to ‘engine’ (materials and
capacity planning) to ‘back end’ (detailed planning and control of source–
make–deliver processes). All are linked to the enterprise resource planning
(ERP) database.
● After manufacture, replenishment of independent demand items in the supply
chain is usually managed by order point methods like EOQ and POQ. Periodic
review places orders of variable size at fixed intervals.
● Retail processes have other, distinct challenges when it comes to material plan-
ning and control. Stock must be available to generate sales, so OSA is a key per-
formance measure. Sales must be supported across a much wider range of skus.
The top priority of retailers has been to serve the market, and manufacturers
have traditionally been expected to serve retail processes. Shrinkage (stock
losses) and the impact of promotions are further challenges.
● Coordinating material planning and control between firms greatly increases
the need for management of detail. There are many more ways to inhibit the
accurate exchange of data than within a focal firm. This results in undesirable
symptoms like the bullwhip effect and even chaotic behaviour of material
movements.
How is it possible to improve coordination between retail
and manufacturing processes?
● Efficient consumer response (ECR) is aimed at integrating SCM with demand
management by means of category management, product replenishment and
enabling technologies.
● Collaborative planning, forecasting and replenishment (CPFR) aims to improve
customer service while inventory management is made more efficient.
References 219
● Vendor managed inventory (VMI) refers to the control of inventory manage-
ment and replenishment by the supplier. The key performance indicator is on-
shelf availability (OSA) at the retailer.
● Quick response (QR) is based on taking a total supply chain view, starting with
supply chain mapping.
Discussion questions
1 Apply the MPC framework in Figure 6.1 to a restaurant. Pay special attention to iden-
tifying the front end, engine and back end components.
2 Evaluate the impact of international supply chains on the challenges to MPC systems
in practice. Does increasing the physical distance between processes mean that they
are more difficult to plan and control?
3 Demand changes from independent to dependent at the customer order decoupling
point (CODP). What actually happens to end-customer demand, and why is this
change so important in managing material flow?
4 What actions are needed to address the problems of inter-firm planning and control
listed in section 6.1.3? How would you go about orchestrating material movements
(for example the cheese supply chain, shown in Figure 1.1) across a grocery supply chain?
5 Paul Polman, Chief Executive of Unilever, said ‘I do not work for the shareholder, to
be honest, I work for the customer. I don’t drive this business by driving shareholder
value.’ What matters more: value to the customer or value to the shareholder? Refer
to section 3.4 of Chapter 3 in formulating your response. How would you expect this
question to impact on Unilever’s long-term MPC strategy?
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Beck, A. (2004) Shrinkage in Europe 2004: A Survey of Stock Loss in the FMCG Sector. Brussels:
ECR-Europe at http://www.ecrnet.org
Chapman, P. (2010) ‘Reducing product losses in the food supply chain’, in C. Mena and
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tics and Retail Management: Insights into Current Practice and Trends from Leading Experts,
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Goldratt, E. and Cox, J. (1984) The Goal. New York: North River Press.
Harrison, A., Chapman, P., Rutherford, C. and Stimson, J. (2004) Demand Planning and Fore-
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Heinemann.
C H A P T E R 7
Just-in-time and the agile
supply chain
Introduction
In Chapter 5, we reviewed the importance of time in supply chain thinking. Time
is one of the ‘hard objectives’ (section 1.3.1), and some supply chains compete on
time by delivering products to the end-customer faster than competition. Here,
the focus is on reducing the time taken for each process. But time can also be used
to alter the trade-offs between competitive priorities – for example, costs do not
have to rise proportionately as lead times are reduced (section 5.1.1). This can be
achieved by squeezing non-value-adding activities (delays, transport, storage and
inspection) from the supply chain by time-based process mapping (section 5.3).
Such activities are referred to generically as waste, the Japanese word for which is
The intended objectives of this chapter are to:
● explain how just-in-time can be used to avoid the build-up of waste within
and between supply chain processes;
● introduce the concept of the agile supply chain as a broad-based
approach to developing responsiveness advantages;
● explore the challenges of coping with volatile demand situations;
● explain how capabilities can be developed and specifically targeted at
thriving in conditions of market turbulence.
By the end of this chapter you should be able to:
● understand how lean thinking can be used to improve performance of the
supply chain in meeting end-customer demand by cutting out waste;
● recognise enemies of flow in the supply chain;
● understand the distinctions between lean and agile strategies, and how
the two can work together;
● identify the type of market conditions under which agile strategies are
appropriate, and how they can be operationalised.
In Chapter 9 we consider another key aspect of the agile supply chain – the virtual
organisation.
Objectives
222 Chapter 7 • Just-in-time and the agile supply chain
muda (the concept of waste was introduced in Chapter 5 and is explored further
in section 7.1.2). Such thinking has been developed into a philosophy and ac-
companying tools and techniques under the banner of ‘just-in-time’ (JIT). The
aim of JIT (Harrison, 1992) is:
To meet demand instantaneously with perfect quality and no waste.
All three targets (demand – quality – waste) are ideals which can never be fully
achieved. But we can get closer to them over time through continuous improve-
ment. The elimination of waste has been promoted under the banner of ‘lean
thinking’ (Womack and Jones, 2003), who advise:
To hell with your competitors; compete against perfection by identifying all activi-
ties that are muda and eliminating them. This is an absolute rather than a relative
standard which can provide the essential North Star for any organization.
JIT and lean thinking share the same roots, and originate from competitive
strategies developed by the Japanese. Toyota Motor Company is held up as the
role model and, although the Toyota brand has been severely damaged in recent
years by widespread quality problems (section 1.3.1), this focal firm’s operational
excellence has had a major influence on logistics thinking today.
A common view is that lean thinking works best where demand is relatively
stable – and hence predictable – and where variety is low. But in situations where
demand is volatile and customer requirement for variety is high, the elimination
of waste in itself becomes a lower priority than the need to respond rapidly to a
turbulent marketplace. So the second part of this chapter reviews developments
under the banner of the ‘agile supply chain’.
In Chapter 6, we reviewed quick response and other time-based approaches to
developing the capabilities needed to support the speed advantage. While such
logistics capabilities are important enablers to lean and responsive supply chains,
the ‘agile supply chain’ takes the argument a significant step further. Market-
places of the 21st century are often characterised by proliferation of products and
services, shorter product lifecycles and increased rates of product innovation.
Simply responding quickly and at the right time are not enough to meet the
needs of such marketplaces.
The mission of modern logistics is to ensure that it is the right product – to
meet exact end customer needs – that gets delivered in the right place at the right
time. Such a mission means that the end-customer comes first. This chapter pro-
poses the agile supply chain as an approach that elevates speed capabilities in a
given supply chain to much higher levels than would be possible using the tools
and techniques discussed so far.
Key issues This chapter addresses two key issues:
1 Just-in-time and lean thinking: the impact of just-in-time on supply chain
thinking. Cutting out waste in business processes. Simple, paperless systems v
central control. Use and misuse in planning and control.
2 The agile supply chain: the dimensions of the agile supply chain, and the
environments that favour agility. Agile practices: addressing the challenges of
market turbulence, rapid response logistics and managing low volume products.
Just-in-time and lean thinking 223
7.1 Just-in-time and lean thinking
Key issue: What are the implications of just-in-time and lean thinking for logistics?
How can just-in-time principles be applied to other forms of material control
such as material requirements planning?
Just-in-time is actually a broad philosophy of management that seeks to elimi-
nate waste and improve quality in all business processes. JIT is put into practice
by means of a set of tools and techniques that provide the cutting edge in the
‘war on waste’. In this chapter, we focus on the application of JIT to logistics. This
partial view of JIT has been called little JIT (Chase et al., 2005): there is far more to
this wide-ranging approach to management than we present here (see, for exam-
ple, Harrison, 1992). Nevertheless, little JIT has enormous implications for logis-
tics, and has spawned several logistics versions of JIT concepts.
The partial view of JIT is an approach to material control based on the view
that a process should operate only when a customer signals a need for more parts
from that process. When a process is operated in the JIT way, goods are produced
and delivered just-in-time to be sold. This principle cascades upstream through
the supply network, with subassemblies produced and delivered just-in-time to
be assembled, parts fabricated and delivered just-in-time to be built into sub-
assemblies, and materials bought and delivered just-in-time to be made into fab-
ricated parts. Throughout the supply network, the trigger to start work is
governed by demand from the customer – the next process (Schonberger, 1991).
A supply network can be conceived of as a chain of customers, with each link coor-
dinated with its neighbours by JIT signals. The whole network is triggered by de-
mand from the end-customer. Only the end-customer is free to place demand
whenever he or she wants; after that the system takes over.
The above description of the flow of goods in a supply chain is characteristic of
a pull system. Parts are pulled through the chain in response to demand from the
end-customer. This contrasts with a push system, in which products are made
whenever resources (people, material and machines) become available in re-
sponse to a central plan or schedule. The two systems of controlling materials can
be distinguished as follows:
● Pull scheduling: a system of controlling materials whereby the user signals to
the maker or provider that more material is needed. Material is sent only in
response to such a signal.
● Push scheduling: a system of controlling materials whereby makers and
providers make or send material in response to a pre-set schedule, regardless of
whether the next process needs them at the time.
The push approach is a common way for processes to be managed, and often
seems a sensible option. If some of the people in a factory or an office are idle, it
seems a good idea to give them work to do. The assumption is that those prod-
ucts can be sold at some point in the future. A similar assumption is that building
up a stock of finished goods will quickly help to satisfy the customer. This argu-
ment seems particularly attractive where manufacturing lead times are long, if
quality is a problem or if machines often break down. It is better and safer to
224 Chapter 7 • Just-in-time and the agile supply chain
make product, just in case there’s a problem in the future. Unfortunately, this
argument has severe limitations. Push scheduling and its associated inventories
do not always help companies to be more responsive. All too often, the very prod-
ucts the organisation wants to sell are unavailable, while there is too much stock
of products that are not selling. And building up stock certainly does not help to
make more productive use of spare capacity. Instead it can easily lead to excess
costs, and hide opportunities to improve processes.
7.1.1 The just-in-time system
Companies achieve the ability to produce and deliver just-in-time to satisfy ac-
tual demand because they develop a production system that is capable of work-
ing in this way. Such a system can be envisaged as a number of ‘factors’ that
interact with each other, as shown in Figure 7.1. This shows JIT capability as
founded on layers of factors that interact together to form a system that is de-
signed for flow. Excellence in each of the six factors determines the effectiveness
with which JIT capability can be achieved: that is, how easy it is to get to the top
of the pyramid.
Level 1
1
2
3 4 6
5
Level 2
Level 3
Just-in-time
Minimum
delay
Minimum
defects
Minimum
down time
Minimum
inventory
Simplicity and
visibility
Figure 7.1 The pyramid of key factors that underpin JIT
Factor 1
The top of the pyramid is full capability for just-in-time supply. This is the level
at which a focal firm can produce and deliver according to the demand that is
placed on it. The relationships operating within and between levels 2 and 3 form
the system that ultimately underpins the achievement of JIT. They are complex,
and in some cases there is a long time delay between taking actions and seeing
the effects.
Factor 2
The two factors delay and inventory interact with each other in a system of posi-
tive amplification; that is, they go up together and they go down together. This
Just-in-time and lean thinking 225
interrelationship results in either a virtuous cycle, where things keep getting bet-
ter, or a vicious cycle, where they keep getting worse. For example, extra delay in
a process will result in extra inventory being held to compensate for the delay.
Adding more inventory causes further delays as products take longer to flow
through the process, which leads to the need for more inventory. Conversely if
delays are reduced then less inventory is needed, which results in fewer delays,
meaning that inventory can be further reduced. Making sure this relationship
operates as a virtuous cycle of reducing delay and inventory instead of a vicious
one where they increase depends on the underpinning factors in level 3.
Factor 3
Defects lead to delays, either through requiring rework or necessitating increased
production to compensate for scrap. The likelihood of defects leads to safety
stocks being held as a buffer against potential problems. This thinking amplifies
quality problems by increasing the time between a defect occurring and its dis-
covery. Not only is the cause harder to identify, but more production will be
affected. The attitude that holding inventory can mitigate the effect of quality
problems is fundamentally flawed. It stands in opposition to the only successful
approach to defect minimisation, where problems are quickly identified, their
causes are traced, and permanent solutions are devised and applied.
Factor 4
Machine downtime relates to a number of issues:
● unplanned downtime – that is, breakdowns;
● planned maintenance;
● changeover times.
Downtime, and particularly the risk of unplanned downtime, is a key cause of
the need for safety stocks in a process. Other JIT tools and techniques can help to
minimise the problems here. For example, total productive maintenance (TPM;
Nakajima, 1989) seeks to answer the question ‘What can everyone do to help pre-
vent breakdowns?’ Regular planned preventive maintenance, closer cooperation
between production and maintenance personnel, and equipment sourcing for
ease of maintenance are some of the actions that can be taken in response. In
other words, increasing planned maintenance costs often results in reduced over-
all costs of machine downtime. Minimising changeover time is a JIT tool that can
be used not only to reduce lost production time but also improve production
flexibility. Inflexible facilities delay the rapid production of customer orders.
Factor 5
Where the flow through a process is easily seen, people in the process will have a
better understanding of their colleagues’ work and how they themselves affect
others. A simple process results from having first focused operations around a
family of compatible products. Layout is then organised to bring together all the
226 Chapter 7 • Just-in-time and the agile supply chain
people and equipment needed to undertake the process. These are arranged so
that there is a logical flow between the process steps. Arranging the process so
that the stations for undertaking the steps are close together not only helps to re-
duce inventory but also will itself be made easier when inventory is low. A simple
process will be more visible, allowing it to be better maintained. Not only should
there be fewer things to go wrong, they will be more obvious when they do, and
will be easier to fix. This attribute helps to minimise both machine downtime
and product defects.
Maintenance of the process is underpinned by housekeeping and cleanliness.
This starts with designing processes and facilities to create order. There is a place
for everything, and everything has its place. Orderliness depends on a thinking
workforce that has accepted ownership and responsibility for organising the
work place. Attention to detail in terms of ‘respect for human’ issues is an essen-
tial part of JIT philosophy (Harrison and Storey, 2000).
Factor 6
The levels of work in progress and other types of inventory have a significant
impact upon the visibility of a process. It becomes increasingly difficult to see the
flow of a process as inventory increases. This may be literally true on a shop floor
or in a warehouse, where piles and stacks of goods can isolate workers. The same
is true in offices when the process flow becomes lost in assorted piles of work on
people’s desks.
In order to highlight the limitations of push production we next consider the
case of how a focal firm took a rather traditional approach to responding to new
demands being placed on the production process.
Smog Co.
The Smog Co. production system
This is the case of Smog Co., a small supplier of well-engineered components. Smog
produces a range of products grouped into families. Production of one of the higher-
volume product families has been organised into a flow process made up of four steps,
which follow one after the other in sequence. Changeover from one product to another
is relatively simple, but takes around ten minutes per machine. To minimise delays
caused by changeovers, products tend to be made in batches. These batches move
from one step to the next, where they queue on a first in, first out basis to be worked
on, after which they move to the next step. This process is shown in Figure 7.2.
CASE STUDY
7.1
Step 1 Step 2 Step 3 Step 4
Figure 7.2 The Smog production process
Fred Hollis, the Smog production manager, felt pleased with performance as he
looked out across the factory. He was pleased because his machines and people were
busy, there were plenty of finished goods on hand, which the sales team could use to
supply customers, and there was stock to call upon if product demand increased. Every-
thing seemed to be under control.
Changes to customer requirements
The motivation to change from the current system has been low in the past, as the
process at Smog Co. is a reliable one, which has worked well for the company. The ‘big
three’ customers, who take three-quarters of sales, tend to order the same things in sim-
ilar quantities one week in advance of delivery. With a production lead time of three
weeks, Smog Co. uses a forecast to schedule production and make sure that finished
goods stocks will be available to meet predicted demand. Consistent demand means
that forecasts are often close to real demand, so stockouts are rare. In fact the only time
this occurred was an incident a couple of years ago, when a key machine went down
and a spare part took a long time to source. Current inventory levels now include safety
stock to provide cover against a similar problem in the future.
When the company found that certain finished goods were selling slowly, the sales
team was particularly good at finding a way to move them. Sometimes prices were cut;
at other times sales used special promotions. If production was too high, or the forecast
was a bit optimistic, then there were ways of selling surplus stock, and the sales team
seemed to enjoy the challenge.
Recently, however, this well-understood position has begun to change. The main cus-
tomers have started to use a number of new strategies to compete with each other. First
one and now a second of them has announced that it will be reducing the call-off time
for its products from one week to two working days. At the same time they are all look-
ing for a 5 per cent cost reduction, and are demanding quality improvements.
A ‘traditional’ reaction to customer demands for better service
The combination of demands for better services caused Smog management some con-
cern. The obvious response to the changes in ordering patterns was to increase stock
levels to cater for unexpected variations in demand. This approach had worked before,
when it was used to justify the safety stocks that covered production problems. It
seemed worth trying again, so stocks were increased.
Things went well over the first few months, during which time delivery performance
remained good, while the customers went ahead with their plan to reduce the order
lead time. Keeping up with these orders provided the production manager with a few
headaches. Preventing stockouts led to an increase in the number of batches being
expedited through the factory. This disrupted the production plan, increased the num-
ber of machine changeovers and lowered productivity. As a result, overtime increased in
order to maintain output.
Just-in-time and lean thinking 227
Key measures of the performance of this process are the utilisation of people and of
machines. The objective is to keep utilisation of both as high as possible. In this situation,
if people or machines are idle – and material is available – they are used to make some-
thing. Naturally it wouldn’t make sense to make anything. Instead the production man-
ager has a feel for what is needed, and uses a forecast from the sales department to make
an early start on products that it is considered will be required in the near future.
228 Chapter 7 • Just-in-time and the agile supply chain
7.1.2 The seven wastes
In Chapter 5 we saw how any activity that does not add value is a form of waste. By
mapping processes through the supply chain, it is possible to sort value-adding and
non-value-adding activities (transport, store, inspect and delay). JIT goes further by
adding three more types of ‘waste’ to make seven in all. They are as follows:
● The waste of overproduction: making or delivering too much, too early or ‘just in
case’. Instead, the aim should be to make ‘just-in-time’ – neither too early nor
too late. Overproduction creates unevenness or lumpiness of material flow,
which is bad for quality and productivity. It is often the biggest source of waste.
The higher level of inventory meant that quality problems were harder to detect. In
one case a new operator missed a drilling operation. By the time the first customer dis-
covered the error, nearly two weeks’ worth of production had to be recalled and
reworked.
The higher inventory levels were also taking up more space. Fred Hollis had submit-
ted a requisition to the finance director to pay for more storage racking. The extra racks
were necessary because existing ones were full, and parts stored on the floor were suf-
fering occasional damage in an increasingly cramped factory. Some parts were recently
returned by a customer, who felt that damaged packaging indicated damaged prod-
ucts. Naturally, Fred was concerned when his request for more storage space was
turned down owing to spending reductions imposed in response to price cuts imposed
by customers.
Reflecting on what had happened at Smog, the increase in stock levels had badly
affected competitiveness. Smog Co. was experiencing the consequences of trying to
forecast demand and using the forecast to determine what to make. Their ‘make to
stock’ approach was responsible for:
● removing the company’s ability to be responsive to changes in either quantities or
product mix;
● increasing costs and making quality problems worse;
● burying underlying production problems under inventory, and thereby preventing
efforts to uncover and resolve them.
In conclusion, while the company had been motivated to change by its customers,
the direction it took seemed to have caused many problems.
(Source: After an original by Paul Chapman)
Questions
1 List the actions that Smog Co. took to respond to the new demands being placed
on it by customers. Group your responses under the headings of stock levels, level
of expediting and storage space. Briefly describe the effects that these actions had
on production performance.
2 Use the ‘pyramid of key factors that underpin JIT’ to describe the factors that caused
these actions to affect the company’s ability to respond to the demands being placed
on it by customers.
Just-in-time and lean thinking 229
● The waste of waiting: takes place whenever time is not being used effectively. It
shows up as waiting by operators, by parts or by customers.
● The waste of transporting: moving parts around from one process to the next
adds no value. Double handling, conveyors and movements by fork-lift truck
are all examples of this waste. Placing processes as close as possible to each
other not only minimises the waste of transport but also improves communi-
cations between them.
● The waste of inappropriate processing: using a large, central process that is shared
between several lines (e.g. a heat treatment plant) is an example of this type of
waste. Another example is a process that is incapable of meeting quality stan-
dards demanded by the customer – so it cannot help making defects.
● The waste of unnecessary inventory: inventory is a sign that flow has been dis-
rupted, and that there are inherent problems in the process. Inventory not
only hides problems, it also increases lead times and increases space require-
ments.
● The waste of unnecessary motions: if operators have to bend, stretch or extend
themselves unduly, then these are unnecessary motions. Other examples are
walking between processes, taking a stores requisition for signature, and de-
canting parts from one container into another.
● The waste of defects: producing defects costs time and money. The longer a de-
fect remains undetected (e.g. if it gets into the hands of the end-customer), the
more cost is added. Defects are counteracted by the concepts of ‘quality at
source’ and ‘prevention, not detection’.
JIT invites us to analyse business processes systematically to establish the base-
line of value-adding processes and identify the incidence of these seven wastes.
The aim is to get parts and data to flow through business processes evenly and
synchronously. The more detailed analysis prompted by the concept of seven
wastes encourages a greater analysis and understanding of processes and their re-
lationships than is made by supply chain mapping. This analysis should first start
with key business processes such as the supply pipeline.
7.1.3 JIT and material requirements planning
As we saw in section 6.1, material requirements planning (MRP) was conceived in
order to answer the questions how many? and when? in ordering parts that are
directly used to manufacture end products. MRP is a logical and systematic way
of planning materials. It links downstream demand with manufacture and with
upstream supply. It can handle detailed parts requirements, even for products
that are made infrequently and in low volumes.
On the other hand, MRP is based on a centrally controlled, bureaucratic ap-
proach to material planning. Although it is based on a pull scheduling logic, it
instructs processes to make more parts whether or not the customer (the next
process) is capable of accepting them. Typically, MRP adopts push scheduling
characteristics. It remains insensitive to day-to-day issues at shop floor level, and
continues to assume that its plans are being carried out to the letter. In other
words, MRP is good at planning but weak at control.
230 Chapter 7 • Just-in-time and the agile supply chain
Meanwhile, JIT pull scheduling is good at handling relatively stable demand
for parts that are made regularly. It is sensitive to problems at shop floor level,
and is designed not to flood the next process with parts that it cannot work on.
On the other hand, JIT pull scheduling is not good at predicting requirements for
the future, especially for parts and products that are in irregular or sporadic de-
mand. JIT is good at control but weak at planning. There are clear opportunities
for putting together the strengths of both systems, so that the weaknesses of one
are covered by the strengths of the other. For example, even in systems with great
variety, many of the parts are common. So JIT can be used to control those parts,
while a much downsized MRP plans what is left.
Ford and Toyota
A car assembly plant is built around a simple sequence of tasks that starts in the press
shop and ends as a car rolls off the final assembly line. Figure 7.3 shows these basic tasks
in summary form:
While these basic tasks are the same for both Ford and Toyota, the way they are man-
aged by the two firms is quite different. We compare policies and practices in relation to
small cars such as the Ford Fiesta and the Toyota Yaris:
● Ford is driven by a long-term strategy in Europe. It has invested heavily in fixed
assets, and does not seek an early return on them. Currently, it is struggling with a
capacity that was designed for a 15 per cent market share when current loading is
CASE STUDY
7.2
Press shop
Pressed parts
Body in white
assembly
Parts supply
Parts ordering
Trim and final
assembly
Painted body
store
Paint
Figure 7.3 Basic tasks in a car assembly plant
JIT has become associated with the Japanese way of cutting out waste, doing
the simple things well and getting better every day. The foundations of Toyota
Production System (TPS) are JIT and jidoka. Jidoka means humanising the man-
machine interface so that it is the man who runs the machine, not vice versa.
MRP has become associated with the Western way of automating our way out of
trouble, and by investing in bigger and better systems that competitors cannot
afford to match. Let us next review how these two different approaches apply in
motor manufacture by comparing Ford (which has developed its own version of
TPS called Ford Production System, FPS) and Toyota.
Just-in-time and lean thinking 231
only 9 per cent. It seeks to make a step change in the production process through
high capital investment. Its investment policy has therefore been technically ori-
ented, seeking the ‘best’ technical solution for each task. For example, Ford’s body
shop is almost fully automated with robots that are flexible across different parts.
When production is changed between one part and another, the robots must be
re-programmed. This places high emphasis on technical support for the software,
and makes Ford dependent on given equipment suppiers. The layout is designed
around the robots and for fixed volumes.
● Toyota has expanded cautiously in Europe. Its investment policy has been step-by-
step, and it has sought to make early returns. Key to the Toyota Production System
(TPS) are process and quality disciplines through JIT and jidoka. Toyota’s philosophy
is more people-oriented: shop floor people are heavily involved in improvement
activities as well as in production work. Toyota’s body shop has maybe one third the
number of press shop robots as Ford, and tends to use simple multi-welders at low
initial cost. It is relatively easy to swap suppliers. Tooling must be changed when
production is changed between one batch and another, but people are trained to
go for fast set-ups and to improve the process. The layout is designed around peo-
ple and volume flexibility.
Having learned much from its stake in Mazda, Ford launched its own version of just-
in-time called Ford Production System (FPS) a few years ago. Ford has done much to
reduce product complexity. This is basically measured by the number of different body
styles that are possible. Both Ford and Toyota have three basic body styles, but Ford lim-
its variation to left-hand/right-hand drive and sunroof/no sunroof options. Since these
are multiplicative, 12 body shells are possible. Toyota in addition has variations to allow
for different engine types and air conditioner types, together with spoiler/no spoiler ver-
sions. In total, this means that Toyota has over 70 body shell variations. When multi-
plied again by the number of painted body colours (say ten for both firms), Toyota ends
up with hundreds more painted body options than Ford. This contributes to a surpris-
ing difference when it comes to building the car:
● Ford treats the painted body as a commodity. Once they have been painted, bodies
are kept in the painted body store, which is a buffer between the body shop and
final assembly. The Ford system calculates the number of each painted body type
that should be in the store to meet forecast final assembly requirements. Trouble is
that the store can be full of the wrong bodies, which means that it is impossible to
build the current orders. Up to this point in the sequence, the emphasis is on num-
bers, not on the end-customer. Bodies are not given a vehicle identification number
(VIN) – which allocates the body to a particular customer order – until the painted
body is removed from the store and dropped onto the trim and final assembly line.
● Toyota treats the body shell as a customer’s car from the start. The VIN is added as
the first process at body in white assembly, when panels are welded together to
make the shell. In turn, this drives discipline and focus in the paint shop, and helps
to improve first time through (FTT) in the paint process. The sequence of bodies
through trim and final processes is thereby more predictable, allowing more precise
material control downstream.
The parts ordering process for auto assembly is particularly challenging, because
some 2,000 individual parts are needed for each vehicle. Most of these parts are added
232 Chapter 7 • Just-in-time and the agile supply chain
7.1.4 Lean thinking
Lean thinking (Krafcik and MacDuffie, 1989) developed as a term used to con-
trast the just-in-time production methods used by Japanese automotive manufac-
turers with the mass production methods used by most Western manufacturers.
Suffering shortages and lack of resources, Japanese car manufacturers responded
by developing production processes that operated with minimum waste. Gradu-
ally the principle of minimising waste spread from the shopfloor to all manufac-
turing areas, and from manufacturing to new product development and supply
chain management. The term lean thinking refers to the elimination of waste in
all aspects of a business.
Lean thinking is a cyclical route to seeking perfection by eliminating waste (the
Japanese word is muda) and thereby enriching value from the customer perspec-
tive. The end-customer should not pay for the cost, time and quality penalties of
wasteful processes in the supply network. Four principles are involved in achiev-
ing the fifth, seeking perfection (see Figure 7.4):
● specifying value;
● identifying the value stream;
● making value flow;
● pull scheduling.
Specify value
Value is specified from the customer perspective. In Chapter 3 we discussed value
from the shareholder perspective. From the end-customer perspective, value is
added along the supply network as raw materials from primary manufacture are
progressively converted into finished product bought by the end-customer,
such as the aluminium ore being converted into one of the constituents of a
can of coke (see Chapter 1, section 1.1). From a marketing and sales perspective
at the trim and final assembly stage. TPS already has a number of advantages when it
comes to this task. First, the more predictable sequence of painted bodies into trim and
final means that there are few last-minute schedule changes. Second, TPS sets stable
lead times that are fixed at certain times for each part.
Third, supplier lead times are allowed for. Ford on the other hand leaves schedules
uncommitted until parts are collected. The Ford call-off quantities are set on the day of
collection, and don’t allow for supplier lead times. Figures 1.8 and 1.9 compare what
happens from a supplier point of view – there are huge differences between scheduled
and actual demand.
Question
1 What changes would you propose to both TPS and to FPS in order to cope with cus-
tomer demands for increasing product variety and more rapid model changes?
Just-in-time and lean thinking 233
the can of coke should be ‘always within reach of your thirst’. That is an
attempt to define value from the end-customer perspective. Another is Porter’s
concept of the value chain (Porter, 1985), which sees two types of activity that
are of value to the customer. The first is the primary value activities of trans-
forming raw materials into finished products, then distributing, marketing and
servicing them. The second is support activities, such as designing the products,
and the manufacturing and distribution processes needed to underpin primary
activities.
Identify the value stream
Following on from the concept of value, the next principle is to identify the
whole sequence of processes along the supply network. The principles of time-
based mapping are discussed in sections 5.4 and 5.5 of Chapter 5.
Make value flow
In essence, this means applying the pyramid of key factors that we outlined in
section 7.1. Minimising delays, inventories, defects and downtime supports the
flow of value in the supply network. Simplicity and visibility are the foundations
to achieving these key factors.
Pull scheduling
Enforce the rules in section 6.1: make only in response to a signal from the
customer (the next process) that more is needed. This implies that demand
information is made available across the supply chain. Where possible, supply
from manufacturing, not from stock. Where possible, use customer orders not
forecasts.
While some of these concepts may be distant from current practice, lean think-
ing shares the philosophy of ‘big JIT’: seek perfection. This is the fifth principle,
and is achieved by gradually getting better at everything we do, squeezing waste
out at every step. We continue this section by considering the sources of waste,
mudamuda
muda
muda
1 Specify value
5 Perfection4 Let customer pull 2 Identify value stream
3 Create product flow
Figure 7.4 Lean thinking principles
(Source: After Womack and Jones, 2003)
234 Chapter 7 • Just-in-time and the agile supply chain
and the way in which lean thinking can be applied to enriching value in business
processes.
7.1.5 Application of lean thinking to business processes
Working back from the customer, a focal firm should consider the following
processes:
● order to replenishment;
● order to production;
● product development.
In each of these processes, the application of lean thinking involves examining
the process, quantifying waste within it, identifying root causes of the waste, and
developing and implementing of solutions. Examining the process involves
mapping it using a variety of techniques such as flow charting, depending on the
nature of the process. Performance is quantified by taking measures of the differ-
ent kinds of waste. For a first attempt, using the time-based measures of lead time
and value-adding time often reveal the main incidences of waste. Having identi-
fied waste, lean thinking applies the problem solving tools associated with total
quality control (TQC) to identify root causes and develop solutions.
The application of lean thinking is the means by which many companies bring
their processes under control. Following a systematic approach to tackling waste,
they seek to minimise defects, to minimise downtime and to maximise simplicity
and visibility.
Order to replenishment
The order replenishment cycle concerns the time taken to replenish what has
been sold. Lean thinking seeks to manage the order replenishment cycle by re-
placing only what has been sold within rapid replenishment lead times. These
points are taken up in the next two sections of this chapter, on vendor-managed
inventory and on quick response.
Order to production
The order to production cycle is the series of steps that are followed to respond to
an order, organise and undertake production, and deliver the product to the cus-
tomer. This ‘make to order’ process may be contained within a company or can
extend down the supply chain.
Product development
Product development delivers new products or services that can be sold. This
process is essential if an organisation is to have future success. Lean thinking
can be applied to this process to make it more effective by supporting the
Just-in-time and lean thinking 235
development of products with desirable attributes and features, and achieving
this on time. It can also make the process more efficient and ensure that products
are developed to cost.
7.1.6 Role of lean practices
Lean thinking is associated with a number of operational practices that help to
deliver the aim of waste minimisation. Two of the most significant are:
● small-batch production;
● rapid changeover.
These two practices are closely associated with each other, but are considered
separately here to aid clarity.
The target in small-batch production is a batch size of 1. The traditional logic
behind large batches is to take advantage of reduced costs through economies of
scale. This approach is often flawed, as batch size decisions generally consider
only production costs, and overlook the costs of inventory and lack of flexibility
that is caused by large batches. Lack of flexibility is a major contributor to poor
quality of service to the end customer. The rationale behind small batches is that
they can reduce total cost across a supply chain, such as removing the waste of
overproduction. They help to deliver products that the end customer wants
within the expected lead time (D-time – Chapter 5, section 5.2).
The contribution of rapid changeover was graphically shown by the
changeover of press tools used to make car body panels. These cumbersome
pieces of equipment can weigh up to 10 tonnes, and historically took up to eight
hours to change within the large presses. The consequence of these long
changeover times was that component production runs were long, often going
on for days before the press tools were changed so that another component could
be made. Extensive work, again pioneered by Toyota, was undertaken on press
design, tooling design and component design over a number of years to help
reduce changeover times. The effect has been to reduce changeover times for
tools for large pressed parts to around five minutes. Consequently, practices that
reduce changeover times are often known as single minute exchange of dies (SMED;
Shingo, 1988). The ability to undertake rapid changeovers allows a batch of each
different body panel to be produced each day in line with current demand
instead of having to produce to forecast.
The lesson from the automotive industry is that even very large pieces of
equipment can be developed to allow rapid changeovers. This effort may take a
number of years, and is reliant upon developments in machinery and product
design. The effect is to provide the flexibility to make possible small-batch pro-
duction that responds to customer needs.
Small-batch production associated with rapid changeover allows productivity
to be maintained by taking advantage of economies of scope. Instead of
economies of scale, where quantities of the same thing are made, economies of
scope lower costs when quantities of similar things that use the same production
resources are made.
236 Chapter 7 • Just-in-time and the agile supply chain
7.2 The concept of agility
The ‘agile supply chain’ is an essentially practical approach to organising logistics
capabilities around end-customer demand. It is about moving from supply chains
that are structured around a focal company and its operating guidelines (for ex-
ample, ‘Ford Production System’) towards supply chains that are focused on end-
customers. Enabling the agile supply chain requires many significant changes: as
an example, consider the position of Li and Fung, the largest export trader in
Hong Kong. The organisation coordinates manufacturers in the Far East to supply
major customers such as the Limited, mostly in the US. Chairman Victor Fung
says that one of the key features of his approach is to organise for the customer,
not on country units that end up competing against each other.
So customer-focused divisions are the building blocks of our organisation, and
we keep them small and entrepreneurial. They do anywhere from $20 million to
$50 million of business. Each is run by a lead entrepreneur.
(Magretta, 1998)
And capabilities of the supply networks are ‘all about flexibility, response time,
small production runs, small minimum order quantities, and the ability to shift
direction as the trends move’. While some of these ideas reflect JIT approaches,
the key is to organise logistics from the customer order back – or ‘outside in’ – as
opposed to pushing product-service offerings into the market – or ‘inside out’.
Important requirements for that change in mindset include:
● A relentless focus on drivers of customer value in all logistics processes.
● Developing capabilities for responsiveness and flexibility in advance.
● Using those capabilities to align supply chains operations in a dynamic manner.
Mason-Jones et al. (1999) developed a helpful comparison between agile and
lean supply, shown in Table 7.1. We have extended this table into our compari-
son of further characteristics of lean and agile supply, shown in Table 7.2.
There is no reason why there should be an ‘either-or’ approach to logistics
strategy. Thus, many supply chains can adopt a ‘lean’ capability up to a given
downstream process, and then adopt an ‘agile’ capability thereafter. This enables
high productivity, low cost processes to start with, followed by responsive
processes to allow high levels of customisation thereafter. Such a strategic choice
has been referred to as ‘leagility’ because it combines the benefits of both supply
capabilities. The concept of leagility is close to that of postponement, which we
discuss later in this chapter.
The comparisons in Tables 7.1 and 7.2 help us to place ‘agile’ in relation to
‘lean’, and thus to complement our earlier concept of logistics performance objec-
tives. In Table 1.1 (page 27 in Chapter 1), we considered the issue of competing
through logistics. The relative importance of the four ways of competing through
logistics (quality, time, cost and dependability) can be assessed with the help of
order winners and order qualifiers (see section 1.3.4). Order qualifiers comprise the
factors that are needed to gain entry into a given market. To actually win orders
The concept of agility 237
demands that performance of the focal firm on one or more factors must be su-
perior, so that products win orders in the marketplace because the performance
of competitors on these factors is not as good. These are called order winners. The
specification of order qualifiers and order winners helps in the development of
logistics strategy. Order winners and qualifiers can change over time (Johansson
et al., 1993), for example as a result of changes in the product lifecycle. Thus it is
essential to re-visit the specification of order winners and qualifiers regularly to
ensure that they reflect current market characteristics (Aitken et al., 2005).
The agile mindset aims to align supply capabilities with end-customer demand,
so we can view demand characteristics as placing the challenges that supply capa-
bilities must meet. We explored demand characteristics in section 2.3: next we
consider how these can be matched by supply capabilities.
Table 7.1 Comparison of lean supply with agile supply: the distinguishing attributes
Distinguishing attributes Lean supply Agile supply
Typical products Commodities Fashion goods
Marketplace demand Predictable Volatile
Product variety Low High
Product lifecycle Long Short
Customer drivers Cost Availability
Profit margin Low High
Dominant costs Physical costs Marketability costs
Stockout penalties Long-term contractual Immediate and volatile
Purchasing policy Buy materials Assign capacity
Information enrichment Highly desirable Obligatory
Forecasting mechanism Algorithmic Consultative
Table 7.2 Further characteristics of lean and agile supply
Characteristic Lean Agile
Logistics focus Eliminate waste Customers and markets
Partnerships Long term, stable Fluid clusters
Key measures Output measures like
productivity and cost
Measure capabilities, and focus on
customer satisfaction
Process focus Work standardisation,
conformance to standards
Focus on operator self-management
to maximise autonomy
Logistics planning Stable, fixed periods Instantaneous response
238 Chapter 7 • Just-in-time and the agile supply chain
Supply capabilities
Allocation of finished goods to given customer orders is a familiar way of
responding quickly to demand – for example, selling cars from a dealer forecourt.
But this approach to supply means that inventories of finished goods must first
be built up. The problem is that they must be built up in anticipation of unknown
demand. If stocks pushed by a manufacturer onto its dealer network are too high,
they will have to be discounted. If they are too low, sales are lost to competitors.
Delaying the exact specification of the car until the customer order is known, and
then delivering it within an acceptable D-time, is called form postponement. The
concept of ‘postponement’ is now increasingly widely employed by organisa-
tions in a range of industries (van Hoek, 2001). Postponement is widely used to
improve responsiveness, and is defined (Skipworth and Harrison, 2004) as:
The delay, until end-customer orders are received, of the final part of the transfor-
mation processes, through which the number of skus proliferates, and for which
only a short time period is available. The postponed transformation processes may
be manufacturing processes, assembly processes, configuration processes, packag-
ing or labeling processes.
For example, the aim of the ‘three-day car’ project is to complete paint, trim,
final assembly and delivery of a car to dealer within three days (Holweg and
Miemczyck, 2003). Many less ambitious form postponement applications delay
packaging, labelling, adding documentation or product peripherals until an
order is received. If the decision is limited to peripherals such as type of power
supply to a printer, or to whether the number of cans in a pack is 6 or 12, we call
this logistical postponement.
The appearance of wide customer choice can be created while keeping source,
make and deliver processes as simple as possible. This is the thinking behind the
principle of design for logistics. Creating an agile supply chain requires more than
revising logistics and distribution management: it goes all the way to product
design. A favourite trick of computer manufacturers such as Dell is to make com-
mon electronic boards, and to package them in many ways to create different op-
tions. While parts of a board are redundant on many of the finished products,
this is more than offset by savings in inbound and manufacturing logistics.
Individual companies in an agile supply chain need to align their operations by
redesigning the flow of goods, information and management practices. The aim
is the virtual organisation, where groups of supply chain partners agree common
terms for working together. There are several possible stages in the evolution of a
virtual organisation. Traditional sourcing and contract logistics imply an inter-
face between trading partners that is limited to buy–sell transactions. JIT sourc-
ing is an example of a broader interface with sharing of demand data and
alignment of logistics processes. Integrated contract manufacturing – in which a
third party controls most of the make processes – attempts the integration of
demand with supply in the way suggested by Figure 1.6. ‘Fourth party logistics’ is
close to this model in that a third party takes over organisation and coordination
of the entire flow of goods, information and management of the entire logistics
operation including material planning and control. These supply capabilities
which can be deployed to support the agile supply chain are summarised in
Figure 7.5.
The concept of agility 239
We explore these approaches further in section 7.2. Meanwhile, Case study 7.3
shows how Xerox developed a ‘next generation’ logistics strategy by injecting
fresh thinking into the position outlined in Case study 1.2.
3PL 4PLContract manufacturing
Design for logistics
Virtual organisation
SubassembliesModulesComponents
Packaging Assembly/testSourcing
Limited Comprehensive
Postponement
Limited Extensive
Limited Extensive
Figure 7.5 Supply capabilities supporting the agile supply chain
Segmenting the supply chain at Xerox (Graham Sweet)
By the middle of the 1990s Xerox had integrated its European manufacturing and logis-
tics processes and organisations, developing an end-to-end approach to its supply
chain. This had delivered massive financials benefits to the company both in terms of
inventory reduction and operating cost. At the time it was to launch a new range of prod-
ucts and to extend its market coverage, and it was recognised that the predominantly
‘one size fits all’ approach to customer fulfillment was not competitive. The company
embarked on a programme of asking customers about their requirements for overall ful-
fillment and understanding supply chain competitive performance.
Based on market/customer expectations the company segmented its supply chain
into four different streams across the total source–plan–make–deliver process. The
segmentation of the market/customer expectations is shown in Figure 7.6 and the
supply chain response in Figure 7.7. Volume represents the number of orders/ship-
ments; variety reflects the combination of product variation and day-to-day demand
variability.
The organisation and the processes of the supply chain needed to operate differently
since the priorities of the market and customers were different. Different performance
measures and targets were established for each segment and cultures and incentives
put in place to drive the change. In all cases the company operated with outsourced
partners as part of the supply chain operations but the balance between outsourced
and in-house varied depending on the skills and flexibility required. As ‘adding
CASE STUDY
7.3
240 Chapter 7 • Just-in-time and the agile supply chain
customer uniqueness as late as possible’ was a key element in the process design, col-
laboration with the product design teams and suppliers became essential to engineer
supply chain-friendly products.
In particular in the high volume/high variety segment the customer order is directed
to the integration centre at the end of the line, which has less than five days to finalise
the product and deliver to the end-consumer. This could only be achieved by engineer-
ing the product to a modular design with final configuration from stock of ‘neutral’
modules and adding customer-unique options. This capability required flexibility and
agility in all areas of the supply chain and investment in the people and skills of demand
and supply planning developing key competencies to ensure capacity and inventory to
meet the different variations in demand.
At the time the segmentation approach allowed the company to fulfil the majority of
its European customer orders from a European supply, with the exception of the high
volume/low variety segment which supplied customers through distributors and
retailers.
This approach not only improved measures of customer responsiveness but also
improved inventory turns, reducing the need for stocks below the European level and
Variety
V
o
lu
m
e
High
High
Low
Low
• New technology/products
• Customers’ buying habits and
demand uncertain
• Customers will want to configure
and receive within 5 days
• Customer buys through retail store
• Price competitive
• High on shelf availability
• Store needs quick replenishment
• Customers from secondary markets
• Standardisation at low cost
• Bulk deals
• Customers require customised service
• High value added integrated into
business
• Lead times less important than
dependability
Figure 7.6 Segmenting the market
Variety
V
o
lu
m
e
High
High
Low
Low
• Neutral build
• Configure to customer order at
volume
• Agile supply chain throughout
• European echelon
• Integrated order, delivery, cash
collection
• Far East build: minor postponement
in Europe
• Lean manufacturing
• Efficient/functional supply chain
• Maximise asset recovery/recycle
• Build to order products
• Additional value added services for
installation
• Unique hardware/software
configurations
Figure 7.7 Supply chain response
The concept of agility 241
7.2.1 Classifying operating environments
Figure 7.8 offers a classification of operating environments based on demand
characteristics shown in Figure 2.9 and supply capabilities shown in Figure 7.5.
This classification places agility in the context of alternative logistics strategies.
First, A, B and C products are positioned. This is based on a Pareto analysis of an
organisation’s product range (for an example, see Figure 2.1). Typically, class ‘A’
products comprise 80 per cent of sales value taken on just 20 per cent of orders.
They tend to be the more standardised, have lower forecast errors and lower vol-
ume variation. Lean logistics methods are therefore often appropriate. Class ‘B’
products on the other hand are often subject to higher forecast errors, and have
higher volume variations. They are often better served by agile approaches.
overall supply chain costs. Inherent in the design was not only the flexibility in opera-
tion but the ability to create and restructure the segments depending on changes to
market and customer needs. This configuration of the Xerox supply chain segmentation
had a life of approximately four years.
Question
1 Map the Xerox segments and market response (Figures 7.6 and 7.7) onto demand
characteristics in Figure 2.11 and supply capabilities in Figure 7.5 as far as you can, mak-
ing assumptions where necessary. How closely does the ‘actual’ match ‘theoretical’?
Virtual
organisation
Design for
logistics
Postponem
ent
H L
D times
C Product
B Product
H = high
L = low, limited
E = extensive
A Product
Innovation/
projects
Lean
ECR/QR
Mass customisation
H
L
L
L
E
H
L
E
L
E
Forecast accuracy
Volume uncertainty
Figure 7.8 Classifying operating environments
242 Chapter 7 • Just-in-time and the agile supply chain
7.2.2 Preconditions for successful agile practice
In addition to the above supply capabilities within the supply chain, there is
another set of factors that need to be in place for the agile principles and
practices described in section 7.2.4 to pay off or work at all. These are cross-
functional alignment and enterprise level focus on the contribution of logistics
management and strategy. If revenue-generating functions in particular do not
adopt at least a base-level understanding of agile principles, all efforts within
logistics may be wasted. And if there is not an enterprise-wide focus on the value
potential of logistics, agile efforts are not going to be recognised for what they are
worth – and might not provide a compelling enough case for possible investment
in them to be made. We propose an enterprise-level reality check and a cost of
complexity sanity check before investing in agile capabilities. We also argue that
complexity should be controlled, and that agility will not take away the need for
forecasting accuracy.
Enterprise-level reality check
Starting with the enterprise-wide context, most senior managers know that turn-
ing to logistics and the supply chain is a ‘good call’ when times get tough. Logis-
tics probably gets most mentioned in earnings reports when cost cutting is a
response offered to poor performance. In spite of its potential to contribute to
cost saving programmes, the value of logistics should not be seen as a first port of
call when the bottom line needs to be improved. Agility is centred around the
notion of winning in the marketplace based upon service and responsiveness.
While such a strategy can be aimed at doing more for less, it may actually – and
more importantly – be doing less to earn more. Top line improvement can flow
from outperforming competitors through responsiveness to customer needs.
