An introduction to supply chain management

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LogisticsAnIntroductiontoSupplyChainManagementDonaldWaters Logistics LogisticsAnIntroductiontoSupplyChainManagementDonaldWaters ©DonaldWaters2003Allrightsreserved.Noreproduction,copyortransmissionofthispublicationmaybemadewithoutwrittenpermission.Noparagraphofthispublicationmaybereproduced,copiedortransmittedsavewithwrittenpermissionorinaccordancewiththeprovisionsoftheCopyright,DesignsandPatentsAct1988,orunderthetermsofanylicencepermittinglimitedcopyingissuedbytheCopyrightLicensingAgency,90TottenhamCourtRoad,LondonW1T4LP.Anypersonwhodoesanyunauthorisedactinrelationtothispublicationmaybeliabletocriminalprosecutionandcivilclaimsfordamages.TheauthorhasassertedhisrighttobeidentifiedastheauthorofthisworkinaccordancewiththeCopyright,DesignsandPatentsAct1988.Firstpublished2003byPALGRAVEMACMILLANHoundmills,Basingstoke,HampshireRG216XSand175FifthAvenue,NewYork,N.Y.10010CompaniesandrepresentativesthroughouttheworldPALGRAVEMACMILLANistheglobalacademicimprintofthePalgraveMacmillandivisionofSt.Martin’sPress,LLCandofPalgraveMacmillanLtd.Macmillan®isaregisteredtrademarkintheUnitedStates,UnitedKingdomandothercountries.PalgraveisaregisteredtrademarkintheEuropeanUnionandothercountries.ISBN0–333–96369–5paperbackThisbookisprintedonpapersuitableforrecyclingandmadefromfullymanagedandsustainedforestsources.AcataloguerecordforthisbookisavailablefromtheBritishLibrary.LibraryofCongressCataloging-in-PublicationDataWaters,C.D.J.(C.DonaldJ.),1949–Logistics:anintroductiontosupplychainmanagement/DonaldWaters.p.cm.Includesbibliographicalreferencesandindex.ISBN0–333–96369–5(paper)1.Businesslogistics.2.Industrialmanagement.I.Title.HD38.5.W3842002658.5—dc212002073544EditingandoriginationbyAardvarkEditorial,Mendham,Suffolk1098765432112111009080706050403PrintedinGreatBritainbyAshfordColourPressLtd,Gosport ToDanandSue ContentsListofFiguresix4ImplementingtheStrategy82PrefacexiRelatingStrategytoLowerDecisions83AreasforDecisionsinImplementation85PARTIManagingChange95DiscussionQuestions103Introduction1References1031TheContextofLogistics35LocatingFacilities104Introduction4ImportanceofLocation105Definitions4ChoosingtheGeographicRegion109TheSupplyChain7InfiniteSetApproaches113ActivitiesofLogistics12FeasibleSetApproaches119AimsofLogistics17NetworkModels126ImportanceofLogistics19LocationPlanning130DiscussionQuestions25DiscussionQuestions136References26References136FurtherReading26FurtherReading1362IntegratingtheSupplyChain276PlanningResources137ProgressinLogistics28TypesofPlanning138CurrentTrendsinLogistics30CapacityPlanning139IntegratingLogisticsWithinanAdjustingCapacity144Organisation34TacticalPlanning150IntegrationAlongtheSupplyChain39Short-termSchedules158AchievingIntegration43DiscussionQuestions165DiscussionQuestions53References165References54FurtherReading165PARTII7ControllingMaterialFlow166PlanningtheSupplyChain57MaterialRequirementsPlanning167ExtendingtheRoleofMRP1743LogisticsStrategy59PrinciplesofJust-in-time178StrategicDecisions60AchievingJust-in-timeOperations183LogisticsStrategy62ExtendingJITAlongtheSupplyChain189StrategyOptions66DiscussionQuestions194DesigningaLogisticsStrategy73References194DiscussionQuestions80FurtherReading195References80 viiiCONTENTS8MeasuringandImproving11WarehousingandMaterialPerformance196Handling282MeasuringPerformance197PurposeofWarehouses283ComparingPerformance207ActivitiesWithinaWarehouse285AnalysingaSupplyChain209Ownership290ImprovingPerformance215Layout292DiscussionQuestions222MaterialsHandling297References223Packaging302FurtherReading223DiscussionQuestions306References306PARTIIIFurtherReading307ActivitiesintheSupplyChain22512Transport308Introduction3099Procurement227ModeofTransport310Definitions228IntermodalTransport319ChoosingSuppliers232OwnershipofTransport321ProcurementCycle236RoutingVehicles325TypesofPurchase242DiscussionQuestions331DiscussionQuestions249References331References249FurtherReading331FurtherReading25013GlobalLogistics33210InventoryManagement251InternationalTrade333ReasonsforHoldingStock252ProblemswithInternationalLogistics338EconomicOrderQuantity259OrganisingInternationalOperations342UncertainDemandandSafetyStock267DiscussionQuestions349PeriodicReviewSystems270References349EffortofStockControl274FurtherReading349DiscussionQuestions280References281Index350FurtherReading281 