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0 Chapter 1 Introduction to Logistics Management

( Learning Objectives )

After reading this chapter, you will be able to:

understand the origins and brief history of logistics conception development;
\bullet learn the definition and boundary of logistics;
\bullet gain an understanding of competitive advantage through logistics management;
\bullet understand the mission of logistics management;
\bullet learn the factors changing logistics environment; get an overview of the changing logistics environment and the new rules of competition; get an overview of the logistics network of the 21st century.

1.1 What Is Logistics

In the early part of 1991, the world was given a dramatic example of the importance of logistics. However, the term logistics" comes from the military.

1.1.1 Brief History of Logistics Emergence

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Logistics,_logistics _management,_ and supply_chain management_are not new ideas. From the_building of the pyramids to the relief of hunger in Africa, the principles underpinning the _effective. flow _ of _materials _and information to meet the requirements of customers have. altered little. L

The history of mankind wars present logistics strengths and capabilities. In the American War of

Independence, the British were defeated because they could not feed their 12,o00 troops from faraway Britain without any capable supplying organization. In the Second World War logistics also played a major role. The Allied Force's invasion of Italy was a highly skilled exercise in logistics, as was the defeat of Rommel in the desert. Rommel himself once said that .... before the fighting proper, the battle is won or lost by quartermaster". However, whilst the Generals and Field Marshals from the earliest times have understood the critical role of logistics, strangely it is only in the recent past that business organizations have come to recognize the vital impact that logistics management can have in the achievement of competitive advantage. Partly this lack of recognition springs from the relatively low level of understanding of the benefits of integrated logistics. It is paradoxical? that it has taken almost 100 years for these basic principles of logistics management to be widely accepted.

1.1.2 Origins and Definition of Logistics

The term "logistics" originates from the ancient Greek "logos"'--ratio, word, calculation, reason, speech, oration. In ancient Greek, Roman and Byzantine empires, there were military officers with the title "Logistikas" who were responsible for financial and supply distribution matters.

Military logistics

Originally, logistics is a military term, first used in the Napoleonic era. Logistics, as a military term, is defined as \*the art of moving armies and keeping them supplied'. The term has become popular since the Gulf War of 1991, particularly since the publication in November, 1992 of an interview with William Pagonis, the general who had been in charge of logistics in that war. William Pagonis defined it as:

"the integration of transportation, supply, warehousing. maintenance, procurement, contracting and automation into a single function_that ensures_no suboptimization in any of those _areas._to. allow the _overall _accomplishment or_a particular strategy, objective, or mission."

While William Pagonis's accomplishments in the field deserve the highest respect, his definition mixes the description of what a function is with how it should be performed. However, without integration and automation, and with suboptimization, his list of functions would still

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presumably comprise logistics. In essence, what all these functions add up to is all military operations except combat.

Webster 's Encyclopaedic? Dictionary designates it as:

"the branch of military science and operations dealing with the procurement, supply, and maintenance of equipment, and hospitalization of personnel, with the provision of facilities and services, and with related matters."

The reference to related matters unfortunately opens this definition to multiple interpretations. In business, a commonly used definition for logistics in business is given by the Council for Logistics Management (CLM):

"Logistics is the part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, service, and related information between the point of origin and the point of consumption in order to meet customers' requirements."

While this definition carries the authority of a professional society, it is difficult to use for the following reasons.

If logistics is defined as "part of the supply chain process', then the "supply chain process" also needs to be defined.
This definition appears to exclude the possibility that logistics could be done in an ineffective or inefficient manner.
Listing goods, services, and related information appears to exclude flows of money from consideration.
The emphasis placed on meeting customers' requirements in the definition is unnecessary and may lead the readers away from the many possible improvements in logistics that are not directly related to customers.

In Supply Chain Strategy, Frazelle gives the following definition:

"Logistics is the flow of material, information and money between consumers and suppliers."

While his definition is crisper and clearer than the CLM's, it has the following shortcomings.

It is too broad in that it appears to encompass production itself. Work-pieces flow through milling machines, but cutting metal is not part of logistics.
It is too narrow in that it does not include services. Getting passengers on and off a plane, for example, does not fit this definition, unless you agree that people are special cases of materials.
The reference to consumers, as opposed to customers, is puzzling, because it restricts the discussion to consumer goods, to the exclusion of capital goods, whose end users, by definition, are not consumers.

So far, many definitions of logistics have been proposed. What is logistics management in the sense that it is understood today? There are many ways of defining logistics, but the underlying concept might be defined as follows:

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Logistics is the process of strategically_managing the_ procurement. movement_and_ storage_ of materials, parts and finished inventory (and the related information flows)_through _the_ organization_ and_its_ marketing channels. _in_ such_a_ way_ _that current _ and_future profitability are maximized through _the _cost-effective fulfillment of orders.

This basic definition will be extended and developed as the logistics practice progresses, but it makes an adequate starting point.

Good to know

The first objective of logistics is to deliver the right materials to the right locations, in the right quantities, and in the right presentation; the second, to do all of them efficiently.

1.1.3 Recognizing the Boundary of Logistics

In manufacturing, logistics includes the following.

\bullet Material flow: Shipping, transportation, receiving, storage and retrieval between plants and between production lines within a plant. Information flow: Transaction processing associated with the material flow, analysis of past activity, forecasting planning and scheduling future activity. Funds flow: Payments triggered the movements of goods and information.

Logistics encompasses everything that happens outside the factory walls, as seen in Figure 1.1. The plant sees materials come in/from a network of suppliers and products go out to a distribution network. What happens inside each of these networks affects the plant, but is often not visible to its management beyond the first tier. Allowing each plant to know more about both its suppliers' suppliers and its customers' customers is a stated objective of supply chain management, but is not yet commonly achieved.

Figure 1.1 Inbound and Outbound Logistics

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In the plant, the logistics and production_boundary is in fact_between_organizations. Production does not only run machines and assembly stations; it also conveys work pieces between contiguous stations. Even though these transfers do not transform the workplaces, this activity is still considered to be production, because it is run by the production department.

Where the boundary_is_placed between logistics_and production_is_a managerial _decision. Technically, part preparation by logistics overlaps with many points. At some locations, materials handlers deliver open bins? of parts

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to flow racks directly in the assembly line; at the other locations, to a warehouse from which a special operator working for production prepares the parts, picks kits, and delivers them to the assembly station. In the first case, the boundary between logistics and production is right behind the assembly station; in the second case, one step removed from it.

Another key boundary is that between the plant and the rest of the world which is usually materialized in the form of docks for receiving and shipping. In-plant logistics is often called dock-to-dock logistics._Besides the obvious differences_in_ distances,_quantities and yehicles., in-plant logistics differs_from_the inbound logistics of getting parts from suppliers and_the _outbound _logistics of_distributing finished goods in the way it is managed. In-plant logistics_is under the control of one organization.

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Inbound and outbound logistics, on the other hand, are ruled by the interaction of multiple independent economic agents-including multiple tiers of suppliers and distributors, trucking companies, railroads, and air and sea freight companies--making their own decisions.

1.1.4 Other Types of Logistics and Logistics Management

1. Other Types of Logistics

(1) Business logistics. Logistics as a business concept evolved only in the 1950s. In 2000, Tanimoto and Hakutoshobo call "business logistics" the efforts of a company to designate the expansion of these efforts to multiple tiers of suppliers and customers or distributors. Most companies, however, have little or no access to suppliers' suppliers or customers' customers: whatever influence they may have limited to the companies they directly buy from or sell to. Companies' actions in supply chain logistics often consist of reinforcing the tier structure to reduce the number of suppliers or customers they must interact with.

In business, logistics may have either internal focus (inbound logistics), or external focus (outbound logistics) covering the flow and storage of materials from point of origin to point of consumption. The main functions of a qualified logistician include inventory management, purchasing, transportation, warehousing, consultation and the organizing and planning of these activities.

(2) Social logistics. Tanimoto also identifies "social logistics" as the setting, maintenance, regulation, and taxation by governments of the infrastructure within which companies operate, including the followings.