Delivery speed and reliability can be such important sources of productivity to
customers that we can earn more of their business. An enterprise-level recogni-
tion of the contribution of logistics is a precondition for any business case on
agile practices.
Cost of complexity sanity check
The value potential of logistics can only be capitalised on if other functions com-
ply with another key precondition: lowering the cost of complexity where differ-
entiation has no competitive value. As much as agility principles are based on the
notion that differentiation is good and ‘doable’, it does not mean that revenue
groups should be given a ‘carte blanche’ to create proliferating service, product
assortments and promotions. There are limits to how much value that variety
creates, and the extent to which these demands can be met without the cost of
complexity spiralling out of control, even for the most agile supply chain. The
key point is not to exceed the capability of the supply chain to deliver the mar-
keting promise.
The concept of agility 243
While differentiation of logistics service can generate short-term gain, the
question that revenue-enhancing proposals need to answer is ‘will it do so prof-
itably?’ Adding a product feature, offering special delivery service and timetables,
and engaging in a special promotion might help close a deal in the market in the
short term. But such deals can also create added logistics and supply chain costs
that are not compensated for by the added revenue. One executive from a manu-
facturing company put it well:
When we showed the financial impact of certain deals our sales teams had closed,
it made them realise there were certain deals we should have walked away from.
Even though it may be hard to assess economic gain or pain from product/
service differentiation, reality can be checked by asking questions such as:
● Do customers really want fast delivery, or is reliable delivery more important
even when slower?
● Do customers really want delivery whenever they ask for it, or could a shared
forecasting effort resolve fire-drill situations?
● Do we need product proliferation for short-term gain, or because we add sus-
tainable revenue to the business?
● Is there a limit to the number of product variations that the market can recog-
nise and absorb?
● Did we offset added warehousing and distribution costs – even when just di-
rectionally right – against added revenue potential?
Heineken, the brewer, offers a powerful example of the last point. During a
recent Christmas season it introduced a special product for promotion in the
market – the magnum bottle. This seasonal promotion and product won several
marketing prizes, and created a lot of buzz (or fizz, even!) in the marketplace. It
was also a product that suffered from substantial added shipment, packaging and
production costs because different production line setups, bottles, labels and
boxes were needed for a very limited demand window. Was it worth the effort
and focus of the responsive capabilities that were needed?
Another powerful illustration of the issue is a tactic that one executive calls the
‘warehouse dust test’:
We take our sales people through our warehouse when they come to us asking for
new products and promotions and show them the dust levels on other promotional
products and product variations that we stock. We ask them ‘which products can be
discontinued when we introduce a new product?’ or ‘do we need the new product
to begin with?’
Lowering the cost of complexity: avoiding overly expensive agility
The purpose of responding to customer demand is fundamental to the role of
logistics. In this sense, agility is a natural goal. A key qualification is:
not at any cost, nor to compensate for mismanagement elsewhere in the
organisation.
244 Chapter 7 • Just-in-time and the agile supply chain
Many organisations face challenges related to the risk of driving responsiveness
over the top in the wrong areas of focus. Three examples illustrate the cost of
complexity (see section 5.1.2):
● Product, packaging and stock keeping unit proliferation leading to extremes of
80 per cent or more of products not even generating 1 per cent of revenue
● Delivery speed is too high, resulting in increased costs for the customer because
products arrive too early. This increases handling, storage and related costs.
● Promotions and special events that cause upswings in demand based on sales
efforts, not on true customer demand. This leads in turn to downswings
shortly thereafter.
In general, complexity in the supply chain is made worse at an organisational
level because of aggressive global and international sourcing of materials and
products. This reduces the cost of goods sold. However, complexity adds substan-
tial distance, time and dependence on the international logistics pipeline. These
increase the as risk of supply chain failures.
There are two key issues at stake here. First, agile capabilities are not the excuse
for other functions (such as sales) to ignore supply capabilities in running the
business. Second, agility should not be driven by the need for supply chains to
compensate for mismanagement in other parts of the business. Cost of complex-
ity is the term that captures the negative consequences of agility in poor organi-
sational contexts. It refers to the costs resulting from unnecessary complexity in
the supply chain that agility can reduce. But the key questions are:
● Where is the value in this complexity to begin with?
● What customer need does it address to have warehouses with products and
materials from old promotions collecting dust?
● Does every shipment really need to be a rush shipment or can some shipments
be allowed a bit more time and consolidation with other shipments in cheaper
modes of transportation?
● Are promotions and resulting short-term peaks in demand a way to boost
short-term revenue, or a way to raise long-term sustainable revenue growth?
The following are some examples of actions to help reduce non-value-added costs
of complexity:
● Has the organisation conducted an analysis of revenue contribution by sku?
● Consider using a revenue threshold for maintaining a given sku.
● Does the organisation have a process for reviewing the product portfolio at
least annually?
● One-off sku reductions do not address the ongoing tendency to proliferate skus over
time.
● Are there hard revenue forecasts related to promotion request that can be
evaluated?
● Revenue upside potential is most often used to justify adding events and skus
reviewing real impact after some time or after the event helps force discipline.
The concept of agility 245
● Are people ordering shipments aware of the cost of rush orders and are they
asked to organise shipment around real and explicit customer request?
● Ticking the ‘ASAP’ (‘as soon as possible’) box on a shipment form may become
standard behaviour, irrespective of customer need.
In addition to such actions, driving forecast accuracy will assist in avoiding
inventories of unsaleable product and panic shipments.
Forecasting; reducing the need for last-minute crises
As important as fast response may be, organisations cannot make all of their
operational decisions in real time and in response to events already taking place.
Some advanced preparation and planning is required. Hence, even in the most
agile supply chains, forecasting is needed and can be used to avoid expensive
panic shipments against orders that could have been anticipated.
Based upon assessment of market potential of new and existing products, pro-
motions and services a demand forecast can be developed. This can be used to
prepare and offer input to several internal forecasts. The financial forecast (com-
municated to financial markets) is impacted by the operational demand forecast
and the plan for capacity and asset utilisation. The capacity plan is used in both
the mid (example: which warehouse will hold which products from the assort-
ment?) and short term (example: how many products can we make tomorrow?).
Asset footprint/forecast is the mid- to long-term plan for capacity needed in the
supply chain to cope with volume of demand and nature of demand for services
(example: how many warehouse spaces do we need in Europe?).
The more accurate the demand forecast, the better a company can prepare in
advance of demand occurring, avoiding the need for last minute response to un-
expected demand as well as the cost of preparing for demand that might never
occur. However, it is probably impossible to fully and correctly anticipate de-
mand at all time horizons and in all markets, for all products and services, even if
revenue groups fully tried and technology (forecasting tools, enterprise resource
planning software etc.) were perfect. There are several management approaches
to forecasting that will enhance its accuracy and relevance. These include:
● A ‘one forecast’ approach: aggregating product/market specific forecasts to a sin-
gle global forecast allows the ‘big picture’ to be developed. It also forces differ-
ences in local forecasts to be discussed and resolved. Further, it ensures that the
firm executes against a single number, not against several.
● Ensure forecast accountability: most often, revenue groups will be asked to de-
velop or crucially impact the demand forecast. These groups have limited in-
centives to drive forecast accuracy. They don’t have to live with the
consequences, so under-forecasting makes it easier to hit sales targets. So a
focal firm should consider adding a review of quality and accuracy of forecast-
ing input to performance evaluation as one mechanism to drive accountability.
● Make forecasting business relevant: in addition to the above, linking demand and
operational forecasts to financial forecasts and effort to drive business im-
provement (such as long-term cost savings) adds relevance to the forecasting
process.
246 Chapter 7 • Just-in-time and the agile supply chain
● Use one process: establishing a single forecasting process for the global supply
chain (allowing for minor local variations if need be) allows for consistency in
approach, interpretation and measurement.
So far, we have considered ‘when’ and ‘where’ agile capabilities should be
considered. Some supply chains will be better positioned to support the mar-
kets they serve by focusing more on lean approaches – for example, in many
low variety, high volume situations. An increasing number of markets will be
better served by agile strategies that require responsiveness – for example, be-
cause variety is increasing and volumes are decreasing. So next, we consider
what capabilities are needed to support the responsiveness objective in more
detail.
7.2.3 Developing measures that put the end-customer first
to improve market sensitivity
All companies include customer service in some form in their performance meas-
urement system. However, almost all operationalise this measurement internally,
leading to responsiveness that is misguided and focused wrongly, i.e. not directly
and fully on customers, thereby limiting network integration across the supply
chain. In particular, most companies measure delivery service in one or multiple
ways based upon their internal definition of success. Typically the measures focus
on how reliably and fast the company delivered against the timetable it put
forward. This misses the point as this timetable might not be aligned with end-
customers needs at all. So companies are not tracking responsiveness to these
needs. It is much better to ask customers for their desired delivery window and
measure execution against that customer-defined measure of success. General
Electric realised this when it presented high delivery reliability scores from its
own measurement to customers and received a negative reaction. Customers said
performance was not as high at all by their measurement, against when they
needed deliveries to take place.
GE changed its measurement set towards what it calls Span measurement. Span
stands for the range of delivery around customer requested due dates. Essentially,
the company now measures, across all deliveries globally, how close it was to the
delivery date the customer requested when ordering. In its plastics business the
company brought Span down from 30 days to just a few days within a matter of
months. This means that every customer can depend upon GE delivering any
product, anywhere in the globe, when they ask for it with a maximum variation
of just a few days.
The experience of GE suggests the value of several actions to improve measure-
ment for agility:
● Share measurement dashboards with customers.
● Do not measure against your own measures of success, ask the customer what
defines success for them.
● Hold all parts of the supply chain accountable against the customer-defined
measure of success so that there is no escape from market sensitivity.
The concept of agility 247
7.2.4 Shared goals to improve virtual integration
Agility requires the ability to be able to respond to local market requirements and
opportunities. However companies should still aim to leverage skills and capabil-
ities across the regions in which they operate. This means they need to establish
and strive for shared goals across their business units as a form of virtual integra-
tion, with local operations remaining in place and the focus remaining on local
customer service (van Hoek et al., 2001).
Most often however, companies trend either towards local responsiveness or
strong global standardisation and organisation. Hewlett Packard used to be in the
former camp. At one point for example they found that there were dozens of sim-
ilar B2B exchange efforts underway across the company with informal coordina-
tion between teams at best. Rightfully, HP did not respond with, what would have
been intuitive to many, a centralisation of efforts and control. Instead, they devel-
oped a distributed governance approach that allows for local responsiveness but
leverages lessons learned for the company and avoids duplication of efforts.
In order to find a way to balance proliferation of businesses and divisions with
high divisional autonomy and complexity in organisation, HP launched a supply
chain governance council. The charter that its executive committee set was to
implement pan-company efficiency initiatives and uncover supply chain-based
revenue opportunities. Specific goals include establishing and driving a coordi-
nated approach to investments pertaining to opportunities that have a pan-
enterprise scope and impact and supporting executive awareness of key initiatives
to avoid reinventing the wheel.
This means that the HP governance council explicitly does not get involved
with initiatives that are specific to an individual business or region; it does not
centrally control supply chain governance but it does support larger initiatives
from which many parts of the organisation can and should benefit. It also pro-
vides senior management with a method for supporting and steering direction
on most important opportunities and directions.
Four key operating rules at the council are:
1 mandated senior participation;
2 focus on enterprise-wide initiatives;
3 driving initiative development through divisional sponsorship;
4 fund initiatives from divisional budgets.
The last two are particularly interesting as they help avoid creating a corporate
centre approach that can dictate without the businesses caring or paying for it.
Keys to success in a governance approach like this include the need to avoid
layering a governance council on top of existing structures. If it generates more
governance this can only conflict with existing structures and might enhance
bureaucracy rather than agility. Further to that it is important to keep the struc-
ture simple and crisp; the governance council serves the purpose of being more
agile as a company as opposed to just being agile locally. In order to accomplish
that there should be minimal procedure and rules. And finally, what is purely
local should remain local; if there is no benefit to leveraging a particular initiative
to the global/corporate level then keep it local.
248 Chapter 7 • Just-in-time and the agile supply chain
7.2.5 Boundary spanning S&OP process to improve
process integration
The purpose of the sales and operations planning (SOP, section 6.1.1) module is
to set sales forecasts and to translate them into operations plans for sourcing,
making, storing and delivering to demand. It requires internal integration, at
least between sales and operations, to make the process work. Additionally, fore-
casting is not just a numbers game, it is a key business process that supports sup-
ply chain readiness for market demand.
Alcoa has made some great strides across very diverse business that are very au-
tonomous in their markets to develop a boundary spanning S&OP process to sup-
port process and internal integration. Three aspects are particularly noteworthy:
● Forecast by market, not by business unit. Alcoa realised that a lot of its businesses
were supplying the same markets with all of them developing their own fore-
cast, often hugely varying, based upon a view limited to one business. So what
they did was form so-called market sector lead teams that operate across busi-
nesses, by market, to come up with one forecast for where that market is going
based upon a much more comprehensive view of the market.
● Coordinate between source-make-deliver. Alcoa not only translates the forecast
into production runs for the factory; in a true process integration fashion they
also translate the forecast to what needs to be sourced and what can be ex-
pected of the customer’s business, hence driving integration along the process,
not just at points.
● Link forecasts to improvement goals. Forecasting is never going to be fun but it can
become more relevant; in that spirit Alcoa links the forecast to 18 months’ busi-
ness improvement goals and have the forecast roll towards that goal. The forecast
does disaggregate to six months, four weeks and one week plans but it also maps
to the longer-term improvement goal. At Alcoa people are very excited for the
new rolling forecast to come out because it tells them whether they are on track
to hitting targets. That is much better than the common approach where the
sales team just does a forecast for the sake of colleagues in manufacturing while
trying not to spend too much time at it because it distracts from selling.
Additionally, the sales and operations planning process is seen as a great way to
begin to drive cross-functional integration. One company just setting out on its
journey to develop supply chain management started with S&OP because it
found it an easy start (calling a meeting) that links to a key activity for many
functions (ensuring we forecast what needs to be made so we can serve cus-
tomers). Hence buy-in is easily gained and joint ownership is quickly established.
The company also found that the S&OP table is an effective way to get people
across functional silos to start talking and working together. A few ground rules
for effective S&OP tables include:
● all key functions need to attend mandatory (sales, finance, production, logis-
tics, procurement) and additional function can be invited if needed (R&D,
engineering);
● all attendees need to come with real decision-making authority and mandate
for the table to become effective;
Summary 249
● the discussion needs to focus not just on generating a forecast but also on
diagnosing forecast errors from the past to learn from them and discuss
trade-offs;
● there needs to be a structured (standing) agenda and set of measures used
(most typically including forecast error, forecasted volumes and sales amounts,
capacity utilisation, new products and upcoming events, sku review).
The vision of creating an agile supply chain is a valuable starting point but
until recently it was mostly just vision. The experiences and cases presented in
this section show how the vision can be supplemented and how the implementa-
tion of agility can be approached practically.
Summary
What is JIT, and how does it apply to logistics?
● JIT is a broad-based philosophy of doing the simple things right and gradually
doing them better. As applied to logistics, JIT can be conceived of as a pyramid
of key factors that centre on minimum delay and minimum inventory.
● ‘How many’ and ‘when’ to order replenishment quantities are key questions
that impact on throughput times and inventories. JIT addresses these ques-
tions by attacking the sources and causes of waste. Examples are reduction of
changeover times and simple, paperless systems of material control based on
the principle of pull scheduling.
● Longstanding approaches to material control, such as reorder point stock
control, economic order and batch quantities (EOQ, EBQ) and material re-
quirements planning (MRP) can be made to be far more responsive by appli-
cation of JIT techniques. Examples include reduction of batch sizes, reorder
quantities and lead times. All of these help to reduce logistics P-times. Syner-
gies can be delivered too: JIT pull scheduling works best for control, MRP for
planning.
What is lean thinking, and how does it apply to logistics?
● Lean thinking is a philosophy that has been derived from JIT principles. It
seeks perfection by gradually reducing waste from each of four areas: specify-
ing value from the end-customer perspective; identifying the value stream
through time-based mapping; making the product flow through the supply
network by applying JIT principles; and letting the customer pull through ap-
plication of pull scheduling.
What is agility, and how does it contribute to competitiveness of the supply
network?
● Agility is a supply-chain-wide capability that aligns organisational structures,
information systems, logistics processes and, in particular, mindsets. It means
using market knowledge and a responsive supply chain to exploit profitable
opportunities in a volatile marketplace. Agile supply is concerned with devel-
oping capabilities proactively to position a supply chain to benefit from
250 Chapter 7 • Just-in-time and the agile supply chain
marketplaces in which product lifecycles are shrinking, product variety is in-
creasing, and the ability to forecast demand is reducing.
● Lean thinking is concerned primarily with the elimination of waste. The order
winners that are supported by this mindset are cost and quality. Agility is con-
cerned primarily with supporting order winners of speed and flexible response.
Time compression is a fundamental requirement for leanness, but only one of
the enablers of agility.
● A key difference in supply strategy is that lean thinking is concerned with plac-
ing orders upstream for products that move in a regular flow. Agile strategy is
concerned with assigning capacity so that products can be made rapidly to
meet demand that is difficult to forecast.
What are the agile practices that help to underpin the agile supply chain?
● Start by understanding the sources and causes of uncertainty in demand, and
take steps to position the supply chain to benefit from this uncertainty. The
easy option is high-volume, low variety, low demand uncertainty. The tough
option is the opposite of all three of these material flow characteristics. Agility
seeks to increase responsiveness to volatility and to end-customer demand
uncertainty.
● Then, develop capabilities for dealing with shrinking time windows for cus-
tomer demand fulfillment. Speed of replenishment is usually much better
downstream than upstream. Developing upstream time sensitivity is therefore
a major enabler. And information dissemination and alignment bring capabil-
ities of dealing with rapid and accurate response using supply-chain-wide dis-
semination and exchange.
● Third, facilitate servicing the ‘market segment of one’ by investing in flexible
processes, modularity of both product and process, and capabilities to support
the information and knowledge content of products and services. Specific prac-
tices outlined in this chapter include aligning metrics with true end-customer
needs, establishing supply chain governance that allows for decentralised
action with central support and coordination, and developing boundary
spanning SOP systems.
Discussion questions
1 Suggest order winning and order qualifying criteria for the following product envi-
ronments:
a reprocessing nuclear fuel
b upstream petroleum refining
c downstream manufacture of petroleum products
d high-value automotive products such as Range Rover or BMW 5 series.
To what extent would lean and agile mindsets contribute to the support of such prod-
ucts in the marketplace?
References 251
2 Dealers have criticised the way auto assemblers use JIT as an excuse for buying parts
from the inbound supply network ‘so that their costs are kept down’. They then
dump finished vehicles onto the dealer by matching ‘their perceptions of a market-
place demand with their constraints as a manufacturer, i.e. what they’ve produced’
(adapted from Delbridge and Oliver, 1991). Referring to the Ford/Toyota case study
in section 7.1.3, comment on the trade-offs implied in these comments from dis-
gruntled dealers.
3 What matters more: value to the customer or value to the shareholder? Refer to
section 3.4 of Chapter 3 in formulating your response. How does this question im-
pact on the philosophy of lean thinking?
4 What is meant by the term overproduction? Why do you think this has been described
as the biggest waste of all?
5 Explain the difference between pull scheduling and push scheduling. In what
circumstances might push scheduling be appropriate?
6 Explain the difference between surge and base demands. Multi Electronique SA (ME)
produces a range of electrical connectors for the automotive industry. Currently, the
six production lines at its factory in Toulouse are fully loaded, operating a three-shift
system for 5 days per week. One of ME’s major customers wants to place an order
that would add loading equivalent to a seventh production line, but only for the
summer months (May to September). Sales are keen to accept the new order, but it
would need to be taken at prices that are no higher than for current business. Sug-
gest options for how ME might manage this order if they accepted it.
7 Refer back to Figure 2.1 in Chapter 2: it shows a Pareto curve for the sales per sku
of a book stockist. A small number of ‘hot sellers’ constitute most of the sales, while
there is a lengthy tail of slow-selling lines and new introductions. The operations
people are pressing for the ’tail’ to be chopped in half, arguing that it adds cost,
not value, to the business. They argue that each order is taken at fixed cost, regard-
less of size. Sales order processing and pick and dispatch from the warehouse are
examples of such fixed costs. ‘Instead, we should focus on the core of the business:
90 per cent of our business comes from just 10 per cent of the titles,’ the opera-
tions director argues. ‘We could chop our costs in half and only lose 5–7 per cent
of the business. Think of the effect on margin!’ Sales, on the other hand, are
reluctant to give up any of the titles, arguing that it is customer choice that drives
the business. ‘We have built up this business on the strength of our product range’,
the sales director argues. ‘Retailers come to us because we are a one-stop shop. If
we haven’t got it in stock, we get it.’ Explain the above in terms of a lean versus
agile debate, using the concepts of market winners and qualifiers and benefiting
from small volumes.
References
Aitken, J., Childerhouse, P., Christopher, M. and Towill, D. (2005) ’Designing and Manag-
ing Multiple Pipelines’, Journal of Business Logistics, Vol. 26, No. 2, pp. 73–96.
Chase, R.B., Jacobs, R. and Aquilano, N.J. (2005) Operations Management for competitive
advantage, 10th edn. London: McGraw-Hill.
252 Chapter 7 • Just-in-time and the agile supply chain
Delbridge, R. and Oliver, N. (1991) ‘Just-in-time or just the same? Developments in the
auto industry: the retailer’s views’, International Journal of Retail and Distribution Manage-
ment, Vol. 19, No. 2, pp. 20–60.
Harrison, A. (1992) Just-in-Time Manufacturing in Perspective. Hemel Hempstead: Prentice
Hall.
Harrison, A. and Storey, J. (2000) ‘Coping with world class manufacturing’, New Technology,
Work and Employment, Vol. 13, No. 3, pp. 643–64.
Holweg, M. and Miemczyk, J. (2003) ‘Delivering the “3-day car” – the strategic implications
for automotive logistics operations’, Journal of Purchasing and Supply Management, Vol. 9,
No. 2, pp. 63–7.
Johansson, H.J., McHugh, P., Pendlebury, A.J. and Wheeler, W.A. (1993) Business Process
Reengineering: Breakpoint Strategies for Market Dominance, Chichester: John Wiley & Sons.
Krafcik, J.F. and MacDuffie, J.P. (1989) Explaining High Performance Manufacturing: The Inter-
national Automotive Assembly Plant Study. MIT: International Motor Vehicle Program.
Magretta, J. (1998) ‘Fast, global and entrepreneurial: supply chain management Hong
Kong style’, Harvard Business Review, Issue Sept/Oct, pp. 102–14.
Mason-Jones, R., Naylor, R. and Towill, D.R. (1999) ‘Lean, agile or leagile: matching your
supply chain to the market place’, International Journal of Production Research, Vol. 38,
No. 17, pp. 4061–70.
Nakajima, S. (ed.) (1989) TPM Development Program: Implementing total productive mainte-
nance. Cambridge, MA: Productivity Press.
Porter, M.E. (1985) Competitive Advantage: Creating and sustaining superior performance. New
York: Free Press.
Schonberger, R.J. (1991) Building a Chain of Customers: Linking business functions to build the
world class company. New York: Free Press.
Shingo, S. (1988) Non-Stock Production. Cambridge: Productivity Press.
Skipworth, H. and Harrison, A. (2004) ‘Implications of form postponement to manufactur-
ing: a case study’, International Journal of Production Research, Vol. 42, No. 1, pp. 2063–81.
van Hoek, R. (2001) ‘The rediscovery of postponement: a literature review and directions
for research’, Journal of Operations Management, Vol. 19, No. 2, pp. 161–84.
Womack, J. and Jones, D. (2003) Lean Thinking. 2nd edn. New York: Simon and Schuster.
Suggested further reading
Goldman, S., Nagel, R. and Preiss, K. (1995) Agile Competitors and Virtual Organizations, New
York: Van Nostrand Reinhard.
Harrison, A.S. (1992) Just in Time Manufacturing in Perspective. Hemel Hempstead: Prentice
Hall.
Lee, H.L. (2004) ‘The Triple A supply chain’, Harvard Business Review, Issue No. 10, Oct.,
pp. 1–11.
Womack, J. and Jones, D. (2003) Lean Thinking, 2nd edn. New York: Simon and Schuster.
P a r t T h r e e
WORKING TOGETHER
In a supply network, no firm is an island that stands on its own. Nor does it compete
on its own. A focal firm depends on its network partners for components to assemble,
for products to sell, for the movement of goods and so on. While Part Two focused on
the central logistics task of achieving responsiveness to customer demand, most firms
cannot achieve this without the support of their network partners. Complete vertical
integration of an industry is unusual today – although ‘vertical retailers’ have
developed a similar strategy, as we saw in Case study 4.4. Functional specialisation of
suppliers on those parts of the value proposition in which they excel, coupled with
integration into the supply network, is more common.
This is becoming especially relevant today. Some manufacturing firms, for example
in the electronics and automotive industries, add only 10–20 per cent of total added
value internally. The rest is created in the supply base – by commodity suppliers, by
co-designers and co-manufacturers, by main suppliers and by their supply partners.
Chapter 8 offers approaches to integration and collaboration in the supply chain, and
Chapter 9 offers insights into sourcing and supply management.
Material flow (supply)
Information flow
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C H A P T E R 8
Integrating the supply chain
Introduction
A number of alternative supply chain structures have emerged, based upon net-
works and the degree of inter-firm collaboration. A well-known view is that of
Sako (1992), who distinguishes a ‘spectrum’ of possible supply relationships,
ranging from:
● arm’s length: a detailed contract specifies the responsibilities of both parties
including terms and conditions. Undue familiarity is avoided, and neither
party is controlled by the other. Divorce is a readily available option when the
contract finishes;
● obligational: individual contracts are still in evidence but embedded within a
broader relationship of mutual trust. Outline specifications are more common,
but there is ‘an incentive to do more than is expected’.
Optimising the supply chain process inevitably leads to a growing inter-
dependence among supply chain partners, and obligational behaviour becomes
more in evidence. With this interdependence, a realisation develops that increas-
ing levels of adaptation are necessary to achieve long-term mutual benefit.
The intended objectives of this chapter are to:
● explain the need to coordinate processes, and the opportunities for
collaboration between partners within supply chains;
● introduce a range of options for buyer–supplier relationships;
● describe the spectrum of supply relationships;
● describe the implications for suppliers of entering into partnerships.
By the end of this chapter, you should be able to understand:
● the benefits of collaboration within supply chains;
● the range of alternative inter-company relationships;
● the benefits and challenges of operating supply chain partnerships;
● ways of approaching implementation issues;
● key aspects of managing the supply chain.
Objectives
256 Chapter 8 • Integrating the supply chain
Adaptation means making changes to a firm’s internal processes in order to ac-
commodate the needs of supply partners. Supply partners may have to develop a
common set of control mechanisms. Hunter et al. (1996) comment:
The two organisations will still be subject to independent governance, but will have
in common a similar set of governance procedures and mechanisms specific to
their joint working relationship, thus replicating in some measure the conditions
within an integrated organisation.
Such common governance is more in keeping with the obligational view. The
implications for competitive strategy of this growth of collaborative supply
chains are considerable – in particular the need to develop those skills that enable
a company to re-engineer established buyer–supplier relationships and success-
fully to manage them on a day-to-day basis.
But a one-sided view of the relationship may be the norm elsewhere, and have
quite different implications for the firms involved. For example, Rubery et al.
(2004) studied the way that a customer firm may ‘extend its tentacles inside the
[supplier firm] to re-shape the internal human resource practices’. The customer
firm may exert pressure on a supplier’s HR practices in areas such as hours worked
(to fit with their own), performance assessment and associated bonus payments.
Centralised purchasing decisions may also greatly impact supplier relation-
ships. While operations and logistics are developing supplier relationship man-
agement, purchasing may replace existing suppliers with new ones with whom
there is no current relationship. And while centralisation lowered purchasing
costs overall, manufacturing and logistics costs were increased (Pagell, 2004). Pur-
chasing may be measured on the visible reductions in piece part prices, but the
invisible costs of longer transport times, extra inventories and poor delivery reli-
ability go unchallenged.
The overall aim of this chapter is to explore the need for integrating supply
chain processes, and then to review different types of supply relationship, the im-
pact on the firms involved, and the situations where a given type of relationship
is most relevant to a supply chain’s competitive position.
Key issues This chapter addresses eight key issues:
1 Integration in the supply chain: the benefits of internal and external co-
ordination.
2 Choosing the right relationship: which relationship is appropriate in different
circumstances – bottleneck items, strategic items, non-critical items and leverage
items.
3 Partnerships in the supply chain: cooperative, coordinated and collaborative
relationships; their advantages and disadvantages.
4 Supply base rationalisation: dealing with a smaller number of suppliers to enable
high-intensity relationships to develop.
5 Supplier networks: the development of supplier associations and the Japanese
equivalent, keiretsu.
6 Supplier development: managing upstream suppliers through integrated
processes and synchronous production.
Integration in the supply chain 257
7 Implementing partnerships: the potential pitfalls in moving from open market
negotiations to collaborative relationships.
8 Managing supply chain relationships: the objective of deeper, closer relationships
in the supply chain and factors for achieving them.
8.1 Integration in the supply chain
Key issue: How can we integrate internally, externally and electronically?
What drives integration in the supply chain? Procter & Gamble’s desire is to
design the supply chain to meet the needs of end-customers, starting from point
of sale and working backwards to deliver the right product, in the right place, at
the right time, of the right quality. The following are four principles of Procter &
Gamble’s supply chain strategy:
● Produce every product that needs to be produced every day through short
cycle production.
● Communicate with suppliers in real time – suppliers with whom we have built
long-term relationships and with whom we have integrated systems.
● Draw demand data from the point nearest to the end-customer – in this case,
the retail cash register.
● Collaboration between all supply chain partners using a multifunctional ap-
proach (commercial and supply chain working together) and aligned metrics
focusing on delivering to the end-customer.
All of these principles involve integration – both internal and external. ‘Inte-
gration’ in the context of the supply chain is concerned with coordination: estab-
lishing the ‘rules of the road’ whereby material and information flows work in
practice.
Evidence that improved integration (both upstream and downstream) leads to
improved performance for the supply chain as a whole has been found by survey
research for firms in fabricated metal products, machinery and equipment manu-
facturing (Frohlich and Westbrook, 2001). Integration was measured across eight
variables, as follows:
1 Access to planning systems.
2 Sharing production plans.
3 Joint EDI access/networks.
4 Knowledge of inventory mix/levels.
5 Packaging customisation.
6 Delivery frequencies.
7 Common logistical equipment/containers.
8 Common use of third party logistics.
The authors found that the broadest integration strategies led to the highest
rates of significant performance improvements. They pictured this in terms of
258 Chapter 8 • Integrating the supply chain
‘arcs of integration’, our version of which is shown in Figure 8.1. We can propose
that broader integration reduces uncertainty of material flow through the supply
network. In turn, this improves efficiency and reduces the P-time (Chapter 5).
Downstream
Narrow arc
Broad arc
MakeSource
Upstream
Deliver
Figure 8.1 Arcs of integration
(Source: After Frohlich and Westbrook, 2001)
8.1.1 Internal integration: function to function
Another survey – this time of over 300 organisations in the US – probed integra-
tion between marketing and logistics functions within a focal firm (Stank et al.,
1999). More frequent integrative behaviour between marketing and logistics re-
sulted in better performance and better interdepartmental effectiveness. This
may seem obvious, but the improvements in performance included cycle time re-
duction, better in-stock performance, increased product availability levels and
improvements in order-to-delivery lead times.
Firms with higher internal integration demonstrated higher relative logistics
performance compared with less integrated firms. There was no difference be-
tween ‘high’ and ‘low’ integration firms on basic service; that is, consistent deliv-
ery on request data and advance notification of delays and shortages. However,
on the ‘higher value’ service elements, such as delivery reliability, there was a sig-
nificant difference. High-integration firms had higher performance in terms of
meeting customer needs, accommodating special customer requests and new
product introductions. This resulted in an enhanced customer perception of the
organisations. Similar conclusions are arrived at by Windahl and Lakemond
(2006), especially where the firm is developing integrated products and services
such as ‘power for life’ (see Case study 2.5). And a study of Spanish food manufac-
turers by Gimenez (2006) shows that the highest levels of external integration
are achieved by firms that have already achieved the highest levels of internal
integration between logistics, production and marketing.
Integration in the supply chain 259
The implications of this research are that firms should continue to work at
improving internal integration. For example, functional barriers between pur-
chasing, manufacturing and distribution may lead to the following scenarios:
● Purchasing buys castings on the basis of low price, but the supplier has a poor
record for delivery reliability and quality. Manufacturing is faced with uncer-
tain deliveries and high reject rates.
● Manufacturing aims to keep machine and labour productivity high, so batch
sizes are kept high. Distribution is faced with poor availability, especially of
class B and C parts.
● Distribution wants to maintain a fast throughput warehousing operation, so
resists carrying out any post-manufacturing operations. Manufacturing is
faced with the additional complexity of customising products.
Internal integration is the key starting point for broader integration across the
supply chain. As Robert Lynch said (cited in Kirby, 2003: 69), ‘For some reason
alliance professionals find it easier to create alliances with their major competi-
tors than with other divisions in their own companies. We don’t deal with our
own internal integration. How can we integrate externally if we can’t do it
internally?’
Taking your business (or one well known to you) as an example, how well do the internal func-
tions integrate? Consider the purchasing–manufacturing–distribution example above and de-
velop a scenario for the company, using the company’s names for the functions concerned.
What impact does your scenario have on material flow?
Activity 8.1
8.1.2 Inter-company integration: a manual approach
If significant improvements can be achieved by internal integration, potential for
the benefits of external integration could be even higher. This was demonstrated
by the Bose Corporation (a US-based manufacturer of hi-fi equipment) in the
early 1990s when they developed the JIT2 concept. Bose recognised that, if the
traditional buyer–supplier relationships were to be made more effective, more
people would be required in their organisation. However, budget constraints
meant that no additional people could be employed in this role. This acted as a
driver to develop the JIT2 concept.
A logical extension of the just-in-time concept described in Chapter 6 is to
place customer and supplier processes closer together. The JIT2 approach goes a
stage further by eliminating the buyer and the salesman from the customer–
supplier relationship, thus fostering increased communication between the parties.
The principle is simple: a supplier employee who resides full time in the cus-
tomer’s purchasing office replaces the buyer and supplier. This supplier-in-plant is
empowered to use the customer’s scheduling system to place orders with their
own company. In addition, the supplier-in-plant does the material planning for
the materials supplied by his company.
260 Chapter 8 • Integrating the supply chain
The ‘supplier in-plant’ is also part of the production planning process, so
production is planned concurrently with the supplier organisation. This form of
integration streamlines the supply process by removing the multi-level planner–
buyer–salesman–supplier plant process by making this the responsibility of one
individual. This dramatically reduces the demand uncertainty experienced by the
supplier organisations. The benefits of this streamlining have also resulted in
major business improvements for Bose. These include:
● 50 per cent improvement in terms of on-time deliveries, damage and shortages;
● 6 per cent reduction in material costs;
● 26 per cent improvement in equipment utilisation;
● major reductions in inventory holdings.
The Bose supplier-in-plant concept demonstrates how collaboration and inte-
gration can benefit the supply chain. The supplier-in-plant can, to a large degree,
be superseded by today’s electronic integration techniques.
What are the opportunities for the JIT2 supplier-in-plant principle in your chosen company?
Could the principle help to improve integration, either by a company representative working in
the customer’s organisation, or by representatives from major suppliers working in your chosen
company?
Activity 8.2
8.1.3 Electronic integration
Much of the pioneering work for electronic integration has been in the fast-moving
consumer goods (FMCG) sector between retailers and manufacturers. The tradi-
tional way to exchange orders and delivery information has been by means of
electronic data interchange (EDI). But EDI systems are generally incompatible
with each other, and have high development and installation costs. Technologies
based on the internet offer worldwide connectivity and relative ease of access.
Achieving visibility throughout the supply chain is of paramount importance
in the search for competitive advantage. The exponential development of inter-
net technology together with the increased power of the personal computer of-
fers organisations a relatively cheap means of integrating information systems
across the supply chain.
The internet provides a platform-independent communications highway that
can be used as a cross-company interface to enable electronic commerce.
Thereby, it fosters operationally efficient, connected and cooperative relation-
ships among manufacturers, suppliers and distributors. Using the internet can
provide an easy and cost-effective answer that is available to all partners in a
network.
E-business is a term used to cover trading with a firm’s suppliers and business
customers – that is, business-to-business – by electronic means. A feature of B2B is
Integration in the supply chain 261
the formation of online trading communities (see, for example, Ariba,
http://www.ariba.net) and electronic marketplaces. Such structures have been en-
abled by the explosion of internet technology and seek to offer cost reductions in
procurement of both direct and indirect goods, and also in the processing of such
transactions. The relationship of these terms in the context of the ‘e-supply
chain’ is shown in Figure 8.2.
Trading partners can integrate electronically in three ways: transactional, infor-
mation sharing and collaborative planning.
Transactional: the electronic execution of transactions
This is usually found in business to business (B2B) e-commerce, with the trading
partners focusing on the automation of business transactions such as purchase
orders, invoices, order and advanced shipment notices, load tendering and ac-
knowledgements, and freight invoices and payments. These transactions involve
the electronic transmission of a fixed-format document with predefined data and
information fields.
Supplier
Manufacturer
Retailer
Customer
Consumer
C2C
e-commerce
e.g. auctions
B2C
e-commerce
B2B
e-business
B2B
e-business
e-trade
e-trade
e-supply chain management
− information-based synchronised supply chains
NB: e-trade = collaborative planning and forecasting,
electronic procurement and information sharing
Figure 8.2 e-business terminology
Information sharing: the electronic sharing or exchange of information
Trading partners are given access to a system with shared information. Often,
however, one partner transmits shared information to another. The information
is sent on a ‘for your information’ basis; the recipient uses the data as it stands,
and no feedback is given. Shared information may include product descriptions
and pricing, promotional calendars, inventory levels, shipment tracking and
tracing. This type of arrangement only supports independent planning by each
partner. Uncertainty is reduced by each partner becoming aware of other part-
ners’ activities. However, trading partners do not have the opportunity to com-
ment on or change the plan in any way.
262 Chapter 8 • Integrating the supply chain
We develop the concept of information sharing by means of a case study in
continuous replenishment (CR). Continuous replenishment logistics is a pioneering
approach to using developments in IT to supply demand quickly from the manu-
facturer. Using electronic point of sale (EPOS) data to track customer demand
through the till, CR shares data from retailer to supplier. The aim is for the sup-
plier to replace quickly what has been sold today, so that stock availability on the
shelf is maintained at the retailer. Case study 8.1 gives a view of where fashion
logistics is heading.
Continuous replenishment in the apparel industry
Case study 4.4 describes some of the competitive pressures in the apparel industry and
trade-offs in developing global ‘vertical’ supply strategies. (Vertical strategies aim to em-
ulate retailers such as Zara, which source everything from set manufacturing plants that
are situated close to their retail outlets.) Setting up a similar operation in the US would
be problematic – for a start, there is not much left of the apparel manufacturing base
because it went overseas long ago for cost reasons. Competitive pressures are con-
stantly increasing – a significant percentage of the industry is fashion-driven – and fash-
ion changes continuously. Thus, time-to-market is increasingly important. Kumar and
Arbi (2008) note:
turnaround time is important for US fashion retailers intending to compete with
Europe’s low-cost fashion providers, including H&M and Zara. Both European
stores have created production models that deliver inexpensive fashion apparel in
weeks, rather than months. Zara designs, produces and delivers a garment in 15
days to US stores according to a 2005 profile by Harvard Business School’s Work-
ing Knowledge. For American apparel chains, Central America is a potential out-
sourcing destination, with lower production costs than the USA, falling tariffs and
approximately 21 days to get designs made and delivered, 43 days if American
material is used.
Retailers drive the industry, and – in a fragmented and very competitive marketplace –
they are moving quickly to address its longstanding logistics problems. Increasingly, they
are turning to suppliers to respond faster to better quality information, including the use
of systems such as Product Lifecycle Management (PLM). Kurt Salmon Associates
(Rubman and del Corrado, 2009), consultants to the industry, have highlighted that many
retailers have embraced the concept of integrating retailer PLM and supplier sourcing
systems, including JC Penney and Guess Inc. Real-time collaboration is essential to driving
product development in the industry. Also a shorter product development lead time
enables the delay of design and colour decisions to maximise the on-trend opportunity.
Kuhel (2002) proposes an apparel supply chain of the future that is based on contin-
uous replenishment, which we have adapted. Let us assume a designer and retailer of
fashion apparel is situated in the north-eastern US. A new range has been designed, and
early sales are encouraging. These early sales figures are used to refine forecasts quickly,
and to prime the logistics pipeline with a flow of product that matches expected
demand. After this, it is essential to regulate the flow of finished goods to match actual
demand. This is how it is done.
CASE STUDY
8.1
Integration in the supply chain 263
As soon as an item is purchased, the retailer collates the electronic point of sale
(EPOS) data from its stores, and sends the data upstream. The ‘pull’ signal (Chapter 6)
goes back all the way to the yarn manufacturer. Figure 8.3 represents the path that a
garment might take from concept to delivery. Six stages are involved.
1 Planning: apparel retailer determines design for a product, evaluates costing with the
supplier and then sends demand data and forecast upstream. These signals set the
supply chain in motion. Later, once the product has gone to market, a web-based link
from the retailer’s EPOS system to the manufacturer triggers replenishment responses.
2 Raw material: suppliers respond to demand signals via phone, fax, email or integrated
system. Raw cotton is compressed into bales, and fitted with radio frequency identifi-
cation device (RFID) tags (see section 6.2.1) to specify source and type.
3 Fabric: manufacturers weave and ship product in response to demand from the re-
tailer. Inventory/shipment tracking starts here. In-transit data are passed downstream
via the internet or integrated system workflow.
4 Assembly: fabrics and trims come together at the final assembly plant, which in this
example is situated in the Caribbean. (Manufacturers situated within short shipping
times of the US are favoured over Far East suppliers.) The plant has an ERP system that
processes orders received electronically. Finished goods are assembled and bar-coded
by store prior to despatch. All suppliers to the apparel retailer use compatible or
integrated systems.
1 Planning
2 Raw material
3 Fabric
4 Assembly
5 Distribution
Mexico
USA
India
Caribbean
Island
USA
USA
6 Retail
Figure 8.3 Continuous replenishment in the apparel industry
(Source: After Kuhel, 2002)
264 Chapter 8 • Integrating the supply chain
5 Distribution: the product is shipped by container to the retailer’s national distribution
centre (NDC). Here, store orders are cross-docked using the bar-code to identify the
destination store. They are then forwarded to regional distribution centres (RDCs)
that serve 50–100 stores.
6 Retail: as items are purchased, EPOS triggers replenishment responses.
Sources: Kuhel (2002); updated by Harrison (2005); updated by Baker (2010)
Questions
1 Summarise the ‘current state’ problems that are typical of the apparel industry, and
their implications for supply chain integration.
2 Identify potential barriers to executing the proposed apparel ‘supply chain of the future’.
8.2 Choosing the right supply relationships
Key issues: What types of supply relationships can be adopted? How can each
type of relationship be tailored to different types of product?
There are many possible types of relationship in the supply chain. A development of
Sako’s view mentioned in the introduction to this chapter is that the different op-
tions can be viewed in the form of a continuum. This can range from arm’s length,
where the relationship is conducted through the marketplace with price as its foun-
dation, to vertical integration, where the relationship is cemented through owner-
ship. Vertical integration can extend for one or more tiers and its direction may be
upstream, downstream or both. A continuum of relationship options is shown in
Figure 8.4. Each of these relationship styles has motivating factors that drive devel-
opment, and which govern the operating environment. The duration, breadth,
strength and closeness of the relationship vary from case to case and over time.
A focal firm may not have the same type of relationship with all of its cus-
tomers and suppliers. The firm may adopt a range of styles: choosing which type
of relationship to adopt in a given supply chain situation is an important strate-
gic issue. For example, grocery retailers often adopt an arm’s length style for ‘own
brand’ goods such as kitchen paper, and use on-line auctions (Smart and Harri-
son, 2003) to obtain lowest price solutions. Elsewhere, they may use a strategic
alliance to develop petrol forecourts, such as the alliance between Tesco Express
(Case study 1.1) and forecourts of Esso fuel stations.
Arm’s length Strategic
alliance
Partnership Joint
venture
Vertical
integration
Figure 8.4 Relationship styles continuum
Source: After Cooper and Gardiner, 1993
Choosing the right supply relationships 265
Companies tend to deal with a large number of suppliers, even after the supply
base has been rationalised. Treating them all in the same way fails to recognise
that some have different needs from others. Differentiating the role of suppliers
and applying appropriate practices towards them allows a focal firm to target pur-
chasing and supply chain management resources to better effect.
A popular view is that Japanese companies consider all of their tier 1 suppliers
as partners. This is not really true: for example, Japanese automotive manufactur-
ers do not regard all of their suppliers as equal. In fact among the typical 100–200
tier 1 suppliers to an OEM only about a dozen will enjoy partnership status. Typ-
ically, these elite few tend to be large organisations. Inspired by the Japanese ver-
sion of supply relationships with partners, outlined in the introduction to this
chapter under Sako’s ‘obligational’ description, Western auto manufacturers have
been developing their own versions. The model for these has been the keiretsu
structure shown in Figure 8.8, which is similar to the structure we showed in
Figure 1.2. A number of lead suppliers such as Robert Bosch and Delphi supply to
their customers worldwide and have developed sophisticated marketing, devel-
opment and logistics capabilities.
This leads to the development of another type of supplier in addition to the
‘lead’ product/service suppliers. This is the group of firms that has been
‘demoted’ to the second tier. Here, they will have to compete against global play-
ers on price, delivery and flexibility. Case study 8.2 explains some of the dynam-
ics in automotive inbound supply chains, and the changing roles and
responsibilities of suppliers.
Automotive supply chains: a range of inbound
logistics solutions
Automotive assemblers and their inbound supply chains have developed many solu-
tions to orchestrate the manufacturing and delivery of the thousands of parts that go to
make up a vehicle. The many potential inbound logistics solutions are summarised in
Figure 8.5.
Changes are of increasing value to the vehicle assemblers, where the complexity of
the logistics operation has been greatly downsized by reducing the number of tier 1
suppliers and broadening their responsibilities. Yet the ability of the assemblers to cus-
tomise their finished products has increased. Quality consistency is expected at 50
ppm, while demanding price reduction targets are the norm.
Supplier delivers CIF (carriage, insurance and freight)
The supplier delivers the ordered parts to the assembler’s factory, and includes the
distribution costs in the piece part price.
Assembler collects ex-works
The assembler subcontracts the process of parts collection from a number of suppliers
visited on a daily frequency. Parts are taken to a consolidation centre, where they are
CASE STUDY
8.2
266 Chapter 8 • Integrating the supply chain
decanted into trailers destined for different assembly plants. An example is the Ford
operation run by Exel at Birmingham in the UK. Parts collections are made from the
Midlands region of the UK, and dispatched to 22 Ford plants around Europe.
Automotive supplier community
This is a dedicated co-location of suppliers in the region of dedicated vehicle manufac-
turers. The big difference from all the other integration types is that deliveries are made
to more than one vehicle assembly plant. An example for more than one OEM plant is
the BMW Innovation Estate in Wackersdorf where several suppliers provide parts for
four BMW sites.