ListofFigures1.1Spectrumofproducts54.5Capacityofasupplychainsetbythe1.2Operationscreatingoutputs5bottleneck921.3Cycleofsupplyanddemand64.6SummaryoflogisticsatRalston1.4Theroleoflogistics6EnergySystemss.r.o.931.5Outlineofthesupplychainforpaper84.7Demingwheel971.6Activitiesinasupplychain94.8Rateofperformanceimprovement1001.7Supplychainaroundamanufacturer95.1Break-evenanalysisforlocationof1.8UsingintermediariestosimplifytheWarwickSupplies108supplychain125.2Hierarchyofdecisionsforlocations1091.9Examplesoforganisationalstructure165.3Alternativechoicesoflocation1141.10InfluenceoflogisticsonROA215.4Variationintransportcostwith2.1Summaryoflogisticsactivities35location1152.2Threelevelsoflogisticsintegration405.5Calculationofcentreofgravity1162.3Varyingdemand405.6LocationsforvanHendrickIndustries1172.4Spectrumofrelationships465.7Weaknessofthecentreofgravity2.5Differentlevelsofverticalintegration49method1175.8MapforBannermanIndustries1203.1Typesofstrategicdecision615.9Comparisonofsites1213.2Roleoflogisticsmanagersinstrategic5.10Variationintransportcostwithdecisions63numberoffacilities1213.3Differentamountsofinputfrom5.11Findingtheoptimalnumberoflogisticsmanagers63facilities1223.4Factorsinthedesignofalogistics5.12MapofIanBruce’sproblem127strategy745.13SpreadsheetofcalculationsforIanBruce1274.1Levelsofdecisioninlogistics865.14Roadnetworkshowingtraveltime4.2Structureofasupplychain87inminutesbetweenlocations1294.3Differentshapesofsupplychain885.15Solutiontothecoveringproblem1294.4Simplifiedsupplychainfor5.16NetworkforProblem6135distributingshoes89 xLISTOFFIGURES6.1Anapproachtoplanninglogistics1389.1Relativepowerofacustomerand6.2Thebottleneckofasupplychainasupplier234limitsthecapacity1409.2Outlineofstepsinaprocurement6.3CapacityofdistributionatJ&Rcycle237Softdrinks1429.3Somearrangementsfordelivery2466.4Alternativetimingofcapacity10.1Aggregatestockasapercentageexpansion144ofGDPfortheUK2536.5Alternativesizeofcapacityexpansion14510.2Typesofstock2556.6Atypicallearningcurve14710.3Repeatedpatternofstockcycles2596.7Costofmaintenance14810.4Variationofcostwithordersize2606.8Aniterativeapproachtoplanning15210.5Usingareorderleveltotimeorders2636.9Graphicalapproachtoplanning–10.6Orderpatternswhenleadtimeisplottingcumulativedemandandlongerthanstockcycle263supply15510.7Thecostcurveisshallowaround6.10Revisionofplansduringcycles156theeconomicorderquantity2656.11Spreadsheettohelpwithplanning10.8SafetystockraisestheaverageinPiotrHucek158stocklevel2677.1Comparisonofstocklevels16810.9Alternativeapproachestoordering2717.2Partofabillofmaterialsforatable16910.10OrderplacedatAhastocover7.3SummaryofMRPprocedure170demanduntilB2727.4Aclosed-loopMRPsystem17510.11TypicalresultsforanABCanalysis2747.5Enterpriseresourceplanning17710.12OriginalsupplychainforNalco/7.6StocklevelswithdifferenttypesofExxon276control18011.1Usingwarehousestoreduce7.7ThesimplestformofmessageforJIT185transportcosts2877.8Atwo-cardkanbansystem18611.2Meetingdemandwithamixture8.1Capacityandutilisationinasupplyofprivateandpublicwarehouses291chain19911.3Break-evenanalysisforpublic/8.2StructureoftheUKfrozenfoodprivatewarehouses292industry20611.4Basiclayoutofawarehouse2938.3Stepsinbenchmarking20811.5Schematicofacommonwarehouse8.4Aninformalprocesschart210layout2938.5Formatforaprocesschart21111.6Layoutofpaintinworkedexample2968.6Partofaprocesschartfordeliveries11.7Choiceofautomationandatasupermarket211warehousesize3008.7Precedencediagram,withactivity11.8OutlineofHandemannGroup’sBfollowingactivityA212warehouse3018.8Precedencediagramforworked12.1Freightmovedbytransportmodeexample213intheUK3118.9Exampleofamultipleactivitychart21312.2TransportingcoalacrossCanada3188.10Multipleactivitychartforworked12.3Thetravellingsalesmanproblem326example21412.4Solutiontoroutingproblem3288.11PartofasimulationforEd’sDrive-throughBottleShop221 