Transportation: Roads, railroads, canals, ports and airports.
Communications: Voice and data communication networks.
Controls and law enforcement: Inspections of goods at border crossings and verification of regulatory compliance.
Taxation: Tolls, taxes, duties, as well as incentives and subsidies designed to influence the behaviour of independent economic agents towards such common goods as preservation of the environment.
Emergency response: Restoration? of services after earthquakes, floods, fires or other natural or human-made disasters.

(3) Lean logistics. Lean logistics is the logistics dimension of lean manufacturing. Lean _logistics_ tailors_ approaches_ _to_ the demand_structures_ of_ different_ items._ as opposed to one-size-fits-all. It is a pull system: materials move when the destination signals \*#tR#T pa$+\*+1 #J,mT\*#vT F

that it is ready for them. Moving small quantities of many items between and within plants with short, predictable lead times requires pickups and deliveries at fixed times along fixed routes called "milk runs'. Toyota uses a worldwide network for logistics and markets in Japan through an internet portal.

(4) Production logistics. The term is used for describing logistic processes within an industry. The purpose of production logistics is to ensure that each machine and workstation is being fed with the right product in the right quantity and quality at the right point in time.

The issue is not the transportation itself, but to streamline and control the flow through the value adding processes and eliminating non-value adding ones. Production logistics provides the means to achieve customer response and capital efficiency. Production logistics is

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getting more and more important with the decreasing batch sizes. In many industries (e.g. mobile phone) batch size one is the short term aim. Track_and_tracing._ which is_an essential part of production logistics - due to product safety. and product reliability_issues_-is_also gaining importance. especially in the automotive and the medical industry.

2. Logisticians

A logistician specializes in the management and coordination of the flow of goods, services, and information within an organization or supply chain. They are responsible for overseeing the entire logistics process, from sourcing and warehousing to distribution and delivery. Logisticians work to ensure that products or services are efficiently transported and delivered to the right place, at the right time, and in the right quantity and quality. They analyze and optimize various aspects of the supply chain, such as inventory levels, transportation routes, and storage facilities, to maximize efficiency and minimize costs. In addition to operational tasks, logisticians also play a strategic role within an organization. They collaborate with internal teams, such as procurement, manufacturing, sales, and customer service, to align logistics activities with overall business objectives. Logisticians are skilled in utilizing data analysis and forecasting techniques to anticipate demand, plan for contingencies, and optimize supply chain processes. They also stay updated with industry trends and advancements in logistics technology to leverage innovative solutions that enhance operational efficiency and responsiveness.

A logistician is often a professional logistics practitioner. Professional logisticians are often certified by professional associations. Some universities and academic institutions train students as logisticians by offering undergraduate and postgraduate programs.

3. Logistics Management

Logistics management is one part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements. Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution-strategic, operational, and tactical. Logistics management is an integrating function which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions, including marketing, sales, manufacturing, finance, and information technology.

Supply Chain Management (SCM) encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive? and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology.

1.2 The Nature of Logistics Management

1.2.1 Logistics Management Provides Competitive Advantage

Effective logistics_management_can_provide a major source_of competitive advantage. Seeking a sustainable and defensible competitive advantage has become the concern of every manager who is alert to the realities of the marketplace. The source of competitive advantage is_ found_firstly_in the ability of_the_organization to _differentiate itself._in the_eyes of the

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customer. from its competitors; secondly by_operating at a lower cost and hence at greater profit.

At its most elemental, commercial success derives either from a cost advantage or a value advantage or, ideally, both. It is as simple as that the most profitable competitor in any industry sector tends to be the lowest cost producer or the supplier providing a product with the greatest perceived differentiated values. Put very simply, successful companies either have a productivity advantage or they have a "value' advantage or a combination of the two. The productivity advantage gives a lower cost profile and the value advantage gives the product or offering a differential "plus" over competitive offerings.

1. Productivity Advantage

In many industries there will typically be one competitor who will be the lowest cost producer and, more often than not, that competitor will have the greatest sales volume in the sector. There is substantial evidence to suggest that "big is beautiful' when it comes to cost advantage. This partly due to economies of scale which enable fixed costs to be spread over a greater volume but more particularly to the impact of the "experience curve".

Good to know

The_experience curve_is_a phenomenon that all costs. not just production costs. would decline at a given rate as yolume increased. In fact, to_be precise. the relationship that the experience curve describes is between real_unit cost and cumulative yolume.

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Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative cost. However, it must also be recognized that logistics management can provide a multitude of ways to increase efficiency and productivity and hence contribute significantly to reduced unit costs.

2. Value Advantage

It has long been an axiom in marketing that "customers don't buy products they buy benefits". These benefits may be intangible, i.e. they relate not to specific product features but rather to such things as image or reputation. Hence the importance of seeking to add additional values to our offering to market is out from the competition.

Different groups of customers within the total market attach different importance to different benefits. Adding value through differentiation is a powerful means of achieving a defensible advantage in the market. Equally powerful as a means of adding value is service. Increasingly it is the case that made markets more service sensitive and this of course poses particular challenges for logistics management. There is increasingly a convergence of technology within product categories which means that it is no longer possible to compete effectively on the basis of product differences. A number of companies have responded to this by focusing upon service as a means of gaining a competitive edge. In practice what we find is that the successful companies will often seek to achieve a position based upon both a productivity advantage and a value advantage.

Good to know

Service in this context relates to the process of developing relationships with customers through the provision of an augmented offer. This augmentation can take many forms including delivery service, after-sales services, financial packages, technical support and so forth.

One_thing is_for_sure: there_is no middle_ground between cost leadership_and service excellence._Companies who_occupy that position_have offers that are distinctive in the_ yalue_they_deliver _and_ are_ also_ cost_competitive. It clearly_ presents__the_ _strategic _ challenge__to__logistics management: it is_to_seek_out_strategies that will_take the business away from the end of the market towards a securer position_of strength_based_upon differentiation and_cost advantage.

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1.2.2 Gaining Competitive Advantage through Logistics

Logistics management, it can be argued, has the potential to assist the organization in the achievement of both a productivity advantage and a value advantage. As Figure 1.2 suggests in the first instance there are a number of important ways, in which productivity can be enhanced for better capacity utilization, inventory reduction, and closer integration with suppliers at a planning level. Equally the prospects for gaining a value advantage in the marketplace through superior customer service should not be underestimated. It will be argued later that the way we service the customer has become a vital means of differentiation.

To summarize, those organizations that will be the leaders in the markets of the future will be those that have sought and achieved the twin peaks of excellence: they have gained both cost leadership and service leadership.

Figure 1.2 Gaining Competitive Advantage through Logistics

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The_ underlying_ philosophy_ behind_ the _logistics concept is that of planning and coordinating the materials flow from source_to_user as _an_integrated system rather than, as_was so often the case_in the past, managing the goods flow as a series of independent activities. Thus under a logistics management regime? the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and yet at lower cost. In other words, to achieve the goal of competitive advantage through both cost reduction and service enhancement.

1.2.3 The Mission of Logistics Management

It will be apparent from the previous comments that the mission of logistics management is to plan and coordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible cost. Logistics must therefore be seen as the link between the marketplace and the operating activity of the business. The scope of logistics spans the organization, from the management of raw materials to the delivery of the final product. Figure 1.3 illustrates this total system's concept.

Figure 1.3 Logistics Management Process

Logistics management, from this total systems viewpoint, is the means whereby the needs of customers are satisfied through the coordination of the materials and information flows that extend from the marketplace, through the firm and its operations, and beyond that to suppliers. To achieve this company-wide integration clearly requires a quite different orientation from that typically encountered in the conventional organization.

For example, for many years marketing and manufacturing have been seen as largely separate activities within the organization. At best they have coexisted, at worst there has been open warfare. Manufacturing objectives have typically been focused on operating efficiency. Marketing has sought to achieve competitive advantage through variety, high service levels and frequent product changes. In today's more turbulent environment there is no longer any possibility of manufacturing and marketing acting independently of each other. In recent years both marketing and manufacturing have become the focus of renewed attention. Marketing as a concept and a philosophy of customer orientation now enjoys a wider acceptance than ever in the western world. It is now generally accepted that the need to understand and meet customer requirements is a prerequisite for survival. At the same time, in the search for improved cost competitiveness manufacturing, management has seen the rapid introduction of flexible manufacturing systems (FMS), of new approaches to inventory based on materials requirements planning (MRP) and just-in-time (JIT) methods and, perhaps most important of all, a sustained emphasis on quality.