On-site distribution centre
Instead of delivering parts directly into the assembler’s plant, the logistics partner may
deliver into a distribution centre positioned close to the assembler’s plant. The advan-
tages are much more controlled inbound parts movements into the plant. The assem-
bler is able to call up parts that are needed for a relatively short time period, thus
improving material flow into the plant and reducing vehicle congestion. Additional
value-adding activities may also be carried out in the DC. Thus, for example, suppliers
carry out some final assembly and sequencing tasks in the new Integrated Logistics
Centre at BMW, Cowley.
Supply centres
These are co-located supplier clusters on site and could be part invested by the VM
and service provider (3PL). Supplier proximity enables late module configuration
with smooth material flow. BMW Leipzig uses an electrical conveyor system to con-
nect external and internal suppliers to the assembly line.
Assembler
Supplier
Commercial integration
Kn
ow
led
ge
, c
ap
ita
l
Modular consortia
Modules (synchro)
Supplier park
Chain logistics
On-site distribution centre
Assembler collects ex-works
Supplier delivers CIF
Modules
Subassemblies
Parts
Figure 8.5 Evolving inbound supply relationships
Choosing the right supply relationships 267
Chain logistics
Here the objective is to increase the speed of the inbound supply chain. If not planned
and managed, drivers’ hours regulations across Europe can lead to waste as the supply
chain stops to allow for rests. The higher the speed of inbound supply, the lower the
stock that needs to be held at the assembly plant. A useful further advantage is that the
higher the speed, the less packaging and containers are needed in the supply chain. An
example of chain logistics is the ALUK operation that supports the Toyota plant at
Burnaston in the UK. Parts movements from a supplier in southern Spain are planned in
four-hour stages, where the full trailer is swapped for an empty one in a similar fashion
to the Pony Express in the days of the Wild West!
Supplier park
A supplier park is a cluster of suppliers located outside but close to a final assembly
plant; popular with JIS suppliers and associated with new assembly plants linked to sup-
plier by conveyor belts, tunnels or bridges. (JIS � just in sequence: the capability to
supply a module in accordance with the drumbeat requirements of an assembler.)
Major tier 1 subassembly manufacturers are positioned on a supplier park close to the
assembly hall. Major sub-assemblies are then sequenced into the assembly hall in re-
sponse to a ‘drumbeat’ (based on the master schedule – see Chapter 6), which identi-
fies the precise specification of the next body to be dropped onto the trim and final
assembly track. Suppliers then have a finite amount of time to complete assembly and
deliver to the point of use on the track. An example here is the Exel operation at the
VW–Seat plant at Martorell near Barcelona, where material movements on the supplier
park are specified and orchestrated by means of Exel’s IT systems.
Modules
The VW–Seat plant at Martorell demonstrates a further advance in logistics thinking.
Instead of delivering a large number of subassemblies, why not get the tier 1 suppliers
to coordinate all the parts needed to produce a complete module that can then be sim-
ply bolted onto the car? Product variety can be increased by customisation of the mod-
ules. The advantages are illustrated in Figure 8.6.
Modular designs offer less WIP and a considerably downsized process for the assem-
bler, and greater variety for the customer. Downsizing of the assembly process means
that it is shorter, and can be positioned closer to customer demand. Complexity can
then be added later in the pipeline between customer order and delivery of the speci-
fied car into the customer’s hands – a concept called postponed variety. The term
synchronous supply has been used to describe the delivery of modules not just at the
correct quality and correct time, but on a real-time basis with the assembler and with
the added challenge of zero safety stock. The condominium approach goes a step
further in integration. In this case the suppliers reside and operate under the same roof
as the vehicle manufacturers. Due to outsourcing and the lean management, VMs
often do not need adjacent space at the final assembly track and can thus offer their
factory space to suppliers. Suppliers then assemble their own modules inside the as-
sembly area. An example for the condominium is the Ford Industrial Complex at
Camacari in Brazil.
268 Chapter 8 • Integrating the supply chain
Modular consortia
This is the highest possible integration step for suppliers in the automotive industry. The
whole assembly operation is divided into separate modules, with a supplier responsible
for each. Therefore the suppliers not only assemble the modules, but they also perform
part of the final vehicle assembly.
The VW bus and truck plant in Brazil is an experiment in the further development of
the modular concept. The truck assembly operation has been divided into seven
modules, with a supplier responsible for each. All the direct workers are on the sup-
plier’s payroll, and the supplier not only assembles the module, but also performs final
assembly of the vehicle. The assembler’s task has been downsized to engineering, de-
sign, supervision and administration. The Mercedes plant at Hambach in France, which
produces the micro compact Smart car, divides the vehicle into five main modules.
Seven suppliers are fully integrated into the final assembly plant, while 16 non-inte-
grated suppliers deliver submodules and parts. The whole information system – which
supports manufacturing, logistics and distribution – is outsourced to Accenture.
Implications for suppliers
The demands on tier 1 suppliers increase in proportion to the various logistics solutions
described earlier. A clear trend towards supplier parks and modularisation can be seen
in the logistics strategies of automotive assemblers. Increasingly, tier 1 suppliers are
being expected to control subsequent tiers in the supply chain, while ensuring delivery
and quality to the assembler. At the same time, challenging cost reduction targets are
being set, while the whole process is facilitated by tier 1 outbound defect levels that are
less than 50 ppm. Many suppliers question whether the draconian demands for ‘cost
down’ targets are compatible with such defect levels.
Four distinct stages can be seen in the development of capabilities by tier 1 suppliers:
● Tier 1 basic: suppliers with in-house design capability and project management
capability who can ensure timely delivery and reasonable quality reliability (50 ppm).
W
IP
Suppliers Primary mfg
Modular
Non-m
odular
Final mfg
Stage (value added)
Distribution
More
customisation
Postponed
variety
Less WIP
− − −
Figure 8.6 Modularisation: doing more with less
(Source: van Hoek and Weken, 1998)
Choosing the right supply relationships 269
An example would be a tyre manufacturer who holds four–five days’ stock and who
delivers to set time windows: that is, limited logistics capability.
● Tier 1 synchro: suppliers who provide all of the basic capabilities, but with virtually no
safety stock. Additional capabilities for the supplier are synchro logistics and IT expert-
ise which is closely integrated with the assembler, greater flexibility and more secure
emergency procedures. They operate through ‘clone’ plants that are situated on sup-
plier parks no more than ten minutes’ travel time from the assembler’s production line.
● Tier 0.5: full service providers, who integrate component manufacturing through
supply chain management to achieve the optimum design of a given module. They
carry out pre-emptive market research and develop innovative designs through shelf
engineering (designs that are prepared proactively in advance of need and placed
‘on the shelf’, thus saving time in the event that the need does arise). They are part-
ners in major cost reduction projects at each model change, and in continuous
improvement projects in between.
● Tier 0: the highest possible integration. In addition to tier 0.5 responsibilities, the tier 0
supplier is responsible for a vehicle manufacturer’s main assembly operations di-
vided into separate modules, with a tier 0 supplier responsible for each. Therefore
the supplier performs final VM module assembly operations. Final VM assembly line
work retention is a matter of the VM’s strategic choice but it could be performed by
the tier 0 as exhibited on line by supplier Magna for BMW.
There is a substantial passing of risk from the assembler to the tier 1 supplier at each
stage. Increasingly, the supplier takes responsibility for designing and developing new
products of increasing complexity in advance of new model programmes. And there is
no guarantee that the supplier will get the work, because competitive tenders are issued
for each new model. This forces suppliers to keep primary manufacturing and core busi-
ness at a ‘home’ location, and to construct low cost, late-configuration ‘postponement’
plants near the OEM’s assembly hall to enable synchro deliveries. The decision by BMW
to switch R50 (Mini) assembly from Longbridge to Cowley left a number of suppliers
with £2 million synchro assembly units in the wrong place.
The strategic dilemma for tier 1 suppliers who currently supply the assemblers di-
rectly is whether to expand into system integrators (tier 0.5), or to become indirect sup-
pliers to such organisations. Siegfried Wolf of Magna International described the tier 0.5
transition as follows:
To become part of this new tier, companies will require a worldwide presence,
global sourcing, programme management, technology, JIT and JIS know-how
and specialist production knowledge. They will also require a high level of R&D
spend.
So, after tier 0.5, where do the competitive challenges lie? Tier 2 suppliers will still be
largely low-overhead, product-based companies that have limited service capability.
Price pressure will continue to be severe, and return on sales often little above break-
even. Tier 2 suppliers often cannot afford expensive inspection and test resources, so
defect levels will continue to be relatively high, often in the range 1,000–2,000 ppm
(i.e. 1–2 per cent). This will present major challenges for tier 0.5 suppliers, who must
also guarantee delivery reliability to the assembly track, and a module that fits perfectly
at all times.
270 Chapter 8 • Integrating the supply chain
As an example of tier 0.5 evolution, the joint venture between Canada’s Magna Inter-
national and Japan’s Calsonic Kansei (‘Magna Kansei’) produces the complete fascia
(‘cockpit module’) for the Nissan Micra at a new facility close to Nissan’s Washington
plant in north-east England. Sales of the joint venture have almost trebled as it assumes
responsibility for all of the components and subassemblies that make up the module.
Calsonic Kansei designed, developed and tested the Micra fascia from a Nissan-
engineered concept design. Co-location of supplier engineers at the Nissan development
HQ in Atsugi City meant that Nissan product development teams supervised the design
and development process. Magna Kansei assumes responsibility for parts it makes itself,
for sourcing externally made parts, and for final module assembly and shipment JIS to the
Nissan plant. There are 32 tier 2 suppliers: 18 are imposed, where Nissan sets the price and
commercial details. The rest are nominated by Magna Kansei. This effectively limits the
amount of integration that can take place at the design stage. Imposed suppliers that
have been selected mainly on price act as barriers for improvement of quality capability.
(Sources: Harrison, 2000, 2004; Bennett and Klug 2010).
Questions
1 Summarise the advantages and risks to suppliers who want to achieve tier 0.5 status.
2 Consider the differences that can be seen between the logistics conditions of the
supplier integration models discussed above. Comment on the geograghic prox-
imity, shared investment, asset specificity, IT-system integration and transport
costs connected with the above models in a drive towards a ‘tier zero’ status for
progressive suppliers and their vehicle manufacturers.
8.3 Partnerships in the supply chain
Key issues: What are partnerships, and what are their advantages and disadvan-
tages?
So far, we have used the term ‘partners’ in a supply chain to apply to all firms that
are involved in a given network. In section 8.7, we develop the term ‘strategic
partners’. Here, we review the added value that partnerships may bring. Gener-
ally, cooperative relationships or ‘partnerships’ have been characterised as being
based upon:
● the sharing of information;
● trust and openness;
● coordination and planning;
● mutual benefits and sharing of risks;
● a recognition of mutual interdependence;
● shared goals;
● compatibility of corporate philosophies.
Among these, perhaps the key characteristic is that concerning the sharing of
information. This should include demand and supply information. Chapter 6
Partnerships in the supply chain 271
showed how collaborative planning is being used to share information between
retailers and manufacturers.
8.3.1 Economic justification for partnerships
Entering into a partnership with a company, to whatever extent, implies a transi-
tion away from the rules of the open marketplace and towards alternatives. These
different structures must demonstrate benefits otherwise they will not deliver
competitive advantage.
Open market relationships are typified by short-term contracts, arm’s length re-
lations, little joint development and many suppliers per part. Observing that
Japanese practice – and consequently the ‘lean’ model of supply differs signifi-
cantly from this – indicates that other, non-market mechanisms must be operating.
The Japanese tend to infuse their transactions with the non-economic qualities
of commitment and trust. These characteristics are important in successful part-
nerships. While this may increase transaction costs and risks, it appears that the
‘non-economic qualities’ help to secure other economic and strategic advantages
that are difficult to achieve through the open market system.
8.3.2 Advantages of partnerships
Within partnerships, savings come in the form of reduced negotiations and draw-
ing up of separate contracts, reduced monitoring of supplier soundness, includ-
ing supply quality and increased productivity. These are accompanied by
strategic advantages of shortened lead times and product cycles, and conditions
amenable to longer-term investment.
These advantages, however, need to be set against the problems that can be as-
sociated with the introduction of commitment and trust.
8.3.3 Disadvantages of partnerships
Some of the examples of potential disadvantages of partnerships include the
following:
● the inability to price accurately qualitative matters such as design work;
● the need for organisations to gather substantial information about potential
partners on which to base decisions;
● the risk of divulging sensitive information to competitors;
● potential opportunism by suppliers.
In the long term, additional factors occur when companies enter into partner-
ships. With the outsourcing of the R&D of components and subsystems, buyers
benefit from the decreased investment they have to make. Working with suppli-
ers who fund their own R&D leads to their earlier involvement in new product
development where buyers benefit from suppliers’ ability to cut costs and de-
velop better-performing products. This scenario leads to greater buyer risk owing
to dependence on a smaller number of suppliers for designs, and also the poten-
tial for opportunism through the smaller number of other companies able to
compete with the incumbent suppliers for their work.
272 Chapter 8 • Integrating the supply chain
Consider an organisation of your choice: have its major customers consolidated their supply
base over the past five years? If so, by how much? What criteria did these customers use to
decide which companies to keep and which to ‘demote’ to a lower tier?
Activity 8.4
Consider the reasons why a company would wish to enter into a partnership with a customer or
supplier. List the advantages and disadvantages you can think of.
Activity 8.3
8.4 Supply base rationalisation
Key issue: What are the drivers for reducing the numbers of direct suppliers?
Integrating a supply chain means that a focal firm’s processes align with those of
its upstream and downstream partners. It becomes impractical to integrate
processes of the focal firm with the processes of a substantial inbound network of
suppliers. Instead, high-intensity relationships can be managed with a limited
supplier base. Such considerations argue for the appointment of a limited num-
ber of lead suppliers, each responsible for managing their portion of the inbound
supply chain. Clearly one of the key concerns for logistics management is the
criteria by which lead suppliers are chosen (see Section 9.2).
8.4.1 Supplier management
Supplier management is the aspect of supply chain management that seeks to or-
ganise the sourcing of materials and components from a suitable set of suppliers.
The emphasis in this area is on the ‘suitable set of suppliers’. The automotive case
study above explains some of the considerations in this process.
Generally, companies are seeking to reduce the numbers of suppliers they deal
with by focusing on those with the ‘right’ set of capabilities. The extent to which
companies have undertaken this and have tiered their supply chains is exceptional.
Even in the early 1990s, two-thirds of companies were reported to be reducing their
supplier base. Anecdotal accounts of the reductions abound. For example, Sun
Microsystems was reported to have consolidated the top 85 per cent of its purchas-
ing spend from across 100 suppliers in 1990 to just 20 a few years later.
8.4.2 Lead suppliers
While true single-sourcing strategies are the exception rather than the rule, the
concept of the lead supplier is now widely accepted. Over the past ten years many
large companies have consolidated their supplier base. In some cases this has seen
the number of suppliers reduce from around 2,000 to 1,000 or so. However, many
of the original suppliers still contribute to the OEM’s products, but they now do so
Supplier networks 273
from lower tiers. The responsibility for managing them now lies with the suppliers
left at the first tier. In some cases this responsibility is new and has had to be learnt.
Has the position of your selected organisation changed in the supply chain? If it has risen up the
supply chain, or remained at the same tier whilst others were ‘demoted’, what new capabilities
had to be developed? If it was demoted, why did this happen? Was it a good thing or a bad
thing to happen?
Activity 8.5
8.5 Supplier networks
Key issues: What are supplier associations and the Japanese keiretsu?
Supplier networks can be formal or informal groups of companies whose com-
mon interest is that they all supply a particular customer, or support an entire
industry. Four such networks are considered here:
● supplier associations;
● Japanese keiretsu;
● Italian districts;
● Chinese industrial areas.
8.5.1 Supplier associations
Aitken (1998) defines a supplier association as:
the network of a company’s important suppliers brought together for the purpose
of coordination and development. Through the supplier association forum this
company provides training and resource for production and logistics process
improvements. The association also provides the opportunity for its members to im-
prove the quality and frequency of communications, a critical factor for improving
operational performance.
Supplier associations may be traced back to the late 1930s with the oldest
known group being one linked to Japanese automotive manufacturer Toyota.
This early group consisted of 18 suppliers producing basic commodity items such
as screws, nuts and bolts. These suppliers formed the group for the benefit of
themselves. The Toyota organisation itself did not perform an active role in the
beginning of the association. However, the distant role of Toyota was to change,
as raw materials became scarce during the Second World War. As part of wartime –
control by the Japanese government, small and medium-sized firms were directed
to supply larger firms, which were being utilised as distributors of raw material by
the government. Prescribing the flow of materials forced the movement of scarce
raw materials to key manufacturers. Through this direct interventionist approach
the government tried to force assemblers and the subcontractors to work together
to increase the efficiency of the supply chain.
274 Chapter 8 • Integrating the supply chain
The policy employed by the government therefore encouraged assemblers to
establish links with suppliers to ensure component supplies. The carrot and stick
approach of the government assisted the foundation of several associations. The
institutionalist approach by government succeeded in determining the future
structure of the supply chain for Japanese automotive companies. Japanese car
assemblers changed their modus operandi to align with the prevailing governmen-
tal coercive isomorphic forces, thereby obtaining social legitimacy. However, it
was not until the early 1940s that assemblers began to recognise the potential
benefits of becoming active members of the associations. In 1943 Toyota became
interested in the management of the association. Through the provision of man-
agement support Toyota started to develop and improve confidence and trust
between members and itself.
There can be many improvement objectives of a supplier association, and these
will vary between associations and industry sectors. Research has identified ten
primary objectives for establishing and developing an association, as shown in
Table 8.1.
Table 8.1 Primary objectives for establishing and developing supplier associations
Objective Rationale
The provision of manufacturing tools and techniques
such as JIT, Kanban and TQM
Improve knowledge and application of best practice tools and
techniques within the supply base
Produce a uniform supply system Remove muda (waste) from the system then standardise process
management in all parts of the supply chain
Facilitate flow of information and strategy formulation The assembler assists the suppliers in formulating an
improvement strategy by providing best practice information
Increase trust between buyer and supplier The result of gaining improvements in the first three objectives is
an improvement in trust
Keep suppliers & customers in touch with market need Assemblers aid their suppliers in understanding the needs of the
customer through sharing market intelligence, sales plans and
development opportunities
Enhance reputation of assembler within supply base Assemblers attempt to prove to their suppliers that they are
worth dealing with
Aid smaller suppliers Some supplier associations are established to aid smaller
associations who could not support the development or
improvement programmes necessary to achieve world class
manufacturing standards from their own internal resources
Increase length of trading relationship Through supporting suppliers in the development of their
operations the assembler needs to invest resource. Through
committing resource the assembler increases the asset specificity
of the supplier and it is therefore important that the relationship
is maintained
Sharing development benefits The association forum supports not only supplier–assembler
improvements but also supplier–supplier knowledge sharing
Providing examples to suppliers of how to develop
their own supply base
The performance of the entire supply chain is improved by
cascading supply chain management technique into it
Supplier networks 275
Supplier association
A major supplier of digital telecommunications systems, which we shall call ‘Cymru’,
had established a successful manufacturing plant in Wales. The European region had
been restructured into five customer-facing divisions, which would provide major cus-
tomers with a single point of contact for integrated solutions. This would in turn focus
operations by key account, and boost Cymru’s commitment to quality and customer
satisfaction. Cymru’s major customer was TELE, a national telecomms service provider.
Following deregulation of markets in Europe, TELE started to buy telephone handsets in
the global market at prices that were well below those of Cymru. A two-year contract
was replaced by a four-month contract, and call-off quantities became much more
uncertain for Cymru and its suppliers.
In order to compete, Cymru decided that it would have to improve customer service
in terms of availability, speed of new product introduction and cost. A new logistics pro-
gramme was conceived whereby Cymru bypassed TELE’s internal distribution structure
and delivered direct to TELE’s customers. This meant that TELE carried no inventories
and that Cymru took over the distribution task with superior service levels. TELE signed
a five-year deal with Cymru, and both parties enjoyed better margins.
In order to support the better service levels, it was essential that Cymru’s supply base
was integrated into the new logistics programme. This meant that the relationship style
(Figure 8.4) would need to be moved from arm’s length to strategic. As the procure-
ment manager commented:
I quickly realised that the old way of communicating on a one-to-one basis
would no longer work. I’d never get round the suppliers quickly enough to
get them all in a mindset of what had to change and when.
Suppliers had previously been informed of future plans on a ‘need to know’ basis
through their organisational ‘gatekeepers’ in the purchasing department at Cymru.
New work was put out to tender, and the lowest-price bid secured the business.
Setting up a supplier association was viewed as the best way to address the needs and
timescales for changing the supply chain. Suppliers could be involved simultaneously in
reducing lead times from two weeks to two days (receipt of order from TELE to delivery
at end-user’s site). This would be achieved through improved responsiveness, both in-
bound and outbound. Far Eastern competitors would be unable to match such service
levels and total logistics costs.
In setting up the supplier association, priority was given to suppliers who supplied
parts for final assembly of the telephone, especially those that supplied colour-related
and mechanical parts which would have maximum impact on lead-time reduction.
Seven tier 1 suppliers and one tier 2 supplier agreed to take part, and the network is
shown in Figure 8.7.
The Cymru supplier association was therefore formed from a wide variety of compa-
nies, in terms of both size and industry sector. In a marked break with the past, Cymru
kicked off the association with an inaugural meeting that presented confidential prod-
uct development and market information. The aim of the association was ‘to promote
best practice, improve overall supply chain performance and support product develop-
ment’. This was to be achieved by self-help teams committed to sharing knowledge and
experience in an open and cooperative manner. Many suppliers were concerned that
CASE STUDY
8.3
276 Chapter 8 • Integrating the supply chain
the association was being formed ‘as a disguise for margin reduction’, and were reas-
sured when Cymru insisted that the main task was cost reduction. More open commu-
nications and an emphasis on mutual cost reduction were seen by suppliers as essential
foundations for the new association.
The initial activity was to benchmark all members to ‘gain an understanding of the
strengths and weaknesses of current processes and practices relative to a best practice
model’. Areas for benchmarking were those that Cymru had itself established already as
competitive priorities. They were:
● quality: ppm of components received, goods produced and goods shipped;
● productivity: value added per employee, throughput and operation times;
● delivery: percentage of deliveries on time to customer and from suppliers;
● stock turns: stock turn ratio;
● continuous improvement: improvement plans, team activities and employee devel-
opment programmes.
The results of the benchmarking process stimulated much interest among the suppli-
ers. The account manager of one of them commented:
Benchmarking is very important. We need to know from the customer what he
thinks of us. How do we rate against other suppliers in the association? I want to
know because it could be I’ve got something to learn from another supplier.
Following the benchmarking phase, suppliers met every quarter to formulate strat-
egy, share market and product development information, and share plans for imple-
menting best practice. The new plans were then deployed within individual supplier
companies by training workshops. In turn, these plans spawned improvement projects
aimed at achieving the competitive priorities.
(Source: Aitken, 1998)
Question
1 The supplier association described above eventually collapsed. What causes do you
think might have led to this collapse?
Packaging Plastics
Polymers
Circuit
boards
Cordage
Cymru
Rubber Labels Fasteners
Figure 8.7 Cymru supplier association inbound supply relationships
8.5.2 Japanese keiretsu
One of the Japanese business structures that have received interest from Western
business is the keiretsu. Keiretsu is a term used to describe Japanese business
consortia based on cooperation, coordination, joint ownership and control.
Supplier networks 277
The keiretsu possesses the particular characteristic of having ownership and
control based on equity exchanges between supply chain members. Despite the
complexities of their ownership structure, keiretsu represents a supply chain
model that helps to explain the organisation of most companies in the automo-
tive and electronics sectors in Japan.
The supply chain keiretsu is a network in which activities are organised by a
lead firm. The typical supplier networks of large automobile and electronics firms
are managed and led by the major assemblers, as shown in Figure 8.8.
The formation of keiretsus occurred as a result of the strategy in the 1960s of
assemblers outsourcing subassemblies to increase capacity, leading de facto to the
emergence of a tiered structure. The keiretsu became instrumental in developing
the pyramidal structure of the supply base with its tiered arrangement to ensure
that the assembler only works directly with a reduced number of suppliers. These
suppliers in turn take responsibility for managing the next level down and so on.
The tiered keiretsu style of arrangement has now become the favourite supply
structure in the automotive industry worldwide.
Customers
Distributors
Manufacturer (focal firm)
1st tier suppliers
2nd tier suppliers/
sub-contractors
3rd tier suppliers/
sub-contractors
Figure 8.8 Japanese keiretsu structure
(Source: Aitken, 1998)
Brazilian-born Carlos Ghosn was despatched to Nissan after Renault took a 36.8 per cent stake in
the Japanese car maker in 1999. What he has done in turning round Nissan’s €15 billion of debt
and chronic losses has sent shock waves through Japanese business thinking. One of his main
targets for change has been the keiretsu system, which he described as a ‘gross waste of capital’.
Ghosn has broken up Nissan’s keiretsu system, and is reducing the number of suppliers from
1,200 to 600. Masaaki Kanno, head of economic research at JP Morgan’s Asian office, is quoted
as saying: ‘While many people in Japan realised this system should be changed, it has taken a
foreigner to change it. I am not exaggerating when I say Ghosn is a hero in Japan now. People
believe that he has saved Nissan from death.’
The system that has acted as a model for Western auto inbound logistics is being dismantled
by Nissan. Is this anomalous? Discuss.
Activity 8.6
278 Chapter 8 • Integrating the supply chain
8.5.3 Italian districts
A third way of organising supply partnerships has been popularised and led by
industrial districts in Italy (Becattini, 2002). Porter (1990) commented on the
strengths of the Italian ceramic tile ‘cluster’ in the Sassuolo district in his
Competitive Advantage of Nations. Producers benefited from ‘a highly developed
set of suppliers, support industries, services and infrastructure’, and the geo-
graphic concentration of firms in the district ‘supercharged the whole process’.
Districts are characterised by hundreds or even thousands of small, family owned
firms with a handful of employees working single shifts. The great majority of
firms are led by entrepreneurs who are craftsmen, often relying on the most basic
planning and control tools. Concern currently focuses on the ability of districts
to adapt to changes in global competition, as Case study 8.4 explores.
Supply chain internationalisation in the Marche shoe district
The National Association of Italian Footwear Manufacturers (ANCI – http://www.anci-
calzature.com) explains ‘The success of the footwear sector in Italy is linked to an enter-
prising spirit and to the structure of the sector. The structure is a “web” of raw material
suppliers, tanneries, components, accessories, machinery manufacturers, model makers
and designers. This has resulted in a territorial concentration of firms and the formation
of shoe manufacturing districts such as Marche, Tuscany, Venetia and Lombardy. The
leading position of the Italian shoe industry is due to superior product quality and high
levels of innovation.’
The Marche shoe district is the largest concentration of producers of shoes and acces-
sories in Europe. There are more than 3,000 shoes firms, almost 500 shoe components
firms and more than 100 leather firms employing almost 50,000 workers, with com-
bined sales of over €3 billion. The district is export-oriented, with more than 75 per cent
of production going abroad – mainly to Germany, the USA, Russia and increasingly to
Asia, including China.
District firms are mostly small family businesses with fewer than 20 employees, but
there are also a few larger firms with internationally recognised brands. The district
leader, Della Valle Group, produces high quality shoes and bags, matching a classic
style design with comfort and a sporty look. Traded on the Milan Stock Exchange, it
has sales of €570 million, and has developed strong international brands – such as
Tod’s, Hogan and Fay, plus a growing network of directly owned stores. Leading posi-
tions in specific market niches are occupied by Fornari (focused on trendy female
teenager shoes with its brand Fornarina), by Falc (specialising in children’s top-quality
shoes under Falcotto and Naturino brand names) and by Santoni (focused on top qual-
ity handmade shoes with prices up to €1,500). Top fashion firms such as Prada, Dolce
& Gabbana and Hugo Boss have signed licensing agreements with Macerata district
firms for the production of their shoe collections. Figure 8.9 shows two products from
the Santoni website.
The shoe district has developed as an integrated supply network, offering the vast
and competitive range of components and equipment required for making shoes –
from leather processing to soles, from cutting machinery to packaging. Logistics is
simplified by the geographical concentration of firms in the district and the personal
CASE STUDY
8.4
Supplier networks 279
knowledge and trust that characterises relationships among district entrepreneurs. Flex-
ibility by the small firms supply network enables the ups or downs of fashions to be met.
Since the 90s, however, the district network has had to come to terms with an out-
sourcing trend to low labour cost countries that is always a threat to mature and labour
intensive industries in developed economies. As a result, production of low cost shoes
has been almost fully outsourced, first to Eastern Europe and then to the Far East. In low
price product ranges, district companies retain only high value activities of design, mar-
keting and distribution in the Macerata district.
Outsourcing has also affected the core district products in medium to high quality
footwear. Here, however, foreign partners are involved only in less complex tasks to pre-
serve Italian style and quality. The result is an increasingly widespread network.
Processed leather is brought into the district after initial processing in Asia (mainly India
and China). The leather is then checked, cut and prepared to be sent to Eastern Europe
for further processing (mainly to Romania and Albania for sewing and hemming). Pre-
pared leather is returned to the district for finishing and assembly. Such partial
outsourcing – called outward processing traffic – preserves the high quality standards of
district shoes while cutting down on costs.
This makes logistics a critical activity. Transportation costs per unit have increased,
and responsiveness has been put at risk. This is of particular concern to a business that
is linked to fashion, where season collections and sales campaign deadlines cannot be
missed. While offshore sourcing has led to significantly longer lead-times, increasing in-
ventories and lot sizes are not an effective answer. Most district firms offer differentiated
products based on fashion trends, and would therefore face a high risk of mark-downs
at the end of season. Therefore, firms normally order only 25–30 per cent of forecast
requirements for a seasonal collection from their suppliers. Orders for the rest of the
collection are made in line with incoming orders from distributors and boutiques.
The new international network (including a sales network that is progressively ex-
tending towards Asia) has become so complex that even large companies find it diffi-
cult to manage. Leading district firms are tackling logistics issues through increased
information processing capabilities and through advanced services from logistics service
providers. In order to manage a production network spanning from nearby district sup-
pliers to Eastern Europe (mainly for shoes) and China (for clothing), Fornari has installed
SAP–AFS (Apparel and Footwear Solution). This new ERP system has allowed the com-
pany to improve visibility over production planning and tighten control over suppliers.
Fornari has outsourced outbound logistics, and is considering a logistics platform to
handle information exchange for district subcontractors and foreign suppliers to reduce
Figure 8.9 Italian style from the Santoni Collection
280 Chapter 8 • Integrating the supply chain
costs, an RFID system to improve responsiveness to European customers and a logistics
network to support its strong selling presence in China.
However, most district companies are not large enough to become attractive propo-
sitions for IT or logistics service providers. While they can’t afford to lose outsourcing
opportunities, these small firms risk being unable to manage the more complex net-
works that result. Moreover, most district entrepreneurs do not fully support the poten-
tial advantages of sharing outsourced services. Since they lack the accounting tools for
getting a complete picture of logistic costs, they do not perceive logistics as a competi-
tive weapon. They only care about emergencies when a rush order is required or when
a planned delivery is late, but dealing with such emergencies becomes more difficult
when distant foreign partners are involved. Therefore the District Committee is support-
ing development of a new logistics approach through its service company and through
regional incentives. Such a radical change in international supply chain management
cannot be limited to setting up new infrastructures and new services alone, but will
also require cultural changes that – led by larger firms – alter the mindsets of district
entrepreneurs.
Source: Professor Corrado Cerruti, University of Rome Tor Vergata
Question
1 Analyse strengths and weaknesses of the Italian shoe district logistics model.
8.5.4 Chinese industrial areas
Manufacturing of goods has been extensively transferred to low cost countries
such as China, and trade between China and Europe has increased dramatically
in the past 20 years. Europe’s imports from China have grown by around 21 per
cent per year for the last five years. In 2008, the EU imported €247.6 billion worth
of goods from China (European Commission, 2009). This comprises mainly
industrial goods: machinery and transport equipment and miscellaneous manu-
factured articles. China imported €78.4 billion from Europe, again mainly manu-
factured goods (for example, Liu, 2005). China is the EU’s second-largest trade
partner, while the EU is China’s top trade partner. Europe invested some €4.5 bil-
lion in China in 2009.
In order to keep pace with these burgeoning trade flows, China has developed
massive industrial areas. But ‘one of the unique characteristics of industrial policy
in China is that it involves government intervention at all levels, from the polit-
ical elite all the way down to village leaders’ (Liu, 2005). Government interven-
tion has created another way of organising supply partnerships by means of
industrial areas. First was Shenzhen in Guangdong province (1980s), then
Pudong of Shanghai (1990s). The latest has been Tianjin included in China’s 11th
Five-Year Programme (2006–10) as part of the country’s effort to boost regional
development of the Bohai Gulf Region in particular and the north-east and
north-west China in general.
Supplier networks 281
Binhai New Area – North China’s latest international
logistics centre
Located on the coast of east Tianjin, Binhai New Area (BNA) is at the intersection of the
Bohai Economic Belt and Jing-Jin-Ji Metropolitan Circle and Bohai Economic Sphere.
This is also the starting point of the Eurasian Continental Bridge and an important out-
let for countries adjacent to China, as shown in Figure 8.10:
BNA has been under construction for ten years, and is composed of three functional
areas:
● Technological and Economic Development Area (TEDA);
● Tianjin Port Free Trade Zone and Tianjin Port;
● an integrated administrative area – Binhai New Area Government.
With an area of 2,270km2, a coastline of 153km and a population of some 2 million,
the function of BNA is to service the northern regions of China. It is a base for modern
manufacturing and research applications, and a centre for international shipping and
logistics. A clear development plan was formed after continual amendment and optimi-
sation, and the nine functional areas have been defined – such as the advanced manu-
facturing zone, airport industry zone and the Binhai high-tech industry development
zone, shown in Figure 8.11.
CASE STUDY
8.5
To Shanxi and
Neimeng
Zhangjiakou
Chengde
To Neimeng,
Northeast
To Liaoning
Qinhuangdao
Tangshan
Tianjin
Tanggu
To Liaolu and
overseas
To Shandong
To ShandongTo Shandong
and HenanTo Henan
Shijiazhuang
Baoding
Bazhou
Beijing
To Shanxi
Langfang
Hengshui
Figure 8.10 Bohai Economic Sphere: BNA is on the coast, near to Tianj
282 Chapter 8 • Integrating the supply chain
The vision is for BNA to become a focus for the development of new technology
industries and so support the overall development of the whole region. A major ad-
vance has been the location of Airbus A320 production facilities in BNA. The Area’s suc-
cess has been built around:
● Location: the Eurasian Continental Bridge to Japan and South Korea, and the closest
port to central and west Asia, Tianjin serves as the link connecting domestic and for-
eign markets. Modern logistics development in the new area will support the con-
stant enlargement of international trade and foreign direct investment.
● Excellent facilities: BNA has become China’s largest deep-sea port, and its sea routes
connect to more than 400 ports in over 180 countries. The port has a modern EDI
network, and benefits from development of an International Trade and Shipment
Service Centre and the Tianjin Electric Port. As one of the four biggest cargo airports
in China, the Area has four channels connected to Europe. Tianjin will be the first
international airport that can transfer goods from one aircraft to another aircraft or
from aircraft to land. It has an effective highway system and is well connected to the
national train network.
Linkong Zone
Tianjin
Bohai Sea
Zhongxin Ecopolis
Binhai High-tech Zone
Binhai Tourist Zone
Advanced Manufacture Zone
Haigang Logistic Zone
Core Commercial Area North Port AreaBinhai
New Area
Port side Industrial Area
South Port Industrial Area
South Port Area
Figure 8.11 Nine functional areas
Supplier networks 283
● Growth: the Area has attracted many part-owned or fully foreign-owned firms.
More than half of the Fortune 500 list of companies have constructed factories in
BNA, which has transformed the Area into a major manufacturing base. Addressing
economic needs of the 21st century, BNA is focusing on aerospace, oil and chemical
engineering, equipment manufacturing, electronic goods, biomedical, new energy
and materials, light industries and textiles, and defence-related science and tech-
nology.
● Logistics: The last government plan called for a target for logistics added value of
RMB65 billion (€8 billion), taking 58 per cent of the service industry as a whole. To
achieve this goal, BNA is constructing six new logistics bases to form a large-scale,
multi-level logistics network, supplemented by sub-centres such as assembly, transit,
storage, processing and distribution. In order to develop a systematic operation of
shipment, harbour and port, Dongjiang Bonded port area was constructed. It imple-
ments a comprehensive international transfer, distribution, storage and related
service systems.
In spite of these success factors, a number of challenges to building an international
logistics centre remains:
● Third party logistics providers: there are more than 20,000 logistics-related firms in
Tianjin, 500 of which are located in the free trade zone – including more than 50
international logistics operators. BNA aims to be a logistics centre of excellence, so it
is important that the best international operators are there in strength. However,
only a few third party logistics operators are there which can provide integral serv-
ices, and few large international logistic firms have their headquarters in Tianjin. It is
of great concern to the government that firms can be persuaded to establish their
headquarters in the new Area.
● Construction work: the shipment centre is fundamental to the success of the logistics
centre, but construction work is behind schedule. The two centres – international
shipment and logistics – are seen by the State Council as having consistent goals
due to their overlapping roles. There is a need to develop a more unified plan for de-
velopment, with a coordinated policy and infrastructure construction logistics. The
coordination of policy and the relationship between different industries and adja-
cent provinces is needed to achieve joint development and integral operation of the
shipment and logistics centres.
● Supporting services: a comprehensive set of supporting services – especially for the
financial industry – has developed relatively slowly. The environment for the devel-
opment of banking, security, insurance, finance, asset management, and consul-
tancy and information services, needs to be improved. Trade services, market
operation, exhibition and spot sale, information collecting and broadcasting, social
supervision and talent exchange are currently weak. Supporting services such as
these are need to create a more favourable business environment, and to support
development of shipment, warehouse and logistics activities.
(Source: Professor Huo Yanfang, Tianjin University School of Management)
Questions
1 What measures would you recommend to BNA management to enhance the devel-
opment of its logistics capabilities?
284 Chapter 8 • Integrating the supply chain
8.6 Supplier development
Key issue: How can upstream supply processes be integrated to improve material
flow?
One of the keys to increased responsiveness in the supply chain is a high level of
integration with upstream suppliers. Analysis of the supply chain often shows
that product lead time is usually measured in weeks rather than days. This is
caused by excessive inventories of raw materials, packaging materials and inter-
mediate products being held upstream of the final point of manufacture. Not
only does this represent a cost burden, it also increases the P-time of the supply
chain as a whole.
Where suppliers appear unable to make improvements, or fail to do so suffi-
ciently quickly, customers who feel their own performance is being hampered –
yet remain committed to the relationship with the supplier – often seek ways to
remedy the situation. Many buying firms actively facilitate supplier performance
and capability through supplier development. This typically results in activities
aimed at developing and improving overall capabilities and performance of the
supplier towards the goal of meeting and serving the needs of the customer.
Supplier development consists of any effort of a buying firm with a supplier to
increase its performance or capabilities and meet the buying firm’s short-term or
long-term supply needs. Unfortunately the temptation for buyers to gain short-
term advantage still exists in supplier development to the detriment of long-term
partnerships. Also, meeting the needs of buying firms is not necessarily linked to
development that would enhance overall supply chain competitiveness. There-
fore care must be taken not to lose sight of end-customer needs in the transac-
tions between specific pairs of companies.
Various trends are observable as leading-edge companies seek to improve their
management of the upstream supply chain, including:
● integrated processes;
● synchronous production.
8.6.1 Integrated processes
A key focus of supplier development should be the alignment of critical
processes: that is, new product development, material replenishment and
2 There are further concerns which government intervention finds hard to resolve.
‘Lack of coordination from within Tianjin and between Tianjin and other regions has
resulted in duplicated developments and cut-throat competition in the Bohai Gulf
Region in general and in Tianjin in particular. The dependence on water diverted
from the Yangtze River Basin or from desalination is also challenging the sustainable
development of Tianjin’ (the Tianjin Binhai New Area as China’s next growth pole,
http://www.eai.nus.edu.sg/BB331 ) Check out this website and find others to
explore the sustainability concerns of the Chinese logistics centre model.
Implementing strategic partnerships 285
payment. This alignment needs to consider collaborative planning and strategy
development.
It is perhaps the concept of joint strategy development that distinguishes inte-
grated supply chains from mere ‘marriages of convenience’. While the customer
will always be pre-eminent in the determination of joint strategic goals, involve-
ment of key suppliers in this process benefits all parties.
Process integration can be enhanced through the creation of supplier develop-
ment teams. The purpose of these teams is to work with suppliers to explore ways
in which process alignment can be achieved; for example, seeking to establish a
common ‘information highway’ between the vendor and the customer, or work-
ing to establish common product identification codes. Nissan in the UK reports
that supplier development teams have been a significant element in its success in
creating a more responsive supply chain.
8.6.2 Synchronous production
Linking upstream production schedules with downstream demand helps to im-
prove material flow. The creation of a ‘seamless’ network of processes aims to dra-
matically reduce inventories while greatly enhancing responsiveness. The
Japanese concept of heijunka seeks coordination of material movements between
different processes in the supply network. Heijunka is often referred to as ‘levelled
scheduling’, which involves distributing volume and mix evenly over a given
time period. Output of each major process in the supply chain therefore matches
end-customer demand as closely as possible throughout that time period (Harrison,
2005).
Transparency of information upstream and downstream is essential for syn-
chronisation to work. For example, the supplier must be able to access the cus-
tomer’s forward production schedules, and the customer must be able to see into
the supplier’s ‘stockroom’. The virtual supply chain envisages partners in the chain
being linked together by a common information system, so that information
replaces the need for inventories.
Another approach that seeks to improve synchronous supply chain processes is
that of vendor-managed inventory (VMI). Here, the supplier takes responsibility for
planning and controlling inventory at the customer (see section 8.4). The advan-
tage is that a large element of uncertainty in the supply chain is removed
through shared information. The need for safety stock can thereby be dramati-
cally reduced.
8.7 Implementing strategic partnerships
Key issue: What are the barriers to achieving strategic partnerships in the supply
chain?
In earlier chapters, we referred to ‘partners’ as other firms who happen to share
the supply network with a focal firm. And in section 8.3, we started to develop
the term ‘partnership’ to address the evolution of additional features from a
286 Chapter 8 • Integrating the supply chain
Open market
negotiations
Price-based negotiations
arm’s length relationships
Fewer suppliers
longer-term contracts
Information links
e-enablement, integration
Joint SC strategies,
technology sharing
Cooperation Coordination Collaboration
Figure 8.12 The transition from open market negotiations to collaboration
(Source: After Speckman et al., 1998)
basic, arm’s length relationship. Here, we use the term ‘strategic partner’ to refer
to a supply partner with whom a focal firm has decided to develop a long-term,
collaborative relationship. ‘Collaboration’ may be the ultimate objective of a
number of phases through which a supply relationship may evolve. A transition
route from open market negotiation to collaboration is shown in Figure 8.12:
Obligational aspects of the relationship increase from cooperation to collabora-
tion. Coordination can be defined in terms of establishing ‘rules of the road’
whereby partners can work together. This is the key step to integrating the supply
chain. Collaboration goes beyond integration by including long-term commit-
ments to technology sharing and to closely integrated planning and control sys-
tems. The two firms become interdependent, that is, they adapt to each other
and develop common logistics governance processes. Case study 8.6 describes
what happened in one such relationship.
A strategic partnership at WheatCo–ChemCo
WheatCo and ChemCo are two US chemical corporations, both leaders in their fields
and with similar sales (around $2 billion per year). Eight years prior to our study, the
two companies formed a 20-year strategic partnership with the objective of gaining
competitive advantage through mutual access to low cost raw materials. One outcome
was the establishment in the UK of a small ChemCo facility (70 employees) on a large
WheatCo site (700 employees). The ChemCo facility was located next to the WheatCo
‘Basics’ unit, and linked by a bridge. While a fence divided the two plants, selected em-
ployees were able to pass between the two by means of swipe card access. A ChemCo
manager commented:
We are symbiotically linked. If you take away the ChemCo and WheatCo
signs, we’re really one site . . . we have a relationship and it’s an umbilical cord.
ChemCo was dedicated to production of a chemical additive used in the production
of rubbers, paints and other compositions. The feedstock used in the ChemCo process
was supplied by the WheatCo ‘Basics’ unit. The manufacturing process of the additive
generated a gaseous by-product, which was recycled back into the WheatCo feedstock.
Half of the additive made on the ChemCo site was sold to WheatCo’s ‘Rubber’ unit, and
the rest to other customers in Europe and the US (see Figure 8.13). The two firms
thereby formed a ‘closed loop’ supply chain – whereby they were both customer of,
and supplier to, each other. The production processes operated on a round-the-clock
basis and there was very little buffer stock within the supply loop: ‘if we have a problem,
then ChemCo has a problem ten seconds later’. This close interdependency of logistics
processes meant that operating teams were in contact on a 24-hour basis. There was a
CASE STUDY
8.6
Implementing strategic partnerships 287
direct telephone link between WheatCo and ChemCo operators to allow easy commu-
nication and instant warning of changes in either of the processes, or to inform of
production stoppages.
The supply relationship was multifaceted, with interactions taking place at many lev-
els. Locally it included plant management, engineers and operators. In the US, an exec-
utive contact was appointed by each firm to manage the relationship at a strategic
level. This applied in particular to the global contract agreement, which provided the
commercial terms for the relationship. A joint Steering Committee determined the local
operational strategy for the relationship and provided guidelines to two other joint
teams: ‘quality improvement’ and ‘technical’.
Eight years after the supply relationship began, the upstream WheatCo process had
become unreliable. There were also quality issues with the chemical additive supplied
by ChemCo, which impacted rubber production at the downstream WheatCo unit. In
the early days of the relationship, operators had been encouraged to socialise through
company events and plant visits. This allowed a common language to be developed,
through interaction:
’we may spend a day there, they spend a day here’ and thus ‘we didn’t need
to communicate where if something did go wrong they would automatically
take care of it’.
More recently, the relationship had developed some disturbing ‘arm’s length’ charac-
teristics. Both partners were implementing internal programmes which drew attention
away from the supply relationship. At shop floor level, less interaction and fewer visits
were allowed. This was made worse by employee turnover. As a consequence, opera-
tors felt that they could no longer ‘put a face to a name’. Lack of interaction, together
with the recurring technical issues, put a strain on the overall relationship. Recognising
that a blame culture had developed, site management from WheatCo and ChemCo de-
cided to organise a ‘Team Day’ to ensure that operators, shift managers and engineers
from the three manufacturing units could meet, socialise and be trained on the specifics
of the supply loop. However, the ‘Team Day’ was cancelled due to a company-wide
Recycled B3 gas
Raw material
supply
B2 gas
Other customers
WheatCo ChemCo
Fluid bed reactor
feedstock 1 & 2
manufacture
building 150
Chemical
additive A1
manufacture
Rubber
manufacture
building 88
Figure 8.13 The WheatCo–ChemCo relationship
288 Chapter 8 • Integrating the supply chain
workforce reduction plan announced by WheatCo: given the circumstances, such a so-
cialisation event was seen as inappropriate.
(Source: Koulikoff-Souviron and Harrison, 2007)
Question
1 Use the template shown in Figure 8.14 to help describe what had happened to the
relationship between ChemCo and WheatCo.
And here it is important to offer a word of warning. It is apparent from our re-
search (Koulikoff-Souviron and Harrison, 2007) that strategic partnerships are
very demanding and resource intensive. So it is necessary to determine where is
the most appropriate point along the route in Figure 8.12 for a given supply rela-
tionship. There is no point in pursuing a partnership just because it is ‘more to
the right’ in Figure 8.12. In some cases, as stated earlier, open market negotiations
will be most appropriate.