PrefaceSUBJECTThisisatextbookaboutlogistics.Itdescribesthewaythatmaterialsmoveintoanorganisationfromsuppliers,throughtheoperationswithinanorganisation,andthenouttocustomers.Asyoucansee,wetakeabroadviewoflogistics,lookingateverykindof‘organisation’,movingeverykindof‘mate-rial’.Wetalkaboutmanufacturersmovingtangiblegoods–andserviceprovidersmovingmaterialsfortheirintangibleservices.Everyorganisationneedsareliableflowofmaterials.Logisticsisanessentialfunction,andmanagershavetomakethemovementofmaterialsasefficientandeffectiveaspossible.Thisisbestdonebyanintegratedfunctionthatisresponsibleforallaspectsofmaterialmovement.Theresultsareimportant,astheydirectlyaffectcustomerservice,costs–andjustabouteveryothermeasureofperformance.Logisticsisnotcontainedwithinanorganisation,buthasauniquepositioninlinkingexternalsuppliersandcustomers.Organisationsincreasinglyrecognisethattheydonotworkinisolation,butformpartofasupplychainwhoseaimistosatisfycustomers.Toemphasisethisbroaderrole,somepeopleprefertotalkabout‘supplychainmanagement’.Thisisaparticularlyfast-movingfield.Developmentsinoperations–suchasjust-in-time,leanoper-ations,efficientcustomerresponse,enterpriseresourceplanning,e-commerce,globalisation,andincreasingcustomerservice–arerapidlychangingthedemandsonlogistics.Thisbookgivesanup-to-dateviewoflogistics,emphasisingcurrenttrendsanddevelopments.Itcoversimportantissues,suchas:●increasingstrategicimportanceoflogistics●globaloperationsandincreasinginternationalcompetition●integrationoforganisationsandactivitiesinthesupplychain●changingrequirementsfromlogisticstodealwithnewtypesofoperations●bettercommunicationsallowingcloserco-ordinationofmovements●newrequirementsfromaspectsofe-commerce●increasingemphasisonqualityandcustomer-basedservice●environmentalconcerns.APPROACHOFTHEBOOKThebookgivesanintroductiontologistics.Itcanbeusedbyanyonewhoismeetingthesubjectforthefirsttime.Youmightbeastudenttakingacourseinbusinessstudies,oranothersubjectthatneedssomeknowledgeoflogistics–oryoumightreadthebooktolearnmoreaboutacentralareaofmanage- xiiPREFACEment.Thebookgivesabroaddescriptionoflogistics,coveringallthemainconcepts.Itdiscussesthetopicsinenoughdepthtoprovidematerialforacompletecourse,butitdoesnotgetboggeddownintoomuchdetail.Byconcentratingonkeyissues,wehavekeptthetexttoareasonablelength.Thebookhasanumberoffeatures.It:●isanintroductorytextandassumesnopreviousknowledgeoflogisticsorexperienceofmanagement●canbeusedbymanytypesofstudent,orpeoplestudyingbythemselves●takesabroadview,coveringalltypesoforganisation●setslogisticswithinitsstrategiccontext●describesalotofmaterial,concentratingontopicsthatyouwillmeetinpractice●developsthecontentsinalogicalorder●ispractical,presentingideasinastraightforwardway,avoidingabstractdiscussions●illustratesprinciplesbyexamplesdrawnfrominternationalorganisations●includesarangeoffeatures,includingchapteraims,examplesoflogisticsinpractice,casestudies,projects,workedexamples,chapterreviews,problems,discussionquestionsandusefulreadings●iswrittenclearly,presentingideasinaninformativeandeasystyle.CONTENTSThebookfollowsalogicalpaththroughthedecisionsoflogistics.Anobviousproblemisthatthetopicsareallrelated,anddecisionsaremadesimultaneouslyratherthanconsecutively.Inthebookweeffectivelyhavetomakealinearjourneythroughacomplexwebofmaterial.Tomakethiseasier,wehavedividedthebookintothreeparts.Thefirstpartgivesanoverallintroductiontologistics.Itdefineskeyterms,discussestheroleoflogistics,itsaims,impor-tance,trendsandthegeneralcontextofsupplychainmanagement.Itshowshowlogisticshasdevelopedintoasingle,integratedfunction.Thesecondpartlooksattheplanningforasupplychain.Thisstartswiththedesignofalogisticsstrategy,andthenshowshowthisstrategycanbeimplemented.Importantdecisionsincludethestructureofthesupplychainandthelocation,numberandsizeoffacilities.Thesedecisionsleadtolowerlevelplanstoorganiseactivitiesandresources.Thesupplychainkeepschanging,sowelookatwaysofmeasuringandimprovingtheperformanceoflogistics.Thethirdpartofthebookfocusesonsomespecificfunctionsoflogistics,includingprocurement,inventorymanagement,warehousing,transportofmaterialsandinternationallogistics.Togetherthesechapterscoversomeofthemostimportantdecisionsmadeinanyorganisation.CONTACTSIfyouhaveanycomments,queries,requestsorsuggestionsforthebookorassociatedmaterial,theauthorandpublisherwouldbeverypleasedtohearthem.Youcancontacttheauthoratdonaldwaters@lineone.net. PARTIIntroductionThisbookisdividedintothreeparts.PartIcontainstwochap-tersandgivesanoverallintroductiontologistics,aswellassettingthescenefortherestofthebook.Itintroducessomeimportantissueswhicharedevelopedinlaterchapters.Chapter1definesthekeyterms,discussestheroleoflogistics,itsaims,importanceandthegeneralcontextofsupplychainmanagement.Chapter2describescurrenttrends,andshowshowlogisticshasdevelopedintoasingle,integratedfunction.PartsIIandIIIlookatplanninginthesupplychain,andfocusondifferentactivitiesoflogistics. CHAPTER1TheContextofLogisticsCONTENTS■Aimsofthechapter■Chapterreview■Introduction■Casestudy–AceDairies■Definitions■Project–Websites■Thesupplychain■Discussionquestions■Activitiesoflogistics■References■Aimsoflogistics■Furtherreading■ImportanceoflogisticsAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■DEFINE‘logistics’andassociatedterms■UNDERSTANDtheroleandstructureofsupplychains■LISTdifferentactivitiesoflogisticsandunderstandtherelationshipsbetweenthem■DISCUSStheaimsoflogistics■SHOWhowlogisticscontributestocustomersatisfaction■RECOGNISEtheimportanceoflogisticstoeveryorganisation 4LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTINTRODUCTIONAllorganisationsmovematerials.Manufacturersbuildfactoriesthatcollectrawmaterialsfromsuppliersanddeliverfinishedgoodstocustomers;retailshopshaveregulardeliveriesfromwholesalers;atelevisionnewsservicecollectsreportsfromaroundtheworldanddeliversthemtoviewers;mostofusliveintownsandcitiesandeatfoodbroughtinfromthecountry;whenyouorderabookorDVDfromawebsite,acourierdeliversittoyourdoor.Everytimeyoubuy,rent,lease,hireorborrowanythingatall,someonehastomakesurethatallthepartsarebroughttogetheranddeliveredtoyourdoor.Logisticsisthefunctionthatisresponsibleforthismovement.Itisresponsibleforthetransportandstorageofmaterialsontheirjourneybetweensuppliersandcustomers.Onanationalscale,logisticsinvolvesahugeamountofeffort.TheUSAhasagrossdomesticproduct(GDP)ofUS$10trillion,1soitspopulationof280millionproducesandconsumesanaverageofUS$36,000ofgoodsandservices.Theworld’ssevenlargesteconomies(USA,Japan,Germany,UK,France,ItalyandCanada)haveacombinedGDPofUS$20trillion.Allofthis–whetheritisoilproducedinCanada,consumerelectronicsinJapan,carsintheUKordairyproductsinFrance–reliesonlogisticstocollectmaterialsfromsuppliersanddeliverittocustomers.Millionsofpeopleareinvolvedinthiseffort,anditcostsbillionsofdollarsayeartokeepeverythingmoving.Ordinarilyweonlynoticeasmallpartoflogistics.Wemightseelorriesdrivingdownamotorway,visitashoppingmall,drivethroughatradingestate,orhaveaparceldeliveredtoourhomes.Thesearethevisiblesignsofahugeindustry.Inthisbook,wetakeamoredetailedlookatthiscomplexfunction.Wediscusstheissuesanddevelopments,andseehowmanagerscangetthebestresultsfromtheirlogistics.DEFINITIONSSupportingoperationsEveryorganisationdeliversproductstoitscustomers.Traditionallywehavedescribedtheseproductsaseithergoodsorservices.ThenmanufacturerslikeSonyandGuinnessmaketangiblegoods,whileAOLandVodafoneprovideintangibleservices.Inreality,thisviewisrathermisleading,andeveryproductisreallyacomplexpackagethatcontainsbothgoodsandservices.Ford,forexample,manufacturecars,buttheyalsogiveservicesthroughwarranties,after-salesservice,repairsandfinancepackages.McDonald’sprovideacombinationofgoods(burgers,cutlery,packaging,andsoon)andservices(whentheysellfoodandlookaftertherestaurant).ItismoreaccuratetodescribeproductsaslyingonthespectrumshowninFigure1.1.Atoneendofthisspectrumareproductsthatarepredominantlygoods,suchascarsanddomesticappliances;attheotherendareproductsthatarepredominantlyservices,suchasinsuranceandeducation.Inthemiddleareproductswithamoreevenbalance,suchasrestau-rantmealsandhospitals.Attheheartofanorganisationaretheoperationsthatcreateanddelivertheproducts.Theseoperationstakeavarietyofinputsandconvertthemintodesiredoutputs,asshowninFigure1.2.Theinputsincluderawmaterials,components,people,equipment,information,moneyandotherresources.Operationsincludemanufacturing,serving,transporting,selling,training,andsoon.Themainoutputsaregoodsandservices.TheGoldenLionrestaurant,forexample,takesinputsoffood,chefs,kitchen,waiters,anddiningarea;itsoperationsincludefoodpreparation,cookingandserving;themainoutputsaremeals,service,customersatisfaction,andsoon. THECONTEXTOFLOGISTICS5LargelygoodsBalanceofgoodsLargelyandservicesservicesCarHouseBespokeFastfoodHealthSeaEducationmakersbuilderstailorrestaurantservicecruiseFigure1.1SpectrumofproductsINPUTSOPERATIONSOUTPUTS■People■Manufacture■Goods■Buildings■Serve■Services■Rawmaterials■Supply■Profit■Equipment■Transport■Waste■Information■Sell■Wages■Investment■Train■etc.