Equally there has been a growing recognition of the critical role that procurement plays in creating and sustaining competitive advantage as part of an integrated logistics process. Leading-edge organizations now routinely include supply-side issues in the development of their strategic plans. Not only is the cost of purchased materials and supplies a significant part of total costs in most organizations, but also there is a major opportunity for leveraging the capabilities and competencies of suppliers through closer integration of the buyers' and the suppliers' logistics processes.

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In _the_ scheme_ of_ things._ logistics _is_ therefore essentially an integrative_concept that seeks to develop_a system-wide_yiew_of the_firm. It is fundamentally a planning concept that seeks to create a framework through which the needs of the marketplace can be translated into a manufacturing strategy and plan, which in turn links into a strategy and plan for procurement. Ideally there should be_a one-plan_ mentality_within _the _business_which. seeks_ to replace_the conventional stand-alone and separate_plans of marketing. distribution, production_and procurement. This, quite simply, is the mission of logistics management.

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1.3 The Changing Logistics Environment

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As the competitive context of business continues to change,_bringing_with it new_complexities_and concerns for management generally. it also has_to be recognized that the_ impact _of_ these__changes _on_logistics__can__be considerable. Indeed. of the many strategic issues that the business organizations_confront today. perhaps_the_most challenging are in the area_of logistics. This part will be devoted to addressing these challenges in detail but it is useful to highlight what is perhaps the most pressing currently. These are:

\bullet The customer service explosion;
\bullet Time compression;
\bullet Globalization of industry; Organizational integration.

1.3.1 The Customer Service Explosion

So much has been written and talked about service, quality and excellence that there is no escaping the fact that the customer in today's marketplace is more demanding, not just of product quality, but also of service.

Customer_service _may _be_ defined as_the_consistent provision of time and place utility. In other words, products don't have value until they are in the hands of the customer at time and place required._Essentially the_role of customer seryice should be to enhance_value in use". meaning that the product becomes worth more because seryice has added yalue_to_the__core_product.__In_ _this__way _significant differentiation_of the total. offer (that is the core product plus the service package) can be achieved.

Those companies that have achieved recognition for service excellence, and thus have been able to establish a differential advantage over their competition are typically those companies where logistics management is a high priority. Companies like Xerox, BMw, Benetton and Dell

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computers are typical of such organizations. The achievement of competitive advantage through service comes not from slogans or expensive so-called customer care programs, but rather from a combination of a carefully thought out strategy for service, the development of appropriate delivery systems and commitment from Chief Executive down.

The attainment of service excellence in this broad sense can only be achieved through a closely integrated logistics strategy. In reality, the ability to become a world class supplier depends as much upon the effectiveness of one's operating system as it does upon the presentation of the product, the creation of images and the influencing of consumer perceptions. In other words, the success of McDonald's, British Airways, or any of the other frequently cited paragons of service excellence, is not due to their choice of advertising agency, but rather to their recognition that managing the logistics of service delivery on a consistent basis is the crucial source of differential advantage.

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1.3.2 Time Compression

One_of the most yisible_ features of_recent_years has been the way in_which_time has become a critical_issue_in management. Product _life_ cycles _are _shorter _than_ever. industrial _customers_ and_distributors _require_just-in-time deliveries, and end _users_are_ever more_willing to accept_a substitute_product _if_their_ first. _choice_ is _not_ instantly available.

In the case of new product introduction there are many implications for management resulting from this reduction of the time "window" in which profits may be made. Except of the new product development process and the quality of the feedback from the marketplace, there is one issue which perhaps is only now being given the attention it demands. That issue is the problem of extended logistics lead times. The concept of logistics lead time is simple: How long does it take to convert an order into cash? Whilst management has long recognized the competitive impact of shorter order cycles, this is only a part of the total process whereby working capital and resources are committed to an order.

From the moment when decisions are taken on the sourcing and procurement of materials and components through the manufacturing subassembly process to the final distribution and after-market support, there are a myriado of complex activities that must be managed if customers are to be gained and retained. This is the true scope of logistics lead-time management.

As we have noted, one of the basic functions of logistics is the provision of "availability". However, in practice, what is so often the case is that the integration of marketing and manufacturing planning that is necessary to achieve this competitive requirement is lacking. Further problems are caused by limited coordination of supply decisions with the changing requirements of the marketplace and the restricted visibility that purchasing demand, because of extended supply and manufacturing have of final and distribution "pipelines".

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To overcome these problems and to_establish enduring competitive_ advantage _by. _ensuring _timely _response_to volatile_ demand._a_ new_ _and_ _fundamentally_ different approach to the management of lead times is required.

1.3.3 Globalization of Industry

The _ third _of. the _strategic_ issues _that _provide_ a challenge _for _logistics management is _the _trend_ towards globalization.- A_ global_ company-_is_ _more _ than__a multinational company. In the global business materials and components _ are _-sourced__ worldwide,__ manufactured offshore_and sold in many_different countries perhaps_with local customization.

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Such is the trend towards globalization that it is probably safe to forecast that before long most markets will be dominated by global companies. For global companies like Hewlett Packard, Philips, and Caterpillar, the management of the logistics process has become an issue of central. The difference between profit and loss on an individual product can hinge upon the extent to which the global pipeline can be optimized, because the costs involved are so great. The global company seeks to achieve competitive advantage by identifying world markets for its products and then developing a manufacturing and logistics strategy to support its marketing strategy. So a company like Caterpillar, for example, has dispersed assembly operations to key overseas markets and uses global logistics channels to supply parts to offshore assembly plants and after-markets. Where appropriate, Caterpillar will use third party companies to manage distribution and even final finishing. So for example in the United States a third party company, in addition to providing parts inspection and warehousing, actually attaches options to forklift trucks. Wheels, counterweights?, forks and masts are installed as specified by Caterpillar. Thus local market needs can be catered for from a standardized production process. Even in a geographically compact area like Europe we find that there is still a significant need for local customization. A frequently cited example is the different preferences for washing machines. The French prefer top-loading machines, the British go for front-loaders, the Germans prefer high-speed spins, and the Italians prefer lower speed spins. In addition there are differences in electrical standards and distribution channels. In the United Kingdom, most washing machines are sold through national chains specializing in white goods. In Italy, white goods are sold through a profusion of small retailers and customers bargain over price.

The challenge to a global company like Whirlpoolo therefore is how to achieve the cost advantage of standardization whilst still catering for the local demand for variety. Whirlpool is responding to that challenge by seeking to standardize on parts, components and modules and then, through flexible manufacturing and logistics, to provide the specific products demanded by each market.

1.3.4 Organizational Integration

Whilst the theoretical logic of taking a system's view of the business might be apparent, the reality of practical implementation is something else. The classical business organization is based upon strict functional divisions and hierarchies. It is difficult to achieve a closely integrated, customer-focused materials flow whilst the traditional territorial boundaries are jealously guarded by entrenched management with its outmoded priorities.

In these conventional organizations, materials managers manage materials, whilst production managers manage production, and marketing managers manage marketing. Yet these functions are components of a system that needs some overall plan or guidance to fit together. Managing the organization under the traditional model just like trying to complete a complex jigsaw puzzle without having the picture on the box cover in front of you.

The challenges that face the business organization in today's environment are quite

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different from those of the past. To achieve a position of sustainable competitive advantage, tomorrow's organization will be faced with the need to dispense with? outmoded labels like marketing manager, manufacturing manager or purchasing manager. Instead we will_ need _broad-based integrators who_ are_ oriented_towards_ the_ achievement_of marketplace success based upon managing processes_and people that _deliver seryice. Generalists_rather than narrow specialists_ _will _increasingly _be _required_ to _ integrate materials_ management with operations_management_and delivery._Knowledge _of_systems theory and_behavior_will! become a competitive advantage.