The transition from multiple sourcing and arm’s length negotiation of short-
term, purchase-price-allocated contracts to one based on cooperation, collabora-
tion, trust and commitment requires a supply chain process to be put in place
which needs designing, developing, optimising and managing. A key step in
achieving this is to ensure that supplier development and purchasing teams are
fully involved in the changes.
Failure to do this often leads to purchasing executives undertaking behaviour in-
compatible with fostering successful strategic partnerships. While many are familiar
with – and voice support for – partnerships, in practice their approach and practices
are not supportive. Barriers that have been identified include the following:
● There is an inappropriate use of power over the supply chain partner.
● Buyers focus on their own company’s self-interest, often because they are incen-
tivised to do so.
● There is a focus on the negative implications of entering into partnership.
● While buyers value trust, commitment and reliability, they continue to be
opportunistic and seek gains at their partner’s expense.
● Price is viewed as the key attribute in supplier selection.
These barriers, which are explained below, show that the decision criteria used
by buyers retain a legacy of the traditional approach where the choice of lowest
price remains the most defining characteristic. Unless such behaviour is changed,
it prevents supply chain relationships from developing beyond a crude applica-
tion of commercial power, where the free market is used to instil discipline and
promote a supply base in which it is assumed that the fit survive. An explanation
of the above barriers is as follows.
Power
The ability of one member in the supply chain to control another member at a
different level can be detrimental to the overall supply network, and can provide
Implementing strategic partnerships 289
a source of conflict. Conflict is clearly associated with power, arising when one
organisation impedes the achievement of the goals of another. For example, in
retailing, shelf space is a key resource that has potentially conflicting implica-
tions for the retailer and for its suppliers. The retailer looks for maximum return
on space and contribution to its image, while the supplier seeks maximum shelf
space, trial for new products and preference over competitors.
Focus on negative implications of partnership
Buyers consider the benefits gained through heightened dependence on a smaller
number of suppliers less favourably, and tend to highlight the risks. Buyers also
consistently view the cost-saving aspects of supply chain management as more
important than the revenue-enhancing benefits.
Opportunism
A key issue that prevents partnerships from enduring appears to be the gap be-
tween the strategic requirements of long-term partnerships and tactical-level
manoeuvring – in particular, opportunism. It is a problem to resolve this, given
that the dimensions that characterise close working relationships also provide
both opportunity and increased incentive for opportunistic behaviour. This is
caused when partners cannot easily obtain similar benefits outside the relation-
ship and when specialised investments have been made. Buyers often assume
that suppliers will take advantage if they become too important, and as such act
to prevent this. The consequences for the partnership relationship come second
in their considerations.
Self-interest
Companies face difficulties in establishing and maintaining supply chain part-
nerships. Even in the automotive industry, often considered the supply chain ex-
emplar, companies keen to implement single sourcing continue to multi-source,
particularly for non-critical items and commodity items. They rarely enter into
collaboration even when the customer is dependent on the supplier – that is,
when the product is strategically important and alternatives are limited – and in-
stead set their self-interest higher than the need to act according to common best
interest.
Focus on price
The focus on price may be due in some part to buyers having trouble valuing
matters such as know-how, technological capability, a particular style of produc-
tion or a spirit of innovation and therefore being unable to price them accurately.
Their concern that suppliers may act opportunistically tends to lead them to
avoid entering into areas where these factors prevail. Significantly, one of the key
areas that feature these traits is that of design and development. It seems that, in
this area, buyers find it extremely difficult to measure designer performance or
the amount of productive time spent during design, and therefore feel the need
to guard against high bids from suppliers.
290 Chapter 8 • Integrating the supply chain
8.8 Managing supply chain relationships
Key issue: How can broader-based relationships be formed between trading part-
ners in the supply chain?
8.8.1 Creating closer relationships
The traditional supplier–customer relationship has been limited to contact pri-
marily between the customer’s buyer and the supplier’s salesperson. Other func-
tions, such as information systems, are kept very much at arm’s length. Indeed,
the customer’s buyer argues that dealings with the supplier should only go
through him or her: in that way, they ensure that sensitive communications,
such as those affecting price, are limited to a single channel.
This traditional style of relationship (‘bow-tie’) is contrasted with a multiple-
contact model (‘diamond’) alternative in Figure 2.6. In the ‘diamond’ version,
contacts between different functions are positively encouraged, and the arm’s
length relationship of the ‘bow-tie’ is replaced by active relationship manage-
ment and supplier development processes. This is exemplified by the remarkable
changes in the supplier portfolio at the UK high street retailer BhS. In the early
1990s BhS had over 1,000 suppliers. Now it has just 50. But the nature of the re-
lationship with the 50 is quite different. There are now multi-level connections
between the supply chain players, and a high level of electronic collaboration.
There is also a much greater involvement by the remaining 50 suppliers in high-
level strategy development at BhS.
We found that even the closest and most interdependent supply relationships in
practice exhibit a tension between togetherness (a tendency to see the requirements
for working together in the supply relationship) and separateness (the frustration of
joint work or the positive aspects of working separately. Koulikoff-Souviron and
Harrison, 2007). Figure 8.14 shows this tension as an arrow that connects two con-
trasting behaviours.
Together
Tension
Separate
• congruent goals
• information sharing
• aligned coordination mechanisms
• joint decision making
• common knowledge base
• labour turnover
• bonus schemes not aligned
• lack of explicit relationship goals
• separate decision making
• focus on internal organisation
Figure 8.14 Creating closer relationships
(Source: After Koulikoff-Souviron and Harrison, 2007)
We concluded that logistics disciplines provide a focus for coordination around
which other aspects of a supply relationship revolve. If failures such as product
quality and process breakdowns did not happen, then adjustments would not be
necessary. It is the failures inherent in the management of physical product flows
that make these adjustments necessary, and which encourage the partners to
Managing supply chain relationships 291
work together. Management of physical flows demands heavy-duty coordination
mechanisms between supply partners. This can be overlooked by senior
managers – who tend to focus on contractual aspects of a relationship, and to
overlook its procedural implications and the necessary resource commitment.
Coordination manifests itself as a tension between mechanisms that bring the
partners together – hence stressing the benefits of achieving shared success – as
well as mechanisms that drive the partners apart. Separateness can be derived
either from a failure to coordinate (because of various technical or organisa-
tional reasons) or from the need to focus on the requirements of the internal
organisation.
However attractive such processes of bonding may appear, in practice the or-
ganisational boundaries and vested interests inhibit the rate at which relation-
ships deepen. These have been described as a series of factors as a result of
research in the auto industry.
8.8.2 Factors in forming supply chain relationships
Lamming (1993) proposed nine factors for analysing customer–supplier relation-
ships, which have been modified and extended below:
● What the order winners are: for example, price, product range, technology ad-
vantage, superior product quality.
● How sourcing decisions are made: is it, for example, competitive tender, auctions,
supplier accreditation and sole source?
● The nature of electronic collaboration: is it transactional, information sharing or
collaborative?
● The attitude to capacity planning: is this seen as the supplier’s problem, as a prob-
lem for the buyer (tactical make/buy/additional sources) or as a shared strate-
gic issue?
● Call-off requirements: does the customer (for example) alter schedules with no
notice, require JIT delivery against specified time windows, or require synchro-
nised deliveries of major subassemblies to the point of use?
● Price negotiations: are price reductions imposed by the buyer subject to game play-
ing by both parties, the result of joint continuous improvement projects, etc.?
● Managing product quality: does the customer help the supplier to improve
process capability? Are aggressive targets (e.g. 50 ppm defects) set by the cus-
tomer? Is the supplier responsible for quality of incoming goods and warranty
of the parts in service?
● Managing research and development: does the customer impose new designs and
have the supplier follow instructions? Does the supplier become involved in
new product development? Is the supplier expected to design and develop the
complete product for the next model?
● The level of pressure: how far does the customer place pressure for improvement
on the supplier to avoid complacency (e.g. 30 per cent price reduction in the
next two years)?
292 Chapter 8 • Integrating the supply chain
Within the European auto industry at present, the most significant factor
seems to be the last. Overcapacity among the assemblers has created massive
pressures for cost reduction. The supply chain accounts for 70–80 per cent of an
assembler’s costs, so this is the primary target. Figure 8.15 shows the inventory
profile for volume assemblers in Europe (Holweg and Miemczyk, 2002).
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Figure 8.15 Automotive supply chain: inventory profile
(Source: After Holweg and Miemczyk, 2002)
It is apparent that assemblers have been using their power in the supply chain
to optimise inventories around their own processes. Meanwhile, component
manufacturers upstream and dealers downstream are carrying huge inventories.
Dealer networks were holding some €18 billion of stock in disused airfields
around Europe! While long-term mutually beneficial relationships are often
talked about, the reality can be very different.
Select an industry of your choice and, within this, review the nine factors listed in section 8.8.2.
How would you classify the state of supply chain relationships in this industry?
Activity 8.7
Summary
What are the benefits of integration in the supply chain?
● Integration in the supply chain is developed through improved coordination
upstream and downstream. Coordination is concerned with establishing the
‘rules of the road’, whereby material and information flows work in practice.
Summary 293
● Research has shown that improved coordination between marketing and logis-
tics results in better performance in areas such as cycle times, inventories,
product availability and order-to-delivery lead times. Internal integration is
the essential precursor to external integration.
● Benefits of electronic collaboration listed by Nestlé UK include improved avail-
ability of product to the consumer and hence more sales. The total service is
improved, total costs are reduced (including inventory, waste and resources),
and capacities can be reduced owing to the reductions in uncertainty
achieved. In addition, processes that span two or more companies become far
more integrated and hence simple, standard, speedy and certain. Trading part-
ners become more committed to the shared plans and objectives.
● The closest supply relationships exhibit both ‘together’ and ‘separate’ tensions.
Separation, especially during periods when the relationship is under pressure
as a result of logistics failures, demands continuous remedial work. Research in
the auto industry indicates that heavy downward cost pressures on suppliers
limit the progress at which relationships deepen.
● JIT2 aims to achieve inter-company collaboration manually by placing cus-
tomer and supplier together as supplier-in-plant.
● Electronic collaboration can be undertaken in three ways: transactional (the
transmission of fixed-format documents with predefined data and information
fields); information sharing (a one-way process of providing access to informa-
tion such as product description and pricing, sales information, inventory and
promotional calendars); and collaborative planning (electronic collaboration
at strategic, operational and tactical levels).
What are the different types of relationship in the supply chain?
● Supply chain relationships can vary from arm’s length (characterised by a
focus on price, and by few points of contact between the organisations con-
cerned), to vertical integration at the other (characterised by integration of
processes and by contacts at all levels).
● The choice of the appropriate relationship is helped by recognising that some
suppliers are more strategic than others. One way to segment the supplier base
is to use the purchase portfolio index, and to divide suppliers according to
strategic, bottleneck, non-critical and leverage characteristics.
● Partnerships may bring added value to supply relationships, and have been
described using seven factors: the sharing of information, trust and openness,
coordination and planning, mutual benefits and sharing of risks, a recognition
of mutual interdependence, shared goals, and compatibility of corporate
philosophies.
● Three stages of the development of partnerships have been defined: coopera-
tion, coordination and collaboration. The move towards collaborative partner-
ships is characterised by increases in the time horizon and the scope of
activities involved.
How can closer supply chain relationships be implemented?
● Supply base rationalisation seeks to reduce the suppliers with whom an organ-
isation deals directly to a smaller number of strategic suppliers. Rationalisation
294 Chapter 8 • Integrating the supply chain
involves re-tiering the supply chain so that other suppliers are placed under a
lead supplier, or ‘tier 1’ supplier.
● Supplier associations bring suppliers to an OEM or tier 1 supplier together for
the purpose of coordination and development. They also aim to improve the
quality and frequency of communications between members. In practice, asso-
ciation companies benchmark each other, and formulate improvement proj-
ects aimed at increasing the competitiveness of the overall network.
● Keiretsu is the term used to describe the supplier association in Japan. Here, the
additional characteristics are that ownership and control of the network are
based on equity exchanges between members. Keiretsu structures have at-
tracted recent criticism because of their relative inflexibility and high capital
cost.
● Districts are a distinctly Italian solution to competitive advantage which involve
the clustering of numerous SMEs in a focused network with close geographic
distances between partners. Again, flexibility to respond to globalisation issues
is proving to be a challenge.
● Industrial areas have supported China’s extraordinary economic growth over
the last 20–30 years. They have been developed by long-term, detailed govern-
ment planning and financing. Binhai New Area exhibits many textbook
features – such as clustering of firms around the state-of-the art port and airport.
There are challenges too, including better third party logistics, development of
the shipment centre and supporting services.
● Improved responsiveness from supply chains is facilitated by integrated
processes (including joint strategy determination) and synchronisation (coor-
dinated flow facilitated by transparency of information upstream and down-
stream).
● Barriers to implementation include the inappropriate use of power, self-inter-
est, a focus on negative implications, opportunism, and a pre-occupation with
price.
Discussion questions
1 Consider the use of partnerships with customers to improve competitiveness. Discuss
this within a group scenario using the following guidelines:
a Make a list of companies in your chosen company’s industry known to undertake
supplier development. This should include all its customers and other companies
that are potential customers.
b Make a list of all the types of development and improvement that your chosen
company would like help with.
c Assemble these lists along the two sides of a grid, following the example shown in
Figure 8.16. Mark on the grid where each of the companies is able to provide the
necessary help.
d Examine the grid you have constructed and identify the following:
● issues that require help that current customers provide;
● issues that require help that only potential customers provide;
References 295
Im
p
ro
ve
m
e
n
t
h
e
lp
r
e
q
u
ir
e
d
Companies that help suppliers
Company A Company B Company C Company D
Key
Strong positive link
ISO 9000
Process improvement
Communication systems
Environmental legislation
Weak positive link
Figure 8.16 A supplier development grid
● issues that require help that no one provides;
● customers (current or potential) that provide a great deal of help;
● customers (current or potential) that provide little or no help.
e Use these five criteria as the basis for identifying companies that should be valu-
able in ensuring your company’s long-term success. These companies are the
ones that should be considered as likely partners.
f Having identified the likely partners, identify the difficulties in establishing part-
nerships and the problems in maintaining them.
g Conclude with the actions that you would undertake to overcome the problems
associated with partnerships in order to achieve their advantages.
2 ‘Supply chain relationships don’t mean anything. At the end of the day, it depends
entirely on who has the most power. It’s the big boys in the supply chain who decide
just how much of a relationship there’s going to be.’
Discuss the implications of this statement.
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Stank, T.P., Daughtery, P.J. and Ellinger, A.E. (1999) ‘Marketing/logistics integration and
firm performance’, The International Journal of Logistics Management, Vol. 10, No. 1,
pp. 11–24.
References 297
Van Hoek, R. and Weken, H.A.M. ‘The impact of modular production on the dynamics of
supply chains’, International Journal of Logistics Management, Vol. 9, No. 2, pp. 25–50.
Windahl, C. and Lakemond, M. (2006) ‘Developing integrated solutions: the importance
of relationships within the network’, Industrial Marketing Management, Vol. 35, No. 7,
pp. 816–18.
Suggested further reading
Brown, S. and Cousins, P. (2004) ‘Supply and operations: parallel paths and integrated
strategies’, British Journal of Management, Vol. 15, No. 4, pp. 302–20.
Cousins, P., Handfield, R., Lawson, B. and Petersen, K. (2006) ‘Creating supply chain rela-
tional capital: the impact of formal and informal socialisation processes’, Journal of Oper-
ations Management, Vol. 24, No. 6, pp. 851–63.
Das, T.K. and Teng, B.S. (1998) ‘Between trust and control: developing confidence in
partner co-operation in alliances’, Academy of Management Review, Vol. 23, No. 3,
pp. 491–513.
Fawcett, S. and Magnan, G. (2002) ‘The rhetoric and reality of supply chain integration’,
International Journal of Physical Distribution and Logistics Management, Vol. 32, No. 5,
pp. 339–62.
Fernie, J. and Sparks, L. (eds) (2004) Logistics and Retail Management (2nd edn). London:
Kogan Page.
Li, S., Ragu-Nathan, B., Ragu-Nathan, T. and Subba Rao, S. (2006) ‘The impact of supply
chain management practices on competitive advantage and organisational perform-
ance’, Omega, Vol. 43, No. 2, pp. 107–24.
Ploetner, O. and Ehret, M. (2006) ‘From relationships to partnerships – new forms of coop-
eration between buyer and seller’, Industrial Marketing Management, Vol. 335, No. 1,
pp. 4–9.
Randall, G. and Seth, A. (2005) Supermarket Wars: Global strategies for food retailers.
Basingstoke: Palgrave Mcmillan.
Scarborough, H. (2000) ‘The HR implications of supply chain relationships’, Human
Resource Management Journal, Vol. 10, No. 1, pp. 5–17.
C H A P T E R 9
Sourcing and supply management
Introduction
Supply management, enshrined in Kraljic’s (1983) formative article ‘Purchasing must
become supply management’, is concerned with inbound logistics (Figure 1.2), and
addresses the broad task of coordinating the inbound flow of materials – including
supplier selection, risk management, and material planning and control. ‘Procure-
ment’, or ‘purchasing’, focuses on the upstream part of the supply chain, and on
interfaces with suppliers in particular. One of Kraljic’s forward-looking comments was:
Few focal firms today can allow procurement to be managed in isolation from
the other elements of their business systems. Greater integration, stronger cross-
functional relations and more top management involvement are all necessary. Every
facet of the purchasing organisation, from system support to top management style,
will ultimately need to adapt to these requirements.
The planned objectives of this chapter are to explain:
● value contributions that procurement can make to the supply chain;
● what procurement does or the basic procurement process, strategically,
tactically and operationally;
● four operating principles for good procurement practice aimed at
leveraging supply market value;
a align internally before turning attention externally
b involve procurement early and completely to develop category
strategies
c focus on total cost of ownership, not just price
d after the order has been placed, the harder work of supplier
relationship management begins;
● the new talent profile for procurement professionals.
By the end of this chapter, you should be able to understand the principles of:
● the drivers of procurement value;
● rationalising the supply base;
● how to segment the supply base.
Objectives
300 Chapter 9 • Sourcing and supply management
Improved visibility
Viewed as more strategic
No change
Less visibility
Viewed as more tactical
Don’t know
2%
5%
2%
28%
29%
34%
Figure 9.1 Changing perspectives of procurement
Sourcing is concerned with the strategic decision of whether to obtain parts or
services internally (within the focal firm) or externally. If externally, then the
next decision is, which supplier to source from? Reflecting the literature, we use
the terms ‘supply management’, ‘procurement’ and ‘sourcing’ interchangeably.
Procurement is essentially a functional domain of the supply chain, just like
manufacturing or distribution. The operational focus of procurement is to ensure
that supplies of goods and services are in place so that a focal firm can produce its
product and/or service and ship it to the end-customer. Tactically, procurement
also contributes to basic value drivers – such as price competitiveness and service
levels. Strategically, procurement holds the potential to accelerate innovation,
and drive step changes in costs and performance levels. In recent years there has
been an increasing focus on procurement, which is being regarded as more
important and strategically relevant. Figure 9.1 shows how more than half of the
respondents to a recent survey indicate that modern-day economic dynamics
and circumstances raise procurement’s importance and strategic visibility. Pro-
curement provides an important perspective on the supply chain.
This change in perception can be explained by the parts and services that are pro-
cured by a focal firm as a portion of total value add created. With outsourcing and
Far East sourcing dominant in many supply chains, firms have become increas-
ingly dependent on suppliers for the customer value they generate. Procurement
professionals have become more of a critical group of supply chain agents whose
role is to create supplier value and align it with customer value creation. That is a
significant migration towards an increasingly strategic role for these professionals,
away from their traditional roots as order processors and/or price negotiators.
Key issues This chapter addresses three key issues:
1 What does procurement do?: the strategic, tactical and operational roles of the
procurement function. Drivers of procurement value.
What does procurement do? 301
Explore
supplier
markets
Analyse
spend and
needs
Contract and
manage
suppliers
Tender and
negotiation
Develop
category
strategy
Strategic
sourcing
Contract and
catalogue
management
Project
requests
Pay
Receive
Order
Project
negotiations
Order
cycle
Figure 9.2 Procurement strategic sourcing, tactical contract management
and operational ordering cycle
2 Rationalising the supply base: supplier rationalisation programmes and why they
are needed.
3 Segmenting the supply base: strategic, bottleneck, non-critical and leverage
items. The impact of sustainable supply chain management (SSCM). Preferred
suppliers, policies per segment, vendor rating – leading to ‘customer of choice’
status. Procurement talent.
9.1 What does procurement do?
If the purpose of the procurement process is to help ensure ‘supply’ in the ‘supply
chain’, how is that achieved? Essentially there are two key subprocesses to con-
sider, as shown in Figure 9.2. After specifying needs for supplies, there is a supply
market search for the supplies that are needed. This is followed by the selection of
supplies and the firms who make them. After this process, the suppliers have been
contracted, but they have not yet delivered the physical goods. For this, we have the
operational process in which supplies are ordered and received, and suppliers are
paid for their services.
In Figure 9.2 strategic, tactical and operational procurement are shown as inter-
linked circular processes. On the right are the operational procurement activities
that focus on placing orders, receiving goods and paying invoices. In order for
these processes to run smoothly, automation through ERP (section 6.1) or
e-procurement tools is often valuable. But aligning procurement processes with sup-
pliers can be even more valuable, linking ordering systems on the ‘buy’ side with
shipment systems on the ‘supply’ side. Thus EDI helps to reduce errors, accelerate
shipments and reduce transaction costs. Managerial integration can create even
greater benefits. This type of integration takes time, effort and investment, and, as a
result, it cannot be achieved with all suppliers. So focal firms contract with selected
suppliers and agree upon product and service catalogues (middle circle of Figure 9.2)
so that – in the operational process – not every purchase needs to be treated as a new
one. Buyers can order from selected and pre-qualified suppliers so that they do not
have to find fresh sources and negotiate new commercial terms for every order.
302 Chapter 9 • Sourcing and supply management
Aligning contract and catalogue management effectively means that the left
circle in Figure 9.2 is needed – strategic sourcing. Suppliers are selected and con-
tracted for longer-term relationships in a particular area of spend. But prior to
that, the company’s need for procured products and services is assessed in depth,
its current spend with suppliers in each area of spend is assessed, the supplier
market is studied, and a strategy to meet business needs by means of a procure-
ment strategy is developed. Typically, this strategy is developed by a team of buy-
ers, but includes business users and stakeholders such as manufacturing. Often
senior management is asked to sponsor and sign off on strategies. In short, there
is a lot that happens before procurement actions such as tendering for framework
agreements even begins. Development of a strategy for a given category of spend
might lead to the conclusion that the category would be better made in-house,
and so should not be tendered at all. The result of the strategic sourcing process
typically is the appointment of suppliers whose contracts are used in tactical pro-
curement (production planning, project sourcing, etc.) and operational procure-
ment. Based upon tactical and operational experiences with contracted suppliers,
performance is often evaluated and rated. Vendor ratings can then be used as the
basis for supplier development and relationship management (section 9.2).
Figure 9.2 can be used to assess the maturity of a procurement function. If pro-
curement is mostly focused on ‘procure and pay’ and ‘operational’ activities,
then its buyers are more tactical in nature. If a focal firm allocates staff and time
to activities more to the left, it can be expected to see greater returns on its efforts
and have the opportunity to align procurement more deeply with strategies and
drivers of customer value.
Figure 9.3 offers an indication of time allocation based upon industry bench-
marks for staff in different parts of the process. Staff mostly focused on the far
right operational procurement activities will allocate little time to strategic sourc-
ing and supplier relationship activities, whereas staff focused on the left should
not be allocating too much time on ordering, pricing orders and tracing ship-
ments and payments. If that is the case, it is likely that operational processes are
not running smoothly enough, leading to the escalation of many operational is-
sues and/or staff is not strategic enough in capability or positioning all together
to deliver procurement value.
9.1.1 Drivers of procurement value
Depending upon the drivers of customer value and industry, structure procure-
ment has different contributions to a supply chain’s competitiveness to make.
The most well known is to ensure cost efficient supply of goods and services. This
driver is particularly valuable in:
● narrow margin industries;
● price-sensitive markets;
● focal firms that have a high procured value ratio, meaning that the value of pro-
cured goods and services is high in comparison to revenue generated. In such
environments a high share of total costs is managed in the procurement process.
What does procurement do? 303
14.1%
31.2%
37.8%
17.0%
Other (training intelligence
gathering, etc.)
Supplier relationship
management
Strategic sourcing
Procure-to-pay and
operational
Figure 9.3 Indication of time allocation for procurement value generation
1142 28
382
9 754
596 30
Revenues Profit Salaries Write-offs External
spend
Addressable
spend
Savings
potential
Figure 9.4 ‘Waterfall’ of revenue, purchasing spend and profit
Figure 9.4 shows an example of such an operating environment. A company
with €1.1 billion in revenues buys in €754 million. So, in this example, procured
goods and services amount to almost 70 per cent of revenues. After investments,
other costs and salaries, the company makes a narrow 2.5 per cent or €28 million
in profit. If procurement is able to lower prices on all the procured goods and
services by only 5 per cent it will more than double profits. This explains why,
especially in recessionary periods, more attention is paid to the cost reduction
potential that procurement holds, as shown in Figure 9.1.
304 Chapter 9 • Sourcing and supply management
Revenue from procurement service
Maturity in external benchmarks
Shareholder value generated
Supplier innovation contribution
Contribution to revenue generation
Savings per employee
Delivery accuracy
Spend per employee
Procure-to-pay processing accuracy
People development
Top tier supplier spend volume
% compliant spend
Procurement ROI
Payment terms
Procurement costs
Supplier performance
% spend under management
Cost avoidance
Cost savings
0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00%
Figure 9.5 KPIs used in 2010 by 200+ respondents to Procurement Intelligence Unit survey
But viewing procurement as essentially a function to drive down costs ignores
its enormous strategic potential. As Cousins and Speckman (2003) say:
To view procurement as a cost savings activity only is to sentence one’s company to
competitive failure. Many firms are only now recognizing that by leveraging the
expertise of their supply base gains can be made that lead to a sustainable competi-
tive advantage.
Research of the Procurement Intelligence Unit, as shown in Figure 9.5, shows
that cost savings are the still the most commonly used measures of procurement
performance today.
However, cost savings are not the only contribution that procurement can make
towards competitiveness of a supply chain. Ensuring reliable delivery of supply
helps ensure that production schedules are met and customer deliveries are not at
risk. Also JIT delivery needs to be negotiated and implemented with suppliers. In
lean operating environments this reliability is of high value for seamless process
execution. In more agile environments (section 7.2) responsiveness of the supply
base is of particular value and, again, capable suppliers need to be selected. Also,
avoiding risks of discontinued supply and supplier bankruptcies or supply inter-
ruptions are among the contributions that procurement can make to supply chain
performance. Innovations and contributions to step changes in services and serv-
ice levels are more easily achieved through close supplier relations.
It is for these reasons that it is commonly recommended that four operating
principles should be followed:
● Align procurement internally towards its broader strategic role within the focal
firm before turning to supplier relations.
What does procurement do? 305
● Involve procurement early and fully in supply chain design and development,
not just when a contract needs to be drawn up about prices for a supplier
already selected.
● Focus on total costs of ownership (see below) or customer value sought, not
solely on price.
● Do not consider the procurement job done when a supplier contract is signed;
this moment marks the start of the supplier relationship management work
(principle IV below) that is arguably harder than the initial sourcing and
contracting work, and more time and resource intensive.
If these four principles are met, procurement staff will be provided with the
incentive to allocate substantially more time to strategic and supplier relation-
ship management tasks. Such changes are not without their detractors. A com-
mon view is that it is hard to show the savings for such broad-based and
long-term developments, whereas it is easy to show how much procurement has
saved by squeezing prices. And it is risky to become dependent on suppliers who
may then take advantage of the buyer’s perceived weakness. But ‘strategic supply
implies that supply chain wide skills, expertise and capabilities are brought to
bear by the full set of supply chain partners. They are united in the belief that by
working collaboratively they will accomplish goals that they could not otherwise
have achieved’ (Cousins and Speckman, 2003).
Consider procurement contributions to managing the supply chain in three different sectors:
construction, consumer electronics and grocery retailing. Include in your consideration margins,
price v service as drivers of customer value, and the ratio of procured value against revenues.
Activity 9.1
Operating principle I: Business alignment
The first operating principle touches upon the work that an organisation needs to
do internally, before it turns to the supply base. Given procurements focus on
and dominant role in supplying these upfront steps are often ignored or not
focused on sufficiently. The downside of that is that procurement might be sourc-
ing supplies that are not fully right for business needs, running the risk of focus-
ing on the wrong supplies, wasting supplier time and credibility internally, as
well as company credibility in the supply market.
So if procurement’s role is to assure the inbound flow of materials, it is impor-
tant for procurement professionals to be closely aligned with their peers in the
supply chain. Without that it will be hard to know exactly what to buy and what
opportunities in the supply market are most valid to consider. Achieving this
alignment takes consistent effort, much of it on the part of procurement profes-
sionals themselves.
Often, however, procurement is governed as a staff department, implying a
degree of remoteness from supply chain operations. Even though in principle
any governance system can work, it does require talent to achieve that. Figure 9.6
306 Chapter 9 • Sourcing and supply management
Best-practice factors in purchasing Performance improvement, %
Purchasing capabilities/talent management
Mindset and aspirations
Strategic influence of purchasing
Purchasing processes/strategies
Cross-functional collaboration
Knowledge, information management/IT
Performance tracking
Structure of purchasing organisation
1-point improvement in overall score
58% explained
by talent!
25
16
16
13
12
8
7
3
100
Talent
Figure 9.6 Weight of factors associated with 1-point increase in purchasing performance score
shows how, according to McKinsey, talent-related factors help explain the major-
ity of improvement in procurement performance (Reinecke et al., 2007). Organi-
sational structure is found at the very bottom of Figure 9.6. So when procurement
professionals ask for better organisational position or a more central role in the
supply chain (and this happens frequently) this is a reflection of weakness. Align-
ment needs to be achieved – while position is earned by means of talent.
How is alignment achieved in procurement? It is achieved at a number of
stages, times and levels. Business plan alignment is achieved around the annual
business planning and review cycle at a senior level between business unit man-
agement and procurement leadership. Alignment around specific business objec-
tives that need to be addressed can be achieved through cross-functional
operation of a project team. Coordination around specific contracts can be regu-
lated by ordering policies and authorisations which specify that orders over a cer-
tain value need to be co-signed by procurement.
Refreshing strategic sourcing at Heineken
Heineken, the world’s third largest brewer, based in the Netherlands, with worldwide
annual sales of over €14 billion and purchased value of over €7.5 billion annually has
taken procurement very seriously for years. And it does so not only within the supply
chain discipline but across the business. There is senior executive ownership for the
function and presidents of operating companies will host ‘president meetings’ where pur-
chasing best practices are exchanged. For strategic sourcing there are cross-functional
project teams that run projects. Peers from the business collaborate with procurement
professionals in the team to ensure proper specification of needs and processes. And
regional buyers collaborate in regional purchasing platforms to align priorities, strate-
gies and tactics. Strategic questions that tend to be discussed in the meetings with the
regional presidents include:
● development of multiyear alliances;
● backward integration through the acquisition of a glass, can, PET or malting plant;
CASE STUDY
9.1
What does procurement do? 307
Alignment requires of professionals:
● The ability to identify potential levers for alignment and for spotting business
needs.
● Willingness to see functional expertise as a price of entry, not a differentiator,
as peers expect you to be knowledgeable about procurement, that is not a
likely subject of conversation: business needs are.
● Service focus to centre the effort around peer needs, not procurement desire to
drive value.
● Flexibility in articulating the agenda differently depending upon business
needs and creativity to find a way to stick to the agenda, despite different busi-
ness needs.
● The ability to ‘sell’ ideas through participation rather than through the use of
authority or position (again, asking for that is a sign of reluctance to engage).
● Standing strong on business values, such as ‘customers first, positions last’;
‘improvement forever, complacency never’; ‘value centricity, position focus
eccentricity,’ to help keep the discussion focused.
Ways to achieve alignment include:
● Embedding/stationing key procurement staff in the businesses to make the
part of the business ‘fabric’.
● Using metrics of the business to evaluate performance.
● Study business plans and business training material.
● approval of new sources;
● substitution of packaging or ingredients;
● roles and responsibilities in promoting innovation through accessing suppliers’ inno-
vation capability.
In short, through careful alignment of purchasing within the function and externally
with top management and other functions within the business, purchasing is involved
in some important strategic discussions.
Question
Supply Management (27 August 2009, web reference below) commented: ‘The world’s
third-largest brewing company, which brews and sells more than 170 beers and ciders
globally including Heineken, Amstel, Foster’s, and Strongbow, announced the savings
in its half-year financial report. The company said they were achieved through
Heineken’s ‘Total Cost Management programme’, a three-year cost reduction initiative
for 2009–2011 targeting areas of supply chain, commerce and wholesale. In total, the
programme delivered savings of €50 million up to the end of June. Of this, 28 per cent
was achieved through using the company’s buying power to drive down costs and
secure more competitive contracts with suppliers.
Does the centralisation of procurement of major variable spend items (such as agri-
cultural inputs, production materials, packaging and labels) count as ‘alignment’?
(http://www.supplymanagement.com/news/2009/beer-money-for-heineken-as-supply-chain-makes-savings/)
308 Chapter 9 • Sourcing and supply management
● Interview executives, get invited to business meetings to understand the
agenda of priorities and issues.
Markers of aligned procurement organisations include:
● Strong business partner focus among staff.
● Incentives and performance indicators are not solely financial – such as cost
savings based on PPV (purchase price variance – the ‘standard cost’ that has
been budgeted and then used as a measure of procurement’s performance. This
ignores other performance measures such as those based on quality and deliv-
ery reliability).
● Results are not claimed by procurement but procurement contributions are ref-
erence in business results (annual reports, for example).
● Procedures and authorisations exist but are hardly referenced due to seamless
working relationships in which peers acknowledge each other’s role and have
clarity about roles and responsibilities.
Business alignment at Cofely
Cofely, in the Netherlands, is an installation and technical services company with annual
revenues of €1.3 billion and with some 7,000 staff. The firm is organised into 14 distinct
businesses with their own profit and loss accounts. These businesses either serve partic-
ular regions of the country or particular market segments. Specialised market segments
include the infrastructure business that focuses specifically on infrastructural works, in-
cluding traffic management and control systems, and the oil and gas business that
serves the oil industry at oil rigs and drilling locations.
Alignment at the highest level is achieved by the CEO’s inclusion of procurement in
his so-called ‘high five’: the top five strategic priorities for the company. It is not strange
that, as a result, procurement is featured in the company’s annual report management
letter and featured articles. The inclusion of procurement in the strategy is explained by
the strategy’s focus on improving margins in a narrow margin industry and the com-
pany’s high procurement ratio.
The strategic mandate is used by the procurement leadership team to engage in busi-
ness alignment efforts with the heads of the company’s 14 business units. Account
plans are developed for each business unit based upon consultation of management
teams during the annual planning process. The account plan, similar to what sales man-
agement would develop for external clients, contains (among other things):
● Business objectives that procurement can help meet.
● Projects and operational priorities that can help achieve these objectives and that
become joint priorities.
● Performance indicators to evaluate progress and results.
● A review and evaluation setup (frequency of review, participants, etc.) to ensure that
the account plan becomes a living document for collaboration during the business
plan execution.
Project teams tend to be cross-functional, involving business peers that have a key
interest in the project and getting the specs right.
These three levels of business alignment are hardwired into ordering policies and
authorisations that specify that large orders need to be co-signed by procurement.
CASE STUDY
9.2
What does procurement do? 309
Principle II: Developing strategies for procurement categories
Principle II calls for involvement of procurement early and fully, right across the
product lifecycle, from design through to disposal. This broad-based involvement
allows procurement to adopt a long-term, strategic role and to seek innovative
opportunities to leverage supplier market value. The focal firm can encourage
innovation by reducing or eliminating three kinds of problems (Henke and
Chun, 2010):
● conflicting objectives among the customer’s functional areas through alignment –
principle I;
● excessive and often late engineering or specification changes;
● price-reduction pressures on suppliers that consider only the focal firm’s finan-
cial needs.
When approaching the procurement of goods and services in a particular cate-
gory or area of the supplier market strategically, the focal firm can be much
smarter about how to approach the supplier market. Procurement will already be
knowledgeable about supply market opportunities against business needs, and
have benchmarked its approaches against competition. Developing strategic
sourcing requires the following to be in place (Kocabasoglu and Suresh, 2006):
● elevation of the procurement function from a traditional, transaction-processing
mode to a more strategic role;
● effective cross-functional coordination of procurement with other functions of
the firm (principle I again);
● information sharing with and development of key suppliers.
Strategic sourcing can be defined as a systematic process that ‘begins with
thorough analysis of spend across a focal firm, and then organises that spend by
focusing on selected suppliers for best results on cost, new product develop-
ment, quality and service’ (Smock, 2004). A procurement strategy is typically fo-
cused on a category of products or services (category management is described
in section 6.2.1), and so is often referred to as a category strategy (for example,
Monckza et al., 2009). Categories could range from health and beauty in grocery,
to surfacing products in the construction sector. Chapter headings of a strategy
document for a procurement category typically include:
● Specification of supply chain stakeholders engaged in the development of the
strategy for the purpose of properly specifying business needs and aligning
business stakeholders.
● Overview of current procured value and existing supply base.
● Analysis of the supply market and supply market trends (what are the major
suppliers, what are their strategies, how interesting are we as a customer?).
● Competitor approaches and benchmark performance in the category.
● Consideration of the need to buy versus the opportunity to in-source; should
we procure at all, and if we do, how will suppliers connect into our supply
chain processes?
310 Chapter 9 • Sourcing and supply management
Visible costs
Invisible costs
Software licences (9%)
Customisation and implementation (43%)
Hardware (26%)
IT personnel (14%)
Maintenance (7%)
Training (1%)
Figure 9.7 Total cost of ownership – initial purchase price might only be a fraction
● Total cost of ownership considerations (see following section).
● Supply facing strategic options and relevant performance indicators for this
category; taking in all of the above how should we approach the supply base,
including relationship considerations; do we want to negotiate or form a part-
nership, for example?
● Implementation and communication plans that focus on engaging the user
base in the business and along the supply chain during and after the procure-
ment project.
The availability of strategies for procurement categories rather than the more
limited procurement role in buying is a key indicator of a focal firm’s supply
chain maturity.
Principle III: Total cost of ownership, not just price
Because savings are such a predominant traditional focus of procurement, it is
understandable that negotiating lower prices is a captive domain for procure-
ment professionals. While price is an important aspect of the value exchange
with the supplier, it might be a limited focus (see logistics strategy drivers in sec-
tion 2.5). Price is typically the order winner in commoditised markets, where
products and services are easily exchangeable. But delivery speed and reliability,
product quality and innovation are more often the order winners in other mar-
kets. So, when squeezing prices relentlessly, service levels may drop in order to
compensate for the price discounts. In section 1.4, we reviewed the trade-off be-
tween cost and time: more of one means less of the other. It is for this reason that
it is wiser to analyse total cost of ownership before negotiating price.
The total cost of ownership (TCO) concept acknowledges that price might only
be the tip of the iceberg of cost drivers. Figure 9.7 displays this graphically. For ex-
ample, price matters when buying a car. But so do maintenance costs, warranty,
durability of the car, how quickly you can take delivery, what are the running
What does procurement do? 311
Table 9.1 TCO summary report
CPC#: PO678496
Volume 100
Description:
NT9X7601PCB151X105
Component Family: 21
Suppliers: Supplier A Supplier B Supplier C
• Price per unit: 98.62 106.48 104.7
• Lifecycle costs/unit
Divisional purchasing 1.498 0.899 0.449
Materials engineering 0.288 0.288 0.288
Transportation 19.955 4.455 0.179
Receiving 0.413 0.158 0.073
Inspect/screen 2.281 0.872 0.403
Work in progress quality 1.422 6.692
Accounts payable 0.033 0.015
Store/select 0.003 0.003 0.003
Deliver to workstation 0.006 0.006 0.006
Waste disposal 0.055 0.055 0.055
After-sale quality
• Total (Price + LCC) $124.54 $113.25 $112.86
costs (fuel, oil) and related costs (insurance, taxes). Beyond the initial purchase
price there are costs that occur over time, during the lifecycle of the product,
such as warranty. TCO is the equivalent to inbound logistics that cost to serve
(CTS, section 3.3.3) is to outbound logistics.
The objective of TCO is to get below the price of a purchase, and to identify how
much it costs a focal firm over the product lifecycle. This includes pre-purchase
costs such as supplier evaluation and QA. Table 9.1 shows a TCO model for three
suppliers of a component to a focal firm in the telecoms sector (Ellram and Siferd,
1998). While supplier A appeared to be the low-price supplier, it was highest TCO
once transportation and QA costs had been added to the basic piece part price.
The TCO situation can change over time. Figure 9.8 compares costs of products
A and B: product A has a lower purchase price but higher maintenance costs. As a
result, over time product A is more expensive than product B. If the purchase had
been made with the intention to use the product for >5 years, it would be advis-
able to purchase product B over product A.
Figure 9.9 compares costs of product C and D over time. Product C again has a
lower initial purchase price, but that price does not include shipping and packaging.
The price of product D does include shipping and packaging – making it a cheaper
product once at the factory (total delivered costs).
(Source: After Ellram and Siferd, 1998)
312 Chapter 9 • Sourcing and supply management
To
ta
l c
o
st
Product C
Product D
Purchase price
Packaging costs
Delivery costs
Figure 9.9 Cost of ownership over time for product C and product D
To
ta
l c
o
st
Purchase price
Maintenance costs Product A
Product B
Maintenance costs
Purchase price
1 2 3 4 5 6
Time in years
Figure 9.8 Cost of ownership over time for product A and product B
While it may be difficult fully to quantify total costs, simply considering total
costs before buying provides an advantage in procurement. For example, service
terms could be more important than price for a particular supply, and the cate-
gory strategy would show this. Alternatively, it could be that technological edge
is more of a differentiator between competitors, so this should be reflected in the
search criteria for suppliers. Table 9.2 lists cost items for different costs areas over
the product lifecycle, and activity 9.2 invites you to apply these.
Using the TCO checklist in Table 9.2, consider the purchase of: 1) a computer; and 2) a newspa-
per. List which cost factors might be relevant in the respective purchases, and compare your
views for the two.
Activity 9.2
Principle IV: Supplier relationship management (SRM)
After the contract with suppliers has been signed for a particular category, the
work of procurement is not done – even though traditionally that is what might
What does procurement do? 313
Table 9.2 Drivers of total cost of ownership
Cost area Cost item Applicable? Yes/No, how?
Purchase price Price
Delivery service Shipping
Packaging
Extra charge for express shipping
Taxes and duties
Warranty Repairs
Service
Operating costs Insurance
Training
Implementation costs Phasing out existing product
Disposing of existing product
have been thought. When a contract has been signed, it still needs to be imple-
mented. A lot of contracts that have been closed have never been fully imple-
mented due to lack of business support, lack of leadership with the new
supplier(s), or lack of alignment with business needs. So, again, without business
alignment and category strategies, contracting could be a wasted effort. But a con-
tract supplier that is not managed might be equally ineffective. Without imple-
mentation and supplier relationship management, many of the contracted
benefits evaporate before realising them during the contract’s duration. So, if not
managed past contract agreement, the procurement process will likely generate
limited value.
SRM aims for collaboration with suppliers so that a focal firm can ‘develop new
products competitively and produce goods efficiently’ (Park et al., 2010). The
basic steps to supplier relationship management are:
1 Reduce the supply-base.
2 Segment the supply-base.
3 Establish policies per supply market segment.
4 Implement vendor rating and improvement planning.
5 Assign executive ownership to most important suppliers to foster relationship
potential.
6 Manage towards customer of choice status.
Figure 9.10 proposes an integrative framework for SRM. The process of contin-
uous improvement is facilitated by the alignment of commodity strategies, sup-
plier selection, and long-term supplier collaboration supported by assessment
and development (Park et al., 2010).
314 Chapter 9 • Sourcing and supply management
9.2 Rationalising the supply base
Paradoxically, the first step to managing the supply base for value through rela-
tionships is to get rid of the majority of suppliers. The rationale for this action is
the inability of a focal firm to allocate development resource to suppliers when
there are simply too many of them.
One of the steps to prepare for reduction of the supply base is to collect the list
across business units and operating entities, together with the amount of annual
spend and which parts of the organisation are buying from which suppliers. This
information also proves valuable in strategic sourcing efforts because it is helpful
to have this information available in advance of developing a category strategy.
Based on this spend information, the opportunity to rationalise much of the
supply base may be revealed. For example, it may reveal that different business
units within a focal firm are buying from the same suppliers under different con-
tractual terms, or that a number of different suppliers are used for non-critical
items (next section) without anybody ever considering to contract a few with
better terms. It also tends to reveal that the majority of spend is concentrated
with a few suppliers, and that the remaining suppliers are high in number, low in
spend. The few suppliers with whom a lot of business is done are obvious candi-
dates for relationship management, others may not provide returns on the
substantial investments involved (section 8.7).
Supplier rationalisation at Nuon
Nuon, a Dutch-based utility company, had about 12,000 suppliers, the total spend with
whom was about €1 billion. The procurement team analysed this supply-base, and was
helped in this task because there was one single list of suppliers – which is not at all al-
ways the case! In more internationally operating companies there are often as many lists
CASE STUDY
9.3
Supplier
assessment and
development
Shaping
commodity
strategies
Supplier
selection
Collaboration:
supplier
involvement
Continuous improvement
Figure 9.10 A proposed integrative SRM framework
(Source: Park et al, 2010)
of suppliers as there are operating countries or subsidiaries. When studying the list of
suppliers, several issues emerged:
● All suppliers were essentially treated in the same way; their invoices were paid in strict
sequence of arrival, they all operated under the same generic terms and conditions,
and no time was invested in any of these suppliers unless there were problems. Part
of the reason for this was that the list was simply too long for procurement profes-
sionals to work other than in ‘firefighting’ mode.
● The list was too long for procurement professionals to be familiar with, let alone
manage all suppliers effectively.
● The list contained errors because it was not owned by procurement; there was a sup-
plier called IBM and a supplier called I.B.M. and a supplier called IBM the Netherlands
What the procurement team did was:
1 Assign ownership for the supplier list to the management team, and appoint a ‘point
person’ in the operational procurement team to administer the list. This person peri-
odically sat down with procurement teams (which all had respective categories under
their control) during ‘drive in’ days.
2 During these days the procurement teams met with the supplier list manager consec-
utively to review their list and correct errors, relocate suppliers when in the wrong
category, remove inactive suppliers or suppliers that did not fit within the category
strategy.
3 The supplier list manager also created ‘speed bumps’ (barriers) to introducing new
suppliers; new suppliers had to be submitted for inclusion and procurement might be
asked to underwrite their inclusion in the list.
It was found that simply assuming ownership over the list – a role not contested by
anybody – helped drive progress and awareness. Additionally, supplier rationalisation
targets were set, and the supplier count was placed on the management team’s ‘dash-
board’ (Case study 10.2) in order to consistently ensure managerial focus and scope
being devoted to the supply base.
After clearing a lot of errors and ‘clutter’ from the supplier list, it was found that less
than 10 per cent of the suppliers generated more than 90 per cent of the spend. In
other words, there was a long ‘tail’ of suppliers (activity 2.1) that had very little spend
and that were only supplying infrequently.
In order to reduce the supplier list further, the expenses policy was adjusted to elimi-
nate a substantial portion of the list where lunch places, restaurants and bars had been
asked to invoice rather than have the employee pre-pay and then claim. Also, a purchas-
ing card was introduced. This is a credit card in an employee’s name but linked to the
firm’s accounts. The introduction of this payment method allowed for a lot of small pur-
chases (for example, books, team outings and flowers) to be made by credit card –
without the need to have the supplier on the list. Finally, the ongoing focus of the organ-
isation strategically to source categories of spend helped reduce the supply-base. For
example, when contracts were developed for IT consultants, the list of IT consultants was
reduced from 200 to a manageable 16.
In just three years, these efforts helped to drive down the supplier list from 12,000 to
4,000 – making for a much more manageable supply-base. Also the structural focus on
the list helped track compliance with contracts (for example – are there suppliers on the
list that are not contracted? Are there old suppliers returning?) – simply because the list
was being actively managed and down to a controllable size.
Rationalising the supply base 315
316 Chapter 9 • Sourcing and supply management
A fundamental factor in supply base rationalisation is ‘which suppliers should
be selected for partnership’? Section 8.3 defines the characteristics of partner-
ships in the supply chain. Selection criteria for partnership should be based on
the products involved and ‘the supplier’s competencies – particularly their capa-
bility to contribute to new product development’ (Goffin et al., 2006).
9.3 Segmenting the supply base
Not all suppliers are created equal. There are large and small suppliers by spend;
suppliers that do business with multiple parts of a focal firm; suppliers that have
been contracted through a strategic sourcing effort – and those that are not.
Therefore it is advisable to segment the supply-base, just as we segment markets
and customers (section 2.2). In the best case scenario, supplier segmentation
should align with market segmentation, based on the notion that supply chains
should be organised from the customer back, across the businesses and compa-
nies involved (‘vertical integration’).
Basic segmentation criteria tend to include:
● the amount of spend with the supplier, and
● criticality of supplies for the smooth operation of the supply chain and for de-
livery to the customer.
Supplier segmentation is the supplier-facing version of customer segmentation in a B2B market.
So a salesperson meeting with a procurement person is like two different parts of the business
meeting each other, creating a match or a mis-match. Consider the conversation between a
salesperson visiting a client considered to be a non-core ‘cash cow’ (customers who can be de-
pended on for steady, dependable cash flow with little opportunity for growth), while the pro-
curement person is considering the customer in terms of forming a strategic relationship. Also
consider the reverse situation.
Activity 9.3
A number of approaches seek to segment suppliers. The widely used purchase
portfolio matrix (Kraljic, 1983), one version of which is presented in Figure 9.11, is
based on the notion that a focal firm will seek to maximise purchasing power when
it can. This approach assumes that the key factors that affect the relationship are
the strength of the buying company in the buyer–supplier relationship, and the
number of suppliers able and willing to supply a product in the short term.
Strategic items
Strategic items are those for which the buyer has strength but there are few avail-
able suppliers. In this situation, procurement should use its power strategically to
draw suppliers into a relationship that ensures supply in the long term.
Segmenting the supply base 317
0
11
10
9
8
7
6
5
4
3
2
1
0.1 1 10 100
Buyer weakness
Company index = % supplier’s total sales
% buyer’s total purchases
Buyer strength
Bottleneck
items
Supplier market index
= no. of available
suppliers
Strategic
items
Non-critical
items
Leverage
items
Figure 9.11 Purchase portfolio matrix
Bottleneck items
Where the buyer has little power and there are few alternatives then these items
are termed bottlenecks. The aim of purchasing in this situation is to reduce de-
pendence on these items through diversification to find additional suppliers,
seek substitute products and work with design teams to ensure that bottleneck
items are avoided in new products where possible.
Non-critical items
With a good choice of suppliers, possibly through following a strategy of using
standardised parts, the traditional buying mechanism of competitive tendering is
most valid for non-critical items. Such items are the ones with the following
characteristics:
● not jointly developed;
● unbranded;
● do not affect performance and safety in particular;
● have required low investment in specific tools and equipment.
Leverage items
Where there are a large number of available suppliers and the buyer has high
spending power, then the buyer will be able to exercise this power to reduce
prices and push for preferential treatment. Naturally, care should be taken not to
antagonise suppliers just in case these favourable market conditions change. A
more tactical approach may be appropriate.
This approach to segmentation is heavily weighted towards the buyer’s view-
point. It is also a little unfashionable because it uses the term ‘power’ in supplier
318 Chapter 9 • Sourcing and supply management
Bottleneck
items
Strategic
items
Non-critical
items
Leverage
items
Pool
Pool
Simplify
Figure 9.12 Migration of bottleneck items
relationships, and assumes that traditional market-based negotiations will be
used for some product groups. However, it applies to many firms today, and re-
flects the tough approach taken by purchasing teams in some of their customers.
Accepting that these sorts of conditions are likely to prevail or even intensify, it is
clear that suppliers need to work on their relative strategic importance to a focal
firm in order to strengthen their position in a supply relationship. Indeed, this
may already be happening in the strategic quadrant, where the supplier tends to
dominate, according to a Dutch survey of procurement professionals (Marjolein
and Gelderman, 2007).
A major value of the Kraljic framework is that it helps procurement profession-
als ‘to move commodities and suppliers around specific segments in the portfolio
in such a way that the dependence on specific suppliers is reduced’ (Gelderman
and van Weele, 2002). Thereby, it is possible for positions to be changed within
the matrix – either by suppliers or commodities. For example, some bottleneck
items (such as, maintenance, repair and overhaul – MRO) might be migrated into
the leverage segment by simplifying the specification – or making it more generic
and so allowing pooling of demand between different product groups. Fig-
ure 9.12 shows such possible migration routes from ‘bottleneck’ to ‘leverage’. Such
migrations and more strategic supply relationships help in the implementation
of target pricing, whereby marketing in a focal firm establishes the price of a prod-
uct that will support the target market share. Target price less margin leaves the
target cost, which is then used to establish prices for suppliers (as well as design
and manufacturing target costs). Target pricing encourages more collaborative
partnerships, and less adversarial relationships (section 8.3). As Newman and
McKeller (1995) state, ‘cohesiveness is an ingredient of target pricing’.
Selecting a focal firm of your choice, use a copy of the purchase portfolio matrix (Figure 9.11)
and plot on it the names of its top ten customers and top ten suppliers. Which position would
your chosen focal firm prefer to be in?
Suggest actions that would improve the situation.
Activity 9.4
Segmenting the supply base 319
Bottleneck
items
Strategic
items
Non-critical
items
Leverage
items
Strategic
commodity
Transitional
commodity
True
commodity
High
Low
HighLow
Su
p
p
ly
r
is
k
Threat to triple bottom line
Figure 9.13 The sustainable purchasing portfolio matrix
But, in what may be a departure from the Kraljic framework, the impact of sus-
tainable supply chain management (SSCM) has apparently been to distort the famil-
iar relationships. By replacing the axes by risk to the triple bottom line (TBL, section
1.3.2) and risk to supply, Pagell et al. (2010) created modified segments (Figure 9.13).
‘Price’ becomes subordinated to ‘TBL risk’, with all three values – environmental,
social and economic – at stake. Some segments remained relatively unchanged –
bottleneck and non-critical items are in the same positions when TBL risk is low. In
the strategic segment, risks have been expanded to encompass all three TBL values.
The biggest change was in leverage items. In SSCM, focal firms are dividing leverage
items into three sub-segments:
● True commodities: retain the characteristics of the ‘traditional’ leverage items:
suppliers would have an impact on only a single value of the TBL.
● Strategic commodities: are recognised for their potential ability to be leveraged
in terms of their long-term competitive advantage. Instead of using buyer
power, small numbers of selected suppliers were being given long-term con-
tracts and premium prices to invest in new product development.
● Transitional commodities: these may initially be regarded as strategic commodi-
ties. But by working to reduce TBL risk, it may be possible to convert them over
time into true commodities.
The emphasis is less on price, more on supply-base continuity. Partners in SSCM
aim to work together in a manner that ‘allows them to thrive, invest, innovate
and grow’ (Pagell et al., 2010).
9.3.1 Preferred suppliers
Suppliers that win contracts as part of a strategic sourcing project tend to be con-
sidered as preferred suppliers. These are favoured over non-contracted suppliers,
and with the implementation of these contracts the suppliers get support and
stewardship from the customer. Often, their success is a target for a procurement
professional, and contract usage is measured as a key performance indicator. So
320 Chapter 9 • Sourcing and supply management
Number of suppliers Time/resource share Management focus
Strategic relationships
• 3–5 year relationship duration
• Board or executive sponsor from the business
• Business reviews, top-to-top, partnership board
• Joint improvement plans
• Innovation roadmap sharing
Preferred relationships
• 2–3 year relationship duration
• Vendor rating
• Joint effort to compel for compliance
• Contracted and improvement expectations
Commercial relationships
• Rationalise number of suppliers
• Automate purchase to pay
• Hands-free interactions
Few
More
(Too)
Many
No focus
Some
focus
Lot of
focus
and
resources
Figure 9.14 Supplier segments and policy considerations
these suppliers are kept closer, and the relationship receives attention. But time
and resources are not committed by the customer to the extent allocated to
strategic relationships.
9.3.2 Strategic relationships
A very small number of suppliers can become of strategic importance to the fun-
damental success of a focal firm, and to performance of the supply chain. The
single most important characteristic of such relationships is that there can be
very few. Unfortunately partnership-type terminology is one of the most inflated
business terms. The term is often used by sales personnel to try to establish an ap-
pearance of commitment, whereas the real commitment for these types of rela-
tionships is simply affordable and uneconomical to spread too thinly.
9.3.3 Establishing policies per supplier segment
If suppliers are segmented as a reflection of how they are not all similar, the obvious
next step is to agree upon, and implement, policies that reflect the differing nature
of relationships with suppliers in different segments. These tend to be centred
around the amount of time and resources allocated to the relationship (for example,
from few in the commercial segment to many in the strategic segment) and the de-
gree to which the relationships are embedded and stewarded inside the company.
Typical policy considerations are shown in Figure 9.14. After this step, we
move from preparing for supplier relationship success by weeding out select rela-
tionships and establishing the relationship framework. This helps to implement
differentiated levels of resource towards capturing relationship value. These ef-
forts are of increasing selectivity and commitment.
Segmenting the supply base 321
9.3.4 Vendor rating
Vendor rating is a measurement effort focused on supplier performance. Basic spot
checks on delivery reliability (correct quantities and times) are typically used for
commercial suppliers. Broader-based measures are needed for strategic and pre-
ferred relationships as shown in Figure 9.14. Vendor rating is not ‘measuring for
the sake of measuring’: it is measuring for the sake of jointly improving both supplier
and customer processes. In the best cases, vendor rating results are used as a basis
for a standing discussion of joint improvement opportunities between a supplier
and customer team of stakeholders. Joint action plans are developed and progress
is evaluated, joint improvement projects and teams may be involved. The supplier
is explicitly asked to offer improvement suggestions to the customer and perform-
ance challenges are jointly owned. They are not just reported to the supplier with a
one-sided assignment to ‘fix them’. In short, vendor rating is a mechanism to de-
velop and advance the relationship, and to centre relationship management on
business-relevant improvement opportunities, structurally and consistently. The
vendor rating results are discussed on a regular basis, and use an agreed set of met-
rics to provide structure and consistency in focus and commitment.
The steps involved in setting up a vendor rating system are:
1 Select the team: vendor rating is best undertaken by a cross-functional team of
stakeholders who have various interests in a given commodity from design
through to logistics. The process is not exclusive to the procurement
function – vendor rating works better when there are business peers of procure-
ment professionals involved in the dialogue to represent a broad internal client-
base. Often, performance data are partially collected based upon qualitative
input from users, and improvement suggestions should not come from procure-
ment alone. So, as in strategic sourcing, business engagement and alignment is
important preparation for vendor rating effectiveness.
2 Establish the rating criteria: the actual set of metrics used is a tool, and there is
some sophistication that goes into its design. For example, the metrics cate-
gories may be consistent across categories but with different weighting between
the categories depending upon the category strategy. Also metrics should be
consistent between suppliers in the same category to allow for comparison be-
tween suppliers. The metrics categories typically include price, delivery reliabil-
ity and quality, with innovation and process improvement as possible extras.
Delivery tends to be reliability more than operational in nature: an on time in
full (OTIF) measure, for example, that can be extracted from the focal firm’s ERP
system. Quality and innovation may be more subjective in nature.
3 Determine the effective weighting: this establishes the team’s view of the relative
importance of each criterion. This may be achieved by asking members to un-
dertake a paired comparison of the criteria that have been defined in step 2.
4 Score each supplier’s performance: team members are asked to rate the criteria for
each supplier. To minimise the risk of bias, a set of rating guidelines is estab-
lished for each criterion, and a scale agreed – for example, from 1 � poor to
10 � excellent.
322 Chapter 9 • Sourcing and supply management
Criteria Sub-criteria
Effective
weight
Criteria
score
Sub-total
Quality
Responsive
Discipline
Delivery
Financial
Management
Tech. capability
Facility
Total vendor
rating
Customer reject
Factory audit
Urgent delivery
Quality problem
Honesty
Procedural compliance
Attitude
Business skill
Tech. prob. solving
Product ranges
Machinery
Infrastructure
Layout
0.171
0.075
0.13
0.18
0.024
0.012
0.336
0.067
0.038
0.010
0.068
0.016
0.102
0.02
0.03
8
7
9
9
7
6
7
9
7
9
9
9
9
1.368
0.525
0.117
0.162
0.168
0.072
0.603
0.266
0.09
2.352
0.612
0.144
0.918
0.18
0.27
7.847
Figure 9.15 Vendor rating example
An example of the output of a vendor rating for a supplier (Yayha and Kingsman,
1999) is shown in Figure 9.15.
Sharing performance feedback may occasionally be considered risky or as giv-
ing up negotiation leverage when the supplier performance is good. That would
be true if negotiation leverage is all that matters, but in preferred supplier rela-
tionships that is not at all the case. These are the relationships in which good per-
formance is celebrated and shared as a joint success. Essentially, the customer
wants the supplier to do well. Additionally, with a continuous improvement
focus, no performance is perfect, so there is always work to be done and the per-
formance bar is always rising. Figure 9.16 shows the output for three areas – price,
quality and delivery reliability. While supplier A scores very positively on price, it
shows weaker performance on delivery reliability, prompting supplier and cus-
tomer to work on forecasting processes collaboratively.
Beyond vendor rating, there are advanced levels of business involvement in
supplier relationship management when it gets to more exclusive relationships,
as we explain next.
9.3.5 Executive ownership of supply relationships
The rationale behind executive ownership is that there is so much value to be
gained from select supplier relationships that it should not be left to procurement
alone to manage them – and that it is worth the involvement of senior executives
Segmenting the supply base 323
A B CSupplier
Quality
Delivery reliability
Price
Example action plan for supplier A
Focus area: ‘It is not just about price’
Feedback from customers: ‘We see defects frequently
while service is not the fastest at all’
Feedback from suppliers: ‘Earlier ordering information
might help speed up shipments and not rush quality control’
Action items: Assign improvement team to redesign
ordering and shipment process including shipping and receiving
Timing: Process redesign review in three months with sponsors
Figure 9.16 Example vendor rating report and action planning
from across business units that use supplier services and goods. Typically, compa-
nies will short-list their most important suppliers and invite senior executives of
business units that are prominent users of the suppliers on the list to assume
ownership of between one and three supplier relationships.
The role of an executive owner of the relationship includes:
● hosting two–three top-to-top meetings with peers from the supplier to discuss
the relationship and business opportunities;
● serving as a steward of the supplier inside the organisation;
● serving as an escalation point for usage and performance issues with the supplier;
● serving as a sponsor of joint improvement projects and ensuring proper re-
source allocation towards these projects.
Procurement may do most of the detailed work to support the executive owner,
but should not seek to take over the relationship. Rather, procurement should
seek to enable the relationship. If it is hard in a business to find executives who
are willing to take on ownership of a few supplier relationships, the value of sup-
pliers is not being properly recognised within the focal firm. In such cases, pro-
curement has some internal marketing to do. Alternatively, it may be that
executives already have suppliers that they regularly interact with, but on a more
informal basis. Here, procurement needs to infuse the systematic selection of the
shortlist and rigour into the way that relationships are managed. The value that
324 Chapter 9 • Sourcing and supply management
can be derived from this should provide the incentive. Finally, it may be that the
supplier will predominantly offer up salesforce resources to the exchange. In that
case there is work for procurement to do to ensure appropriate commitment to
the relationship on the supplier side. Without it the exchange will eventually un-
ravel and attention will shift away.
In addition to the very close ‘one on one’ engagement with select suppliers, a
lot of companies also use supplier awards and events to acknowledge and award
suppliers more publicly. These events can include a broader range of preferred
suppliers and be tied to vendor rating continuous improvement efforts. They also
serve as an effective channel for communication and supplier engagement.
Acknowledgement of suppliers by P&G
P&G host an annual supplier appreciation event where it makes awards to its best
suppliers. As a sign of the importance and prominence associated with this event by
P&G, the 2009 event was published on the very front page of the company’s website.
Suppliers of the year, such as Novozymes of Bagsvaerd in Denmark – a strategic enzyme
supplier for P&G’s laundry and cleaning products – achieved this recognition by ‘consis-
tently scoring the highest in broad-based qualitative and quantitative evaluations by
P&G employees throughout the supply chain’. The company’s global head of procure-
ment said during the event:
From market changing innovation to supply chain excellence, our supplier
partners are foundational for building a stronger future. P&G is at our best
when we have fostered relationships with our external business partners
that enable collaboration in achieving mutual goals, addressing challenges,
and delivering ongoing innovation.
(Rick Hughes, VP Global Purchases, P&G)
But perhaps more importantly – and as a sign of business ownership that could not
be more clear – the company CEO participated in the event and said:
I want to acknowledge the tremendous contributions and commitments that
our external business partners make to help us achieve our strategies and goals.
(Bob McDonald, CEO P&G)
(Source: Company website press release 4 November 2009 http://www.pginvestor.com/phoenix.zhtml?c=
104574&p=irol-newsArticle&ID=1350941&highlight=)
CASE STUDY
9.4
9.3.6 Migrating towards customer of choice status
A final stage in implementing and rolling out supplier relationship management is
more of an aspirational stage that is not achieved by many focal firms. In this stage
all the investment in the preparation for focus on a select few suppliers and the re-
source allocation geared towards selected suppliers, begins to pay off at an ad-
vanced level of supplier privileges. Supplier relationship management in many
respects is ‘reverse marketing’ – it is the marketing of a focal firm to its suppliers,
seeking to acquire preferred status as a customer. Think back to the segmentation
Segmenting the supply base 325
Tips for effective supplier relationship management
1 Supplier relationship management is a process not a one-off activity.
2 We need to align internally before looking outward, but often look outside first.
3 Again, this is also not just about price: do not set all measures in a one-sided way but
have the discussion about which measures to use as a basic level engagement with sup-
pliers, ending up with joint and shared scorecards.
4 Procurement challenges suppliers but should steward them internally.
activity 9.3: does this not have a lot to do with ‘selling’ the supplier? Again, this
goes well beyond the traditional approach of procurement as the function that
drives prices down through tough negotiations. This has everything to do with un-
leashing the full power of business-aligned procurement – with business engage-
ment, ownership and involvement at multiple levels, from category strategy
development, through strategic sourcing, through account planning and segmen-
tation and strategic relationship ownership. The purpose of seeking customer of
choice status is to acquire a level of support from suppliers, not just in price points
or shipment conditions but wholly and fully that is preferred to competition. In
search of this goal, supplier relationship management might pay off as a competi-
tive differentiator. This obviously requires an organisation’s ability to achieve a sta-
tus with its supplier making it worthy of such investment.
The recent recession seems to have driven US-owned auto manufacturers to-
wards this goal. Planning Perspectives carry out an annual survey of supplier rela-
tions in the sector. CEO John Henke said:
If there was a silver lining to the recession for US suppliers, it has to be that it
caused the domestic automakers to wake up and realise how important their sup-
pliers are to their future fortunes.
Henke ‘believes the US firms’ improvement reflects the fact that many of their
suppliers went bankrupt or were nearly bankrupt to the extent that it threatened
the auto businesses. This led to companies working hard to be fair and manage
their suppliers more equitably, while continuing to consolidate their overall
number of suppliers’ (Allen, 2010).
Customer of choice status entails several benefits, including:
● First access to innovations and R&D.
● Customised solutions on a technology, process, service and product level hard-
wired into company supply chain processes.
● Best account management staff allocated to the account.
● Supplier wanting to do more than needed.
● All senior executive ownership met with equal level engagement, both in senior-
ity, resource allocation, account management support and time commitment.
The box below offers a set of tips and suggestions for supplier relationship
management.
326 Chapter 9 • Sourcing and supply management
9.4 Procurement technology
As is the case with many parts of the supply chain there are several types of tech-
nology dedicated to procurement (sub-)processes. In the late 1980s during the
technology boom there were a lot of portals and e-auction sites and technologies
considered part of the big revolution. These technologies are however mostly re-
lated to the operational ordering and buying part of the process. Hence, one of
the reasons for it going bust was that its value contribution was mostly limited to
ease of operational ordering and price reductions but excluding more strategic
domains and advanced value drivers of procurement contribution.
Today, there are procurement technologies related to all process, from e-auction
technology (including B2B versions of eBay) for ordering in commodity markets to
e-sourcing process support software that can facilitate a strategic sourcing process.
Catalogues (supplier generated or internally managed) and e-procurement tech-
nologies are often used in the operational process. Then there are linkages into sup-
ply chain technology that are used in procurement including ordering in the ERP
system or the use of EDI linkages to suppliers to accelerate paperless ordering, order
confirmation and paying. Self-billing is often used by suppliers that are hooked
into the operational software of their customers; these suppliers can just bill for or-
ders generated in the ERP. Technology can help create ease of ordering and in fact
this can both be a way to compel the business into using preferred suppliers or a
way for procurement to create some basic-level customer satisfaction (making the
life of peers in the business easier). It should be noted however that technology in
procurement can make processes run smoother and more efficiently but can never
replace the value of top procurement talent (see following sections).
9.5 Markers of boardroom value
If procurement is such a lever of supply chain performance and competitiveness
in more and more operating environments and companies, it is understandable
that there are markers of boardroom value that may be found in advanced organ-
isations. These markers include:
● Explicit mention and coverage of procurement in the annual report, investors’
updates and CEO/CFO speeches. An increasing number of purchasing executives
5 Don’t try to do it on your own, the more sponsors and business interactions the better
(including for vendor rating).
6 If you do not know how suppliers are graded, the supplier might, as suppliers very
often conduct customer satisfaction surveys.
7 Measuring is less important than joint action planning, also share relative positions of
a supplier against its competition to drive up performance.
8 Any feedback conversation is an improvement opportunity to drive progress.
What does top procurement talent look like? 327
are finding their way to board-level appointments (Hall, 2010): ‘our study
found a 41 per cent increase over the past year in the number of European
companies with procurement represented on the board. And last year was up
32 per cent from the 2008 study. So, while we’ve frequently found that US
companies gave procurement far more recognition than European counter-
parts, that simply isn’t the case any more.’
● Published targets for procurement return in mergers, savings or supplier inno-
vation targets.
● Procurement targets are explicitly mentioned in the budget letter to the busi-
nesses at the start of the budgeting season, preferably with an expectation of
paragraphs of the business plan to include procurement references.
● All businesses have stated plans, objectives and key performance indicators on
their dashboard (see Case study 10.2) that relate to procurement so that they
are managing towards clear business-centric and mission-critical procurement
(related) targets.
● Internal service awards are being won by procurement professionals as a
sign of recognition within the company of its service and valuable business
contributions.
● A ‘tour of duty’ in procurement becomes a plus for general managers and heads
of business units, just like a ‘tour of duty’ in sales is – once this stage is reached
it is clear that, as a function, procurement has arrived and its impact in business
is acknowledged. Talent in procurement is not the sole property of the function
but becomes a company or supply chain asset. The nature of this talent is not
unique to procurement either as the next section will help clarify.
9.6 What does top procurement talent look like?
Obviously talent needs vary by supply chain segment, and within the procure-
ment segment it varies by subprocess. If savings are very important then negoti-
ating skills are important, particularly in the operational buying process. For
strategic sourcing, seeking to unleash contributions to supply chain competitive-
ness, a lot more skills are needed. Whereas, traditionally, negotiations skills are
emphasised in procurement, the list of skill requirements has grown long and far
beyond that. Skill requirements include:
● Strategic thinking in order to approach supply markets smarter and with com-
pany strategic priorities in mind.
● Entrepreneurial focus to be able to spot opportunities in the supply market
against end-market needs.
● Creativity and solution orientation to be able to find ways around supply mar-
ket constraints and barriers.
● Communication skills to engage internally and build bridges to suppliers.
● Quality and improvement focus to continue to improve the performance of
the supply base over time.
328 Chapter 9 • Sourcing and supply management
● Relationship skills, not to ‘wheel and deal’ but to develop joint ongoing
improvement focus with suppliers and grow those relationships over time.
● Stewardship skills to represent suppliers internally and ensure they achieve
proper alignment with the business.
● Consultative skills to engage with the business and ensure proper articulation
of business needs for suppliers to fulfil.
● Service posture towards business partners who specify and order, and towards
suppliers who actually do the majority of the work. While it is fine to report re-
sults, procurement talent should not seek the spotlight over suppliers and its
internal customers.
In short, this profile is ideally suited to Master’s graduates in the supply chain
domain. Often, procurement roles are much sought after, even if just for a few
years, due to the opportunity to make a clear and visible impact on large parts of
the business. Procurement results are clear and often targeted in investment up-
dates, merger and acquisition plans, budgets and business plans. So procurement
allows for demonstrable impact with senior exposure, which in turn makes it
an even more relevant milestone along the career path of future CEOs.
Summary
What is the role of procurement in logistics?
● Procurement is the upstream part of the supply chain that faces suppliers.
Given the amount of value procured in by most companies procurement plays
a key role not only in helping manage the company bottom line, but also in
ensuring critical suppliers and delivery service and product quality.
● Essentially, most companies and supply chains are critically dependent on sup-
plies and suppliers for customer service and performance. It is therefore recom-
mended that procurement is involved early and fully, so that strategies can be
developed per product category, strategies that appreciate total cost of owner-
ship, not just purchase price.
● Supplier relationships should be managed proactively with segments, perform-
ance measurement and management, policies per segment, and executive
ownership for key relationships.
● The talent profile required for effectiveness in procurement is that of (future)
top leaders of the company.
● The ability to demonstrate high level, concrete business impact within procure-
ment makes it a function much sought out by aspiring and ambitious talent.
How can a procurement strategy be crafted and delivered?
● Procurement strategy begins with internal business alignment of procurement
with other business functions. It continues with developing strategies for pro-
curement categories. It is guided by total cost of ownership, rather than purchase
price variance (PPV). And it facilitated by supplier relationship management.
References 329
● Supplier relationship management starts with rationalising the supply base. The
remaining supply base is then segmented. Strategic relationships are formed with
a small number of suppliers, and policies established for each supplier segment.
Supplier performance is established and monitored collaboratively using vendor
rating. The longer-term aim is to migrate towards ‘customer of choice’ status.
Discussion questions
1 List ‘before’ and ‘after’ descriptions for procurement as a function and the profes-
sionals within that function when considering what procurement came from (staff
order processor negotiating discounts after supplier selection was made by others)
and how it is described in this chapter when it comes to:
a business alignment and business involvement;
b stage and degree of involvement of procurement in supply chain design and
strategy;
c amount of time devoted to strategy discussion;
d link between category strategy, supplier segmentation, and vendor rating, and
company and supply chain strategic priorities;
e calibre of staff in the function (defined as: potential to migrate to other parts of
the business, potentially make CEO one day and have a visible impact on com-
pany and supply chain performance, both on a day-to-day basis as well as in
terms of progressing strategy).
Please also offer descriptions/examples of what these differences look like.
2 A recent CAPS report (Monckza and Petersen, 2009) listed ten top issues relating to
the implementation of procurement strategy:
● Vision, Mission and the Strategic Plan
● Commodity and Supplier Strategy Process
● Strategic Cost Management
● Engagement by Corporate Executives and Business Unit Leaders
● Human Resource Development
● Procurement & Supply Organisation Structure & Governance
● Measurement & Evaluation
● Total Cost of Ownership
● Functional & Business Processes, Practices & Systems
● Structuring & Maintaining the Supply Base.
Explain how each of these issues contributes to a well-crafted procurement strategy.
3 Explain what is meant by the term ‘triple bottom line’ (TBL), and why it is important
to procurement strategy. Elaborate the significance of TBL to supplier segmentation
strategy, paying particular attention to its impact on strategic and leverage items.
References
Allen, A. (2010) US Motor Giants Move up Supplier Relations Ranking, Supply Management, at
http://www.supplymanagement.com/news/2010/us-motor-giants-move-up-supplier-
relations-ranking/
330 Chapter 9 • Sourcing and supply management
Cousins, P. and Speckman, R. (2003) ‘Strategic supply and the management of inter- and
intra-organisational relationships’, Journal of Purchasing and Supply Management, Vol. 9,
No. 1, pp. 19–29.
Ellram, L. and Siferd, S. (1998) ‘Total cost of ownership: a key concept in strategic cost
management decisions’, Journal of Business Logistics, Vol. 19, No. 1, pp. 55–63.
Gelderman, C. and van Weele, A. (2002) ‘Strategic direction through purchasing portfolio
management: a case study’, International Journal of Supply Chain Management, Vol. 38, No. 2,
pp. 30–8
Goffin, K., Lemke, F. and Szwejczewski, M. (2006) ‘An exploratory study of “close” supplier–
manufacturer relationships’, Journal of Operations Management, Vol. 24, pp. 186–209.
Hall, S. (2010) Procurement Leaders Jump on Board, Procurement Leaders, http://blog.
procurementleaders.com/procurement-blog/2010/4/28/procurement-and-supply-chain-
jump-on-board.html
Henke, J.W. Jr and Chun, Z. (2010) ‘Increasing supplier-driven innovation’, Sloan Manage-
ment Review, Vol. 51, No. 2, pp. 41–6.
Kocabasoglu, C. and Suresh, N. (2006) ‘Strategic sourcing: an empirical investigation of the
concept and its practices in US manufacturing firms’, Journal of Supply Chain Management:
A Global Review of Purchasing and Supply, Vol. 42, No. 2, pp. 4–16,
Kraljic, P. (1983) ‘Purchasing must become supply management’, Harvard Business Review,
Sept/Oct, pp. 109–17.
Marjolein, C. and, Gelderman, C. (2007) ‘Power and interdependence in buyer supplier
relationships: a purchasing portfolio approach’, Industrial Marketing Management, Vol. 36,
No. 2, p. 219.
Monckza, R., Handfield, R., Guinipero, L. and Patterson, J. (2009) Purchasing and Supply
Management, 4th edn. Mason, OH: Cengage Learning.
Monckza, R. and Petersen, K. (2009) Supply Strategy Implementation: Current State and Future
Opportunities, CAPS Research, Arizona State University, at http://www.capsresearch.org/
publications/pdfs-public/monczka2009es
Newman, R. and McKeller, J. (1995) ‘Target pricing – a challenge for purchasing’, Interna-
tional Journal of Purchasing and Materials Management, Vol. 31, No. 3, pp. 13–20.
Pagell, M., Wu, Z. and Wasserman, M. (2010) ‘Thinking differently about purchasing port-
folios: an assessment of sustainable sourcing’, Journal of Supply Chain Management: A
Global Review of Purchasing & Supply, Vol. 46, No. 1, pp. 57–73.
Park, J., Shin, K., Chang, T.-W. and Park, J. (2010) ‘An integrative framework for supplier rela-
tionship management’, Industrial Management and Data Systems, Vol. 110, No. 4,
pp. 495–515.
Reinecke, N., Spiller, P. and Ungerman, D. (2007) ‘The talent factor in purchasing’, McKinsey
Quarterly, Vol. 1, pp. 6–13.
Smock, D. (2004) ‘Strategic sourcing: it’s now deeply rooted in US buying’, Purchasing,
2 September, pp. 15–16.
Yayha, S. and Kingsman, B. (1999) ‘Vendor rating for an entrepreneur development pro-
gramme: a case study using the analytic hierarchy process method’, Journal of the Opera-
tions Research Society, Vol. 50, pp. 916–1030.
Suggested further reading
Monckza, R.M., Handfield, R.B., Giuipero, L.C., Patterson, J.L. and Waters, D. (2010)
Purchasing and Supply Chain Management. Andover: South Western Cengage.
Van Weele, A. (2009) Purchasing and Supply Chain Management – Analysis, Strategy, Planning
and Practice, 5th edn. Andover: Cengage.
P a r t F o u r
CHANGING THE FUTURE
The final part of this book takes a somewhat different approach. It takes the lessons
learned in the previous nine chapters and considers how future changes can be
expected. The rationale for these changes is based on earlier lessons combined with
current leading-edge thinking on logistics. Chapter 10 assesses current approaches to
the supply network, and their impact on logistics in several areas such as internal
alignment, spotting opportunities for collaborative developments, managing cost-
to-serve for company growth, and the creation of supply chains and supply chain
managers of the future. We hope that this will provide input to the process of taking
the lessons learned in this book off the page and putting them into practice to create
improvements in tomorrow’s supply chains.
Material flow (supply)
Information flow
Time
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C H A P T E R 10
Logistics future challenges
and opportunities
Introduction
We are looking at an exciting future for logistics in general and logistics managers
in particular. Everything you have learned in the book so far offers you crucial
basics to travel on the journey towards supply chain management becoming a key
enabler of a firm’s competitive position. So the question becomes, what is it that
we will be working on in the next few years as we strive to deliver on the promise
of supply chain management? There is not one single answer to this question. If
one thing should be clear from the cases and examples offered in this book so far,
it is that there are multiple answers depending upon markets, company maturity
and strategy. No two supply chains are alike, and companies often participate in
multiple supply chains. Furthermore, there are multiple scenarios and initiative
areas on which both practice and research focus. There is accordingly plenty of
scope for progress, both in terms of basics and in the more innovative areas. The
difference between ‘satisfactory’ focal firms and managers, and ‘excellent’ focal
firms and managers will be in the degree of executing concepts such as those
covered in this book and implementing them for real. In this chapter we
The intended objectives of this chapter are to:
● collect together four major changes that are impacting on supply chain
strategies (the what);
● identify how management of the supply chains of the future will be
affected by the advance of new structures and approaches to aligning
the organisation, external partners and management development;
● list key issues in managing the transition towards future state supply
chains (the how).
By the end of this chapter, you should be able to understand:
● key issues in four key areas that will affect the way supply chains of the
future will be structured;
● improved ways in which supply chains may compete in the marketplace;
● ways of approaching implementation in four major change areas.
Objectives
334 Chapter 10 • Logistics future challenges and opportunities
both offer key areas where work is to be done even for the best companies as well
as levers to develop for successful supply chain managers of the future. So we look
both at the ‘what’ and the ‘how’ of supply chains of the future in this chapter.
Key issues This chapter addresses five key issues:
1 Wrapping the chain around the heart of the focal firm, or, achieving internal
alignment: improving internal alignment (wrapping around) with key other parts
of the internal organisation (the heart) to help the supply chain become front and
centre and well positioned internally to be able to further integration externally.
2 Selectively hooking up the chain, or, external improvement priorities: picking
upstream and downstream collaborative opportunities.
3 Pulling the chain the right direction, or, cost-to-serve: how do we manage full
service costs (pull from the customer) for healthy (right direction), profitable growth?
4 The critical link in the chain, or, supply chain managers of the future: the major
influences on creating supply chain managers of the future and the rapidly
migrating talent profile needed for success.
5 Changing chains: practical lessons on how the massive changes needed to create
the supply chain of the future can be managed and achieved.
10.1 Changing economics?
Key issue: Supply chain integration assumes integration that does not come
naturally to firms and managers.
Supporting the concept of integrated logistics and supply chain management is
the fundamental belief that when functions, regions and companies are closely
aligned and work collaboratively, the customer will be served better. The reality
of course is that these are big assumptions that are very hard to achieve in prac-
tice. Focal firms still have to report their financial results and set their strategies.
Different functions in the supply chain have different priorities and internal
challenges. Cultural differences between firms and countries still play a big role
along the supply chain (Case study 4.5 refers to some of these).
Economically, supply chain integration has many benefits – for example, lower
inventories and faster response times. Implementation may be less about chang-
ing economics and more about changing mindsets and behaviours. Godsell and
van Hoek (2009) list five common practices that companies adopt for the benefit
of sales or financial reporting that really hurt supply chain efforts. They are:
1 Pulling forward sales to hit a revenue target causing huge short-term surges in
demand and related possible inventory shortages to be followed by a drop in
demand and inventory build.
2 Reporting on time in full measures against delivery dates promised by the
focal firm – not those requested by the customer. This creates the illusion of
‘customer focus’, while potentially being too late or too early from the actual
customer’s point of view.
Changing economics? 335
3 Having an inventory policy that is applied generally across the product range
to focus on the challenges of seasonal peaks and long lead times – when
demand for some products in the range can be more accurately forecast (for
example, T-shirts in Table 1.1).
4 Manipulating orders in favour of reporting ambitions – for example, stopping
inventory build towards the end of a reporting period to improve the balance
sheet, but ordering extra quantities after the period has ended. Quarterly
financial reporting requirements in the US can encourage this behaviour.
5 Manipulating sales forecasts so that they will add up to the numbers promised
by finance to the investor community and result in poor ordering policies.
In short the point is:
a Can we stop treating the supply chain like a concept or a philosophy and start
working towards its operational benefits in meeting end-customer needs?
b Can we stop using the supply chain as a playground for the strategically poor
who are seeking short term gains from other functional angles?
The major change is to prioritise internal alignment above making increasingly
sophisticated demands on suppliers for JIT and JIS deliveries and modular con-
struction (case study 8.3 illustrates this transition). This has everything to do
with day-to-day working practices inside the company and between functions.
Before we cover internal alignment, one more point needs to be made about
changing economics and it has to do with sustainability, which we addressed in
section 4.7.
There is a lot of talk these days about how sustainability means that focal firms
have to change their ways of thinking and the economics they use in making
decisions. While we agree that sustainability needs to be factored into decision
making widely and generally as a consideration of importance (the Akzo Case
study 4.8 refers) we do not believe this challenges existing economic frameworks
such as the trade-off between lead time and transportation costs (for example,
Figure 4.7). This trade-off implies that shorter lead times create higher trans-
portation costs (for example, air freight), while lowering transportation costs (for
example, container vessel) increase lead times. Increased fuel prices, or trans-
portation costs due to factoring in more environmental considerations and costs,
may lead to some longer lead times But while the curves in the trade-off model
may change, the framework still applies.
This scenario became a reality when fuel prices increased rapidly in advance of
the 2009 recession. Many firms were reconsidering global sourcing and shifting
sourcing back locally to save on transportation costs. Essentially the equilibrium
of the trade-off between lead time and transportation costs shifted with changes
in fuel prices. But the framework was still valid. Also, when the costs of capital
increased with the credit crisis prior to the 2009 recession, inventory holding
became more expensive and as a result companies were reconsidering centralised
inventories. But the model of centralisation of inventory to reduce inventory
costs v longer transportation routes remained valid. In short, sustainability con-
siderations might change the economic equilibrium but the basic economic
trade-offs are still the same (van Hoek and Johnson, 2010).
336 Chapter 10 • Logistics future challenges and opportunities
10.2 Internal alignment
Key issue: How do we align the internal organisation around supply chain
opportunities, priorities and efforts?
External integration between partners in a supply network is an important desti-
nation. But internal integration is the essential precursor to external integration,
the case for which we outlined in section 8.1.1. Key functional domains that
form parts of the supply chain or impact supply chain performance need to align
around priorities, opportunities and approaches. The fact that this is often not
the case impedes supply chain efforts and might be what stands between ‘great
plan’ and ‘great success’. As quoted in section 8.1.1, ‘how can we integrate exter-
nally if we can’t do it internally?’
Figure 10.1 shows a chart from van Hoek and Mitchell (2006) that demon-
strates the challenge of internal alignment. This chart captures findings from an
internal survey of a globally operating manufacturing company (and repeated in
many other companies with similar results). The survey included existing supply
chain priorities and initiatives. In a way it lists supply chain targets and supply
chain efforts already underway; that is, the existing plan that the supply chain is
Forecasting accuracy
Customer measures
VM
Voice of the customer
Sixsigma
Supplier development
Supplier partnerships
Strategy translation
Information system integration
Internal alignment
Cost of complexity
Staff talent
Align supply and demand
Margins
Inventory levels and management
Visibility of operational data
Low volume production
Purchasing power
Cost reduction
Customisation
Product availability
Speed of delivery
Delivery accuracy
Transportation management
Serve better but
do not talk
to customers?
Sales wants
less of
Good News:
The area of
greatest agreement:
we need to work
better together
Sales sees more development
opportunities for staff
Sales wants
more of
“Just get the product
to my customers”
–1.00 –0.80 –0.60 –0.40 –0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20
Figure 10.1 Misalignment between supply chain and sales
(Source: van Hoek and Mitchell, 2006)
Internal alignment 337
operating against – and that is board-approved. The supply chain team and peers
in other functions – in particular sales – were surveyed. They were asked for their
opinion about the importance of these priorities and the current performance on
them. The difference between importance and performance is considered to be
an indication of the opportunity for improvement.
Figure 10.1 shows that, when contrasting opportunity scores of respondents
from sales with respondents from the supply chain, important differences in
opinion are found. When bars point to the right, sales sees a greater priority;
when bars point to the left, the supply chain sees a greater priority. Taken to-
gether, the chart tells a shocking story of misalignment. Not least, when looking
at the smallest bar in the centre of the graph, it appears that there is one and only
one area where supply chain and sales more or less agree – the area of internal
alignment. An interpretation of this is that the only thing we agree upon is that
we do not agree on anything, and that we need to align better. Another obvious
area of misalignment is that sales is asking for improved transportation manage-
ment and delivery services. But sales is asking for less focus on the enablers of
improved delivery service, such as forecasting accuracy. The chart reveals the
painful challenge many supply chain managers face on a day-to-day basis: com-
plaints about shipments and little support for its efforts at improvement that are
critically dependent on support from other functions.
Alfa Laval
When the senior supply chain executive team from Alfa Laval conducted an alignment
analysis throughout the company, as exemplified in Figure 10.1, it realised there were
a lot of basics to be improved. The team identified four areas where alignment
improvement efforts could be focused: in interactions with peers from other functions;
in interactions with their bosses and the board; in interactions with their teams; and in
their own day-to-day behaviour. Some of the mechanisms and actions defined by the
team are captured in Figure 10.2, which they termed their ‘alignment compass’.
In this effort, two key areas received a lot of attention – improving communication
and training in supply chain and operations, and improving the initiative planning
process. Starting with the latter, it was surprising for the executive team to see that
there was no appreciation from peers in other functions for some of the strategic initia-
tives under way in the supply chain. The team realised that this was going to make the
journey through those efforts harder at least and impossible at worst. It was decided
that improvements could be made in the initiative planning process by expanding pi-
lots in cross-functional efforts in the supply chain already underway and that the plan-
ning process could be improved to capture the voice of the organisation up-front. Areas
earmarked as valuable included initial discussions with key peers to ensure engage-
ment, time and resource commitment, and the effective focusing of initiatives.
In the communication area it was realised that the case for supply chain initiatives was
not clearly communicated to begin with, and that peers were not committed to the imple-
mentation journey. Specific communication tactics for improving this situation included:
● using training in other functions as a channel for communication;
● moving away from jargon and technical language;
CASE STUDY
10.1
● moving towards using shared business language that puts initiatives in terms
of shared output objectives and in terms of benefits to priorities in other functions;
● communicating the case for initiatives from the start, and frequently updating peers
on progress and, more importantly, results against shared output objectives.
It is important to note that these communication improvements are also intended to
be personal in nature. These communication issues should not be left to an internal
communications department. They need to be incorporated into the personal toolkit of
supply chain managers in order to increase the likelihood of initiative success, effective
cross-functional management, and, most importantly, their personal effectiveness. It
was found that driving success in these areas will require some training, coaching and
possible ‘tag teaming’ with peers – or even job rotation.
(Source: After van Hoek and Mitchell, 2006)
Questions
1 Can you provide examples of how functional agendas might clash, leading to chal-
lenges in supply chain initiatives?
2 Can you suggest additional integrative mechanisms along the axes of the alignment
compass?
338 Chapter 10 • Logistics future challenges and opportunities
Peers
• Support exchange programmes and job rotations
across functions
• Invest in understanding each other’s problems and
building relationships; capture the voice of other
functions and be able to articulate plans in their
language, not our jargon
• Develop appropriate KPIs across functions; ensure
that KPIs are linked or at least coordinated and not
driving conflicting behaviour
• Joint problem solving teams to tackle common issues
Teams
• Collaborate on common issues not functional
pet-projects
• Reach consensus on priorities; do not set a functional
agenda but a company-wide focus that will engage
peers
• Work on improving accuracy of performance
information and tell peers upfront when shipments
are going to be late, do not surprise peers with bad
events when they happen
• Awareness training in supply chain and sales
• Improve the initiative planning process to focus on
essentials peers care most for mostly (service,
execution, price, etc.) and articulate initiatives in
those terms
Individuals
• Trace and learn from the cause of lost orders – delivery
time, price, specification
• Encourage open communication
• Avoid pointing blame
• Visit & ‘… see, smell, understand customers – get
under their skin’
• Create regular dialogue between sales and supplying
units
Bosses
• Join sales on key customer visits to ensure you are
close enough to the customer in driving the supply
chain agenda and focusing efforts and service + be
credible with sales when discussing service
• Align goals between functions and link those to
incentives
• Encourage the use of the same language; avoiding
functional jargon and promoting the use of business
language (profit, customers, service, etc.)
• Support appropriate forecasting tools
• Ensure that operations/supply chain is seen to take
action on old issues and communicates results to
other functions (don’t forget to tell others what has
been done, there is no way that others know when
you don’t tell them)
Figure 10.2 Alfa Laval’s alignment compass
Internal alignment 339
In addition to improving internal alignment with sales, new product develop-
ment is a key peer function that deserves internal alignment focus. It is often
pointed out that the impact of the supply chain on new product development
(NPD) and new product introduction is important in areas such as:
● shipping products to market fast enough (before product launch dates);
● ensuring sufficient inventory at the launch date; and
● ensuring a flow of parts and components for new product manufacturing.
Examples of how this presents itself in practice are provided by Nike and
Reckitt Benckiser (van Hoek and Chapman, 2006). At Nike (see Case study 4.3) –
as in most fashion companies – it is important to ensure that all key accounts
have sufficient stock available at the start of each of the four seasons in a year
when a rush for products begins. That means ensuring supply of several thou-
sand skus from multiple suppliers globally, through the distribution channel to
all customers on time simultaneously. Missing the launch date disappoints cus-
tomers and affects overall product revenue. Equally, when a new blockbuster
videogame is introduced in the market, one-third or more of the entire sales take
place within the first 24 hours of the product becoming available, with people
lining up in front of stores before a midnight release. Obviously in this example
it is also crucial to ensure sufficient supply to stores in order to avoid lost sales,
and disappointed customers and accounts. In conclusion, new product develop-
ment and the supply chain is another key area where internal alignment must be
targeted.