1.3.5 The New Rules of Competition

We are now entering the era of "supply chain competition'. The fundamental difference from the previous model of competition is that an organization can no longer act as an isolated and independent entity in competition with other similarly stand-alone organizations. Instead, the need to create value delivery systems that are more responsive to markets and that are much more consistent and reliable. In the delivery of that value requires that the supply chain as a whole be focused on the achievement of these goals.

Ultimately, _therefore. the means of achieving success in such _markets_ is to _accelerate_movement through_the supply _chain and_to_make _the _entire logistics system_ far more flexible_and thus_ responsive _to_these fast-changing markets.

Whilst there are many implications of these pressures for the way we manage logistics, there are three key issues, "3R", which should be discussed in this part: responsiveness, reliability and relationships.

1. Responsiveness

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In today's JIT world the ability to respond to customers' requirements in shorter time frames has become critical. Not only do customers want shorter lead times, they are also looking for flexibility and, increasingly, solutions to their problems. In other words, the supplier has to be able to meet the precise needs of customers in less time than ever before.

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The key word in this changed environment is agility?. Agility implies the ability to move quickly and_to_meet customer's_demand sooner. In a fast-changing marketplace. agility is actually more important than long-term_strategy. in_a traditional business planning sense. Because future demand patterns are uncertain, which makes planning more difficult and, in a sense, hazardous.

In the future, organizations must be much more demand-driven than forecast-driven. The means of making this transition will be through the achievement of agility, not just within the company but across the supply chain.

2. Reliability

One of the main reasons why any company carries safety stock is because of uncertainty. It may be uncertainty about future demand or uncertainty about a supplier's ability to meet a delivery promise, or about the quality of materials or components. Significant improvements in reliability can only be achieved through reengineering the processes that impact performance. Manufacturing managers long ago realized that the best way to improve product quality is not by quality control through inspection but to focus on process control. The same is true for logistics reliability.

A key to improving reliability in logistics processes is enhanced pipeline visibility. It is often the case that there is limited visibility of downstream demand at the end of the pipeline. This problem is exacerbated @ the further removed from final demand the organization or supply chain entity is. Thus the manufacturer of synthetic? fibers may have little awareness of current demand for the garments that incorporate those fibers in the material from which they are made.

If a means can be found of opening up the pipeline so that there is clear end-to-end visibility then reliability of response will inevitably improve.

3. Relationships

The trend towards customers seeking to reduce their supplier base has already been commented upon. In many industries the practice of "single sourcing" is widespread. It suggested that the benefits of such include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. Underlying all of this is the idea that buyer/supplier relationships should be based upon partnership. More and more companies are discovering the advantages that can be gained by seeking mutually beneficial, long-term relationships with suppliers. From the suppliers' point of view, such partnerships can prove a formidable barrier to entry for competitors. The more processes are linked between the supplier and the customer, the more the mutual dependence, and hence the more difficult it is for competitors to break in.

Supply chain management by definition is about the management of relationships across complex networks of companies that whilst legally independent are in reality interdependent. Successful supply chains will be those which are governed by a constant search for win-win solutions based upon mutuality and trust. This is not a model of relationships that has typically prevailed in the past. It is one that will have to prevail in the future as supply chain competition becomes the norm.

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These _three_themes_of_responsiveness. _reliability and relationships provide the basis _for successful logistics_and supply chain management. As_we enter the 21st century the need_for_a _greater focus on_the_ logistics_processes _that underpin supply_ chain_effectiveness _becomes _even_more. apparent.

1.4 Building the Logistics Network of the 21st Century

As_companies progress with their _business _allies to advanced supply_chain management. they accept the tenet. that no single firm can optimally perform all of the functions required for procurement, manufacturing. and delivery._They. recognize_the _need_to_build a_network of _response _all the way_to the consumers. As business organizations continue to chase further improvement opportunities, make no mistake-supply chain networks will only be as good as their collective logistics systems.

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1.4.1Logistics Network Building with E-business Development Framework

It is through a redesign of the logistics steps, from supply to manufacturing and beyond, that the linkages between demand chain (needs expressed by the customer and consumer) and supply chain (responses from the suppliers and manufacturers) can be integrated to result in an effective supply chain network. Beginning in Level I/II, as depicted in Figure 1.4, companies have to abandon the typical manufacturing push mentality that says, "make the products at high efficiency, and then push them to consumer." This stage cannot reach optimization. It is too full of safety stocks and extra inventory to cover possible shortage of product.

As the constitutes begin embarking on the electronic network formation stage, they must do it with an understanding that the system will be designed for customers and consumers, which will pull products and services through the combination of internal and external providers. As they do, the partners must determine which supply chain partner should perform which function and how technology can be applied to facilitate each of those steps. As the network then shares logistics expertise and uses technology to provide information and systems that dramatically improve cycle time, cut inventory, reduce total costs, and delight the consumer, a long-term advantage is created.

Competence in locating, acquiring, and coordinating the delivery of raw materialscomponents and services, for example, can be a key to competitiveness if value is added at each process step and the products in demand reach the consumer in time of need relying on best suppliers for sourcing the most critical materials (most of which are ordered and scheduled for shipment electronically) is one feasible solution in this area. It allows the nucleus fitmento to concentrate on internal skills at the key process points in manufacturing and delivery.

Such a company needs a multi-faceted? logistics program involving many partners that can do most of the shipping from a single or a few distribution centers. Typically, these centers are not equipped to handle such variety. When we investigate emerging supply chain network logistics systems, we find few that are well equipped technologically to efficiently handle a variety of products and volumes. We find a larger number where the warehouse management system (WMS) and transportation management system (TMS) in the distribution centers are products of systems designed for a simpler era.

With global expansion, the problems compound again. The Forrester report also indicates that \*85 percent of firms can't fill international orders because of the complexities of shipping across borders. Of the 15 percent that can handle global orders, most are shipping to only a few customers in Europe and Asia where they can fill orders out of local warehouses". One respondent to the survey indicated that the firm did not ship globally because it did not have logistics systems in place allowing such shipments. When it comes to order entry, for example, some logistics systems only allow shipment to five-digit ZIP codes, thereby eliminating international service.

As supply chains lengthen and_become more complex, additional tools_and relationships are needed to plan and coordinate activities. We now turn our attention to how e-supply chain best practices can be formulated and applied to_manage_and execute the logistics component.

The first_question is which component activities should_be handled_internally__and__which_ _are_better _performed externally.

The next set of questions deals with how the various best practices and logistics strengths across the network can be leveraged in a mutual fashion to create a logistically excellent value chain constellationo. This leverage must include the best application of e-commerce and be tied directly to the overall supply chain operational plan. With careful collaborative planning and execution, the emerging constellation can optimize its total performance and walk away. With the targeted consumer groups, the solutions that

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are developed, however, must be designed for a network formation transition that enables the value chain constellation to perform excellently in the traditional physical channel as well as the rapidly growing cyber channel of response.

1.4.2 Factors in Optimizing a Logistics Network

Achieving network optimization in logistics system requires each constituent in the supply chain to demonstrate best practice in its area of linkage. To help in that endeavor, the channel partners have to work together and share resources to find the means to develop a total system of interaction that is seamless, flawless, and electronically enabled. That requires beginning at the upstream side of the network and working across each link toward the downstream side, scrutinizing each logistics factor along the way. Figure 1.5 is a generalized list of factors that could help a network group begins tracking logistics improvement factors. Additions can be inserted, as appropriate, for the network being constructed.

Figure 1.5 Key Factors in Optimizing a Logistics Network

Starting with the area of freight cost and service management, each network member should consider the factors listed as opportunities for establishing the desired optimized conditions. As the process steps are considered, the idea is to determine which player is best suited for the function and, if necessary, where to outsource the function into more reliable hands. The next consideration is how inbound materials, outbound products, and warehouse deliveries can be consolidated into one transportation system that can be handled by the most effective entity. That move takes the constituents into Stage 2 of e-supply chain. Administrative services should be included, as these necessities can be a burden if not automated.

Moving to fleet management, a typical supply chain network is loaded with transportation equipment, particularly tractors and trailers. What is the total cost, how is the equipment being utilized, who does the maintenance, and how are deployment and back hauls planned are typical questions that bring a focus group to the point of making valid recommendations. The task is to determine which is the best constituent provider through channels of response, and thereby to make optimum use of the available assets without detrimento to service levels. As the consideration goes forward, it becomes a time to look at the possibility of using a third-party logistics (3PL) firm or a lead logistics provider to handle the transportation services.

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In Figure 1.5 there are factors relating to load planning. routing and scheduling. and warehouse management. These logistics elements should be_considered as the_focus teams analyze_ how _the _network_can _use_best_ practices _and e-commerce to move toward optimum conditions.

Throughout the entire planning process, the value chain members should be considering how the process steps could be automated or enhanced through technology. The complication of communicating through disparate software systems being used by network members should be dealt with as well as deciding on what data are needed and how it should be communicated. A major data consideration will be the reformation that will be communicated via the extranet. In the same way that advance shipping notices (ASNs) allow buyers to anticipate arrival of orders, the flow of information enables better decisions to be made faster. In this manner, information replaces inventory.

E-commerce_is_ having_an _enormous impact_ on_the logistics_ function_ in_ most _companies _as_ the _distance between_suppliers. manufacturers._distributors, customers. and _ consumers_ continues. _to._shrink._ It _ is _ causing organizations to redefine_ their market_assumptions,_value propositions, and yalue delivery systems. It is also forcing firms to take on new_value chain roles and responsibilities. In today's environment, most products flow through delivery systems that move bulk. E-commerce changes that situation by dramatically adding growth in small-parcel deliveries to homes and businesses.

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As we continue our look at the impact of e-commerce and supply chain on logistics in Level IV, we should consider how the electronic impact is going to alter and redefine some traditional roles. There are four areas where significant changes are taking place: cargo reservation systems, cargo space auctioning, global track and trace, and enterprise-wide documentation. Although we will not extend the discussion of these areas, all of them will be attractive for every global firm in this changing logistics environment.

Phrases and Terms

logistics management #
integrated logistics #t
military logistics
Council for Logistics Management (CLM)() #
material flow #
information flow
funds flow
production department PI
materials handlers #iT
in-plant logistics
dock-to-dock logistics #
inbound logistics
outbound logistics H#
business logistics #
social logistics ##
lean logistics \*W
production logistics P
value advantage 1t
productivity advantage ft
economies of scale #
experience curve J
flexible manufacturing system (FMS) R#Jt
materials requirements planning (MRP) #J\*iFJ
customer care programs FiJ
product life cycles #
after-market support
manufactured offshoreJi
warehouse management system (WMS) t
transportation management system (TMS) i#
e-commerce 73

Questions for Discussion and Review

1. Translate the following English into Chinese.

(1) Logistics is the process of strategically managing the procurement, movement and
storage of materials, parts and finished inventory (and the related information flows) through
the organization and its marketing channels in such a way that current and future profitability
are maximized through the cost-effective fulfillment of orders. (2) The first objective of logistics is to deliver the right materials to the right locations, in
the right quantities, and in the right presentation; the second, to do all of them efficiently. (3) The source of competitive advantage is found firstly in the ability of the organization
to differentiate itself, in the eyes of the customer, from its competition and secondly by
operating at a lower cost and hence at greater profit. (4) The logistics plan is dependent upon and takes direction from corporate strategic
planning, which require that consideration be given to the following environments: legal and
political environment, technological environment, economic and social environment, overall
competitive environment. (5) Logistics strategic planning can be defined as: a unified, comprehensive, and
integrated planning process to achieve competitive advantage through increased value and

customer service, which results in superior customer satisfaction (where we want to be), by anticipating future demand for logistics services and managing the resources of the entire supply chain (how to get there). This planning is done within the context of the overall corporate goals and plans.

2. Translate the following Chinese into English.

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3. Decide whether the following statements are true or false.

(1) The term "logistics" originates from the ancient Greek. (2) The objective of logistics is to deliver the materials as fast as possible to meet custom
er's satisfaction. (3) In-plant logistics is the same term as the inbound logistics, which differs from the
outbound logistics. (4) The source of competitive advantage is found firstly in the ability of the organization
to differentiate itself, in the eyes of the customer, from its competition and secondly by
operating at a lower cost and hence at greater profit. (5) In Level I/II of e-business development framework, companies can reach

optimization.

4. Answer the following questions.

(1) In your opinion, what is logistics? (2) Briefly describe the boundary of logistics. (3) What is the difference between logistics management and supply chain management,
according to their definition from CLM? (4) What is the mission of logistics management? Why and how can companies gain
competitive advantage through logistics? (5) What are the challenges in current changing logistics environment?

(6) What is "3R" in the current logistics competition? (7) Briefly describe the e-business development framework for logistics network building. (8) Summarize the factors in optimizing a logistics network.

Case Study

Energetic Sports Bay (ESB)

Company Background

Located in California, ESB produces sportswear and equipment. Started in the 1990s by Mr. Smith, the company had generated only nominal profits because of sharp competition. In the the beginning of 20th century, due in part to a "healthy lifestyle" campaign swept in the US, sales began to increase rapidly. In 2006, Mr. Smith recruited Mr. George as a logistics manager. Mr. George received his MBA degree in logistics from Arkansas University and has substantial experience in the logistics field.

The Organization

Currently the organization consists of five departments headed by the managers who report to the president, Mr. Smith. These departments are production, finance, marketing, logistics, and administration. Mr. Smith employs a democratic style of management, where each person has the right to comment on and recommend improvements. Mr.Smith is glad that the departments can work cohesively and assist each other.

Production

One hundred employees work at ESB's only plant, located in Los angeles. The raw materials (plastics and metals) are stored in the company warehouse near the factory. Mr. Smith believes that having a warehouse near the factory will ensure smooth operations. Finished goods transferred to a public warehouse in Austin, Texas. From there the products are delivered to the retailers.

The Market

ESB distributes its products to three major retailers. One of the three retailers, Metro Silver Plaza (MSP), holds about 60 percent of the market share. Recently MSP informed the logistics manager, Mr. George, that too many late deliveries from ESB had affected MSP's customer service levels. Mr. George said that he would look into the matter.

Recently ESB's rivals built manufacturing and distribution facilities in southern California. These new facilities have caused wholesale price of sporting goods to drop. Mr.

Smith realized that this threatens ESB and will severely affect sales.

Suppliers

One distinguishing feature of ESB is that it maintains a large supplier base. ESB has about fifty raw material suppliers. Mr. Smith believes that a large supplier base is good because it encourages price competition among the suppliers and will give some competitive advantage to the company.

Transportation

ESB uses a private fleet of twenty trucks to deliver the products to its retailers' warehouses and uses the same trucks to transport products from its own site to the public warehouse.

Conference Meeting

Mr. Smith quickly met with his managers to develop a new strategy for the evolving U.S. market in an attempt to protect profitability. During the meeting, the marketing manager pointed out that to remain competitive, the company had to become a "low-cost supplier of high-quality products.' The production manager cited that this is a good strategy. But he questioned how to become a low-cost supplier when the cost of raw material has arisen 15 percent because of increased raw material'demand. Moreover, public warehousing cost increases had raised the delivered price of ESB's products.

Mr. George brought up the feedback from MSP about delivery failures. The administrative manager, who is responsible for the order processing, explains that the department is responsible for employees' welfare and information processing. Being too busy had caused the delivery delays.

Questions for discussion

1. Briefly explain an integrated logistics function for Mr. Smith. 2. How can the delivery problems to MSP be solved? 3. In your opinion, what measures are available to ESB to becoming a "low-cost, high-quality" product manufacturer?

] (Learning Objectives )

After reading this chapter, you will be able to:

gain an understanding of the characteristics of supply chain management; \bullet learn the definition of QR, ECR, ERP, CPFR, JIT; get an overview of supply chain management principles and their implications for enterprises; get an overview of how a supply chain system comes out.

2.1 Introduction to Supply Chain Management

2.1.1 Definition of Supply Chain Management

Supply chain management (SCM) is_the control_of_the supply chain_as_a process from supplier to manufacturer to wholesaler_to_ retailer_to__consumer. Supply chain management does not involve only the movement of a physical product (such as a microchip) through the chain

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but also any data that goes along with the product (such as order status information, payment schedules, and ownership titles) and the actual entities that handle the product from stage to stage of the supply chain.