Like many companies, Reckitt Benckiser, a consumer products company, found
forecasts for new products to be one area where misalignment between supply
chain and NPD was particularly costly and challenging. A major challenge with
new products is that there is less historical reference data to use as a base number
for forecasting and there are more uncertainties to contend with around such im-
portant issues as an exact launch date, and supply volumes. Misalignment was
found to be costly because poor forecasts led to limited product availability, dis-
appointed customers and lots of firefighting and last-minute fixes. Several rea-
sons were found for the underperformance of the forecasting process. These
included tendencies to average out forecasts when functions do not agree, de-
layed response due to lack of group consensus, and even forecasts that become
available late as a result of forecasting being given a low priority for too long.
In order to address these shortcomings and contribute to supply chain readi-
ness, Reckitt Benckiser created a new role in the supply chain team – a new prod-
uct introduction forecasting manager. This manager is dedicated to working with
functions involved in the NPD process specifically to drive alignment around the
forecast. The manager flags forecasting differences between functions, and spots
possible challenges in assumptions and works across functions to arrive at a
more accurate forecast. Next, the forecasting manager supports the translation
of the forecast into a supply chain capacity plan, and forms a natural spotlight
in the organisation for avoiding bottlenecks.
With supply chain readiness for NPD improved and with fewer execution is-
sues and firefighting the supply chain team has manoeuvred itself into a better
position. It is less likely to be distracted by last-minute crises and more likely to
340 Chapter 10 • Logistics future challenges and opportunities
be considered a useful member of the NPD team that can make valuable contri-
butions based upon the capability it has to offer.
Assume for a moment that you are a supply chain manager invited into a new product develop-
ment team meeting. What questions would you ask of the team to ensure you can prepare your
supply chain for effective product launch?
Activity 10.1
10.3 Selecting collaborative opportunities upstream
and downstream
Key issue: Where and how to place bets on collaborative opportunities upstream
and downstream in the supply chain.
Once a company has its internal organisation more aligned around supply chain
opportunities, priorities and initiatives, it is in a better position to select exter-
nal collaborative opportunities. In some respects, this is like placing bets – but
not like playing roulette, if managed carefully! There are new developments per-
taining to selecting opportunities downstream (with customers) and upstream
(with suppliers and partners). Specifically, the notion of being selective is key.
Some argue that the term ‘partnership’ is one of the most inflated terms in
modern business and it is well known that you can only truly partner with a
few. So where should we focus upstream and downstream in the supply chain
for maximum benefit?
Selecting upstream collaboration opportunities
Beyond sourcing parts and services needed to make and deliver products and
service for customers, firms are increasingly looking at collaboration opportuni-
ties in new product development and R&D. Of course companies can only do
this really effectively when they are aligned internally first (see section 10.1
above). Procter & Gamble has a stated objective to move towards having 50 per
cent or more of its innovation from external partners, and has launched a pro-
gramme called ‘Connect � Develop’ to enable this (see Figures 10.3 and 10.4).
The company has tackled this diligently:
● The programme has CEO-level support and public endorsement making it
crystal clear that this is not just a supply chain initiative or playground but
that this is mission critical for the company.
● They have established a dedicated organisation with senior leadership, pro-
gramme management, deal makers, business developers and engineers.
● They have developed a ‘needs list’ containing technologies in which the com-
pany is interested. This helps to focus the search for innovation, and serves as
a screening tool for assessing collaborative opportunities. Note also that this
Selecting collaborative opportunities upstream and downstream 341
What consumers
need
What’s possible
through P&G
What’s possible
with your
innovation
Connect and develop allows
us to quickly create and
introduce innovations
by incorporating the capabilities
of external resources
Figure 10.3 The P&G ‘connect � develop’ philosophy
(Source: Procter & Gamble Connect � Develop programme)
means the company is publicly and on record sharing areas where it could use
help. This is completely counter to old procurement practices of playing divide
and rule with information.
● Account managers will steward partner innovations into the organisation and
throughout a structured and well-defined process.
● P&G can structure partnerships in multiple forms depending on the type of in-
novation and application.
Figure 10.3 shows the P&G ‘Connect � Develop’ philosophy, and Figure 10.4
illustrates examples of ‘Connect � Develop’ efforts.
Selecting downstream opportunities: which customers
to give the keys to our car
Partnering with customers can be a much scarier notion than partnering upstream.
It implies sharing a lot of inside information with customers and talking openly
about what a company cannot do. Traditionally, this is not how companies (and
sales staff) sell. When making the mind-shift, however, there is a lot of potential on
the table. Specifically, some companies are initiating customer collaboration efforts
that involve working to resolve supply chain problems jointly with customers to
serve the end-consumer better. Among the areas where fruitful collaboration
opportunities have been found are several process integration areas, including:
● linking supplier delivery to customer warehousing and materials handling
processes;
● linking supplier to customer forecasting;
● linking customer ordering to supplier delivery planning systems.
342 Chapter 10 • Logistics future challenges and opportunities
Connect � Develop successes
Consumers around the world have already realised
the benefits of P&G’s Connect � Develop strategy.
The following products and technologies are examples
of the mutually beneficial collaborations we have
established through external connections.
Ready-to-go technologies
P&G introduced Bounce, the world’s first dryer-added
softener, after acquiring the product technology from
the independent inventor who developed the
innovative fabric-care solution.
Ready-to-go products
By acquiring the newly introduced SpinBrush, P&G
was able to bring a superior oral care brand to market
quickly, without undertaking the time and expense
of developing an entirely new product.
Ready-to-go packaging
Several of our Olay Skin Care products now utilise new
consumer-preferred pump dispenser originally
developed by a European packaging products company.
P&G led a collaborative improvement process to make
the original pumps more effective prior to their launch
in Olay’s North American markets.
Commercial partnerships
P&G found the perfect complement to the Swiffer
brand in a hand-held duster developed by a Japanese
competitor. After purchasing the product, P&G
leveraged elements of existing manufacturing processes
and advertising components to launch Swiffer Duster
within 18 months.
Figure 10.4 Examples of ‘Connect � Develop’
(Source: Procter & Gamble Connect � Develop programme)
Additionally, a focus on serving the end-consumer better implies collaborative
opportunities such as:
● supplier suggestions for campaigns and merchandising;
● joint product and packaging design;
● joint product mix development to improve inventory turns on the retailer’s shelf.
An example of the latter would be for a consumer product company to suggest
replacing certain of its own products on a retailer’s shelf with others, and suggest-
ing improved store and shelf planograms. Essentially, these collaborations centre
around a supplier actively (re-)designing part of the customer’s operation and ad-
justing its own systems accordingly. These efforts can come at an investment pre-
mium and involve market risks. Hence it is important to select wisely which
customer relationships to engage with in these collaborative efforts. One global
manufacturer uses a set of screens to evaluate customer relations in terms of
collaboration opportunities. Counter to common wisdom, they do not look
so much at the size of the customer account but rather at the nature of the
customer’s business and their relationship. The company may select smaller
Managing with cost-to-serve to support growth and profitability 343
customers for investment in collaboration for reasons such as: it could be one of
the rising stars in the industry worth investing in now, or it might be a particularly
innovative customer investment which could have a much broader spin-off. The
characteristics the company uses to evaluate customer relationships are not so
much financial or sales-oriented, but focus on ‘soft’ factors (see section 1.3.3) such
as openness to innovative suggestions and willingness to experiment. The com-
pany found that its efforts to evaluate customer relationships before offering up
collaborative options helped in prioritising projects for greater returns and greater
opportunities for success.
1 What are the main risks involved in collaborating with customers? Consider industrial as well
as consumer sectors by referring to Table 2.2.
2 Why are internal stewardship and process ownership necessary for collaborations?
Activity 10.2
10.4 Managing with cost-to-serve to support
growth and profitability
Key issue: How do we leverage full service costs management for growth and
profit?
Assessing the cost-to-serve uses ABC methodology to quantify the actual costs
involved in fulfilling customer orders (see section 3.3.3). Despite all the progress
in the last few years on moving from functional organisations to process and sup-
ply chain organisations, most firms today are still focused on managing efficient
supply of products against customer demand. Cost rationalisation efforts centre
on using global sourcing and purchasing to reduce material costs. As a result, sup-
ply chain cost reduction has been executed in isolation of customer value and rev-
enue generation. The undesirable outcome is to rationalise service to the most
valuable customers. This has been brought about by lack of a clear sense of cus-
tomer relationship investment opportunities, and by the inability to have a con-
structive discussion with sales and customer service about what services are
valuable for which customers, and what services do not contribute. Figure 10.5
shows how costs and revenue have been moving in opposing directions. Cus-
tomer profitability analysis helps dispose of that shortcoming, as it assesses focal
firms’ ability to profitably fulfil individual customer orders, and to serve individ-
ual customer accounts and distribution channels with current supply chain de-
sign and customer service systems. Essentially, this analysis changes the economic
starting point from internal costs to working from customer orders upstream.
Figure 3.11 showed how customer profitability analysis can reveal how the
profits are generated by 50 per cent of the customer base, and how the other
50 per cent of customers are currently unprofitable. This finding assumes that
most traditional accounting systems are very accurate in tracking cost of goods
sold (source and make costs) but underperform in tracking logistics costs to indi-
vidual customers (deliver costs). Once shipment, service and customisation costs
are added on a ‘per customer’ basis, a different profitability curve emerges.
344 Chapter 10 • Logistics future challenges and opportunities
This analysis has several implications, including:
● service terms and conditions for unprofitable accounts need to be changed,
and converted into profitable alternatives;
● the most important customers need more attention, by focusing more cus-
tomer service efforts on these customers;
● prices should be increased for unprofitable customers, or they should be grad-
ually removed from the focal firm’s sales portfolio altogether.
Most importantly, customer profitability analysis enables focal firms to link
supply chain efforts to customer value and market opportunity in a way that
improves customer relations and revenues in a profitable manner.
The concept of cost-to-serve shows that outbound logistics contribute signifi-
cantly to profitability. Cost-to-serve also enables a firm to home in on the
best growth opportunities, which would otherwise be difficult to identify. While it
also focuses internal and external alignment opportunities, now we are aligning
the entire supply chain around customer service opportunities that are not just
doable but also have the greatest impact on profitability and competitiveness.
Rationalising a product mix is a good area of application, as shown in Case
study 10.2 below.
Cost
… lead to an unfavourable profit distribution
Cost and revenue spinning in opposite directions …
Revenue
Figure 10.5 The dynamics of customer profitability
Clorox supports growth by cutting skus
Companies want to grow, and one of their commonest strategies is to create new prod-
ucts. These may increase revenues, but of course they do not guarantee profits. In fact,
product proliferation often reduces margins. One company we studied found that the
bottom 40 per cent of its products generated less than 3 per cent of revenue, and the
bottom 25 per cent of its products were highly unprofitable.
Several years ago, Clorox, a $4 billion consumer products company, realised it
needed to address the problem of underperforming products. At the time, 30 per cent
of the company’s stock keeping units (skus) were falling short of sales volume and profit
targets. Clorox responded by developing a formal process for evaluating sku performance
and making decisions about which products to cut.
As part of the annual business planning process, annual reduction goals are estab-
lished for underperforming skus, as well as a ‘glidepath’ (specific goals by month) and
specific action items for reaching the reduction goal. Specific action items may include
CASE STUDY
10.2
The supply chain manager of the future 345
discontinuance, substitution or increasing distribution. A cross-functional sku manage-
ment process team, sponsored by the CFO and led by the director of supply chain plan-
ning, meets monthly to track progress, spotlight businesses that are off-target, discuss
process improvements and resolve policy issues. The team includes director- or VP-level
representatives from sales, marketing, finance and product supply.
This team uses a ‘dashboard’ (selected key measures of performance) to evaluate the
performance of skus against annual sales volume and profit goals (or hurdles). The dash-
board also rates the performance of each business according to the proportion of skus that
meet hurdles. Businesses are graded green if they are exceeding goals; yellow if they are
within 5 per cent of target and red if they are more than 5 per cent from target. ‘Red’ busi-
nesses are required to specify tactics to bring their proportion of products meeting hurdle
rates in line with goals. The executive teams of ‘red’ businesses typically must identify under-
performing skus that will be eliminated, and specify the strategy for eliminating them.
Like any business tactic, product rationalisation must be used cautiously. Many com-
panies have tried to tackle this issue by ruthlessly cutting the product portfolio. The risk,
though, is that a company cuts too deeply into its revenue streams and finds it has
discontinued products that key customers care for, damaging important customer
relationships. Clorox frequently reviews product lines with customers to optimise the
product mix on the shelf.
Today, more than 90 per cent of Clorox’s skus meet volume and profit hurdles, up
from 70 per cent four years ago. Retail sales per sku have grown by more than 25 per
cent, the return on products has increased and retail customer service levels have im-
proved. Clorox now leads its peers in retail sales per sku in the majority of its categories.
(Source: Based on van Hoek and Pegels, 2006)
Questions
1 What reasons for and against product proliferations might different functions use?
2 What reasons need to be considered for discontinuing and continuing skus?
10.5 The supply chain manager of the future
Key issue: What are the changing needs and requirements that apply to the most
effective supply chain managers?
Ultimately, the purpose of this book is to support the development of effective sup-
ply chain managers. This is arguably the most important job to begin with. In that
respect it should be noted that today’s and tomorrow’s supply chain managers look
very different from the supply chain staff of the recent past. There are several key
capabilities that will make or break supply chain managers of the near future:
● These managers need to be effective at interfacing with customers. This is new
because in the past supply chain staff used to be almost completely internally
and operationally focused. Sales monopolised the customer, leaving supply
chain managers short of ‘supply chain relevant’ customer insight.
● Functional knowledge is a base requirement (this used to be a differentiator,
now it is a qualifier).
346 Chapter 10 • Logistics future challenges and opportunities
● They need to have strong interpersonal skills (van Hoek et al., 2002) Supply
chain staff used to be technical and operational in background and training.
They were heavily focused internally, without the ability to align peers around
efforts and priorities, and unable to engage business people in their efforts.
● They need to have general management and strategic management capabilities
and skills. Hence, they should no longer be solely operationally focused and
boxed in, which makes them unable to integrate and be seen as contributing to
corporate strategic goals.
● They need to be able to develop and foster relationships internally and exter-
nally (as opposed to being focused only on running an operation).
● They need to be able to translate supply chain efforts and jargon into business lan-
guage that their peers can respond to and relate to their own day-to-day efforts.
● They need to have a service ethic that does not include always saying ‘yes’. Tra-
ditionally, supply chain people have either been very good at saying ‘no’ to
special requests, or saying ‘yes’ all the time. They therefore need to manage
trade-offs in operations, while finding creative ways to serve the customer and
becoming an essential part of the business organisation (chain wrapped
around the heart) and being considered key business partners.
● They need to be ‘business people’ that help build and grow the business and
use supply chain as a tool not the purpose in doing so, so creativity, inno-
vative approaches to business problems and entrepreneurial approaches to
leveraging supply chain capabilities and practices to the benefit of the
customer are key.
This will help supply chain managers avoid traditional pitfalls such as:
● being unable to align the organisation around supply chain opportunities;
● lacking crucial voice of the customer (VoC) insights to achieve success with final
customers (VoC processes aim to go beyond customer satisfaction measurement
by crafting a more comprehensive, cross-functional exchange with selected
customers – for example, Delgado-Hernandez et al., 2007);
● being only operationally focused, with limited insight into strategic business
goals;
● taking initiatives in an effort to help peers, but not succeeding due to the
points listed above;
● being great at supply chain concepts, but weak at solving customer problems
and becoming a partner that is mission critical for the focal firm.
1 Consider what personal development courses are key for a supply chain student to follow, in
addition to supply chain programmes.
2 Find an example of a recent supply chain job advertisement at a management level, critique it
for competency requirements and propose how it might be modified to fit the future
challenges in the area.
Activity 10.3
Changing chains 347
Finally, we have a few pointers for the supply chain managers of the future:
● Traditional logistics people are often seen as being best at saying ‘no’, often be-
cause of initiative overload. Avoid saying ‘no’ for technical reasons, but ask
about the business need that a request serves.
● One way to select what initiatives to support is to avoid being caught out by
those without clear business and cross-functional involvement, ownership,
sponsorship and goal sharing.
● Do not rely on technology as a ‘be all and end all’. Most of the tough supply
chain challenges can at best be supported by technology, but they mostly
involve people and processes – and management of change skills.
● Traditional supply chain people often spend a lot of time taking calls about
problems, fighting fires and being the hero of the day. But this can distract
from working on structural solutions that will prevent those problem
calls from happening to begin with. So stop fixing things and start solving
problems.
● Traditional logistics people were born and raised in areas of functional
expertise and have built their careers around those skills. This leads to
communication and business alignment issues. Supply chain management is
a cross-functional job. So stop being a functional expert and start being a
business general manager.
● Think growth, not just cost containment. The supply chain is often called on
first to deliver savings and operational synergies – most often in tough times
and during mergers. While the supply chain has a key role to play here, an em-
phasis on cost containment underestimates the contribution of the supply
chain to growth, and keeps it in a negative box – insulated from the happy
times during periods of growth!
● Put the end-customer first – as ally and ultimately as judge.
10.6 Changing chains
Key issue: How do we actually make the transition to supply chain effectiveness
happen?
Based upon the experiences of having worked with and for many companies and
the detailed study of companies in different industries, countries, stages of devel-
opment and parts of the supply (details in van Hoek et al., 2010) it appears that
there are some big lessons about changing supply chains that are being learned
today. Most textbooks and research on supply chains pay too much attention to
the technical aspects of management, leaving change management largely un-
covered and unstudied. We have found that there are some clear pointers in mak-
ing change happen in a supply chain. While this list is not exhaustive, we intend
it to be informative and useful.
348 Chapter 10 • Logistics future challenges and opportunities
Focal firms that make change happen in supply chains over and over again ex-
perience the following:
1 Prepare for the (longer) run: major supply chain change efforts tend to take
longer than initially planned and longer than might be anticipated up-front.
And there are typically no short cuts to true implementation of the plan (no
matter what consultants and vendors might say).
2 Plan to re-plan: most major supply chain change efforts end up being exe-
cuted differently than initially planned and the change programmes are
often revised along the way in order to be able to respond to changed circum-
stances or additional change issues found along the change journey.
3 A voyage of discovery: there is real learning as you go along. As change
programmes evolve and progress, managers learn about new changes and
behavioural challenges – and how to incorporate them into the change
programme.
4 The boardroom pitch is only the start of the test: after pitching successfully to
senior management and gaining their buy-in, middle management and staff
across the organisation need to be engaged in the effort to give the pro-
gramme a chance for real implementation. Additionally, given the learning
that needs to happen along the way and the extended time period, real re-
configuration and implementation changes require (senior) management
commitment which needs to be earned repeatedly. So, in short, boardroom
support helps launch the change but is not merely sufficient when it comes
to making the change actually happen.
5 Integrative but not integral: change programmes in supply chains often focus
on different parts of the supply chain. While they all require integrative ac-
tions to ensure business alignment and cross-functional peer support they
often do not address the whole supply chain. Often it might be one part of
the supply chain taking the lead; logistics or procurement, for example, and
that is fine, the supply chain is big and comprehensive enough for many
strides forward, some even simultaneous.
6 Internal customers are a proxy for end-customers: customer service first is key in
all good supply chain efforts but not all parts of the supply chain have direct
access to the customer, let alone the end-customer. For those, often more up-
stream, segments of the supply chain, internal customers might be focused
on as a proxy for end-customers. Just like external integration requires inter-
nal alignment as a basis, focusing on internal service is a good foundation for
external service capability, good service ethic also runs everywhere in your
blood, not just when in front of a customer.
7 Inside first: many supply chain reconfigurations start internally to the com-
pany before they impact other segments of the supply chain externally, fol-
lowing the lessons on internal alignment.
8 IT integration: this was also a hot topic in the early 1990s but it appears to still
be hard to achieve and is not easily enabled but rather a source of a lot of work.
It is important to keep that in mind, and not to assume that technology makes
it easy to change broken processes. Technology cannot change broken process
or poor alignment without the hard managerial change work to support it.
Summary 349
9 Benchmarks and best practices open eyes and help change programmes to stay on
track: external benchmarks are useful to set direction, make the case for
change and audit progress on the change journey using externally verifiable
standards.
10 Cross-functionality: is key to engaging relevant stakeholders in the supply
chain, although not all functions and businesses need to engage. Rather than
full supply chain integration, the concept of selective integration is key and
specific to company and context. This also helps make change management
more focused and perhaps doable.
11 Consistent cross-functionality: is a key characteristic of supply chain reconfigu-
ration. Together with the complexity of the change process we suggest this is
a marker of effective supply chain change management.
12 Training and communication: these are well-known levers. Training staff and
management are key enablers of change effectiveness and readiness.
Communications – to remind and reinforce across the organisation – are
useful tactics as long as they are updated with the change journey adjust-
ments and learnings during the change journey.
Summary
What does the supply chain of the future look like?
● The chain is wrapped around the heart, or, the ability to align the organisation
internally around supply chain opportunities, priorities and efforts in order to
avoid partial, ineffective or failed supply chain improvement efforts.
● Hook on the chain, or, the capability to spot and select the limited number of
collaborative opportunities upstream with partners and suppliers, and down-
stream with customers.
● Pulling the chain, or, the capability to map true and complete cost to fulfil cus-
tomer orders and to manage services and costs for increased profitable growth.
● Critical link in the chain, or, the development of a ‘new breed’ of supply chain
managers that will help realise all of the above.
● Changing chains, or, the capability to make the change actually happen
for real.
We hope the readers of this book will have picked up insights and lessons that
they can use on their journey to create supply chains of the future. In our expe-
rience of working for many different companies in different industries and
countries, and based upon our research from across the past decade we are con-
vinced about one thing: most of the progress in supply chain management is
still ‘up for grabs’. Both at the basic and more advanced levels, most focal firms
still have only started on the journey of opportunity and possibility. Actually
making the change happen will be the characteristic that sets leaders apart in
our field. We wish readers the best in making change happen, and in working for
a better supply chain of the future.
350 Chapter 10 • Logistics future challenges and opportunities
Discussion questions
1 We started out in Chapter 1 by defining supply chain management as ‘Planning and
controlling all of the business processes that link together partners in a supply chain in
order to serve the needs of the end-customer’. How will leading-edge developments
covered in this chapter contribute to this vision?
2 Suggest how the five change areas discussed in this chapter apply to our model of
the supply network (Figure 1.2) and to the integration of demand and supply shown
in Figure 1.7.
References
Delgado-Hernandez, D., Benites-Thomas, A. and Aspinwall, E. (2007) ‘New product
development studies in the UK’, International Journal of Product Development, Vol. 4,
No. 5, pp. 413–29.
Godsell, J. and van Hoek, R. (2009) ‘Fudging the supply chain to hit the number: five com-
mon practices that sacrifice the supply chain and what financial analysts should ask
about them’, Supply Chain Management, An International Journal, Vol. 14, No. 3,
pp. 171–6.
van Hoek, R. and Chapman, P. (2006) ‘From tinkering around the edge to enhancing
revenue growth: supply chain – new product development alignment’, Supply Chain
Management, An International Journal, Vol. 11, No. 5, pp. 385–9.
van Hoek, R.I., Chatham, R. and Wilding, R.D. (2002), ‘People in supply chains: the critical
dimension’, Supply Chain Management, An International Journal, Vol. 7, No. 3, pp. 119–25.
van Hoek, R. and Johnson, M. (2010) ‘Sustainability and energy efficiency’, International
Journal of Physical Distribution & Logistics Management, Vol. 40, Nos. 1–2. pp. 148–58.
van Hoek, R., Johnson, M., Godsell, J. and Birtwistle, A. (2010) ‘Changing chains. Three
case studies of the change management needed to reconfigure European supply chains’,
International Journal of Logistics Management, Vol. 21, No. 2 (to come).
van Hoek, R. and Mitchell, A. (2006) ‘Why supply chain efforts fail; the crisis of mis-
alignment’, International Journal of Logistics, Research and Applications, Vol. 9, No. 3,
pp. 269–81.
van Hoek, R. and Pegels, K. (2006) ‘Growing by cutting sku’s at Clorox’, Harvard Business
Review, April, p. 23.
Suggested further reading
2016: The future value chain, Global Commerce Initiative, Capgemini, Intel.
Harrison, A. and White, A. (2006) Intelligent distribution and logistics, IEE Proceedings of Intel-
ligent Transportation Systems, Vol. 153, No. 2, pp. 167–80.
Index
Accenture 268
accommodate strategy 29
account plans 308
activity times 92
activity-based costing 89–95, 102, 343
cost-time profile 92–4
cost-to-serve 94–5
maintenance costs, allocation of 91
adaptation 255–6
after sales 57
agile supply chain 21–3, 236–49
boundary spanning sales and operations
planning process 248–9
classification of operating environments 241
complexity costs reduction 243–5
cost of complexity sanity check 242–3
customer service and market sensitivity 246
enterprise-level reality check 242
forecasting 245–6
lean and agile supply characteristics 237
supply capabilities 238–41
virtual integration improvement 247
Xerox: segmenting supply chain 239–41
air miles 117
Airbus A380 113–14
Akzo 149, 335
Alcoa 248
Alfa Laval 337–8
alignment 31, 305–8
internal 335, 336–40
Amazon.com 37
annual costs 195
apparel industry 136–9, 262–4
appraisal cost driver 88
arm’s length relationships 255, 264, 288
assemble to order 165, 188
assembler collects ex-works 265–6
asset:
efficiency 100
footprint 245
Atlanta Agreement 146
attitude (customer loyalty) 51
Australia 23
authority 133
AutoCo 58, 62, 64
automation 178, 179
automotive supply chains 265–70, 292
Bacalao (dried fish) 64–8
back to school surge 39
balanced measurement portfolio 95–100
balanced measures 96–7
supply chain financial model 99–100
supply chain management and balanced
scorecard 97–9
batching rules 202
behaviour (customer loyalty) 51
benchmarking 103, 276, 349
Benchmarking Partners 210
Benetton 208
best alternative use 74
best before dates 199
best in class 103
best practices 349
BhS 290
Binhai New Area 281–4
BMW 25–6, 62, 176, 266, 269
boardroom value markers 326–7
BOM 201
Bond SA – marginal costing 84
Boots the Chemist 40
Bose Corporation 259–60
bottleneck items 317, 318
boundary spanning sales and operations
planning process 248–9
break points, multiple 125–6
break-even point 81–2, 84
break-even time 158, 159
bricks and mortar model 37
Bruntland report 23
buffer capacity 62, 63
buffer stock 194, 199, 212
bullwhip effect 186, 202, 203
business customers 36
business to business (B2B) 37, 38, 50, 247, 316, 326
electronic 260–1
business to customer (B2C) 37–8, 50
buying behaviour 59
call-off quantity 20
call-off requirements 291
Calsonic Kansei 270
capability, full 224
capacity planning 291
cash:
and debtors 76
generation 100
to cash cycle 78
catalogues 326
category:
management 205
strategy 309
cause-and-effect diagram 175
change, understanding necessity for 179–80
352 Index
changeover cost per unit 194–5
changeover, rapid 235
chaos 203
child labour elimination in Sialkot soccer ball
industry (Pakistan) 146–7
Chinese industrial areas 280–4
Christmas surge 39–40
Chrysler 144
Cisco Systems value recovery programme 142–3
classical strategy 29
CleanCo 44–5, 58, 59
cleanliness 226
Clorox 344–5
Coca-Cola 111–12
Cofely 308
collaboration 286, 288, 340–3
electronic 291
collaborative planning, forecasting
and replenishment 210–14
commercial partnerships 342
commitment 288
commodities 319
communication skills 327, 337–8, 349
competing through logistics 16–27
hard objectives 17–19
soft objectives 25–6
see also supportive capabilities
competitive environment 104
competitive moves 113
competitive profile 60, 62
completeness 57
complexity 155–6
costs reduction 243–5
costs sanity check 242–3
compression and lead time 178
compromise strategy 64
concentration of firms at specific sites 117–18
condominium approach 267
confidence 25
‘Connect and Develop’ examples 342
consolidation:
global 116–18
multiple 125–6
consultative skills 328
Continental Tyres 144
continuity 31
continuous replenishment in apparel industry 262–4
contractual terms 94
contribution 81–2, 84
control and lead time 178
control process 7
cooperation 288
coordination 49, 178, 179, 257, 291, 306
global 130
coordination in retail supply chains 203–18
collaborative planning, forecasting
and replenishment 210–14
efficient consumer response 204–9
quick response 217–18
vendor-managed inventory 214–16
core competencies 137
Corporate Social Responsibility 23, 145–9
correctness 57
corruption 186
cost 16, 31, 76
advantage 18–19
options, multiple 126
of placing an order 86, 196
rationalisation 343–4
reduction 98, 154–5, 159–61
-time profile 92–4
-to-serve 94–5, 343–5
see also activity-based costing
countermeasures 21
creativity and solution orientation 327
creditors 77
cross-functionality 349
cultural differences 334
currency fluctuations 126–8
customer 37, 96
of choice status 324–6
demands for better service 227–8
expectations 37
facing teams 58–9
intimacy 53
loyalty 51–2
needs, increased responsiveness to 157
order decoupling point 166, 176, 188
profitability curve 95
relationship management 53–6
requirements 227
satisfaction 51–2
service and market sensitivity 246
value analysis 60
value profiles 62
see also end-customers
customisation 60, 63, 64, 73
cycle stock 198
D-time (demand time) 60, 164–8, 181, 183, 188,
192, 238
data:
collection 170
sharing 216
Dawnfresh 117
debtors 76
decoupling point 192
defect rates, internal 98
defects 225, 229
delay 57, 224–5
delivery:
accuracy 122
costs 343
frequency 57, 94
process 102
Dell 165, 176, 238
Della Valle Group 278
Delphi 265
demand 11
actual 20–1, 195
e-auction technology 326
e-business 260–1
e-information 57
e-procurement 301, 326
e-sourcing process support software 326
‘economic’ batch sizes 193–6
‘economic’ order sizes 193–6, 197
economic values 24
EDF (France) 26
efficient consumer response 76, 204–9
Electro-Coatings Ltd 172–6
electronic data interchange 5, 200, 206, 215, 217,
260, 301, 326
electronic point of sale 5, 40, 210, 262, 263
electronic product code 207
enabling technologies 205, 206, 217–18
end-customers 35–70
demand profiling 46–9
marketing perspective 36–8
quality of service 50–6
see also priorities setting; quality of service;
segmentation
endorsements 199
engineered costs 80, 87–9, 103
engineered to order 166, 176
engineering instructions 167
enquiry processing 167
enterprise resource planning 186, 193, 263, 279,
301, 321, 326
enterprise-level reality check 242
entrepreneurial focus 327
Environmental Protection Agency 23
environmental values 23
Ericsson 22
events management and promotions in retail
sector 39–40
Everglo Battery 54–6
evolve strategy 28
executive ownership of supply
relationships 322–4
exponential smoothing 189
external metrics 104
failure driver, internal and external 88
fair trade products 147, 148
Fairtrade Foundation 23
fashion industry 199
see also apparel industry
fast-moving consumer goods
sector 38, 43
field sales 44
Filmco 86–7
financial bonds 53
financial flexibility 98
financial incentives 53
financial ratios 77–9
finished product inventory 187
fixed assets 77
fixed costs 77, 80, 81–4
flexibility 22, 57, 98
Index 353
amplification 215
average 197
base 31, 48
chain 15
dependent 188, 193
forecasts 202
independent 188, 193, 196, 201
management 188
peaks and troughs 62
profile 46–9, 60
-pull system 39
schedule 20–1
and supply chains, integration of 15
surge 31
total 48
trend 48
unknown 238
variable 197
dependability advantage 19, 21
design for logistics 238
development costs reduction 160
differential advantage 41
direct costs 80, 85–7
direct product profitability 84–7
disaggregation 49
discounting 59
discretionary costs 80, 87–9, 103
distress purchases 30
distribution 6
centres, changing role of 132
channels 94
of shipment cycles times in days 161
domestic and international logistics pipelines,
comparison of 126
downstream organisations 236, 257, 272, 285,
292, 341–3
end-customers 36, 58
supply chain 6, 9, 10, 11, 14
drivers of internationalisation 111–19
Airbus A380 113–14
dimensions of strategies 113
fourth generation global shift in Europe 112
global consolidation 116–18
handling 115
inventory 114
risk 119
time-to-market 115
transport 115
drivers, measurement of 60–3
drivers of procurement value 302–14
business alignment 305–8
Procurement Intelligence Unit survey 304
purchasing performance score 306
strategic sourcing at Heineken 306–7
strategies for procurement categories 309–10
supplier relationship management 312–14
time allocation 303
total cost of ownership 310–12, 313
‘waterfall’ of revenue, purchasing spend
and profit 303
354 Index
flow 225–6
charts 170
information 6, 11, 15
material 6, 11, 12–14
value 233
focal firm 9–10, 60, 102, 123, 155, 334
supply chain integration 258, 264
supply chain planning and control 185,
188, 193
focus 29, 132, 133
focused factories: from geographical to product
segmentation 120–1
Food and Drug Administration 47
Ford 10, 62, 230–2, 266
forecast/forecasting 46–7, 158–9, 245–6, 248–9
demand 49, 188–9, 202
error 31, 60
projective 47, 200
form postponement 238
fourth party logistics 238
freight modes, multiple 126
funds flow 73
future challenges and opportunities 333–50
Alfa Laval 337–8
changing economics 334–5
Clorox 344–5
cost-to-serve 343–5
downstream collaboration opportunities 341–3
internal alignment 336–40
supply chain effectiveness 347–9
supply chain management 345–7
upstream collaboration opportunities 340–1
Gantt chart technique 171
General Electric 246
General Motors 143
geopolitical threats 119
global consolidation 116–18
global coordination and local operation
maxim 130
global sourcing arrangements 144
Glup SA 88–9
governance 256
government 96
gross requirement 191–2
growth functions 47
handling 115
hard objectives 17–19, 221
see also cost; quality; time
harmfulness 57
heijunka (leveled scheduling) 285
Heineken 156, 243, 306–7
Henkel 144–5
heritage in market 133
Hewlett-Packard 130–1, 144, 147, 247
historical analogy 47
housekeeping 226
human rights 148
IBM 36
Ikea 51
impulse shoppers 39
in full 19
in-store availability, improved 88–9
inbound logistics 10, 265–70
inbound strategies 67
indirect costs 80, 85–7
individual plants/factories, evolving role of 131–2
industrial marketing 42
information flow 6, 11, 15
information revolution 37–8
information security 148
information sharing 261–4
information technology 217–18, 348
initiative planning process 337
initiatives, time-based 156
inputs 12
inside out 236
integration 10, 178, 301
contract manufacturing 238
external 336
high 258
improvement, virtual 247
internal 336
and lead time 178–9
processes 284–5
vertical 136, 264
see also supply chain integration
inter-firm planning and control 201–3
internal logistics 10, 13
International Labour Organisation 146
internationalisation 109–51
Akzo 149
Asian facilities, location of 128
child labour elimination in Sialkot soccer ball
industry (Pakistan) 146–7
Cisco Systems value recovery programme 142–3
consolidation and break points, multiple 125–6
corporate social responsibility in the supply
chain 145–9
distribution centres, changing role of 132
domestic and international logistics pipelines
118, 126
focused factories: from geographical to product
segmentation 120–1
freight modes and cost options, multiple 126
individual plants, evolving role of 131–2
inventories, centralised 121–4
layering and tiering 130–1
lead time of supply, extended 125
location analysis 128–30
price and currency fluctuations 126–8
reverse logistics 141–3
risk readiness 143–5
trade-off between cost and time for shipping 127
transit times 125
Wal-Mart sustainability programme 149
see also drivers; reconfiguration processes
Index 355
internet technology 260
see also e-entries
inventory 76, 114, 192, 224–5, 226
/availability 57
average turnover 78
carrying cost 194–5
centralised 121–4
-holding costs 115
management 193–8
policies to reflect volatility levels 143–4
profile 13–14, 292
vendor-managed 185–6, 214–16, 285
waste, unnecessary 229
investment 74–5, 216
see also return on investment
invoice price 86
ISO 9000 168
ISO 14001 23
Italian districts 278–80
jidoka 230–1
JP Morgan Chase Vastera 73–4
judgemental methods 47
just-in-sequence 269–70
just-in-time 13, 14, 161, 166–7, 190, 195–6,
269, 291
JIT2 concept 259
just-in-time and lean thinking 221–2, 223–35
defects 225
delay and inventory 224–5
flow 225–6
Ford and Toyota 230–2
full capability 224
inventory 226
machine downtime 225
material requirements planning 229–32
order to production 234
order to replenishment 234
product development 234–5
pull scheduling 233–4
role of lean practices 235
Smog Co. production system 226–8
value flows 233
value specification 232–3
value stream identification 233
waste 228–9
keiretsu 265, 276–7
Kimberly-Clark 210
Kmart 210
LaCrosse Footwear 144
layering 130–1
lead suppliers 272–3
lead-time 57, 64, 335
of supply, extended 125
lead-time frontier 153–84
implementation of time-based practices 179–82
P-time greater than D-time 176, 177, 178–9
see also P:D ratios and differences;
time-based competition;
time-based process mapping
leagility 236
lean capability 236
lean logistics 241
lean thinking 222
see also just-in-time and lean thinking
leverage items 317–19
Li and Fung Co. 236
lifecycle curves 47
local community 96
location analysis 128–30
loyalty 6
programme 52
M&S 24–5, 27, 185–6
McDonald’s/McColonisation 111
machine downtime 225
Magna International 269, 270
maintenance costs, allocation of 91
make process 102
make to order 176, 188, 189, 201
make to stock 176, 177, 188
management system 207
managerial (short- and medium-term) aspects 8
manufacturing costs 80, 86–7
manufacturing planning and control 186, 187–8,
201–2, 203
manufacturing supply chain planning
and control 187–93
Manugistics 210
Marche shoe district 278–80
margin of safety 84
margin-driven behaviour 59
market/marketing 57, 177
approach 113
and logistics 67–8
mix 41–2
participation 113
perspective 36–8
sector lead teams 248
sensitivity 246
master production scheduling 167, 168, 189,
190–2, 193
Matalan 27
material and capacity planning (engine room) 189
material flow 6, 11, 12–14
material requirements planning 189, 190, 201,
229–32
matrix twist 45
maximum variable, minimum fixed policy 77
mean absolute deviation 48
mean average deviation 189
Mercedes 155–6, 268
merchandising requirements 45
milk rounds 196
modelling trend 47–8
modules 267, 268
356 Index
Monte Carlo experiments 162
motions waste, unnecessary 229
moving averages 189
multiple-contact model (diamond) 290
national accounts 44
national distribution centres 8–9, 17, 40, 80, 94
supply chain planning and control 187, 200,
210, 212
NEC 147, 148
Nestlé UK 213–14
net requirement 191–2
networks 10–11
and capacity planning 6
logistical 113
see also supplier networks
new items 209
new pharmaceutical entities 47
new product development 164, 339–40
new product introduction rate 98
new product launches 89
Nike 23, 24, 123–4, 146, 147, 158, 339
Nissan 270, 277, 285
Nokia 22, 25, 193
non-critical items 317
non-standard 192
non-value-adding time 170, 172–3
Nuon 314–15
obligational relationships 255, 256, 286
obsolescence 158
occupational health and safety 148
on quality 19
on shelf availability 176, 199, 204
on site distribution centre 266
on time 19
on time in full 98, 122, 321
one size fits all 73
open market relationships 271
operating environments, classification of 241
operation release tickets 167–8
operational excellence 53
operational ordering cycle 301–2
opportunism 288, 289
opportunity costs 87
order:
batching 202
management 57
point methods 193
qualifiers 26–7, 59, 236–7
to delivery lead time 98
to production 234
to replenishment 234
winners 26–7, 41, 59, 61, 237, 291
orderliness 226
organisational structure 306
original equipment manufacturing 131, 265, 266,
269, 272
outbound logistics 10, 13
outputs 12
outside in 236
outsourcing 77, 136, 271, 279
overheads see indirect costs
overproduction waste 228
P:D ratios and differences 162–8
consequences when P-time is greater than
D-time 165–8
getting ideas to market 165
supply pipeline performance, using time
to measure 163–5
time, use of as a performance measure 162–3
Wiltshire Distribution Transformers 166–8
see also D-time; P-time
P-time (production time) 176–7, 181, 183, 186, 188,
192, 258
pace 133
Pareto analysis 41
partnerships 270–2, 285–9, 342
perceived benefit 74
performance objectives 27
periodic order quantity 196–8
periodic review 198
Philips 22
physical and accounting correspondence 57
physical distribution 10
physical infrastructure set-up with LLP origin
in Asia 138
physical product 16
pick accuracy 17
pipeline map 211, 212
planning process 7, 102
plant and equipment capital reduction 160
point of sale 47, 186, 196, 200, 204
see also electronic point of sale
policy establishment per supplier segment 320
postponement 14, 131, 192
logistical 238
power 288–9
Powerdrive Motors 42–3
PowerGen (UK) 26
presentation (supply condition) 57
pressure 291
prevention cost driver 88
price 42
fluctuations 126–8, 203
focus on 289
negotiations 291
priorities setting 56–68
Bacalao (dried fish) 64–8
buying behaviour 59
current approach to market segmentation 58–9
customer value analysis 60
drivers, measurement of 60–3
market segmentation, future approach to 63–4
selected service level measurements 57
priority planning 201
Probo Koala ship 145
Index 357
process:
improvement 177
steps, unnecessary 181
technology 201
processes, understanding of 180–1
processing costs 80
Procter & Gamble 112, 118, 200, 204, 210, 214,
257, 324
Connect � Develop 340–1, 342
procurement:
business-aligned 325
technology 326
see also sourcing and supply management
product 42
development 177, 234–5
innovation, increased 157–8
leadership 53
lifecycle management 262
obsolescence 115
offering 113
profile 60, 63
quality and safety 148, 291
range 45
segmentation 120–1
types 45
profit (margin) 80, 82–3
promotional efficiency 205
promotions 42, 45, 59, 89, 199, 209
pull scheduling 195, 214, 223, 230, 233–4
pull signal 263
punctuality 57
purchase portfolio matrix 316, 317, 319
purchasing 10
performance score 306
push production 226
push scheduling 223–4, 229
qualifying criteria 41
quality 16, 156, 162
advantage 17
assurance audits 55
costs 88, 160
improvement 154–5, 327
standards 168
quality of service 35, 50–6
customer loyalty 51–2
Everglo Battery 54–6
Ikea 51
measurement 56
relationship marketing and customer relationship
management 53–6
service quality gap model 50
value disciplines 53
quick response 204, 217–18
radio frequency identification devices 206–8,
263, 280
randomness see uncertainty
range of items 208
rationalisation 314–16
rationing 203
re-order point 194
ready-to-go packaging/products/technologies 342
reality check 242
Reckitt Benckiser 339
reconfiguration processes 132–40
global structure 133
localisation structure 133
postponed manufacturing 134, 135
Smiths Aerospace 139–40
trade-off between time and cost in global supply
chains: apparel industry 136–9
regional distribution centres 8–9, 17, 40, 80, 210–11
regularity (service care) 57
relationships:
management 290–2
marketing 53–6
skills 327
strategic 320
reliability of delivery 122
remote factory system 18
replenishment of stock 206, 209
representation of logistics costs 79–89
Bond SA – marginal costing 84
break-even chart 82, 83
direct material costs against volume of activity 82
direct product profitability 86–7
direct/indirect costs 85–7
engineered/discretionary costs 87–9
fixed/variable costs 81–4
Glup SA 88–9
rent cost against volume of activity 81
total cost cube 80
research and development 291
resource planning 189
response time 57
responsibility: sustainability advantage 23–5
restructuring costs 216
retailer vulnerability 216
retailing supply chain planning and control
198–200
return on capital employed 75
return on investment 75–9, 84, 100, 103
return on new products, improved 158
return process 102
returns 7
reverse logistics 9, 141–3, 199
reverse marketing 324–5
review period 198
risk:
in international logistics 119
readiness 143–5
reduction 158–9
Robert Bosch 265
Royal Mail 19
safety stock 197, 198
Saga Sports 147
358 Index
sales 76
based ordering 200
order processing 189
SAP 210
-AFS (Apparel and Footwear Solution) 279
Sara Lee 214
scheduled receipts 192
seasonality 39, 47–9, 62, 199, 216
security of information and property 25
segmentation 38–45, 58–9, 63–4, 240–1
annual sales per customer for book distributor 41
behavioural 39, 44
CleanCo 44–5
consumer and industrial marketing, comparison
between 42
demographic 38
events management and promotions in retail
sector 39–40
geographical 38, 120–1
Powerdrive Motors 42–3
product 120–1
technical 39
segmentation of supply base 316–28
boardroom value markers 326–7
bottleneck items 317, 318
customer of choice status 324–6
executive ownership of supply relationships 322–4
leverage items 317–19
non-critical items 317
policy establishment per supplier segment 320
preferred suppliers 319–20
Procter & Gamble 324
procurement technology 326
strategic items 316
strategic relationships 320
top procurement talent 327–8
vendor rating 321–2, 323
self-billing 326
self-interest 289
separateness (in supply relationships) 290–1
service 16
care 57
level measurements 57
posture 328
see also quality of service
settlement period for creditors/debtors, average 78
shareholders 96
shipped quantity 57
shop scheduling 167–8
shortage gaming 203
shrinkage 199
Silicon Fen (Cambridge) 117
Silicon Valley 117
simplicity 156
simplification 178
single business concept 111
single minute exchange of dies 235
small-batch production 235
Smiths Aerospace 139–40
Smog Co. production system 226–8
social bonds 53
social values 23
soft objectives 16, 25–6
solution generation 171–6
source and make costs 343
source process 102
source-make-deliver processes 187, 193
source-plan-make-deliver process 239
sourcing:
commodity items from low-wage economies 116–17
decisions 291
multiple 288
sole 144
strategic 301, 302, 306–7
see also outsourcing
sourcing and supply management 299–329
supplier rationalisation 314–16
see also drivers of procurement value; segmentation
of supply base
Span measurement 246
speed 161
of delivery 122
of response 57
standard component 192
standard procedures, lack of 216
starting point 133
steady state replenishment policy 39
stewardship skills 327
stock:
replenishment 176
turnover 57
turns 98
stockout 57
storage costs 87
strategic alliance 264
strategic customers 58
strategic items 316
strategic (long-term planning) aspects 8
strategic partnerships integration 285–9
strategic relationships 320
strategic sourcing 301, 302, 306–7
strategic suppliers 58
strategic thinking 327
strategy 155
for procurement categories 309–10
strategy drivers 63, 64
strategy of logistics 27–31
aligning strategies 29–30
definition 28–9
differentiating strategies 30–1
Talleres Auto 30
trade-offs 31
structural bonds 53
Sun Microsystems 272
supplier 96
codes of conduct 24
delivers carriage, insurance and freight 265
development 284–5
Index 359
-in-plant 259–60
management 272
networks 9, 10–12, 273–84
Chinese industrial areas 280–4
Italian districts 278–80
Japanese keiretsu 276–7
supplier associations 273–6
park 267
preferred 319–20
rationalisation 314–16
relationship management 312–14
strategic 58
supply 10, 11
supply capabilities 238–41
supply centres 266
supply chain 3–33
automotive 265–70, 292
closed loop 286
of customers 223
definitions and concepts 6–8
development 6
effectiveness 347–9
financial model 99–100, 101
governance council 247
implications 38
information flow 15
integration 255–95
arcs 258
continuous replenishment in apparel
industry 262–4
electronic 260–4
external 257
inter-company 259–60
internal 257, 358–9
partnerships 270–2
relationships management 290–2
strategic partnerships 285–9
supplier development 284–5
supply base rationalisation 272–3
see also supplier networks; supply relationships
logistics 21
management 6, 7, 100, 319, 345–7
and balanced scorecard 97–9
network, global 137
tools and trade-offs in supply chain 138
material flow 12–14
operations reference model 15, 101–4, 185
performance 103–4
planning and control 185–219
inter-firm 201–3
inventory management 193–8
retailing 198–200
Victoria SA 190–3
within manufacturing 187–93
see also coordination in retail supply chains
ratio 100
scope/activities 132, 133
structure and tiering 8–12
tailored 31
Tesco 4–5
virtual 285
Xerox 13–14
see also agile supply chain; competing through
logistics; strategy of logistics
supply conditions 57
supply management see sourcing and supply
management
supply pipeline performance, using time to
measure 163–5
supply relationships 264–70
automotive supply chains: inbound logistics
solutions 265–70
supply-base continuity 319
support activities 233
supportive capabilities 19–25
responsibility: sustainability advantage 23–5
uncertainty: agility advantage 21–3
variability control: dependability advantage 19–21
sustainability 16, 19, 23–5, 145, 335
synchronous production 13, 267, 285
system maintenance 216
systemic strategy 29
tactical contract management 301–2
tags 207
Talleres Auto 30, 162
target:
pricing/cost 318
stock levels 196–8
task force creation 169
TBL 24
tendency (in reconfiguration process) 132, 133
Tesco 4–5, 6, 8, 21, 23, 39, 199
corporate store steering wheel 98–9
Express and Esso 264
Information Exchange 5
loyalty programme 52
regional distribution centre 17
third party logistics providers 77, 131
tier 0 269
tier 0.5 269, 270
tier 1 basic 268–9
tier 1 customers 36
tier 1 suppliers 186, 265, 267, 269
tier 1 synchro 269
tier 2 265
tiers 10, 130–1
time 16, 31
advantage 17–18
allocation 302, 303
between orders (TBO) 197
break-even 158, 159
elasticity of price 162
horizons 187–8
-to-market 115, 137
use of as a performance measure 162–3
wasted 181
see also just-in-time
360 Index
time-based competition 154–61
adding value opportunities 157–9
cost reductions 159–61
definition and concepts 154–5
distribution of shipment cycles times in days 161
initiatives 156
limitations 161
variety and complexity 155–6
time-based process mapping 92, 168–76
cause-and-effect diagram 175
construction 171
current 174
data collection 170
Electro-Coatings Ltd 172–6
example document 169
flow charting process 170
identification of each step 173
re-engineered 175
selection of process to map 169
solution generation 171–6
task force creation 169
time-based analysis data 174
value-adding and non-value adding time 170
walking the process 172
waste, sources of 171
timetable 133
togetherness (supply relationships) 290
tolerance zone 96
top procurement talent 327–8
top-down decisions 100
top-up shoppers 39
total cost of ownership 310–12, 313
total costs 80, 87
re-balancing 94
total order cycle time 57
total productive maintenance 225
total quality control 234
Toyota 17, 18–19, 22, 143, 161, 222, 230–2, 235, 267
supplier associations 273–4
UK 21
trade-offs 31, 78–9, 127, 130, 154–5, 310, 335
between cost and time in global supply chains:
apparel industry 136–9
between cost and time for international
shipping 127
between two locations 130
identification 31
trading 199
tradition 133
traditional style of relationship (bow-tie) 290
training 337–8, 349
transactional electronic integration 261
transit times, extended and unreliable 125
transport/transportation 115
breakdowns 119
bulk 118
costs 80, 87, 89
network redesign 144
of wastes 229
triple bottom line 23, 145, 319
trust 288
uncertainty 16, 19, 21–3, 46, 49, 199
Unilever 112
unique value proposition 31
upstream organisations 58, 257, 272, 285, 292, 340–1
supply chain logistics 6, 9, 10, 11, 14
supply chain planning and control 193, 201, 202
use by dates 199
value:
activities 233
-adding 7, 54–6, 113
-adding time 157–9, 170, 172–3
chain 233
disciplines 53
flows 233
and logistics costs 73–106
financial ratios 77–9
return on investment 75–9
supply chain operations reference
model 101–4
see also activity-based costing; balanced
measurement portfolio; representation of
logistics costs
specification 232–3
stream identification 233
variability control 16, 19–21
variable costs 80, 81–4
variety 155–6, 157, 239–40
vendor rating 321–2, 323, 324
vendor-managed inventory 185–6, 214–16, 285
vicious cycle 225
Victoria SA 190–3
virtual organisation 238
virtuous cycle 225
Vision Express 18, 19
VM modules 267, 269
voice of the customer 346
volatility levels 143–4
Volkswagen 17–18, 268
volume 239–40
of activity 81
-driven behaviour 59
-driven customers 44
variation 62
Voluntary Inter-industry Commerce Standards
Committee 210
Wal-Mart 23, 39, 149, 204, 208, 210, 214
walking the process 170
warehouse dust test 243
Warner-Lambert 210
waste 9, 181, 221–2, 228–9, 232, 233–4
whale curve 94
WheatCo-ChemCo 286–8
Wilson formula 194
Wiltshire Distribution 166–8, 176
working capital 76, 159–60
working routines 201
world wide web 37–8
Xerox 13–14, 15, 239–41
Logistics
Management
Chapter 1
Saudi Electronic University
Chapter 1: Logistics and the Supply Chain
Chapter 1: Logistics and the Supply Chain
• What is the supply chain, and
how is it structured?