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There are essentially three goals_ of SCM: to reduce inventory. _to. increase the _speed_of transactions_ with real-time_ data_ exchange. and_ to _increase _revenue _by. satisfying customer_ demands _more. efficiently. Supply chain management is getting the right things to the right places at the right times for maximum profit. It is a process used by companies to ensure that their supply chain is efficient and cost-effective. Many important strategic decisions impact the supply chain: how to coordinate the production of goods and services, including which suppliers to buy materials from; how and where to store inventory; how to distribute products in the most cost-effective, timely manner; and how and when to make payments.

A typical supply chain is made up of many interrelated firms linked by a core enterprise. Supply chain network structure model is shown in Figure 2.1, component and subassembly suppliers are upstream from the manufacturer. Further up the chain are the supplier's suppliers. who provide raw materials. Downstream from the producing firm are the resellers, then the retail channels and finally the customers. Thus, the supply chain encompasses the flow and transformation of goods, services and information from the raw materials stage to the consumers.

Figure 2.1 Supply Chain Network Structure Mode!

2.1.2 Differences between Logistics and Supply Chain Management

A widely adopted textbook defines logistics management as follows:

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"the__-process__of__planning._ implementing._ and controlling_the_efficient, effective _flow_and _storage_of goods. services. _and related information _from_ point_of origin. to_ point_ of_ consumption _for_ the _purpose _of conforming to customer requirements."

Starting from the late 1980s, logistics has been extended to cover a wider range of interest and activities.

Such an enlarged concept and practice is called Supply Chain Management.

A_ supply._chain_is _a_network_of_facilities__and distribution__options__that _performs_the _functions_of procurement of materials. transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.

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Supply chains exist in both service and manufacturing: #JI 7Ty hX EJ PJ 2 0 organizations. Taking into account the most recent development of logistics and supply chain management, we describe logistics with the following definition.

Logistics is an optimization process of the location, movement and storage of resources from the point of origin, through various economic activities, to the final consumer.

This definition provides logistics with a comprehensive dimension and allow organizations to take full_advantage of the_ philosophy, the way_ of thinking and_the_practice of logistics_during the entire_ process of_all logistics_related activities to_enhance the system efficiency in different areas. To better understand the exact meaning and scope of logistics we need to explain this definition by looking at some of its key words.

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First we should look at the word process. This means that logistics is not an isolated

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action, it is rather a series of continuous and interrelated activities in which principles of logistics thinking, planning, organization, management and operation apply. Therefore logistics _is_a_process_ concerned _with _various_activities within an_organization from the overall thinking_to each individual_operational task. Logistics is_ also a_process_that covers every element_that associates_with the product from the origin of resources to the final stage of consumption.

Logistics does not only concern materials. It interests in all resources needed for having the right product or service at the consumer's disposal. The resources here mean materials, capital, people, but they also include information, technology know-how, etc.

Logistics should include two levels of planning and organizing activities. The first level is about where and when to get resources and products and where to send them, therefore it's a problem of location. This is the major difference between the traditional logistics concept and supply chain management, as the former is concentrating on "flows", while the latter concerns the problems of location as well. The second level concerns how to get resources and products from the origin to the final destination, thus it's a problem of movement and storage. So far much attention has been paid to the second level of logistics or to the movement and storage of resources, but not enough to the fundamental question of location or in other words where the resources should be secured and transformed.

Logistics itself is not a new activity in the organization. It is rather a new way of thinking and organizing the existing activities under an integrated concept of logistics. It is a process of optimizing systematically the system which includes each activity so that the total benefit can

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be maximized and the best overall result can be achieved. Optimization_means to organize all _releyant activities for the purpose_ of minimizing the_total_cost of providing the consumer _with_ the _yalue_ required. _This. implies_the elimination or_minimization of all_unproductive_activities and activities that_ do_not_provide_ or provide_less value added. The_ optimization_is_ to be_ assured on_ the entire. process_of providing _the product_or_service _instead of_on only a part of it.

2.1.3 Supply Chain Management Process

Typically. supply_chain management is comprised of five stages: plan, develop, make, deliver return.

The first stage in supply chain management is known as Plan. A plan or strategy must be developed to address how the given goods or services could meet the needs of the customers. A significant portion of the strategy should focus on planning a profitable supply chain.

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Develop is the next stage in supply chain management. It involves building a strong relationship with suppliers of the raw materials needed in making the product the company delivers. This phase involves not only identifying reliable suppliers but also planning methods for shipment, delivery, and payment.

At the third stage, Make, the product is manufactured, tested, packaged, and scheduled for delivery. Then, at the logistics phase, customer orders are received and delivery of the goods is planned. This fourth stage of supply chain management is aptly named Deliver.

The final stage of supply chain management is called Return. As the name suggests, during this stage, customers may return defective products. The company will also address customers' questions in this stage.

Companies use forecast-distribution models in order to have the appropriate inventory, or safety stock, necessary to meet fluctuations in customer demand. Under this model, participants in the lower-end of the supply chain, rather than those near the end-customer, increase their orders frequently when there is a rise in demand. This greater variation_in demand that can be_seen in the supply chain_ as one moves away _from_the_end customer_is_known _as_the_bullwhip effect. A possible solution to this effect is Kanban, a demand-driven supply chain. The participants in the supply chain would react to actual customer orders, not forecasts of them.

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Demand variability increases as one moves up to the supply chain away from the retail customer, and small changes in consumer demand can result in large variations in orders placed upstream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem'from its perspective. This phenomenon is known as the bullwhip effect.

Food for thought

In view of bullwhip effect, can you find ways to solve this problem to ensure the effective and efficient SCM?

2.1.4 Importance of an Effective Supply Chain Management

Better supply chain helps not only manufacturers of goods, but also some service businesses, including those requiring creativity, imagination and specialized knowledge. For example, using a virtual reality system and ultrasound data sent through the Internet, a medical specialist in Dallas can give an opinion to a patient in New York, or London, or Bombay. A virtual reality system worn around the hand and arm allows a physician to feel pressure sensations from computer images and make an informed diagnosis? in real time halfway around the globe.

Today's most efficient supply chains use the Internet and associated technologies to move information in real time to those who need it. These bits of data -digital strings of zeroes and ones--can be shipped anywhere in the world in seconds at virtually no cost. And with digital products there are no time-to-manufacture delays, inventory shortages or delivery problems. Effective management must take into account coordinating all the different pieces of this chain as quickly as possible_ without losing any of the quality_or customer satisfaction, while still keeping costs down.

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While supply chain management is as old as trade itself, new information and communications technologies have made today's supply chains better, faster and cheaper. Information engineering that combines new information technologies with improved production, inventory, distribution and payments methods has revolutionized supply chain operations.

For example, one way to buy a computer is to get on Dell's web site and configure and price a system exactly as you want it. As soon as you submit the online order, all of Dell's global suppliers-those providing chips, monitors and so on are immediately notified of the sale and go to work so that you receive your computer typically within a week.

Contrast this direct sales model with yesterday's supply chain. The old model required the customer to go to a store in search of a product that the manufacturer thinks you want to buy. But now, in some cases, the middlemen between you and the manufacturer can be eliminated. Moreover, in the direct sales model, the upstream suppliers play a key real-time role in keeping production and distribution flowing smoothly.

Food for thought

Can you cite more examples to tell us how convenient supply chain management brings to enterprises?

2.1.5 Supply Chain Management Eras

Throughout history, new ideas and technologies have revolutionized supply chains and changed the way we work. Two hundred years ago, giant machines replaced manual labor to complete tasks in large factories. Railroads, electricity and new communication media expanded markets and made supply chains better, faster and cheaper.

Supply Chain Management (Walmart)

(1) Mass Production Era. In the early 1900s, Henry Ford created the first moving assembly line. This reduced the time required to build a Model T from 728 hours to 1.5 hours and ushered? in the mass production era. Over the next 60 years, American manufacturers became adept at mass production and streamlined supply chains with the help of scientific management methods and operations research techniques.