• What is the purpose of a
supply chain?
؟اھمیظنتمتیفیكودیروتلاةلسلسيھام
؟دیروتلاةلسلسنمضرغلاوھام
Competitiveness needs to be considered at two levels:
• The level of the focal firm
• The level of the supply chain
We need to clarify the managerial and strategic perspectives of the logistics
challenge:
• Managerial: supervising day-to-day logistics processes in terms of their time,
cost and quality objectives
• Strategic: formulating and implementing the guiding principles, driving forces
and ingrained attitudes that are shared by partners across a supply network
We need to create clarity in logistics terms.
• Supply chain
• SCM
• Logistics
• Material flow
• Supply networks
Note that we will use “chain” and “network” interchangeably.Chain will generally
be used to describe simple links between organisations and network for more
complex linkages.
Logistics is the task of planning and controlling the purchase and
distribution of the product range from suppliers to stores.
It is concerned with 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 concerned 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 (DCs), and the distribution of products from the DCs to
the associated stores;
• network and capacity planning: the task of planning and implementing
sufficient 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.
A supply chain is a network of partners who collectively convert a basic
commodity (upstream) into a finished product (downstream) that is
valued by end- customers, and who manage returns at each stage.
Transforms inputs in the form of materials and information into
outputs in the form of goods and services.
SCM encompasses the planning and controlling of all processes
involved in procurement, conversion, transportation and distribution
across a supply chain.
SCM includes coordination and collaboration between partners,
which can be suppliers, intermediaries, third party service
providers, and customers.
SCM integrates supply and demand management within and
between companies in order to serve the needs of the end-
customer.
SCM encompasses the planning and controlling of all processes involved in
procurement, conversion, transportation and distribution across a supply
chain.
SCM includes coordination and collaboration between partners, which
can be suppliers, intermediaries, third party service providers, and
customers.
SCM integrates supply and demand management within and between
companies in order to serve the needs of the end-customer.
Logistics has both strategic (long-term planning) and managerial (short- and
medium-term planning and control) aspects.
Chapter 1: Logistics and the Supply Chain
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.
The additional complexity prompts many authors to refer to supply
networks rather than supply chains, a point we return to shortly.
Logistics today is also concerned with what happens after a product
has been sold. Two major concerns are:
• Reverse logistics: the return of unwanted goods and packaging in
the opposite direction
• Waste: the discarding of product at any stage in the supply chain
due to quality problems – for example, the disposal of out-of-
date or damaged stock by a retailer or by an end- customer.
Supply chains should be views as
networks of organizations.
Chapter 1: Logistics and the Supply Chain
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.
Chapter 1: Logistics and the Supply Chain
Figure 1.5 Example of a confectionery network map
(Source: After Zheng et al., 1998)
What is the relationship between
material flow and information
flow?
؟تامولعملاقفدتوداوملاقفدتنیبةقالعلايھام
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
Material flow should be synchronous.
It is important to keep materials flowing from
source to end-customer in a supply chain.
To keep unnecessary build-ups of inventory,
flow must be orchestrated so that parts
movement is coordinated.
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
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.
Chapter 1: Logistics and the Supply Chain
2. Material Flow and Information Flow
Traditionally, sales were focused as stocked developed.
Xerox realized that they should only make the stock when they
needed it, then ship it to the customer.
Three types of delivery were needed:
• Deliver JIT: Off the shelf commodity products
• Finish JIT: Middle-range products with 5-day window
• Build JIT: Larger products planned months in advance
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Within a given supply chain, it is important that each
organisation understands how each group of products
competes in the marketplace, and that it aligns its
capabilities with those of its partners.
Variability undermines the dependability with which a product or service meets
target.
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 the
target
• In-full – percentage of orders delivered complete
and the variability against the target
• On-quality – percentage of defects and the variability against the
target.
Chapter 1: Logistics and the Supply Chain
3. Competing through logistics
Dealing with Uncertainty
Dealing with uncertainty means responding rapidly to unknown problems
that affect logistics processes. The implication of uncertainty for supply
chain processes is that they need to be flexible.
Flexibility comes in two basic forms:
• Proactive – to create the capability in advance to handle uncertainty
• Reactive – to cope with uncertainty in a focal firms internal or external
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Sustainability
Sustainability is defined as the development that meets the needs of
the present without compromising future generations.
The three sustainability values are:
Environmental – a focal firm is concerned with reducing consumption of
non-renewable energy and materials.
Social – ensuring that goods are manufactured in socially responsible
conditions
Economic – the net value that a firm generates after social and
environmental values have been taken into account.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Order Winners and Qualifiers
Order winners are factors that directly and significantly help
products to win orders in the marketplace.
Order qualifiers are factors that are regarded by the market as an
‘entry ticket’. Unless the product or service meets basic performance
standards, it will not be taken seriously.
Order winners and qualifiers are specific to individual segments.
Table 1.1 Different product ranges have different logistics performance objectives
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Defining Strategy
• Strategy is about planning as distinct from doing.
Hayes and Wheelwright (1984):
• Logistics strategy is the set of guiding principles, driving
forces and ingrained attitudes that help to coordinate goals,
plans and policies, and which are reinforced through
conscious and subconscious behaviour within and between
partners across a network.
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Defining Strategy
Whittington (2000) proposes four approaches to setting strategy.
He starts by suggesting different motivations for setting strategy:
• How deliberate are the processes of strategy setting? These can range
from clearly and carefully planned to a series of ad hoc decisions taken
on a day-to-day basis.
• What are the goals of strategy setting? These can range from a focus
on maximising profit to allowing other business priorities such as sales
growth to be included.
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Defining Strategy
What are the implications for the way in which supply chain strategy is approached in
different organisations? Following is a brief description of Whittington’s four options:
• Evolve. ‘Strategy’ is not something that is formally undertaken at all. ‘Our
strategy is not to have a strategy’ is a typical viewpoint. Operating decisions are
taken in relation to the needs of the moment, with financial goals as the main
guiding principle.
• Classical. While financial goals are again the main guiding principle, these are
achieved through a formal planning process. This is called ‘classical’ because it is
the oldest and most influential option.
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Defining Strategy
• Accommodate. Here, decisions are back to the day- to-day mode, but
financial objectives are no longer the primary concern. Strategy is
accommodated instead to the realities of the focal firm and the markets
in which it operates.
• Systemic. This option for strategy setting sees no conflict between the
ends and means of realising business goals. While goal setting takes place
across all major aspects of the business (including human resources,
marketing and manufacturing policies), these are linked to the means by
which they will be achieved in practice.
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Aligning Strategies
• If different links in the supply chain are directed towards different
competitive priorities, then the chain will not be able to serve the
end-customer as well as a supply chain in which the links are directed
towards the same priorities.
• That is the basic argument for alignment in the supply chain
(Cousins, 2005).
• Where the links are directed by a common and consistent set of
competitive criteria, then that supply chain will compete better in the
marketplace than one in which the links have different, conflicting
priorities. This is the concept of ‘focus’, the view that you cannot be
good at everything.
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Case Study 1.6: Talleres Auto
Talleres Auto (TA) is an SME based in Barcelona. TA attends to broken-
down vehicles, providing a roadside repair and recovery service.
• Two of the parts that TA frequently uses are starters and
alternators, which were obtained from a local distributor.
• In turn, the local distributor ordered parts from a prime distributor.
Starters and alternators were obtained from a remanufacturer, who
replaced the windings and tested the products using parts bought from
a component supplier.
• A diagram of this part of the supply chain is shown in Figure 1.11.
Talleres 1.6ةلاحلاةسارد Auto:
Talleres Auto (TA) متھت.ةنولشرباھرقممجحلاةطسوتموةریغصةكرشيھTA تابكرملاب
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Differentiating Strategies
What makes a successful strategy? Five principles of strategic positioning,
related to logistics strategy:
• A unique value proposition: determining what makes the
product/service different from its competitors.
• A tailored supply chain: governed by consistent order winning and
qualifying criteria.
• Identify the trade-offs: by choosing not just the priorities but also what
not to do. A responsive supply chain is not compatible with an efficient
supply chain (Fisher, 1997).
• Align logistics processes: so that processes are mutually reinforcing.
• Continuity: logistics processes are continually and consistently improved
Chapter 1: Logistics and the Supply Chain
4. Logistics Strategy
Trade-offs in Logistics
To reinforce the issue of differentiating strategies, let us look at two
commonly used strategies:
• Cost: a high-volume product for which demand is relatively stable
throughout the year.
• Time: a high variety product, which is designed for a given season
and which is completely redesigned for the next season.
‘Marketing’ has traditionally been associated with anticipating,
identifying and satisfying customer requirements profitably. A more
current definition emphasises value in the context of the broader
supply chain – and that includes partners rather than just
customers:
Marketing is the activity, set of institutions, and processes for
creating, communicating, delivering, and exchanging offerings
that have value for customers, partners, and society at large.
Harnessing customer power:
The basic assumption that customers choose – that they know best
what they want – means that they have become the centre of the
retailer’s universe. In the best businesses, their decisions drive
everything. These choices are also judgements. They pick the
winners and losers in retail and in manufacturing. This is not
theoretical: they regularly pass verdicts, moving from product to
product and store to store. These judgements send strong feedback –
shocks might be a better word – forcing change.
Chapter 2: Putting the end customer first
قیوستلاروظنم 2.1
In Chapter 1, we referred to ‘tier 1 customers’ with whom a focal
firm deals directly, and to ‘end-customers’ who are the
individuals or businesses that buy the finished ‘product’ at the
downstream end of the supply network. It is therefore usual to
refer to two types of customer:
• business customers: who represent the focal firm’s
immediate trading environment
• end-customers: who represent the ultimate customer
for the network as a whole
Chapter 2: Putting the end customer first
قیوستلاروظنم 2.1
2.1 The marketing perspective
Rising customer expectations
Expectations have risen among customers in line with a general
increase in the wealth of developed countries over the last half
century. This increase in expectations has many causes, including:
• better levels of general education;
• better ability to discern between alternative products;
• exposure to more lifestyle issues in the media.
2.1 The marketing perspective
Rising customer expectations
The explosion in applications of internet technology continues to
have sweeping effects on the way that business is transacted today.
Applications that have sprung from the world wide web have
impacted both B2C and business to business B2B relationships.
• Business to consumer (B2C)
• Business to business (B2B)
• Supply chain implications
Chapter 2: Putting the end customer first
قیوستلاروظنم 2.1
ءالمعلاتاعقوتةدایز
Segmentation describes how a given market might be broken up into
different groups of customers with similar needs.
Profiles of the segments and evaluation of their relative
attractiveness to a focal firm can then be developed.
There are many possible ways in which markets can be segmented,
including:
• Demographic
• Geographic
• Technical
• Behaviorial
The important characteristics of segments (McGoldrick, 2002) are that
they must be: measurable: variables that can be easily identified and
measured;
• economically viable: capable of producing the contribution that
justifies the effort and cost of marketing;
• accessible: geographically or in terms of media communications;
• actionable: can be attracted and served effectively.
The marketing mix is the set of marketing decisions that is made to
implement positioning strategy and to achieve the associated
marketing and financial goals.
The marketing mix has been popularly termed the ‘4 Ps’:
• product: range, sizes, presentation and packaging, design and
performance;
• price: list price, discounts, geographical pricing, payment
Segmentation principles can also be applied to industrial marketing. But ‘there
are distinct differences between the marketing of industrial products and
consumer goods’ (Millier and Palmer, 2000: 60), as summarised in Table 2.2.
Chapter 2: Putting the end customer first
تاجتنملاقیوستنیبةحضاوتافالتخاكانھ”نكلو .يعانصلاقیوستلاىلعةئزجتلائدابمقیبطتاًضیأنكمی
Millier(،ةیكالھتسالاعلسلاوةیعانصلا and Palmer،2000: 60 (،2.2لودجلايفھصیخلتمتامك.
3. Demand Profiling
• Marketing people want to forecast demand in order to plan
broad goals such as allocating the salesforce, setting sales goals,
promotions planning and advertising campaigns.
• Logistics people need to know how many to deliver, where and
when to do so, for each sku in the product range and for each
channel – not just for the range as a whole. This leads to a
common perception of the two functions – marketing dealing in
the abstract and logistics dealing in the day-today realities.
In practice, the MAD may be exponentially weighted to give
higher weightings to the most recent demand data.
The sidebar on Figure 2.3 shows how the total (aggregate) demand for
this product can be broken down into four components:
• Base
• Trend
• Seasonality
• Uncertainty
Base and trend demands can be found by linear regression analysis,
and a seasonality index can be found by dividing the original data by
the trend for each period. Uncertainty is usually allowed for by
increasing the forecast to provide a safety margin to make it unlikely
that there are missed sales opportunities.
Forecast demand for a future period n is then calculated from;
So forecast demand for year 4 was based on projecting historical data
for these four components into the future
• Most supply chains that involve physical products end with service
processes such as retailing (grocery or apparel), healthcare
(pharmaceutical and other medical goods) and distribution
(motor cars).
• Service processes mean that the customer is present in some
way, although distribution through web- based shopping,
telephone and mail order mean that customers do not have to be
physically present.
• Performance of service processes often differs between
employees, between customers and from one hour to the
next.
• Quality of service takes place during service delivery,
which is the interaction between the customer (B2B
or B2C) and the service process.
• ‘Gaps’ can emerge between what the service is
supposed to be, what the customer expects it to be,
and how the customer perceives it when it is delivered.
Chapter 2: Putting the end customer first
ةمدخلاةدوج 2.4
While plugging gaps in service quality helps to
improve customer satisfaction, this is a ‘qualifier’ for long-
term customer loyalty. The two concepts are not the same.
Piercy (2009) distinguishes them as follows:
• Customer Satisfaction
• Customer Loyalty
The benefits of customer loyalty are potentially huge. The loyal customer
should be viewed in terms of lifetime spending potential. Loyal
customers:
• generate long-term revenue streams (high lifetime values);
• tend to buy more than new customers;
• tend to increase spending over time;
• may be willing to pay premium prices;
• provide cost savings compared with attracting new customers.
Chapter 2: Putting the end customer first
ةمدخلاةدوج 2.4
لیمعلاءالو
Perceived value is a development of the service quality– product quality–price
model is that of value disciplines. Instead of competing on all of these fronts
equally, Treacy and Wiersema (1997) argue that companies taking leadership
positions do so by narrowing their competitive focus, not by broadening it.
They propose three
strategies, or ‘generic value disciplines’ that can be
followed:
• Operational excellence
• Product leadership
• Customer intimacy
Setting priorities to assure quality of service leads to establishment of
performance measures. Priorities should be used to help ensure that:
• partners in a supply network focus on providing end- customer value;
• partners in that network can see how well the network as a
whole is performing against this yardstick.
In this way they can judge whether performance is improving or declining, and
assess the effect that changes to the system may have on quality of service.
The use of financial ratios in relation to time is key to monitoring working
capital and the ‘cash to cash’ cycle. Key time-related ratios include:
• average inventory turnover: the number of times inventory is turned
over in relation to the cost of good sold;
• average settlement period for debtors: the time taken for customers
to pay their invoices;
• average settlement period for creditors: the time taken for an
organisation to pay its creditors.
Chapter 3: Value and Logistics Costs
رامثتسالادئاعتاكرحموةیلاملابسنلا
Another way to cut up the total cost ‘cube’ is to analyse
costs in terms of whether or not they can be directly
allocated to a given product. Two further categories
emerge:
A classic example of converting discretionary costs into engineered
costs has been the conversion of ‘quality’ as a discretionary concept
into engineered ‘quality costs’ (Dale and Plunkett, 1995).
This was achieved by breaking down the concept of quality into
three cost drivers:
• Prevention
• Appraisal
• Internal and external failure
Chapter 3: Value and Logistics Costs
يریدقت /ایسدنھ
موھفمك “ةدوجلا”لیوحتوھةیسدنھفیلاكتىلإةیریدقتلافیلاكتلالیوحتىلعةیكیسالكلاةلثمألانم
.)Dale and Plunkett ،1995(ةیسدنھ “ةدوجفیلاكت”ىلإيریدقت
Refer to Cooper and Kaplan (1988) explanation about the
two pen factories. (p.90 and previous slide)
ABC principles would help the management of Complex to
make more informed product decisions. The management
of Simple has no need for another costing system;
the current one works well for them.
Chapter 3: Value and Logistics Costs
(ABC)طاشنلاساسأىلعةفلكتلا
)ةقباسلاةحیرشلاوP 90(.مالقألايعنصملوح(Cooper and Kaplan (1988حرشعجار
The cost–time profile (CTP) (Bicheno, 2005) is a graph, which plots cumulative
time against cumulative cost for a set of discrete activities that together form
a process or a supply chain.
The CTP utilises outputs from two sources:
• activity times: from the time-based process mapping (TBPM) process time
recording system (see Chapter 5);
• activity costs: from a process costing system that is underpinned by
Cost-to-Serve
Identical manufactured products may be distributed in many
different ways.
Examples of factors that may influence CTS are:
• Distribution channel used (for example, wholesalers, supermarkets,
hypermarkets).
• Delivery frequency (for routinely planned replenishment deliveries
– daily, weekly, etc.).
• Customised deliveries (requiring special planning).
• Promotional activity
• Contractual terms used (for example, pricing by full truck loads, full pallet
Supply Chain Management and the Balanced Scorecard
Extending the balanced scorecard into the context of the supply
chain, Brewer and Speh (2000) consider that performance
measurement systems must be aligned to supply chain practices:
If firms talk about the importance of supply chain concepts, but
continue to evaluate employees using performance measures that
are . . . unaffected by supply chain improvements, then they will fail
in their supply chain endeavours.
Supply Chain Management and the Balanced
Scorecard
As a general rule, effective cross-supply chain measures should have
the following characteristics (Derocher and Kilpatrick, 2000):
• simple to understand;
• no more than ten in total number;
• representative of a significant causal relationship;
• have an associated target;
• capable of being shared across the supply chain
and Kilpatrick،2000(:
مھفلالھس•
؛يلامجإلاددعلايفةرشعنعدیزیال•
؛ةمھمةیببسةقالعلثمم•
؛طبترمفدھاھل•
دیروتلاةلسلسربعاھتكراشمنكمی•
Chapter 3: Value and Logistics Costs
Supply Chain Management
and the Balanced Scorecard
The following are eight such
measures, which can be adapted to
focus on specific sectors:
1. on time in full, outbound
2. on time in full, inbound
3. internal defect rates
4. new product introduction rate
5. cost reduction
6. stock turns
7. order to delivery lead time
8. financial flexibility
Time-to-Market
Time-to-market has particular significance for the management of the
global logistics pipeline. We will discuss the following issues here:
• Product obsolescence – The extended lead time inherent in
international logistics pipelines means that products run the risk of
becoming obsolete during their time in transit.
• Inventory-holding costs – Lead time spent in the logistics
pipeline increases the holding cost of inventory.
Global Consolidation
The types of resource acquired in this way include all inputs to the end-
product, such as raw materials and components, and also labour and
knowledge.
Familiar features of global consolidation include:
• sourcing of commodity items from low-wage economies
• concentration at specific sites
• bulk transportation
Sourcing commodity items from low-wage economies
Two sourcing issues are used by internationally operating
organisations:
• consolidation of purchasing of all company divisions
Concentration at specific sites
Consolidation of purchasing applies not only to commodity goods but
also to high-value or scarce resources.
• Research and development skills are both high value and scarce.
• Therefore there is an incentive to locate at certain sites to tap
into specific pools of such skills.
Bulk transportation
One of the more obvious advantages of operating a company in a
global manner is the cost advantage of consolidated transportation.
Risk in International Logistics Companies are adapting to the new
supply chain reality of expecting the unexpected.
Companies are developing new risk management approaches based
upon the realisation that decades of globalising supply chains has
come at a price: a heightened and different risk profile.
Considerations:
• Geopolitical threats
• Transportation breakdowns
The tendency towards internationalisation There
is a need to lower costs while enhancing the service
they provide to customers.
They use the following approaches:
• Focused factories
• Centralised inventories
Chapter 4: Managing Logistics Internationally
The Challenges of International Logistics and Location International
logistics is complex, and different from localised logistics pipelines.
The main differences that need to be
taken into consideration are:
• extended lead time of supply;
• extended and unreliable transit
Organising for International Logistics
There are at least three elements in organising for
international logistics. These are:
• layering and tiering
• the evolving role of individual plants
• reconfiguration processes
These will be outlined in the following subsections
Figure 4.11 Stages in the implementation of
postponed manufacturing: local starting
point
(Source: van Hoek, 1998)
Figure 4.12 Stages in the implementation of
postponed manufacturing: global
starting point
(Source: van Hoek, 1998)
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Reverse Logistics
Reverse logistics deals with the flow of goods that go back up the
supply chain for a number of reasons, including: product returns,
repairs, maintenance and endof-life returns for recycling or
dismantling.
Reverse Logistics
Reasons why reverse logistics is often
only partially incorporated into
international network design include:
• no infrastructure: companies often try
to use the same outbound
distribution system to handle returns
without considering whether it is fit
for purpose;
• reverse logistics is often a ‘corner-of-the-
desk concern’, and does not receive
sufficient resources;
• much attention on the subject is driven
by legislation, not yet by recognised
business value;
• focal firms see reverse logistics as a cost of
doing business;
• the subject is intuitively not popular: it
means something has gone wrong, so
people are tempted to ignore it or hide it;
• it is hard to forecast the reverse flow and
composition – what is going to come back.
Reverse Logistics
Opinions indicate that there are operational
shortcomings such as using the same
infrastructure for the return flow, and the
difficulty of forecasting reverse flow. These
might be explained by a lack of management
attention, and by lack of appreciation of the
full costs of reverse logistics. On the other
hand, potential downsides of a reactive
approach include image risks, service
shortfalls and being a nuisance to customers.
Suggested ways forward include
considering the full impact of reverse
logistics and approaching it as a business:
• consider reverse logistics for its full cost and
negative potential market impact;
• seek green as a business (‘green is green’);
• design for disassembly and recycling;
• outsource reversed operations to a
Managing for Risk Readiness
Supply chain disruptions such as transportation breakdowns and
geopolitical risks can have many impacts: empty distribution channels,
stores and goods stuck upstream leading to lost sales, revenue and
customers.
There are at least two levels at which companies are
responding to risk in international logistics:
• Preparing for immediate response to risks
• Structurally preparing for risk in international supply chains
Structural Risk Readiness
Because risk needs to be an ongoing focus, companies are increasingly
devoting dedicated teams to risk management in the supply chain.
These teams can do several things:
• develop contingency plans and risk protocols;
• audit preparedness;
• train plant management and staff;
• report to senior management on risk profiles and
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Competing on time is the principle of taking timely
completion of supply chain tasks to a higher level:
that of compressing cycle times for supply chain
operations for internal and external benefits.
External benefits include:
• lowering overall cycle time and providing
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
A working definition of competing on time is:
The timely response to customer needs
Traditionally, people often have the opinion that you cannot
have low cost and high quality, or low cost and fast delivery,
or fast delivery and high quality.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
The trade-off between cost and quality can be altered by preventing
defects from happening in the first place through such measures as:
• designing the process so that defects cannot occur (error
proofing);
• designing products so that they are easy to make and
distribute;
• training personnel so that they understand the process and its
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
Understanding trade-off relationships lies at the heart of a focal firm’s ability
to achieve competitive advantage. Relationships that need to be understood
and harnessed include recognising that:
• costs do not have to increase in order to improve quality, they can
reduce;
• costs do not have to increase when lead times are reduced. It may be
possible to reduce both in some processes (see Figure 3.10);
• costs do not have to go up as product variety increases and times
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive
advantage
Variety and complexity
One of the first challenges we have in
describing logistics systems
is to understand the terms variety and
complexity.
Thus Galbraith (1977) defines
complexity as the difference
between the information needed
to perform a task and the
information actually possessed.
A more helpful definition for logistics
purposes (Edmunds, 1999) is:
A system is complex when it is difficult to
formulate its overall behavior, even
when given almost complete
information about its components and
their relationships
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive
advantage
Variety and complexity
Mercedes offers 3.3 × 1024 possible variations on its E
class model, which is ‘far more than the company
could ever sell in its entire existence’ (Pil and Holweg,
2004). Only 17,000 of these variations are said to
matter to the end-customer, a situation which appears
to be making the logistics challenge unnecessarily
complex. Here, the complexity of the E class is being
driven by variety, and it is useful to distinguish two
types of variety:
• External variety: is the choice offered to the
end-customer, or potential finished product
skus. Choice soon builds up – an automotive
example would be:
o2 body styles × 15 power train combinations ×
19 painted body colours × 15 trim colours × 70
factory fitted options ≈600,000 variations
• Internal variety: converts external variety into the
internal requirements placed onto the supply chain.
Holweg and Pil (2004) measured internal variety at three
levels in the product structure (for an example of a
product structure, see Case study 6.1): the basic product
(models and body styles), intermediate (such as power
trains, wiring harnesses and body colours), and
peripheral (number and variety of components used).
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in
competitive advantage
Variety and complexity
These authors have used variety as a measure of
complexity. Complexity makes it progressively more
challenging to plan and control the supply chain.
Cooper and Griffiths (1994) state that ‘issues of
variety and complexity are strongly linked’, and list
three rules for managing complexity:
• Increased variety tends to add to the complexity of
logistics operations, and so increases both direct
and indirect costs (section 3.2.2).
• Variety should only be increased when it
contributes to added value. Heineken, the Dutch
beer manufacturer, has 10 skus today compared
with 2,500 across Europe a few years ago. The
‘right’ level of product variety starts with
consumer research (Mahler and Bahulkar, 2009)
rather than ‘tail cutting’ (Activity 2.1).
• System redesign can enhance added value through
reducing the cost impact of an increase in variety.
The antidote to complexity is simplicity, so auto
manufacturers have implemented several ways to
offer external variety without making internal
operations too complex (see Case study 8.3).
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Initiatives
When a company attacks time directly, the first benefits to show up
are usually shorter cycle times and faster inventory turns.
Lower overhead costs usually follow, as the costs of dealing with
breakdowns and delays begin to disappear from the system.
By seeking time reduction, both time reduction and cost reduction are
often the rewards.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Opportunities to Add Value
There are several ways in which a company can use time to help meet
customer needs better and therefore add more value.
The most common examples of this are:
• increased responsiveness to customer needs;
• managing increased variety;
• increased product innovation;
• improved return on new products;
• reducing risk by relying less on forecasts.
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Opportunities to Reduce Costs
The second key element of time-based competition is to reduce cost and
therefore improve productivity through the elimination of non-value-added
time in processes. This means that wasted lead time and unnecessary tasks
that are not actually adding any value in the customers’ eyes should be
identified and eliminated. Stopping unnecessary tasks and removing wasted
time from those that remain lowers cost by:
• reducing the need for working capital;
• reducing the need for plant and equipment capital;
• reducing development costs;
• reducing quality costs.
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
P:D ratios and differences
Using time as a performance measure
Cost is a more subjective measure that is open
to interpretation.
For quality measures to be useful they
often require a statistical approach that
can easily be misunderstood.
Deming’s famous Monte Carlo experiments
with a funnel and glass marble (Deming, 1986:
327) illustrate the perils of interfering with a
stable process:
If anyone adjusts a stable process to try to
compensate for a result that is
undesirable, or for a result that is extra
good, the output that follows will be
worse than if he had left the process
alone.
Chapter 5: Managing the Lead-Time Frontier – Part I
P:D ratios and differences
Using time as a performance measure
Frequent interference in a stable process
increases the variability of its output! Time, on
the other hand, is a measure that everyone
understands. Using this measure anyone can
answer the key question:
• Do we meet the target the customer has
set for us?
By comparing this measure with one
taken for the performance of
competitors, we can easily answer the
next key question:
• How good are we compared with the
competition?
If we take a reason for measuring performance
as being to understand the effect of making
changes to a process, we can more easily
answer the question:
• Is our performance getting better or
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Time-based process mapping
The following sections give an overview of the key stages involved in the time-
based mapping process:
Stage 1: Create a task force
Stage 2: Select the process to map
Stage 3: Collect data
Stage 4: Flow chart the process
Stage 5: Distinguish between value-adding and non-value-adding time
Stage 6: Construct the time-based process map
Stage 7: Solution generation
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Two basic strategies for managing timeliness in the logistics pipeline
are make to stock (MTS) and make to order (MTO). In between, we
have assemble to order (ATO). We begin with a brief description of
each:
• Make to stock (MTS)
• Assemble to order (ATO)
• Make to order (MTO)
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Strategies to cope when P-time is greater than D-time
• When faced with a D-time shorter than the corresponding P-time, a
company has a number of options. In the short term it can attempt
to make to order, or it can forecast demand and supply from stock
(MTS).
• The more common solution is to forecast customer demand,
make products to stock and supply from there.
Managing timeliness in the logistics pipeline Strategies to cope when P-
time is greater than D-time Both make to order and make to stock have
associated costs and risks, so a company should look at ways to reduce
these costs and risks in the longer term.
Reducing risks can be grouped into three inter-linked areas. These are:
• marketing
• product development
• process improvement
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline Practices to
cope when P-time is greater than D-time There are a number of ways to
reduce P-time. These can be summarised as follows:
• Control by optimising throughput and improving process capability.
• Simplify by untangling process flows and reducing product complexity.
• Compress by straightening process flows and reducing batch sizes.
• Integrate by improving communications and implementing teams.
• Coordinate by adding customer-specific parts as late as possible.
• Automate with robots and IT systems
∑ The supply chain ‘game plan’
Key issue: What are the key steps in planning and executing material flow and
information flow within the focal firm? What are the key steps in planning and
executing material flow and information flow between partners in a supply net-
work? What are the implications for planning and controlling the supply chain as a
whole?
o Planning and control within manufacturing
عینصتلايفمكحتلاوطیطختلا
The purpose of a manufacturing planning and control (MPC) system is to meet customer
requirements by enabling managers to make the right decisions.
Three time horizons are involved for all of these processes:
1- Long term: to support decisions about capacity provision.
2- Medium term: to match supply and demand.
3- Short term: to meet day-to-day demand as it unfolds.
Figure 6.1 shows the main modules in an MPC system. The top section is called the ‘front end’,
and provides an overall match of demand and resource.
MPC System :An Overview-Manufacturing Planning and Controlـللحرش
MPC System:MPC Manufacturing Planning and Controlـلليبرعلابحرش
A summary of the main front-end modules, followed by a summary of engine and back
end:
FRON END
– Demand management: collates demand from all sources – external (forecasts
and orders), internal (other firms within the organization) and spares.
– Resource planning: pooling demand and passing it on to manufacturing must be
moderated by capacity to deliver. Resource planning is concerned with
manufacturing capacity in the longer term (output measure), and with machine
and man- power loading (input measure) in the shorter term.
– Sales order processing (SOP): is the module concerned with matching of demand
management and resource planning. Therefore, it is crucial that compatible
measures of demand and capacity are used. The aim of SOP is to maintain
balance between demand and supply.
– Master production scheduling (MPS): is the disaggregated form of the SOP. The
MPS is the link between front end and engine of the MPC system.
– Material and capacity planning (engine room): the logic behind this is called
material requirements planning (MRP). This takes MPS data and explodes it into
detailed plans by component and subassembly. Each of these plans must be
checked and optimized against available capacity by means of the detailed
capacity planning module.
– MPC execution systems (back end): the outputs from material and capacity plans
in the engine are sets of instructions to suppliers, manufacturing and
distribution. The basic format is ‘how many’ and ‘when’ for each part number for
each planning process for the relevant planning period. Achievement against
schedule has to be monitored by minute, by hour or by day. Failures to meet
schedule require that remedial action is taken , such as overtime working or
outsourcing.
Front end, engine and back end MPC modules are all connected to the enterprise
requirements planning (ERP) database. This enables MPC modules to be seamlessly
connected to human resource management, finance and sales and marketing modules.
o Managing inventory in the supply chain
ß Planning and controlling factory output is part of the challenge of managing
material flow in the supply chain.
ß Random demand is independent
ß Dependent demand is fixed by the actions of the firm
ß It is important to manage inventories of independent demand items using order
points
ß Important to optimize trade-offs between inventory holding costs and
‘Economic’ batch sizes and order sizes
ß The question of how many parts to
make at a time has traditionally been
answered by reference to a
longstanding concept called the
‘economic’ batch quantity (EBQ)
formula.
ß Similar principles are used to
determine how many parts at a time to
order from suppliers in ‘economic’
order quantities (EOQs). Both EBQ and
EOQ assume that parts are used at a
uniform rate and that another batch of
parts should be made or ordered when
stock falls below the re-order point.
The principle behind reorder point, which sets out to answer the question when to
order, is shown in Figure 6.3
In the case of manufacturing batch sizes, the EBQ is determined by optimizing the trade-
off between changeover cost between one batch and the next and inventory carrying
cost:
– Changeover cost per unit, : The cost associated with changing over a given
machine from the last good part from a batch to the first good part from the
succeeding batch.
– Inventory carrying cost, C : The cost of holding stock, calculated from the total
inventory cost and the annual rate charged for holding inventory.
The usage rate z is known and constant and that the manufactured cost of the SKU c is
also known and constant. A little algebra applied to these assumptions leads to the so-
called Wilson formula: EBQ √2z /cC
EBQ increases with usage rate and changeover cost and reduces with manufactured cost
per unit and inventory carrying cost.
The concept of the economic order quantity EOQ is based on similar assumptions to the
EBQ. The calculation addresses the question ‘how many parts will we order?’ The trade-
off this time is between the cost of placing an order and inventory carrying cost,
where:
– Cost of placing an order: All order related costs, including purchase department
costs, transportation costs from the supplier, and goods-in inspection and
receiving.
EOQ increases in line with the cost of placing an order and reduces in line with the
inventory carrying cost.
Periodic order quantity and target stock levels
ß Various methods have been adopted to overcome some of the deficiencies of
EOQ models.
ß An EOQ system finds it very difficult to cope if demand goes up or down rapidly.
ß An alternative way to deal with variable demand is to use the periodic order
quantity.
ß Here, the re-order quantities are revised more frequently.
ß The method uses mean time between orders (TBO), which is calculated by
dividing the EOQ by the average demand rate.
ß the re-order quantity is based on total demand for the immediate two weeks of
history. This re-order method is called periodic order quantity (POQ).
ß POQ normally gives a lower mean inventory level than EOQ in variable de- mand
Periodic review
ß A widely used model for inventory control in retailing is periodic review. This
works by placing orders of variable size at regular intervals – the review period.
The quantity ordered is enough to raise stock on hand plus stock on order to a
target level called the target stock level (TSL):
Order quantity = Target stock level – Stock on hand – Stock on order
ß The TSL is the sum of cycle stock (average daily demand over the review period
and replenishment lead time) and the safety stock. An example of the way the
TSL is calculated is:
o Planning and control in retailing
ةئزجتلابعیبلايفمكحتلاوطیطختلا
Retailing is faced with planning and control challenges distinct from manufacturing:
– A retailer cannot generate sales without stock, and stock that is bought for sales
that do not happen can be very expensive for the retailer.
– The product range that has to be supported on the shelf is comparatively wide.
– Several stages of the internal supply chain must be coordinated – depots, back of
store and front of store
– Retail profit margins in grocery are tighter (2–4 per cent) than for large, branded
manufacturers (8–10 per cent).
– Demand can be affected by changes that are difficult to forecast, such as
seasonality, fashion, endorsements, and promotions.
– ‘Best before’ and ‘use by’ dates for fresh produce increase obsolescence
pressures and inventory turns.
– Reverse logistics is more complicated.
ß Customers’ choices ‘drive everything’. Retailers be-come more connected to the
market than to the supply chain. The core capability in retailing is trading.
ß Examination of a very typical retail demand series shows that there is a degree of
uncertainty about the actual demand for each day. Retailers expect suppliers to
cope with this demand uncertainty by holding buffer stocks.
ß Retailers use projective forecasting for planning replenishment quantities of
stable demand items
ß Using sales based ordering (SBO), retailers attempt to match supply with POS
demand as closely as possible.
One consequence of poor coordination within a supply network is amplification of
changes in demand upstream. Amplification of demand changes has been called the
bullwhip effect.
four major causes of the bullwhip effect:
– Updating of demand forecasts
– Order batching
– Price fluctuation
– Rationing and shortage gaming
It is possible for material movements in supply chains to descend into chaos.
∑ Overcoming poor coordination in retail supply chains
Key issue: How can collaboration be extended across the supply chain to focus on
meeting consumer demand?
Category management aims to balance
retailers’ product volume and variety of
objectives.
Category management represents a focus
on the development of at least some of the
following capabilities:
– account management
– demand management;
– multifunctional selling teams;
– price list restructuring;
– effective and customized
Continuous replenishment offers both retailers and their suppliers the opportunity to
manage their inventory in a more efficient manner
effective replenishment strategies require development of the following capabilities:
Enabling technologies drive ECR and make it work. They include scanning data, data
warehousing and data mining, which have facilitated our understanding of customer
requirements.
capabilities required by organizations in order to implement an effective ECR initiative
include:
– effective information sharing
– automated order generation;
– bar-coding and the use of other scanning technology.
In addition, the data to be shared and communicated at various stages in the supply
chain depend on what will provide the most overall benefit. These data should include:
– demand/consumption/sales information
– cash flow;
– stocks of finished goods/work in progress;
– delivery and output status
Radio frequency identification (RFID) is a product tracking technology that is becoming
applied widely in supply chains today. An RFID device, often called a tag, can be
attached to a piece of merchandise and informs a reader about the nature and location
of what it is attached to.
Figure 6.9 shows how the reader can relay this information to a management system
that can create a picture of what merchandise is where at a level of detail that has not
previously been possible.
The antenna is a device that uses radio waves to read and/or write data to the tags.
The reader manages the interface between antenna and management system.
The management system enables data from tags to be collected and sorted for the
purposes of management information and action.
Product tagging allows for several interesting applications including:
– tracking products throughout the distribution pipeline (‘asset tracking’)
– tracking products through back of store to the shelf
– intelligent shelves, whereby ‘sweeping’ of product
– registering sales without involving a cashier
o Collaborative planning, forecasting and replenishment (CPFR)
)CPFR(دیدجتلاوؤبنتلاوينواعتلاطیطختلا
ß Collaborative planning, forecasting and replenishment (CPFR) is aimed at
improving collaboration between buyer and supplier so that customer service is
improved while inventory management is made more efficient. The trade- off
between customer service and inventory is thereby altered.
ß The goal of the CPFR movement was to develop a business model to forecast
and replenish inventory collaboratively.
ß The CPFR concept can have bottom-line impact on their businesses.
A nine-step business model has been developed that provides an insight into the effort
required by both supplier and customer. The model is as follows:
1- Develop front-end agreement.
2- Create joint business plans.
3- Create individual sales forecasts.
4- Identify exceptions to sales forecasts.
5- Resolve/collaborate on exception items.
6- Create order forecast.
7- Identify exceptions to order forecast.
8- Resolve/collaborate on exception items.
9- Generate orders.
Benefits of electronic collaboration Nestlé UK states that the advantages of
collaborative systems are significant, and lists the following benefits:
– There is improved availability of product to the consumer, and hence more sales.
– Total service is improved, total costs are reduced (including inventory, waste and
resources), and capacities can be reduced owing to the reductions in
uncertainty.
– Processes that span two or more companies become far more integrated and
hence simple, standard, speedy and certain.
– Information is communicated quickly, in a more structured way, and is
transparent across the supply chain to all authorized users.
– An audit trail can be provided to say when information was amended.
– Email prompts can update users of variance and progress and can confirm
authorizations.
– The data that are in the system can be used for monitoring and evaluation
purposes.
– The process can be completed in a quick timescale, at a lower total cost.
– All trading partners become more committed to the shared plans and objectives.
Changes are made with more care and are immediately visible to all.
o Vendor-managed inventory (VMI)
)VMI(عئابلاهریدیيذلانوزخملا
Vendor-managed inventory (VMI), is an approach to inventory and order fulfilment
whereby the supplier, not the customer, is responsible for managing and
replenishing inventory.
Automated VMI originated in the late 1980s with department stores in the US as a
solution to manage the difficulties in predicting demand for seasonal clothing.
Manual VMI had been around for many years.
– Unwillingness to share data
– Seasonal products
– Investment and restructuring costs
– Retailer vulnerability
– Lack of standard procedures
– System maintenance
Quick response (QR) is an approach to meeting customer demand by supplying the
right quantity, variety and quality at the right time to the right place at the right price.
Understanding overall performance involves mapping the processes needed to convert
raw material into the final product. The performance of the process is also assessed to
determine its effectiveness.
High variety in clothing markets and in grocery markets has led these industries to use
information technologies as a means of enabling QR.
These technologies are based around the use of uniform product codes and electronic
data interchange (EDI).
This process has enormous implications for links across the supply chain.
Chapter 7: Just-in-time and the agile supply chain
∑ Just-in-time and lean thinking
Key issue: What are the implications of just-in-time and lean thinking for
logistics? How can just-in-time principles be applied to other forms of material
control such as material requirements planning?
– Just-in-time is actually a broad philosophy of management that seeks to eliminate
waste and improve quality in all business processes. JIT is put into practice by means of
a set of tools and techniques that provide the cutting edge in the ‘war on waste’.
– The partial view of JIT is an approach to material control based on the view that a
process should operate only when a customer signals a need for more parts from that
process.
– A supply network can be conceived of as a chain of customers, with each link
coordinated with its neighbors by JIT signals. The whole network is triggered by demand
from the end-customer.
– The two systems of controlling materials can be distinguished as follows:
1. Pull scheduling: a system of controlling materials whereby the user signals to the
maker or provider that more material is needed. Material is sent only in
response to such a signal.
2. Push scheduling: a system of controlling materials whereby makers and
providers make or send material in response to a pre-set schedule, regardless of
whether the next process needs them at the time.
The push approach is a common way for processes to be managed, and often seems a
sensible option.
Companies achieve the ability to produce and deliver just-in-time to satisfy actual
demand because they develop a production system that is capable of working in this
way. Such a system can be envisaged as a number of ‘factors’ that interact with each
other, as shown in Figure 7.1.
Factor 1
The top of the pyramid is full capability for just-in-time supply. This is the level at which
a focal firm can produce and deliver according to the demand that is placed on it. The
relationships operating within and between levels 2 and 3 form the system that
ultimately underpins the achievement of JIT. They are complex, and in some cases,
there is a long time delay between taking actions and seeing the effects.