(2) Lean Manufacturing Era. In the 1970s, U.S. manufacturing's superiority was challenged. Foreign firms in many industries made higher quality products at lower costs. Global competition forced U.S. manufacturers to concentrate on improving quality by reducing defects in their supply chains. Starting in_the_early \underline { { 1 9 } } \underline { { 7 } } \underline { { 0 } } \underline { { { s } } } _ { { : } } Japanese manufacturers_like Toyota changed the rules of production from _mass _to_ _lean._ Lean_ manufacturing_ focuses _on flexibility and_quality more than on efficiency and_quantity. Significant_lean_ manufacturing ideas_ include _six-sigma guality. control._iust-in-time_JIT) _inventory_and total guality management.

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Six-sigma: This quality control idea was pioneered by Motorola as a way to improve processes that are already under control. The outputs of such processes typically have a normal distribution, and the process capability is expected to be within plus or minus three standard deviations of the mean. Each standard deviation is one sigma, so the total process capability covers six-sigma.

Total quality management: This idea emphasizes multifunctional teams to solve quality-related problems. Such teams are trained to understand basic statistical tools and then collect and analyze data to resolve quality problems.

(3) Mass Customization Era. Beginning around 1995 and coinciding with the commercial application of the Internet, manufacturers started to mass-produce customized

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products. Henry Ford's famous statement "You can have any color Model T as long as it's black' no longer applies. While Dell may be the most famous mass customizer. the elimination of middlemen (such as travel agents, warehouse. keepers_ and_ salespeople)_ and_ the _sharing _of_ critical information_in_real time with key partners make_this era significantly different. Perhaps a more accurate term would be the "information engineering" or "information management"' era.

Firms are effectively using new information technologies to improve service and delivery processes. Through secure intranet systems and business-to-business (B2B) e-commerce platforms, firms focus on improving information management by integrating internal systems with external partners. For example, through its web site, Amazon.com gives customers the ability to track the delivery status of their purchases. And Walmart routinely shares all sales data in real time with its upstream suppliers and manufacturers.

2.2 Principles of Supply ChainManagement

Supply Chain Management (ZARA)

There are altogether seven principles in managing supply chains.

(1) Segment_customers based on the seryice_needs of distinct groups _and_adapt the supply_chain to serve these segments profitably.

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Segmentation has traditionally grouped customers by industry, product, or trade channel and then taken a one-size-fits-all approach to serving them, averaging costs and profitability within and across segments. But segmenting customers by their particular needs equips a company to develop a portfolio? of services tailored to various segments. Surveys, interviews, and industry research have been the traditional tools for defining key segmentation criteria.

Viewed from the classic perspective, this needs-based segmentation may produce some odd couples. Research can establish the services valued by all customers versus those valued only by certain segments. Then the company should apply a disciplined, cross-functional process to develop a menu of supply chain programs and create segment-specific service packages that combine basic services for everyone with the services from the menu that will have the greatest appeal to particular segments. This does not mean tailoring for the sake of tailoring. The goal is to find the degree of segmentation and variation needed to maximize

(2) Customize the_logistics network_to_the service requirements and profitability of customer segments.

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Companies have traditionally taken a monolithic approach to logistics network design in organizing their inventory, warehouse, and transportation activities to meet a single standard. This can not achieve superior asset utilization or accommodate the segment-specific logistics necessary for excellent supply chain management. In many industries, especially such commodity industries as fine paper, tailoring distribution assets to meet individual logistics requirements is a greater source of differentiation for a manufacturer than the actual products, which are largely undifferentiated.

Return on assets and revenues improved substantially? thanks to the new inventory deployment strategy, supported by outsourcing of management of the quick response centers and the transportation activities. The logistics network will be more complex, involving alliances with third-party logistics providers, and will certainly have to be more flexible than the traditional network. As a result, fundamental changes in the mission, number, location, and ownership structure of warehouses are typically necessary. Finally, the network will require more robust logistics planning enabled by \*real-time" decision-support tools that can handle flow through distribution and more time-sensitive approaches to managing transportation.

(3) Listen_to_market_signals _and align demand planning. accordingly _across_ the. supply_ chain. ensuring consistent forecasts and optimal resource allocation.

Today, companies enjoy/ lowerXinventory and warehousing costs and much greater ability to maintain price levels and limit discounting. Like all the best sales

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and operations planning (S&OP), this process recognizes the needs and objectives of each functional group but bases final operational decisions on overall profit potential.

Excellent supply chain management, in fact, calls for S&OP that transcendso company boundaries to involve every link of the supply chain (from the supplier's supplier to the customer's customer) in developing forecasts collaboratively and then maintaining the required capacity across the operations. Channel-wide S&OP can detect early warning signals of demand lurking in customer promotions, ordering patterns, and restocking algorithms and takes into account vendor and carrier capabilities, capacity, and constraints.

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(4)_Differentiate product_closer_to_the_customer and speed conversion_ across the supply chain.-

Manufacturers have traditionally based production goals on projections of the demand for finished goods and have stockpiled? inventory to offset forecasting errors.

While even such traditionalists can make progress in cutting costs through set-up reduction, cellular manufacturing, and just-in-time techniques, great potential remains in less traditional strategies such as mass customization.

Realizing that time really is money, many manufacturers are questioning the conventional wisdom that lead times in the supply chain are fixed. They are strengthening their ability to react to market signals by compressing lead times along the supply chain, speeding the conversion from raw materials to finished products tailored to customer requirements. This approach enhances their flexibility to make product configuration decisions much closer to the moment demand occurs. The key to just-in-time product differentiation is to locate the leverage point in the manufacturing process where the product is unalterably configured to meet a single requirement and to assess options, such as postponement, modularized design, or modification of manufacturing processes that can increase flexibility.

Good to know

Just-in-time: This inventory management idea was pioneered by Toyota to ensure that inventory in production systems would arrive in good condition exactly when needed: not too early and not too late.

(5) Manage sources of supply_strategically to reduce the total cost of owning materials and possessed services.

Determined to pay as low a price as possible for materials, manufacturers have not traditionally cultivated warm relationships with suppliers. In the words of one

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general manager: "The best approach to supply is to have as many players as possible fighting for their piece of the pie--that's when you get the best pricing."'

Excellent supply chain management requires a more enlightened mindset--recognizing, as a more progressive manufacturer did: "Our supplier's costs are in effect our costs. If we force our supplier to provide 90 days of consigned material when 30 days are sufficient, the cost of that inventory will find its way back into the supplier's price to us since it increases his cost structure.' While manufacturers should place high demands on suppliers, they should also realize that partners must share the goal of reducing costs across the supply chain in order to lower prices in the marketplace and enhance margins. Some companies are not yet ready for such progressive thinking because they lack the fundamental prerequisite. That is, a sound knowledge of all their commodity costs, not only for direct materials but also for maintenance, repair, and operating supplies, plus the money spent on utilities, travel, and virtually everything else. This fact-based knowledge is the essential foundation for determining the best way of acquiring every kind of material and service the company buys.

(6) Develop a supply chain-wide technology strategy. that supports multiple levels of decision making and gives a clear _yiew _of _the_ _flow_ of_ products,_ services._and information.

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To sustain reengineered business processes, many progressive companies have been replacing inflexible, poorly integrated systems with enterprise-wide systems. Yet too many of these companies will find themselyes victims of the powerful new transactional systems they put in place. Unfortunately, many leading-edge information systems can capture reams? of data but cannot easily translate it into actionable intelligence that can enhance real-world operations. It needs to build an information technology system that integrates capabilities of three essential kinds. For the short term, the system must be able to handle day-to-day transactions and electronic commerce across the supply chain and thus help align supply and demand by sharing information on orders and daily scheduling; From a mid-term perspective, the system must facilitate planning and decision making, supporting the demand and shipment planning and master production scheduling needed to allocate resources efficiently; To add long-term value, the system must enable strategic analysis by providing tools, such as an integrated network model, that synthesize data for use in high-level "what-if"' scenario planning to help managers evaluate plants, distribution centers, suppliers, and third-party service alternatives.

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(7) Adopt channel-spanning performance measures to gauge --collective - succes in _ reaching. the _ end-user effectively and efficiently.

To answer the question, "How are we doing?" most companies look inward and apply any number of functionally oriented measures. But excellent supply chain managers take a broader view, adopting measures that apply to every link in the supply chain and include both service and financial metrics. First, they measure service in terms of the perfect order--the order that arrives when promised, complete, priced and billed correctly, and undamaged. The perfect order not only spans the supply chain, as a progressive performance measurement should, but also view performance from the proper perspective of the customer. Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account, especially a key account.

2.3 Methods Concerning Supply Chain Management

The generation of supply chain management theory lags far behind the specific technologies and methods as the former was shown initially by the latter. The most common methods in supply chain management are Quick Response (QR), Efficient Consumer Response (ECR), Enterprise Resource Planning (ERP), Just-in-time (JIT), Collaborative Planning, Forecasting, and Replenishment (CPFR), etc.

1. QR

The gap between demand for consumer goods and their efficient supply is greater now than at any other time, and is widening as consumers' wants become less predictable, and suppliers struggle to meet them. QR is both a management paradigm? and a methodology that allows supply systems to react quickly to changes while improving their performance. QR aims to help organize a business in the face of problems associated with the vast array of goods and services now to be found in consumer markets. It is particularly relevant to the Fast Moving Consumer Goods (FMCG) and Fashion industries. QR works by compressing the time between product or service design concept and appearance on the retail shelf. It then takes advantage of such recent technologies as Point of Sale (POS) tracking and Electronic Data Interchange (EDI) to constantly up-date estimates of true consumer demand, and then places intelligent re-orders for goods with flexible manufacturers and their suppliers.

2. ECR

ECR is a_business concept _aimed_at_better satisfying consumer_needs. through businesses_and trading partners working together.

In doing so, ECR best practices will deliver superior business results by reducing costs at all stages throughout

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the supply chain, achieving efficiency and streamlined processes. ECR best practices can deliver improved range, value, service and convenience offerings. This in turn will lead to greater satisfaction of consumer needs.

ECR principles support the belief that business success comes from delighting the consumer through meeting or exceeding their expectations. This can only be done through working together to remove inefficiencies and costs that add little value to the consumer. This principle applies to the grocery industry and many, if not all, other industry sectors.

3. ERP

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ERP_stands_for enterprise resource_planning is a_way to_integrate_the data and processes_of_an organization_into one single system. Usually ERP systems will have many components including hardware and software, in order to achieve integration, most ERP systems use a unified database to store data for various functions found throughout the organization.

The term ERP originally referred to how a large organization planned to use organizational wide resources. In the past, ERP systems were used in larger more industrial types of companies. However, the use of ERP has changed and is extremely comprehensive, today the term can refer to any type of company, no matter what industry it falls in. In fact, ERP systems are used in almost any type of organization--large or small.

In order for a software system to be considered ERP, it must provide an organization with functionality for two or more systems. While some ERP packages exist that only cover two functions for an organization, most ERP systems cover several functions.

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ERP- systems_ can_cover_a_ wide_range_ of functions and integrate them into one unified database. For instance, functions _such_as Human Resources Management. Supply_Chain_Management._Customer Relations _Management. Financials. _Manufacturing and_Warehouse Management were _all once _stand alone_software_applications,_ usually_ housed_ with their own database and network, today, they can all fit under one umbrella--the ERP system.

Good to know

Advantages of ERP Systems

A total integrated system
\bullet The ability to streamline different processes and workflows
\bullet The ability to easily share data across various departments in an organization
\bullet Improved efficiency and productivity levels
\bullet Better tracking and forecasting
\bullet Lower costs Improved customer service

Disadvantages of ERP Systems

Customization in many situations is limited
\bullet The need to reengineer business processes
\bullet ERP systems can be cost prohibitive to install and run
\bullet Technical support can be shoddy May be too rigid for specific organizations that are either new or want to move in a new direction in the near future

Food for thought What is the difference between ERP and MRP?

4. JIT

JIT is a strategy used in inventory management. With the_ JIT strategy. companies_aim _to_ decrease_ waste_ and inventory_costs by_receiving goods _only_when they are needed_to produce_products. JIT inventory management

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thus increases efficiency, and is used by companies that prefer to keep low inventory levels. JIT is the opposite of just in case (JIC), in which companies carried large inventories in the

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event that demand spiked. In order for JIT to work correctly. the_company must_ be_able_to predict. demand_for_ the product and how_much inventory_will be needed at which stage of production. JIT also depends on a reliable supply chain for the effective, timely delivery of parts.

Good to know

Benefits of JIT:

Reduced operating costs;
\bullet Greater performance and throughput;
\bullet Higher quality; Improved delivery, Increased flexibility and innovativeness.

Food for thought

Do you know JIC? Can you cite the differences between JIC and JIT?

5. CPFR

Collaborative _Planning. Forecasting, and_-Replenishment_-(CPFR)_-is.--a collaborative business practice that enables partners_ to_ have__visibility_ _into _ one another's _ demand,_order_forecast _ and promotional data to anticipate_and satisfy future. demand. This _is_done through_a systematic _process_ _of_ information_ and b#JFFilCPFR TAF k AFJ aihv ii +piR#CPFR4 #i ii ifv$1Ki#\*#i

knowledge _sharing. _CPFR_ links _sales_ and_ marketing. best practices, such _as_ category management. _to_ supply_chain_planning. and_execution_ processes. In_ this _way_product availability can be increased while reducing inventory, transportation and logistics costs.

CPFR goes beyond current internal system implementations and builds the next level of information sharing out to trading partners. The objective often is to foster a strategic partnership and establish an enabling process for all other supply chain improvement initiatives.

2.4 Developing Supply Chain Systems

After a company defines its supply chain strategy and sets the performance targets for the markets it serves, the next step is to develop the systems needed to implement the strategy. Often existing systems need to be enhanced and new systems need to be built. This section presents a process to follow to create the detailed system designs and to build those systems. This process contains ten steps.

1. Organizing the Systems Development Project

There are three steps in creating new systems, namely, define, design and build. Each step has a certain amount of time and budget that should be allocated to it. Organize and run the

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project so that the work that needs to be done in each step is done within the boundaries of these time and budget limits. To_ run _a project _well._ a_ company needs _to_ appoint _a full-time _leader_with _overall_ _responsibility__and_the appropriate authority and_define a_set _of_measurable_and non-overlapping obiectives to accomplish the proiect goal or mission. Then, assign project objectives to teams of two to seven people with hands-on team leaders and the appropriate mix of business and technical skills. Besides, project office staff and project leader and team leaders should work with each other closely in order to update plans and budgets.

Good to know

Project management is the discipline of planning, organizing and managing resources to bring about the successful completion of specific project goals and objectives. A project is a temporary endeavor, having a defined beginning and end undertaken to meet particular goals and objectives, usually to bring about beneficial change or added value. The temporary nature of projects stands in contrast to usual business management which is repetitive, permanent or semi-permanent functional work to produce products or services.

The _primary_challenge of project management_is to achieve all of the project goals_and objectives_while honoring the preconceived project constraints. Typical constraints are scope. time and budget. The secondary challenge is to optimize the allocation_and integration of _inputs_necessary_to_ meet _pre-defined_objectives. Regardless of the methodology used, the project development process will have the same major stages: initiation, planning or development, production or execution, monitoring and controlling, and closing. Not all the projects will visit every stage as projects can be

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terminated before they reach completion. Some projects don't have planning and/or monitoring stages.

2. Designing Supply Chain Systems

The purpose of the design step is to flesh out the conceptual system design and create the detailed system specifications, detailed project plan and budget needed to build the system. This is where the people who will work on the project get to take a look at what senior management wants and figure out how they will do it. This is where adjustments and refinements are made to the project objectives as the people who have to build the system consider the realities of the job before them.

The phase begins with the project leader reviewing the project goal, the conceptual system design, and the objectives with the project work group. The work group is composed of business and technical people who have the necessary mix of business and technical skills and experience needed to do the detailed system design. Specific issues relating to the project objectives and budget can be investigated during this phase. If necessary, adjustments can be made in light of the findings that come out of this phase. Once the people on the project work group understand the goal and the objectives, they participate with the project leader to lay out a detailed plan for the work in this phase. There are two main things that need to be done in the design phase: create detailed process flow diagrams for the new system; build and test the