Factor 2
The two factors delay, and inventory interact with each other in a system of positive
amplification; that is, they go up together and they go down together. This
interrelationship results in either a virtuous cycle, where things keep getting better, or a
vicious cycle, where they keep getting worse.
Defects lead to delays, either through requiring rework or necessitating increased
production to compensate for scrap. The likelihood of defects leads to safety stocks
being held as a buffer against potential problems. This thinking amplifies quality
problems by increasing the time between a defect occurring and its discovery.
Factor 4
Machine downtime relates to a number of issues:
– unplanned downtime – that is, breakdowns.
– planned maintenance.
– changeover times.
Downtime, and particularly the risk of unplanned downtime, is a key cause of the need
for safety stocks in a process. Other JIT tools and techniques can help to minimize the
problems here. Example of JIT tools used to reduce the costs of machine downtime :
total productive maintenance, Minimizing changeover time.
Factor 5
A simple process results from having first focused operations around a family of
compatible products. Layout is then organized to bring together all the people and
equipment needed to undertake the
process. These are arranged so that
there is a logical flow between the
process steps. A simple process will
be more visible, allowing it to be
better maintained.
The levels of work in progress and other types of inventory have a significant impact
upon the visibility of a process. It becomes increasingly difficult to see the flow of a
process as inventory increases.
There are seven total types of waste:
– The waste of overproduction
– The waste of waiting
– The waste of transporting
– The waste of inappropriate processing
– The waste of unnecessary inventory
– The waste of unnecessary motions
– The waste of defects
– MRP is a logical and systematic way of planning materials.
ß It links downstream demand with manufacture and with upstream supply.
ß It can handle detailed parts requirements, even for products that are made
infrequently and in low volumes.
– MRP is based on a centrally controlled, bureaucratic approach to material planning.
– Typically, MRP adopts push scheduling characteristics. MRP is good at planning but
weak at control.
– JIT pull scheduling is good at handling relatively stable demand
for parts that are made regularly.
– JIT has become associated with jidoka, the Japanese way of cutting out waste, doing
the simple things well and getting better every day.
– The term lean thinking refers to the elimination of waste in all aspects of a business.
– Lean thinking is a cyclical route to seeking perfection by eliminating waste (the
Japanese word is muda) and thereby enriching value from the customer perspective.
– The end-customer should not pay for the cost, time and quality penalties of wasteful
processes in the supply network.
Specify value
– Value is specified from the customer perspective.
– From the end-customer perspective, value is added along the supply network as raw
materials from primary manufacture are progressively converted into finished product
bought by the end-customer, such as the aluminum ore being converted into one of the
constituents of a can of coke. From a marketing and sales perspective, the can of coke
should be ‘always within reach of your thirst’.
– Another is Porter’s concept of the value chain, which sees two types of activity that are
of value to the customer. The first is the primary value activities, the second is support
activities.
Identify the value stream
Following on from the concept of value, the next principle is to identify the whole
sequence of processes along the supply network.
Make value flow
Minimizing delays, inventories, defects and downtime supports the flow of value in the
supply network. Simplicity and visibility are the foundations to achieving these key
factors.
Pull scheduling
– Enforce the rules in section 6.1: make only in response to a signal from the customer
(the next process) that more is needed.
– This implies that demand information is made available across the supply chain.
– Supply from manufacturing, not from stock.
– Use customer orders not forecast.
o Application of lean thinking to business processes
– Working back from the customer, a focal firm should consider the following processes:
ÿ Order to replenishment.
ÿ
Order to production
.
ÿ Product development.
– In each of these processes, the application of lean thinking involves examining the
process, quantifying waste within it, identifying root causes of the waste, and
developing and implementing of solutions.
Order to replenishment
The order replenishment cycle concerns the time taken to replenish what has been sold.
Lean thinking seeks to manage the order replenishment cycle by re- placing only what
has been sold within rapid replenishment lead times.
The order to production cycle is the series of steps that are followed to respond to an
order, organize and undertake production, and deliver the product to the customer.
Product development
Product development delivers new products or services that can be sold. This process is
essential if an organization is to have future success.
Lean thinking is associated with a number of operational practices that help to deliver
the aim of waste minimization. Two of the most significant are:
– small-batch production.
– rapid changeover.
These two practices are closely associated with each other but are considered
separately here to aid clarity. READ PAGE 235 ON THE TEXTBOOK
∑ The concept of agility
YouTube Video : Agile and Lean Supply Chain
– The ‘agile supply chain’ is an essentially practical approach to organizing logistics
capabilities around end-customer demand.
– It is about moving from supply chains that are structured around a focal company and
its operating guidelines towards supply chains that are focused on end customers.
– Capabilities of the supply networks are ‘all about flexibility, response time, small
production runs, small minimum order quantities, and the ability to shift direction as
the trends move’. While some of these ideas reflect JIT approaches, the key is to
https://www.youtube.com/watch?v=qJxKbQBN9j0
organize logistics from the customer order back – or ‘outside in’ – as opposed to
pushing product-service offerings into the market – or ‘inside out’. Important
requirements for that change in mindset include:
ÿ A relentless focus on drivers of customer value in all logistics processes.
ÿ Developing capabilities for responsiveness and flexibility in advance.
ÿ Using those capabilities to align supply chains operations in a dynamic manner
A helpful comparison between agile and lean supply, shown in Table 7.1 We have
extended this table into our comparison of further characteristics of lean and agile
supply, shown in Table 7.2.
– The comparisons in Tables 7.1 and 7.2 help us to place ‘agile’ in relation to ‘lean’, and
thus to complement our earlier concept of logistics performance objectives.
– The relative importance of the four ways of competing through logistics (quality, time,
cost and dependability) can be assessed with the help of order winners and order
qualifiers.
– The specification of order qualifiers and order winners helps in the development of
logistics strategy.
– Order winners and qualifiers can change over time.
Allocation of finished goods to given customer orders is a familiar way of responding
quickly to demand – for example, selling cars from a dealer forecourt.
But this approach to supply means that inventories of finished goods must first be built
up.
The problem is that they must be built up in anticipation of unknown demand. If stocks
pushed by a manufacturer onto its dealer network are too high, they will have to be
discounted. If they are too low, sales are lost to competitors.
Delaying the exact specification of the car until the customer order is known, and then
delivering it within an acceptable D-time, is called form postponement. The concept of
‘postponement’ is now increasingly widely employed by organizations in a range of
industries.
Postponement is widely used to
improve responsiveness, and is defined
as:
The delay, until end-customer orders
are received, of the final part of the
transformation processes, through
which the number of skus proliferates,
and for which only a short time period
is available. The postponed
transformation processes may be
manufacturing processes, assembly
processes, configuration processes,
packaging or labeling processes.
The appearance of wide customer
choice can be created while keeping source, make and deliver processes as simple as
possible. This is the thinking behind the principle of design for logistics.
Creating an agile supply chain requires more than revising logistics and distribution
management: it goes all the way to product design.
Individual companies in an agile supply chain need to align their operations by
redesigning the flow of goods, information and management practices. The aim is the
virtual organization, where groups of supply chain partners agree common terms for
working together.
Figure 7.8 offers a classification of
operating environments based on demand
characteristics. This classification places
agility in the context of alternative logistics
strategies.
First, A, B and C products are positioned.
This is based on a Pareto analysis of an
organization’s product range.
class ‘A’ products comprise 80 per cent of
sales value taken on just 20 per cent of
orders. They tend to be the more
standardized, have lower forecast errors
and lower volume variation. Lean logistics
methods are therefore often appropriate.
Class ‘B’ products on the other hand are
often subject to higher forecast errors and
have higher volume variations. They are
often better served by agile approaches.
– There is another set of factors that need to be in place for the agile principles and
practices to pay off or work at all.
– These are cross-functional alignment and enterprise level focus on the contribution of
logistics management and strategy.
– Before investing in agile capabilities, it is important to do an enterprise-level reality
check and a cost of complexity sanity check.
Lowering the cost of complexity: avoiding overly expensive agility
– The purpose of responding to customer demand is fundamental to the role of logistics.
In this sense, agility is a natural goal.
A key qualification is:
not at any cost, nor to compensate for mismanagement elsewhere in the organization.
Forecasting; reducing the need for last-minute crises
– As important as fast response may be, organizations cannot make all of their
operational decisions in real time and in response to events already taking place.
– Some advanced preparation and planning is required. Hence, even in the most agile
supply chains, forecasting is needed and can be used to avoid expensive panic
shipments against orders that could have been anticipated.
There are several management approaches to forecasting that will enhance its accuracy
and relevance :
1. A ‘one forecast’ approach 2. Ensure forecast accountability
3. Make forecasting business relevant 4. Use one process
o Developing measures that put the end-customer first to improve market
sensitivity
– All companies include customer service in some form in their performance
measurement system. However, almost all operationalize this measurement internally,
leading to responsiveness that is misguided and focused wrongly and limiting the
network integration across the supply chain.
– GE changed its measurement set towards what it calls Span measurement. Span
stands for the range of delivery around customer requested due dates.
– The experience of GE suggests the value of several actions to improve measurement
for agility:
ÿ Share measurement dashboards with customers.
ÿ Do not measure against your own measures of success, ask the customer what
defines success for them.
ÿ Hold all parts of the supply chain accountable against the customer- defined
measure of success so that there is no escape from market sensitivity.
– Agility requires the ability to be able to respond to local market requirements and
opportunities.
– Companies should still aim to leverage skills and capabilities across the regions in
which they operate.
– This means they need to establish and strive for shared goals across their business
units as a form of virtual integration, with local operations remaining in place and the
focus remaining on local customer service.
– Most often however, companies’ trend either towards local responsiveness or strong
global standardization and organization.
o Boundary spanning S&OP process to improve process integration
– The purpose of the sales and operations planning is to set sales forecasts and to
translate them into operations plans for sourcing, making, storing and delivering to
demand.
– It requires internal integration, at least between sales and operations, to
make the process work.
Additionally, forecasting is not just a numbers game, it is a key business process that
supports supply chain readiness for market demand.
– Alcoa has made some great strides across very diverse business that are very
autonomous in their markets to develop a boundary spanning S&OP process to support
process and internal integration.
– A few ground rules for effective S&OP tables include:
ÿ all key functions need to attend mandatory (sales, finance, production,
logistics, procurement) and additional function can be invited if needed
(R&D, engineering);
ÿ all attendees need to come with real decision-making authority and mandate
for the table to become effective.
ÿ the discussion needs to focus not just on generating a forecast but also on
diagnosing forecast errors from the past to learn from them and discuss
trade-offs.
ÿ there needs to be a structured (standing) agenda and set of measures used
(most typically including forecast error, forecasted volumes and sales
amounts, capacity utilization, new products and upcoming events, sku.
Chapter 8: Integrating the supply chain
∑ Integration in the supply chain
Key issue: How can we integrate internally, externally and electronically?
What drives integration in the supply chain?
Procter & Gamble’s desire is to design the supply chain to meet the needs of end-
customers, starting from point of sale and working backwards to deliver the right
product, in the right place, at the right time, of the right quality. The following are four
principles of Procter & Gamble’s supply chain strategy:
– Produce every product that needs to be produced every day through short cycle
production.
– Communicate with suppliers in real time – suppliers with whom we have built
long-term relationships and with whom we have integrated systems.
– Draw demand data from the point nearest to the end-customer – in this case,
the retail cash register.
– Collaboration between all supply chain partners using a multifunctional
approach (commercial and supply chain working together) and aligned metrics
focusing on delivering to the end-customer.
Evidence that improved integration (both upstream and downstream) leads to
improved performance for the supply chain as a whole has been found by survey
research for firms in fabricated metal products, machinery and equipment
manufacturing (Frohlich and Westbrook, 2001). Integration was measured across eight
variables, as follows:
1. Access to planning systems.
2. Sharing production plans.
3. Joint EDI access/networks.
4. Knowledge of inventory mix/levels.
5. Packaging customization.
6. Delivery frequencies.
7. Common logistical equipment/containers.
8. Common use of third party logistics.
The broadest integration strategies led to
the highest rates of significant performance
improvements. They pictured this in terms of
‘arcs of integration’, our version of which is
shown in Figure 8.1. We can propose that
broader integration reduces uncertainty of
material flow through the supply network. In
turn, this improves efficiency and reduces
the P-time.
– Firms with higher internal integration demonstrated higher relative logistics
performance compared with less integrated firms.
– Firms should continue to work at improving internal integration. For example,
functional barriers between purchasing, manufacturing and distribution may lead to the
following scenarios:
– Purchasing buys castings on the basis of low price, but the supplier has a poor
record for delivery reliability and quality. Manufacturing is faced with uncertain
deliveries and high reject rates.
– Manufacturing aims to keep machine and labor productivity high, so batch sizes
are kept high. Distribution is faced with poor availability, especially of class B and
C parts.
– Distribution wants to maintain a fast throughput warehousing operation, so
resists carrying out any post-manufacturing operations. Manufacturing is faced
with the additional complexity of customizing products.
– Internal integration is the key starting point for broader integration across the supply
chain.
– If significant improvements can be achieved by internal integration, potential for the
benefits of external integration could be even higher.
– A logical extension of the just-in-time concept is to place customer and supplier
processes closer together.
– The ‘supplier in-plant’ is also part of the production planning process, so production is
planned concurrently with the supplier organization.
The benefits of this streamlining have also resulted in major business improvements for
Bose. These include:
1. 50 per cent improvement in terms of on-time deliveries, damage and shortages.
2. 6 per cent reduction in material costs.
3. 26 per cent improvement in equipment utilization.
4. major reductions in inventory holdings.
– Much of the pioneering work for electronic integration has been in the fast-moving
consumer goods (FMCG) sector between retailers and manufacturers. The traditional
way to exchange orders and delivery information has been by means of electronic data
interchange (EDI).
– Achieving visibility throughout the supply chain is of paramount importance in the
search for competitive advantage.
– The internet provides a platform-independent communications highway that can be
used as a cross- company interface to enable electronic commerce.
– E-business is a term used to cover trading with a firm’s suppliers and business
customers – that is, business-to-business – by electronic means.
Trading partners can integrate electronically in three ways: transactional, information
sharing and collaborative planning.
Transactional: the electronic execution of transactions
This is usually found in business to business (B2B) e-commerce, with the trading
partners focusing on the automation of business transactions such as purchase orders,
invoices, order and advanced shipment notices, load tendering and acknowledgements,
and freight invoices and payments. These transactions involve the electronic
transmission of a fixed-format document with predefined data and information fields.
Information sharing: the electronic sharing or exchange of information
– Trading partners are given access to a system with shared information.
– The recipient uses the data as it stands, and no feedback is given.
– Shared information may include product descriptions and pricing, promotional
calendars, inventory levels, shipment tracking and tracing.
– Continuous replenishment (CR): Continuous replenishment logistics is a pioneering
approach to using developments in IT to supply demand quickly from the manufacturer.
CR shares data from retailer to supplier.
The aim is for the supplier to replace quickly what has been sold today, so that stock
availability on the shelf is maintained at the retailer.
o Choosing the right supply relationships
Key issues: What types of supply relationships can be adopted? How can each
type of relationship be tailored to different types of product?
– There are many possible types of relationships in the supply chain.
– The different options can be viewed in the form of a continuum.
– This can range from arm’s length, where the relationship is conducted through the
marketplace with price as its foundation, to vertical integration, where the relationship
is cemented through ownership.
– A continuum of relationship options is shown:
∑ Partnerships in the supply chain
Key issues: What are partnerships, and what are their advantages and
disadvantages?
– Here, we review the added value that partnerships may bring. Generally, cooperative
relationships or ‘partnerships’ have been characterized as being based upon:
ß The sharing of information.
ß Trust and openness.
ß Coordination and planning.
ß Mutual benefits and sharing of risks.
ß A recognition of mutual interdependence.
ß Shared goals.
ß Compatibility of corporate philosophies.
ß
– Open market relationships are typified by short- term contracts, arm’s length
relations, little joint development and many suppliers per part.
– Observing that Japanese practice – and consequently the ‘lean’ model of supply differs
significantly from this – indicates that other, non-market mechanisms must be
operating.
– The Japanese tend to infuse their transactions with the non-economic qualities of
commitment and trust.
– Within partnerships, savings come in the form of reduced negotiations and drawing up
of separate contracts, reduced monitoring of supplier soundness, including supply
quality and increased productivity.
– These are accompanied by strategic advantages of shortened lead times and product
cycles, and conditions amenable to longer-term investment.
– These advantages, however, need to be set against the problems that can be
associated with the introduction of commitment and trust.
Some of the examples of potential disadvantages of partnerships include the following:
– The inability to price accurately qualitative matters such as design work.
– The need for organizations to gather substantial information about potential
partners on which to base decisions.
– The risk of divulging sensitive information to competitors.
– Potential opportunism by suppliers.
∑ Supply base rationalization
Key issue: What are the drivers for reducing the numbers of direct suppliers?
– Integrating a supply chain means that a focal firm’s processes align with those of its
upstream and downstream partners.
– It becomes impractical to integrate processes of the focal firm with the processes of a
substantial inbound network of suppliers.
– Instead, high-intensity relationships can be managed with a limited supplier base.
– Such considerations argue for the appointment of a limited number of lead suppliers,
each responsible for managing their portion of the inbound supply chain.
– Clearly one of the key concerns for logistics management is the criteria by which lead
suppliers are chosen.
– Supplier management is the aspect of supply chain management that seeks to
organize the sourcing of materials and components from a suitable set of suppliers.
– Companies are usually seeking to reduce the numbers of suppliers they deal with by
focusing on those with the ‘right’ set of capabilities.
– The extent to which companies have undertaken this and have tiered their supply
chains is exceptional.
– While true single-sourcing strategies are the exception rather than the rule, the
concept of the lead supplier is now widely accepted.
– Over the past ten years many large companies have consolidated their supplier base.
– However, many of the original suppliers still contribute to the OEM’s products, but
they now do so from lower tiers.
– The responsibility for managing them now lies with the suppliers left at the first tier.
∑ Supplier networks
Key issues: What are supplier associations and the Japanese keiretsu?
Supplier networks can be formal or informal groups of companies whose common
interest is that they all supply a particular customer or support an entire industry.
Four such networks are considered here:
– supplier associations.
– Japanese keiretsu.
– Italian districts.
– Chinese industrial areas.
Aitken (1998) defines a supplier association as:
the network of a company’s important suppliers brought together for the purpose of
coordination and development. Through the supplier association forum this company
provides training and resource for production and logistics process improvements. The
association also provides the opportunity for its members to improve the quality and
frequency of communications, a critical factor for improving operational performance.
– Supplier associations may be traced back to the late 1930s with the oldest known
group being one linked to Japanese automotive manufacturer Toyota.
– This early group consisted of 18 suppliers producing basic commodity items such as
screws, nuts and bolts.
– These suppliers formed the group for the benefit of
themselves.
– The Toyota organization itself did not perform an active role in the beginning of the
association.
– During WWII, the Japanese government intervened and forced assemblers and
subcontractors to work together to increase the efficiency of the supply chain.
– One of the Japanese business
structures that have received
interest from Western business is
the keiretsu.
– Keiretsu is a term used to
describe Japanese business
consortia based on cooperation,
coordination, joint ownership and
control.
– The keiretsu possesses the
particular characteristic of having ownership and control based on equity exchanges
between supply chain members.
– Despite the complexities of their ownership structure, keiretsu represents a supply
chain model that helps to explain the organization of most companies in the
automotive and electronics sectors in Japan.
– A third way of organizing supply partnerships has been popularized and led by
industrial districts in Italy (Becattini, 2002).
– Porter (1990) commented on the strengths of the Italian ceramic tile ‘cluster’ in the
Sassuolo district in his Competitive Advantage of Nations.
– Producers benefited from ‘a highly developed set of suppliers, support industries,
services and
infrastructure’, and the geographic concentration of firms in the district ‘supercharged
the whole process’.
– Districts are characterized by hundreds or even thousands of small, family owned
firms with a handful of employees working single shifts. The great majority of firms are
led by entrepreneurs who are craftsmen, often relying on the most basic planning and
control tools. Concern currently focuses on the ability of districts to adapt to changes in
global competition
– Manufacturing of goods has been extensively transferred to low cost countries such as
China, and trade between China and Europe has increased dramatically in the past 20
years.
– China is the EU’s second-largest trade partner, while the EU is China’s top trade
partner. Europe invested some €4.5 billion in China in 2009.
– China has developed massive industrial areas. But ‘one of the unique characteristics of
industrial policy in China is that it involves government intervention at all levels, from
the political elite all the way down to village leaders’
∑ Supplier development
Key issue: How can upstream supply processes be integrated to improve material
flow?
– One of the keys to increased responsiveness in the supply chain is a high level of
integration with upstream suppliers.
– Where suppliers appear unable to make improvements, or fail to do so sufficiently
quickly, customers who feel their own performance is being hampered – yet remain
committed to the relationship with the supplier – often seek ways to remedy the
situation.
– Supplier development consists of any effort of a buying firm with a supplier to
increase its performance or capabilities and meet the buying firm’s short-term or long-
term supply needs.
– Various trends are observable as leading-edge companies seek to improve their
management of the upstream supply chain, including:
1. integrated processes.
2. synchronous production
– A key focus of supplier development should be the alignment of critical processes:
that is, new product development, material replenishment and payment.
– It is perhaps the concept of joint strategy development that distinguishes integrated
supply chains from mere ‘marriages of convenience’.
– Process integration can be enhanced through the creation of supplier development
teams.
– Linking upstream production schedules with downstream demand helps to improve
material flow.
– Transparency of information upstream and downstream is essential for
synchronization to work.
– Another approach that seeks to improve synchronous supply chain processes is that of
vendor-managed inventory (VMI).
∑ Implementing strategic partnerships
Key issue: What are the barriers to achieving strategic partnerships in the supply
chain?
– We use the term ‘strategic partner’ to refer to a supply partner with whom a focal firm
has decided to develop a long-term, collaborative relationship.
– Strategic partnerships are very demanding and resource intensive.
– It is necessary to determine where is the most appropriate point along the route for a
given supply relationship.
– In some cases, as stated earlier, open market negotiations will be most appropriate.
– The transition from multiple sourcing and arm’s length negotiation of short-term,
purchase-price-allocated contracts to one based on cooperation, collaboration, trust
and commitment requires a supply chain process to be put in place which needs
designing, developing, optimizing and managing.
Barriers that have been identified include the following:
– There is an inappropriate use of power over the supply chain partner.
– Buyers focus on their own company’s self-interest, often because they are
incentivized to do so.
– There is a focus on the negative implications of entering into partnership.
– While buyers value trust, commitment and reliability, they continue to be
opportunistic and seek gains at their partner’s expense.
– Price is viewed as the key attribute in supplier selection.
∑ Managing supply chain relationships
Key issue: How can broader-based relationships be formed between trading
partners in the supply chain?
o Creating closer relationships
– Even the closest and most interdependent supply relationships in practice exhibit a
tension between togetherness (a tendency to see the requirements for working
together in the supply relationship) and separateness (the frustration of joint work
or the positive aspects of working separately.
Lamming (1993) proposed nine factors for analyzing customer–supplier relationships,
which have been modified and extended below:
– What the order winners are
– How source decisions are made
– The nature of electronic collaboration
– The attitude to capacity planning
– Call-off requirements
– Price negotiations
– Managing product quality
– The level of pressure
1 What does procurement do? The strategic, tactical and operational roles of the
procurement function. Drivers of procurement value.
2 Rationalizing the supply base: supplier rationalization programs and why they
are needed.
3 Segmenting the supply base: strategic, bottleneck, non-critical and leverage
items. The impact of sustainable supply chain management (SSCM). Preferred
suppliers, policies per segment, vendor rating – leading to ‘customer of choice’
status. Procurement talent.
Procurement strategic sourcing, tactical contract management and
operational ordering cycle
There are two key subprocesses to consider, as shown in Figure 9.2. After
specifying needs for supplies, there is a supply market search for the supplies that
are needed. This is followed by the selection of supplies and the firms who make
them. After this process, the suppliers have been contracted, but they have not yet
delivered the physical goods. For this, we have the operational process in which
supplies are ordered and received, and suppliers are paid for their services.
Drivers of procurement value
This driver is particularly valuable in:
● Narrow margin industries;
● Price-sensitive markets;
● Focal firms that have a high procured value ratio, meaning that the value of procured
goods and services is high in comparison to revenue generated. In such environments a
high share of total costs is managed in the procurement process four operating
principles should be followed:
1. Align procurement internally towards its broader strategic role within the
focal firm before turning to supplier relations.
2. Involve procurement early and fully in supply chain design and
development, not just when a contract needs to be drawn up about prices for a
supplier already selected.
3. Focus on total costs of ownership (see below) or customer value sought,
not solely on price.
4. Do not consider the procurement job done when a supplier contract is
signed;
Operating principle I: Business alignment
Alignment requires of professionals:
● The ability to identify potential levers for alignment and for spotting business needs.
● Willingness to see functional expertise as a price of entry, not a differentiator, as peers
expect you to be knowledgeable about procurement, that is not a likely subject of
conversation: business needs are.
● Service focus to center the effort around peer needs, not procurement desire to drive
value.
● Flexibility in articulating the agenda differently depending upon business needs and
creativity to find a way to stick to the agenda, despite different business needs.
● The ability to ‘sell’ ideas through participation rather than through the use of authority
or position
● Standing strong on business values, such as ‘customers first, positions last’;
Ways to achieve alignment include:
● Embedding/stationing key procurement staff in the businesses to make the part of the
business ‘fabric’.
● Using metrics of the business to evaluate performance.
● Study business plans and business training material.
●Interview executives, get invited to business meetings to understand the agenda of
priorities and issues.
Markers of aligned procurement organizations include:
● Strong business partner focus among staff.
● Incentives and performance indicators are not solely financial – such as cost savings
based on PPV (purchase price variance – the ‘standard cost’ that has been budgeted and
then used as a measure of procurement’s performance).
● Results are not claimed by procurement but procurement contributions are reference in
business results (annual reports, for example).
● Procedures and authorizations exist but are hardly referenced due to seamless working
relationships in which peers acknowledge each other’s role and have clarity about roles
and responsibilities.
Principle II: Developing strategies for procurement categories
Principle II calls for involvement of procurement early and fully, right across the product
lifecycle, from design through to disposal. This broad-based involvement allows
procurement to adopt a long-term, strategic role and to seek innovative opportunities to
leverage supplier market value
Document for a procurement category typically include:
● Specification of supply chain stakeholders engaged in the development of the strategy
for the purpose of properly specifying business needs and aligning business stakeholders.
● Overview of current procured value and existing supply base.
● Analysis of the supply market and supply market trends
● Competitor approaches and benchmark performance in the category.
● Consideration of the need to buy versus the opportunity to in-source;
● Supply facing strategic options and relevant performance indicators for this category;
taking in all of the above how should we approach the supply base, including relationship
considerations;
● Implementation and communication plans that focus on engaging the user
Base in the business and along the supply chain during and after the procurement project.
Principle III: Total cost of ownership, not just price
The total cost of ownership (TCO) concept acknowledges that price might only
Be the tip of the iceberg of cost drivers. For example, price matters when buying a car.
But so do maintenance costs, warranty, durability of the car, how quickly you can take
delivery, what are the running
9.2 Rationalizing the supply base
Paradoxically, the first step to managing the supply base for value through relationships
Is to get rid of the majority of suppliers. The rationale for this action is
The inability of a focal firm to allocate development resource to suppliers when there are
simply too many of them.
One of the steps to prepare for reduction of the supply base is to collect the list across
business units and operating entities, together with the amount of annual spend and which
parts of the organization are buying from which suppliers.
Supply base may be revealed. For example, it may reveal that different business units
within a focal firm are buying from the same suppliers under different contractual terms,
or that a number of different suppliers are used for non-critical items (next section)
without anybody ever considering to contract a few with better terms.
9.3 Segmenting the supply base
Not all suppliers are created equal. There are large and small suppliers by spend;
Suppliers that do business with multiple parts of a focal firm; suppliers that have been
contracted through a strategic sourcing effort – and those that are not.
Therefore, it is advisable to segment the supply-base, just as we segment markets and
customers (section 2.2). In the best-case scenario, supplier segmentation should align
with market segmentation, based on the notion that supply chains should be organized
from the customer back, across the businesses and companies involved (‘vertical
integration’).
Basic segmentation criteria tend to include:
● the amount of spend with the supplier, and
● criticality of supplies for the smooth operation of the supply chain and for delivery to
the customer.
Strategic items
Strategic items are those for which the buyer has strength but there are few available
Suppliers. In this situation, procurement should use its power strategically to
Draw suppliers into a relationship that ensures supply in the long term.
Bottleneck items
Where the buyer has little power and there are few alternatives then these items
Are termed bottlenecks. The aim of purchasing in this situation is to reduce dependence
On these items through diversification to find additional suppliers, seek substitute
products and work with design teams to ensure that bottleneck items are avoided in new
products where possible.
Non-critical items
With a good choice of suppliers, possibly through following a strategy of using
standardized parts, the traditional buying mechanism of competitive tendering is most
valid for non-critical items. Such items are the ones with the following characteristics:
● Not jointly developed;
● Unbranded;
● Do not affect performance and safety in particular;
● Have required low investment in specific tools and equipment.
Leverage items
Where there are a large number of available suppliers and the buyer has high
Spending power, then the buyer will be able to exercise this power to reduce
Prices and push for preferential treatment.
A more tactical approach may be appropriate.
In SSCM, focal firms are dividing leverage items into three sub-segments:
● True commodities: retain the characteristics of the ‘traditional’ leverage items:
Suppliers would have an impact on only a single value of the TBL.
● Strategic commodities: are recognized for their potential ability to be leveraged
In terms of their long-term competitive advantage. Instead of using buyer
Power, small numbers of selected suppliers were being given long-term contracts
And premium prices to invest in new product development.
● Transitional commodities: these may initially be regarded as strategic commodities.
Strategic relationships
A very small number of suppliers can become of strategic importance to the fundamental
Success of a focal firm, and to performance of the supply chain. The single most
important characteristic of such relationships is that there can be very few.
Establishing policies per supplier segment
If suppliers are segmented as a reflection of how they are not all similar, the obvious
Next step is to agree upon, and implement, policies that reflect the differing nature of
relationships with suppliers in different segments. These tend to be centered around the
amount of time and resources allocated to the relationship (for example, from few in the
commercial segment to many in the strategic segment)
Vendor rating
Vendor rating is a measurement effort focused on supplier performance.
The steps involved in setting up a vendor rating system are:
1 Select the team: vendor rating is best undertaken by a cross-functional team of
Stakeholders who have various interests in a given commodity from design
Through to logistics. The process is not exclusive to the procurement
Function – vendor rating works better when there are business peers of procurement
professionals involved in the dialogue to represent a broad internal client base.
2 Establish the rating criteria: the actual set of metrics used is a tool, and there is some
sophistication that goes into its design. For example, the metrics categories may be
consistent across categories but with different weighting between the categories
depending upon the category strategy
3 Determine the effective weighting: this establishes the team’s view of the relative
importance of each criterion. This may be achieved by asking members to undertake a
paired comparison of the criteria that have been defined in step 2.
4 Score each supplier’s performance: team members are asked to rate the criteria for each
supplier.
To minimize the risk of bias, a set of rating guidelines is established
For each criterion, and a scale agreed – for example, from 1 _ poor to 10 _ excellent.
9.3.5 Executive ownership of supply relationships
The role of an executive owner of the relationship includes:
● hosting two–three top-to-top meetings with peers from the supplier to discuss
The relationship and business opportunities;
● serving as a steward of the supplier inside the organization;
● serving as an escalation point for usage and performance issues with the supplier;
● serving as a sponsor of joint improvement projects and ensuring proper resource
allocation towards these projects.
9.3.6 Migrating towards customer of choice status
Customer of choice status entails several benefits, including:
● First access to innovations and R&D.
● Customized solutions on a technology, process, service and product level hardwired
into company supply chain processes.
● Best account management staff allocated to the account.
● Supplier wanting to do more than needed.
● All senior executive ownership met with equal level engagement, both in seniority,
Procurement technology
There are procurement technologies related to all process, from e-auction
Technology (including B2B versions of ebay) for ordering in commodity markets to e-
sourcing process support software that can facilitate a strategic sourcing process.
Catalogues (supplier generated or internally managed) and e-procurement technologies
are often used in the operational process
Markers of boardroom value
These markers include:
● Explicit mention and coverage of procurement in the annual report, investors’ updates
and CEO/CFO speeches.
●Published targets for procurement return in mergers, savings or supplier innovation
targets.
● Procurement targets are explicitly mentioned in the budget letter to the businesses at
the start of the budgeting season.
● All businesses have stated plans, objectives and key performance indicators on their
dashboard that relate to procurement
● Internal service awards are being won by procurement professionals as a sign of
recognition within the company of its service and valuable business contributions.
● A ‘tour of duty’ in procurement becomes a plus for general managers and heads of
business units, just like a ‘tour of duty’ in sales is – once this stage is reached it is clear
that, as a function, procurement has arrived and its impact in business is acknowledged.
Summary
What is the role of procurement in logistics?
● Procurement is the upstream part of the supply chain that faces suppliers.
Given the amount of value procured in by most company’s procurement plays a key role
not only in helping manage the company bottom line, but also in ensuring critical
suppliers and delivery service and product quality.
● Essentially, most companies and supply chains are critically dependent on supplies and
suppliers for customer service and performance. It is therefore recommended that
procurement is involved early and fully, so that strategies can be developed per product
category, strategies that appreciate total cost of ownership, not just purchase price.
● Supplier relationships should be managed proactively with segments, performance
measurement and management, policies per segment, and executive ownership for key
relationships.
● The talent profile required for effectiveness in procurement is that of (future) top
leaders of the company.
● The ability to demonstrate high level, concrete business impact within procurement
makes it a function much sought out by aspiring and ambitious talent.
How can a procurement strategy be crafted and delivered?
● Procurement strategy begins with internal business alignment of procurement with
other business functions. It continues with developing strategies for procurement
categories.
● Supplier relationship management starts with rationalizing the supply base.
Chapter 10: Logistics future challenges and opportunities
Logistics future challenges and opportunities Objectives
The intended objectives of this chapter are to:
● collect together four major changes that are impacting on supply chain strategies (the
what);
● identify how management of the supply chains of the future will be affected by the
advance of new structures and approaches to aligning the organization, external partners
and management development;
● list key issues in managing the transition towards future state supply chains (the how).
By the end of this chapter, you should be able to understand:
● key issues in four key areas that will affect the way supply chains of the future will be
structured;
● improved ways in which supply chains may compete in the marketplace;
● ways of approaching implementation in four major change areas.
This chapter addresses five key issues:
1 Wrapping the chain around the heart of the focal firm, or, achieving internal
Alignment: improving internal alignment (wrapping around) with key other parts of the
internal organization (the heart) to help the supply chain become front and center and
well positioned internally to be able to further integration externally.
2 Selectively hooking up the chain, or, external improvement priorities: picking
upstream and downstream collaborative opportunities.
3 Pulling the chain the right direction, or, cost-to-serve: how do we manage full-
service costs (pull from the customer) for healthy (right direction), profitable growth?
4 The critical link in the chain, or, supply chain managers of the future: the major
influences on creating supply chain managers of the future and the rapidly migrating
talent profile needed for success.
5 Changing chains: practical lessons on how the massive changes needed to create the
supply chain of the future can be managed and achieved
10.1 Changing economics?
Key issue: Supply chain integration assumes integration that does not come
naturally to firms and managers.
List five common practices that companies adopt for the benefit of sales or financial
reporting that really hurt supply chain efforts. They are:
1 Pulling forward sales to hit a revenue target causing huge short-term surges in demand
and related possible inventory shortages to be followed by a drop in demand and
inventory build.
2 Reporting on time in full measures against delivery dates promised by the focal firm –
not those requested by the customer.
3 Having an inventory policy that is applied generally across the product range to focus
on the challenges of seasonal peaks and long lead times – when demand for some
products in the range can be more accurately forecast
4 Manipulating orders in favor of reporting ambitions – for example, stopping inventory
build towards the end of a reporting period to improve the balance sheet, but ordering
extra quantities after the period has ended.
5 Manipulating sales forecasts so that they will add up to the numbers promised by
finance to the investor community and result in poor ordering policies.
10.2 Internal alignment
How do we align the internal organization around supply chain opportunities,
priorities and efforts?
Figure 10.1 shows a chart from van Hoek and Mitchell (2006) that demonstrates the
challenge of internal alignment. This chart captures findings from an internal survey of a
globally operating manufacturing company ,The survey included existing supply chain
priorities and initiatives. In a way it lists supply chain targets and supply chain efforts
already underway; that is, the existing plan that the supply chain is operating against –
and that is board-approved.
Figure 10.1 shows that, when contrasting opportunity scores of respondents from sales
with respondents from the supply chain, important differences in opinion are found.
When bars point to the right, sales sees a greater priority; when bars point to the left, the
supply chain sees a greater priority. Taken together, the chart tells a shocking story of
misalignment. Another obvious area of misalignment is that sales is asking for improved
transportation management and delivery services.
New product development
Is a key peer function that deserves internal alignment focus. It is often pointed out that
the impact of the supply chain on new product development (NPD) and new product
introduction is important in areas such as:
● shipping products to market fast enough (before product launch dates);
● ensuring sufficient inventory at the launch date; and
● ensuring a flow of parts and components for new product manufacturing.
10.3 Selecting collaborative opportunities upstream and downstream
Key issue: Where and how to place bets on collaborative opportunities upstream and
downstream in the supply chain.
Once a company has its internal organization more aligned around supply chain
opportunities, priorities and initiatives, it is in a better position to select external
collaborative opportunities.
Selecting upstream collaboration opportunities
Develop’ to enable this (see Figures 10.3 and 10.4).
The company has tackled this diligently:
● The programme has CEO-level support and public endorsement making it crystal clear
that this is not just a supply chain initiative or playground but that this is mission critical
for the company.
● They have established a dedicated organization with senior leadership, programme
management, deal makers, business developers and engineers.
● They have developed a ‘needs list’ containing technologies in which the company is
interested. This helps to focus the search for innovation, and serves as a screening tool for
assessing collaborative opportunities
● Account managers will steward partner innovations into the organization and
throughout a structured and well-defined process.
● P&G can structure partnerships in multiple forms depending on the type of innovation
and application.
Consumers around the world have already realized the benefits of P&G’s
Connect +Develop strategy. The following products and technologies are
examples of the mutually beneficial collaborations we have established
through external connections.
P&G introduced Bounce, the world’s first dryer-added softener, after
acquiring the product technology from the independent inventor who
developed the innovative fabric-care solution.
Ready-to-go products
By acquiring the newly introduced spinbrush, P&G was able to bring a
superior oral care brand to market quickly, without undertaking the time and
expense of developing an entirely new product.
Ready-to-go packaging
Several of our Olay Skin Care products now utilize new consumer-preferred
pump dispenser originally developed by a European packaging products
company. P&G led a collaborative improvement process to make the original
pumps more effective prior to their launch in Olay’s North American
markets.
Commercial partnerships
P&G found the perfect complement to the Swiffer brand in a hand-held duster
developed by a Japanese competitor. After purchasing the product, P&G
leveraged elements of existing manufacturing processes and advertising
components to launch Swiffer Duster within 18 months.
Selecting downstream opportunities: which customers to give the keys to our car
Partnering with customers can be a much scarier notion than partnering upstream. It
implies sharing a lot of inside information with customers and talking openly about what
a company cannot do. Traditionally, this is not how companies (and sales staff) sell.
When making the mind-shift, however, there is a lot of potential on the table.
Specifically, some companies are initiating customer collaboration efforts that involve
working to resolve supply chain problems jointly with customers to serve the end-
consumer better. Among the areas where fruitful collaboration opportunities have been
found are several process integration areas, including:
● linking supplier delivery to customer warehousing and materials handling processes;
● linking supplier to customer forecasting;
● linking customer ordering to supplier delivery planning systems.
Additionally, a focus on serving the end-consumer better implies collaborative
opportunities such as:
● supplier suggestions for campaigns and merchandising;
● joint product and packaging design;
● joint product mix development to improve inventory turns on the retailer’s shelf.
10.4 Managing with cost-to-serve to support growth and profitability
Service terms and conditions for unprofitable accounts need to be changed, and converted
into profitable alternatives;
● the most important customers need more attention, by focusing more customer service
efforts on these customers;
● prices should be increased for unprofitable customers, or they should be gradually
removed from the focal firm’s sales portfolio altogether.
10.5 The supply chain manager of the future
Key issue: What are the changing needs and requirements that apply to the most
effective supply chain managers?
Ultimately, the purpose of this book is to support the development of effective supply
chain managers. This is arguably the most important job to begin with. In that respect it
should be noted that today’s and tomorrow’s supply chain managers look very different
from the supply chain staff of the recent past.
There are several key capabilities that will make or break supply chain managers of
the near future:
● These managers need to be effective at interfacing with customers. This is new because
in the past supply chain staff used to be almost completely internally and operationally
focused. Sales monopolized the customer, leaving supply chain managers short of
‘supply chain relevant’ customer insight.
● Functional knowledge is a base requirement (this used to be a differentiator, now it is a
qualifier).
● They need to have general management and strategic management capabilities and
skills.
● They need to be able to develop and foster relationships internally and externally (as
opposed to being focused only on running an operation).
● They need to be able to translate supply chain efforts and jargon into business language
that their peers can respond to and relate to their own day-to-day efforts.
● They need to have a service ethic that does not include always saying ‘yes’.
They therefore need to manage trade-offs in operations, while finding creative ways to
serve the customer and becoming an essential part of the business organization (chain
wrapped around the heart) and being considered key business partners.
● They need to be ‘business people’ that help build and grow the business and use supply
chain as a tool not the purpose in doing so, so creativity, innovative approaches to
business problems and entrepreneurial approaches to leveraging supply chain capabilities
and practices to the benefit of the customer are key.
This will help supply chain managers avoid traditional pitfalls such as:
● being unable to align the organization around supply chain opportunities;
● lacking crucial voice of the customer (voc) insights to achieve success with final
customers (voc processes aim to go beyond customer satisfaction measurement by
crafting a more comprehensive, cross-functional exchange with selected customers – for
example, Delgado-Hernandez et al., 2007);
● being only operationally focused, with limited insight into strategic business goals;
● taking initiatives in an effort to help peers, but not succeeding due to the points listed
above;
● being great at supply chain concepts, but weak at solving customer problems and
becoming a partner that is mission critical for the focal firm.
Delgado-Hernandez et al. ،2007(؛
؛ةیجیتارتسالالمعلافادھألةدودحمةیؤرعم،طقفتایلمعلاىلعزیكرتلا●
؛هالعأةروكذملاطاقنلاببسبحجنتملنكلو،نارقألاةدعاسملةلواحميفتاردابمذاختا●
ةمھملثمیاًكیرشحبصتنأوءالمعلاتالكشملحيفاًفیعضنكلو،دیروتلاةلسلسمیھافميفاًعئارنوكتنأ●
.ةیروحملاةكرشللةیمھألاةغلاب
10.6 Changing chains
Focal firms that make change happen in supply chains over and over again experience
The following:
1 Prepare for the (longer) run: major supply chain change efforts tend to take longer than
initially planned and longer than might be anticipated up-front.
And there are typically no short cuts to true implementation of the plan (no matter what
consultants and vendors might say).
2 Plan to re-plan: most major supply chain change efforts end up being executed
differently than initially planned and the change programmes are often revised along the
way in order to be able to respond to changed circumstances or additional change issues
found along the change journey.
A voyage of discovery: there is real learning as you go along. As change programmes
evolve and progress, managers learn about new changes and behavioral challenges – and
how to incorporate them into the change
Programme.
The boardroom pitch is only the start of the test: after pitching successfully to senior
management and gaining their buy-in, middle management and staff across the
organization need to be engaged in the effort to give the programme a chance for real
implementation. Additionally, given the learning that needs to happen along the way and
the extended time period, real reconfiguration and implementation changes require
(senior) management
Commitment which needs to be earned repeatedly. So, in short, boardroom support helps
launch the change but is not merely sufficient when it comes to making the change
actually happen.
Integrative but not integral: change programmes in supply chains often focus on different
parts of the supply chain. While they all require integrative actions to ensure business
alignment and cross-functional peer support they often do not address the whole supply
chain.
Internal customers are a proxy for end-customers: customer service first is key in all
good supply chain efforts but not all parts of the supply chain have direct access to the
customer, let alone the end-customer. For those, often more upstream, segments of the
supply chain, internal customers might be focused on as a proxy for end-customers. Just
like external integration requires internal alignment as a basis, focusing on internal
service is a good foundation for external service capability, good service ethic also runs
everywhere in your
Blood, not just when in front of a customer.
Inside first: many supply chain reconfigurations start internally to the company before
they impact other segments of the supply chain externally
IT integration: this was also a hot topic in the early 1990s but it appears to still be hard to
achieve and is not easily enabled but rather a source of a lot of work. It is important to
keep that in mind, and not to assume that technology makes it easy to change broken
processes. Technology cannot change broken process
Or poor alignment without the hard managerial change work to support it.
Benchmarks and best practices open eyes and help change programmes to stay on track:
external benchmarks are useful to set direction, make the case for change and audit
progress on the change journey using externally verifiable standards.
Cross-functionality: is key to engaging relevant stakeholders in the supply chain,
although not all functions and businesses need to engage. Rather than full supply chain
integration, the concept of selective integration is key and
Specific to company and context.
Consistent cross-functionality: is a key characteristic of supply chain reconfiguration.
Together with the complexity of the change process we suggest this is a marker of
effective supply chain change management.
Training and communication: these are well-known levers. Training staff and
management are key enablers of change effectiveness and readiness.
Communications – to remind and reinforce across the organization – are useful tactics as
long as they are updated with the change journey adjustments and learnings during the
change journey.
Summary
What does the supply chain of the future look like?
● The chain is wrapped around the heart, or, the ability to align the organization
internally around supply chain opportunities, priorities and efforts in order to avoid
partial, ineffective or failed supply chain improvement efforts.
● Hook on the chain, or, the capability to spot and select the limited number of
collaborative opportunities upstream with partners and suppliers, and downstream with
customers.
● Pulling the chain, or, the capability to map true and complete cost to fulfil customer
orders and to manage services and costs for increased profitable growth.
● Critical link in the chain, or, the development of a ‘new breed’ of supply chain
managers that will help realize all of the above.
● Changing chains, or, the capability to make the change actually happen for real.
The purpose of this assignment is to identify and apply Logistics and Supply Chain Management concepts/tools to suggest logistics performance priorities. To this purpose, you should search and review about these companies through secondary available information. Think about how you can apply the concepts/tools that you learned in this course.
Suggest logistics performance priorities for a fast food chain Five Guys restaurant (product), and explain why you have come to your conclusions:
The Answer must follow the outline points below:
1. Executive summary (word count rage 100)
– Summarize what is logistics performance priorities, what Logistics and Supply Chain Management concepts/tools applied to achieve the company’s objective in Saudi Arabia.
2. Background information (word count rage 250)
– Briefly introduce the company background (e.g., name, products, business size, location, internal/external interesting facts, etc.).
3. Problem Description (word count rage 300)
– Describe the objectives clearly and specifically.
– The objective may involve either logistics decision-making or process improvement.
4. Application of logistics and supply chain management concepts/tools that applied (300)
– Describe what specific logistics and Supply Chain Management concepts/tools be applied to achieve the objective. This section should make it clear that you understand the concepts/tools you are about to use.
5. References (7 references)
Use APA style of referencing
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