■etc.■etc.Figure1.2OperationscreatingoutputsTheproductscreatedbyanorganisationarepassedtoitscustomers,givingthecycleshowninFigure1.3.Thisshowscustomersgeneratingdemands,withoperationsusingresourcestomakeproductsthatsatisfythem.Logisticsmovesmaterialsaroundthiscycle.Theoperationsareusuallydividedintoanumberofrelatedparts,inthewaythatahospitalhasanemergencyroom,surgicalward,purchasingdepartment,heartunit,operatingtheatreandsoon.Sologisticsalsomovesmaterialsthroughthedifferentpartsofanorganisa-tion,collectingfrominternalsuppliersanddeliveringtointernalcustomers(asshowninFigure1.4).Thisleadstoourbasicdefinition.LOGISTICSisthefunctionresponsiblefortheflowofmaterialsfromsuppliersintoanorganisation,throughoperationswithintheorganisation,andthenouttocustomers. 6LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCustomerspassedtocreateSupplyofDemandforproductsproductspassedtoarrangeOperationsOtheroutputsOtherinputsFigure1.3CycleofsupplyanddemandExternalOperationswithinExternalsuppliertheorganisationcustomerInternalInternalsuppliercustomerInboundOutboundlogisticsMaterialsmanagementlogisticsLogisticsFigure1.4TheroleoflogisticsMovingmaterialsintotheorganisationfromsuppliersiscalledinboundorinwardlogistics;movingmaterialsouttocustomersisoutboundoroutwardlogistics;movingmaterialswithintheorganisationismaterialsmanagement.MaterialsInthesedefinitionswehavetalkedaboutthemovementofmaterials–butwhatexactlydowemeanbymaterials?Sometimesthisisobviouswhen,forexample,apowerstationbringscoalfromamine,afarmermovespotatoestoawholesaler,oracomputermanufacturerdeliversPCstoawarehouse.Atothertimesitislessclearwhen,forexample,atelevisioncompanydeliversentertainmenttoitsviewers,atelephonecompanyprovidesacommunicationsservice,ora THECONTEXTOFLOGISTICS7researchcompanycreatesnewknowledge.Tangiblegoodsclearlyhavetobemoved,andyoucaneasilyseetheroleoflogistics.Evenorganisationsprovidingthemostintangibleservicesmovesomegoodsaround–perhapspaperworkorconsumables–sotheystillneedlogistics.However,wecantakeabroaderviewandsaythatlogisticsalsomoveslesstangiblethings,suchasinformationandmessages.Thenatelevisioncompanyuseslogisticstomovearounditsproductionfacilities,andalsototransmitprogrammestocustomers.Indifferentcircumstances,logisticsisresponsibleformovingrawmaterials,components,finishedproducts,people,infor-mation,paperwork,messages,knowledge,consumables,energy,moneyandanythingelseneededbyoperations.Tosimplifythings,wedescribealloftheseasmaterials.MATERIALSareallthethingsthatanorganisationmovestocreateitsproducts.Thesematerialscanbebothtangible(suchasrawmaterials)andintangible(suchasinformation).THESUPPLYCHAINDefinitionSofar,wehavefocusedonthemovementofmaterialsthroughasingleorganisation.Inreality,organisationsdonotworkinisolation,buteachoneactsasacustomerwhenitbuysmaterialsfromitsownsuppliers,andthenitactsasasupplierwhenitdeliversmaterialstoitsowncustomers.Awholesaler,forexample,actsasacustomerwhenbuyinggoodsfrommanufac-turers,andthenasasupplierwhensellinggoodstoretailshops.Acomponentmakerbuysrawmaterialsfromitssuppliers,assemblestheseintocomponents,andpassestheresultstoothermanufacturers.Mostproductsmovethroughaseriesoforganisationsastheytravelbetweenoriginalsuppliersandfinalcustomers.Milkmovesthroughafarm,tankercollection,dairy,bottlingplant,distributor,andsupermarketbeforewebuyit.Atoothbrushstartsitsjourneywithacompanyextractingcrudeoil,andthenitpassesthroughpipelines,refineries,chemicalworks,plasticscompanies,manufacturers,importers,wholesalersandretailersbeforefinishinginyourbathroom.Asheetofpapermovesthroughseveralorganisationsbeforeitreachesourdesk(illustratedinFigure1.5).Peopleusedifferentnamesforthesechainsofactivitiesandorganisations.Whentheyemphasisetheoperations,theyrefertotheprocess;whentheyemphasisemarketing,theycallitalogisticschannel;whentheylookatthevalueadded,theycallitavaluechain,2whentheyseehowcustomerdemandsaresatisfied,theycallitademandchain.Hereweareemphasisingthemovementofmaterialsandwillusethemostgeneraltermofsupplychain.ASUPPLYCHAINconsistsoftheseriesofactivitiesandorganisationsthatmaterialsmovethroughontheirjourneyfrominitialsupplierstofinalcustomers.Everyproducthasitsownuniquesupplychain,andthesecanbebothlongandcomplicated.ThesupplychainforCadburystartswithcocoabeansgrowingonfarmsandendswiththedeliveryofbarsofchocolatetohungrycustomers.ThesupplychainforLevijeansstartswithcottongrowinginafieldandendswhenyoubuythejeansinashop.Thesupplychaindescribesthetotaljourneyofmaterialsastheymove‘fromdirttodirt’.3Alongthisjourney, 8LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTGrownbygardenerSeedlingPlantedbyYoungforestertreeMaturetreeFelledbyloggerWoodLogsRawpulpChippedProcessedpaperProcessedLargerollsFinishingofpaperSmallrollsCuttingoffinishedpaperSheetsofpaperPackerTransportWholesalerTransportTransportRetailerFinalPurchasecustomerFigure1.5Outlineofthesupplychainforpapermaterialsmaymovethroughrawmaterialssuppliers,manufacturers,finishingoperations,logisticscentres,warehouses,thirdpartyoperators,transportcompanies,wholesalers,retailers,andawholerangeofotheroperations.Sometimes,thesupplychaingoesbeyondthefinalcustomertoaddrecyclingandre-useofmaterials.StructureofthesupplychainThesimplestviewofasupplychainhasasingleproductmovingthroughaseriesoforganisa-tions,eachofwhichsomehowaddsvaluetotheproduct.Takingoneorganisation’spointofview,activitiesinfrontofit–movingmaterialsinwards–arecalledupstream;thoseaftertheorganisation–movingmaterialsoutwards–arecalleddownstream.Theupstreamactivitiesaredividedintotiersofsuppliers.Asupplierthatsendsmaterialsdirectlytotheoperationsisafirsttiersupplier;onethatsendmaterialstoafirsttiersupplierisasecondtiersupplier;onethatsendsmaterialstoasecondtiersupplierisathirdtiersupplier,andsoonbacktotheoriginalsources.Customersarealsodividedintotiers.Onethatgetsaproductdirectlyfromtheoperationsisafirsttiercustomer;onethatgetsaproductfromafirsttiercustomerisasecondtiercustomer;onethatgetaproductfromasecondtiercustomerisathirdtiercustomer,andsoontofinalcustomers(seeFigure1.6).Inpractice,mostorganisationsgetmaterialsfrommanydifferentsuppliers,andsellprod-uctstomanydifferentcustomers.Thenthesupplychainconvergesasrawmaterialsmovein THECONTEXTOFLOGISTICS9UpstreamactivitiesDownstreamactivitiesInitialThirdSecondFirstFirsttierSecondThirdFinalsuppliertiertiertiercustomertiertiercustomersuppliersuppliersuppliercustomercustomerORGANISATIONFigure1.6Activitiesinasupplychainthroughthetiersofsuppliers,anddivergesasproductsmoveoutthroughtiersofcustomers.Amanufacturermightseesub-assemblyprovidersasfirsttiersuppliers,componentmakersassecondtiersuppliers,materialssuppliersasthirdtiersuppliers,andsoon.Itmightseewhole-salersasfirsttiercustomers,retailersassecondtiercustomers,andendusersasthirdtiercustomers(asillustratedinFigure1.7).ThirdSecondFirstFirstSecondThirdtiertiertiertiertiertiersuppliersuppliersuppliercustomerscustomerscustomersMaterialsComponentSub-assemblyWholesalersRetailersEnduserssuppliersmakersprovidersManufacturerFigure1.7Supplychainaroundamanufacturer 10LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTItisfairlyeasytoimaginetheshapeofamanufacturer’ssupplychain,butmostotherorganisationsusethesamegeneralapproach.Airlines,forexample,movepassengersfrompick-uppoints,throughlocalfeederservicestomajor‘hub’airports,ontoanotherhub,andthenbackoutthroughlocalservicestotheirdestinations;bankscollectallchequesincentralclearinghousesbeforesendingthembacktobranchesandcustomers;bloodtransfusionserv-iceshaveregionalcentresthatactaswholesalersforplasma.Eachproducthasitsownsupplychain,andthereisahugenumberofdifferentconfigura-tions.Someareveryshortandsimple–suchasacookbuyingpotatoesdirectlyfromafarmer.Othersaresurprisinglylongandcomplicated.Aneverydayproductlikeashirthasalongjourneyfromthefarmgrowingcottonthroughtothefinalcustomer.Italsohasseveralchainsmergingasbuttons,polyester,dyesandothermaterialsjointhemainprocess.Inthesameway,whenyoubuyacomputer,manystrandsofthesupplychainmergeasIntelprovidetheprocessor,MatshitatheDVDdrive,Agfathescanner,Hewlett-Packardtheprinter,Microsofttheoperatingsystem,andsoon.Supplychainsdivergetomeetdemandfromdifferenttypesofcustomer.Manufacturersofcarcomponents,forexample,sellsomeproductstocarassemblyplants,sometowholesalersforgaragesdoingrepairs,sometoretailshopsforindividualcustomers,andsomedirectlytocustomersthroughwebsites.Thenthesupplychaindividesintoseparatestrandswiththesameproductfollowingalternativeroutes.Asyoucansee,ourpictureofsupplychainsisgettingmorecomplicated,withvariousmergersanddivisionsalongtheirlength.Therealityisevenmorecomplex,aseachorganisa-tionworkswithmany–oftenthousands–ofdifferentproducts,eachofwhichhasitsownsupplychain.TheFrenchcompanyCarrefourisEurope’slargestretailer,andthiscomesattheendoftensofthousandsofsupplychains;Corusmakessteelthatisusedincountlessfinalproducts,DELmakescomputersthatareusedforhugeamountsofinformationtransfer.Somepeoplearguethattheterm‘supplychain’givestoosimpleaview,andtheyprefertotalkaboutasupplynetworkorsupplyweb.However,wewillsticktotheusualname,andrecognisethatitreferstoacomplexpatternofmovements.YoucangetsomeideaofthesizeandcomplexityofthesefromtheLogisticsinPracticeexampleofWal-Mart.LOGISTICSINPRACTICEWal-MartIn1962SamWaltonopenedadiscountintheUSA,andstarteditsinternationalstoreinRogers,Arizona.Heattractedcus-expansion.ItmovedintoMexico,Puertotomerswithacombinationoflowprices,aRicoandCanada,andthenintoSouthwiderangeofgoodsandfriendlyservice.America,AsiaandEurope.MostofitslaterSamcalledhisstoreWal-Mart,andwassoexpansioncamethroughbuyinglocalcom-successfulthathequicklyopenedmorepanies,suchasASDAintheUK.branches.In1983heopenedaSAM’SClubWal-Martalwayskeptthesameempha-warehouseformembers,andin1988thesisonlowprices,awiderangeofproductsfirst‘Supercenter’sellinggroceries.By1991andfriendlyservice.ThesceneissetattheWal-Marthadbecometheleadingretailerfrontdoorofeachstore,whereastaff THECONTEXTOFLOGISTICS11LOGISTICSINPRACTICEcontinuedmembergreetscustomersandtellsthemlargepartofWal-Mart’soperatingexpensesaboutspecialoffersandpromotions.Bydependontheefficiencyoftheirlogistics.2000Wal-Martwastheworld’slargestWhenmarginsaretight,asmallchangeinretailerwith4000stores,serving100mil-logisticsperformanceandcostshasacon-lioncustomersaweek,employing1.2mil-siderableeffectonprofit.ThisiswhyWal-lionstaff–or‘associates’–anannualMartusethe‘industry’smostefficientandturnoverofUS$175billionandprofitofsophisticateddistributionsystem’.TheirUS$6billionayear.successcanbejudgedbycontinuingYoucanimaginethesizeofthelogisticsexpansion,withannualsalesup20perinWal-Mart.OnmainlandUSAtheyhavecentinthefirstquarterof2000,andlike-85,000supplierssending$1.5billiondol-for-likesalesup5percent.lars’worthofmaterialsaweekto62mainSources:Wal-Martreportsandwebsiteatdistributioncentres,andonto1800Wal-www.walmartstores.commartstores,800Supercenters,460SAM’sclubsand13NeighbourhoodMarkets.ABenefitsofsupplychainsSupplychainsaresocomplicatedthatyoumightwonderifthereissomewayofavoidingthem.Sometimesthisispossible,whenwemoveproductsdirectlyfrominitialproducerstofinalcustomers–when,forexample,farmshopssellvegetablesdirectlytoconsumers,orauthorspublishtheirworksontheInternet.Ingeneral,though,thereareverygoodreasonsforhavingalongersupplychain.Supposethepopulationofatowndecidestobuyvegetablesfromafarmshop.Thiswouldhaveaminimalsupplychain,butthewholepopulationwouldtravelsepa-ratelytothefarm.Itwouldmakemoresensetohaveatransportcompanycollectthevegetablesanddeliverthemtoacentrallocationinthetown–likeasupermarket.Ifthetransportcompanydeliverstoonetown,itcaneasilydelivertoothernearbytowns,perhapsstoppingatadepottoorganiselocaldeliveries.Asthereisadepot,vegetablescanbeputintostoragewhilethesupplyisplentiful,andremovedwhenthereareshortages.Ifthevegetablesneedcleaningorpreparation,thetransportcompanycandiverttoaprocessingplant.Continuinginthisway,youcanseewhyalongsupplychaindevelops,andwhatbenefitsitbrings.Supplychainsexisttoovercomethegapscreatedwhensuppliersaresomedistanceawayfromcustomers.Theyallowforoperationsthatarebestdone–orcanonlybedone–atloca-tionsthataredistantfromcustomersorsourcesofmaterials.Forexample,coffeebeansgrowinSouthAmerica,butthemaincustomersareinEuropeandNorthAmerica.Thebestlocationsforpowerstationsareawayfromboththeirmaincustomersincitiesandtheirfuelsupplies.Aswellasmovingmaterialsbetweengeographicallyseparateoperations,supplychainsallowformismatchesbetweensupplyanddemand.Thedemandforsugarismoreorlessconstantthroughouttheyear,butthesupplyvarieswiththeharvestingofsugarcaneandbeet.Whenthereisexcesssupply,stocksarebuilt-upinthesupplychain,andtheseareusedaftertheharvestsfinish.Supplychainscanalsomakemovementsalotsimpler.Imaginefour 12LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT(a)Withoutawholesaler(b)WithawholesalerFactoriesFactories4routesinwards32routesWholesaler8routesoutwardCustomersCustomersFigure1.8Usingintermediariestosimplifythesupplychainfactoriesdirectlysupplyingproductstoeightcustomers(asshowninFigure1.8).Logisticshastoorganise32differentdeliveryroutesbut,ifthefactoriesuseacentralwholesaler,thenumberofroutesiscutto12.Thefollowinglistsuggestssomeotherbenefitsofwell-designedsupplychains(whereweusetheterms‘wholesaler’and‘retailer’asaconvenientlabelforintermediaries):●Producerslocateoperationsinthebestlocations,regardlessofthelocationsoftheircustomers.●Byconcentratingoperationsinlargefacilities,producerscangeteconomiesofscale.●Producersdonotkeeplargestocksoffinishedgoods,astheseareheldfurtherdownthesupplychainnearertocustomers.●Wholesalersplacelargeorders,andproducerspassonlowerunitcostsinpricediscounts.●Wholesalerskeepstocksfrommanysuppliers,givingretailersachoiceofgoods.●Wholesalersareneartoretailersandhaveshortleadtimes.●Retailerscarrylessstockaswholesalersprovidereliabledeliveries.●Retailerscanhavesmalloperations,givingaresponsiveserviceneartocustomers.●Transportissimpler,withfewer,largerdeliveriesreducingcosts.●Organisationscandevelopexpertiseinspecifictypesofoperation.ACTIVITIESOFLOGISTICSSeparateactivitiesLogisticsisresponsibleforthemovementandstorageofmaterialsastheymovethroughthesupplychain.Butwhatactivitiesdoesthisinclude?Ifyoufollowsomematerialsmovingthroughanorganisation,youcanseethatthefollowingactivitiesarenormallyincludedinlogistics. THECONTEXTOFLOGISTICS13●Procurementorpurchasing.Theflowofmaterialsthroughanorganisationisusuallyiniti-atedwhenprocurementsendsapurchaseordertoasupplier.Thismeansthatprocure-mentfindssuitablesuppliers,negotiatestermsandconditions,organisesdelivery,arrangesinsuranceandpayment,anddoeseverythingneededtogetmaterialsintotheorganisation.Inthepast,thishasbeenseenasalargelyclericaljobcentredonorderprocessing.Nowitisrecognisedasanimportantlinkwithupstreamactivities,andisbeinggivenmoreattention.WedescribeprocurementinmoredetailinChapter8.●Inwardtransportortrafficactuallymovesmaterialsfromsupplierstotheorganisation’sreceivingarea.Thishastochoosethetypeoftransport(road,rail,air,andsoon),findthebesttransportoperator,designaroute,makesurethatallsafetyandlegalrequirementsaremet,getdeliveriesontimeandatreasonablecost,andsoon.WedescribetransportinmoredetailinChapter11.●Receivingmakessurethatmaterialsdeliveredcorrespondtotheorder,acknowledgesreceipt,unloadsdeliveryvehicles,inspectsmaterialsfordamage,andsortsthem.●Warehousingorstoresmovesmaterialsintostorage,andtakescareofthemuntiltheyareneeded.Manymaterialsneedspecialcare,suchasfrozenfood,drugs,alcoholinbond,chemicalsthatemitfumes,animals,anddangerousgoods.Aswellasmakingsurethatmaterialscanbeavailablequicklywhenneeded,warehousingalsomakessurethattheyhavetherightconditions,treatmentandpackagingtokeepthemingoodcondition.WedescribewarehousinginmoredetailinChapter10.●Stockcontrolsetsthepoliciesforinventory.Itconsidersthematerialstostore,overallinvestment,customerservice,stocklevels,ordersizes,ordertimingandsoon.WedescribestockmanagementinmoredetailinChapter9.●Orderpickingfindsandremovesmaterialsfromstores.Typicallymaterialsforacustomerorderarelocated,identified,checked,removedfromracks,consolidatedintoasingleload,wrappedandmovedtoadepartureareaforloadingontodeliveryvehicles.●Materialshandlingmovesmaterialsthroughtheoperationswithinanorganisation.Itmovesmaterialsfromoneoperationtothenext,andalsomovesmaterialspickedfromstorestothepointwheretheyareneeded.Theaimofmaterialshandlingistogiveeffi-cientmovements,withshortjourneys,usingappropriateequipment,withlittledamage,andusingspecialpackagingandhandlingwhereneeded.WedescribematerialshandlinginmoredetailinChapter10.●Outwardtransporttakesmaterialsfromthedepartureareaanddeliversthemtocustomers(withconcernsthataresimilartoinwardtransport).●Physicaldistributionmanagementisageneraltermfortheactivitiesthatdeliverfinishedgoodstocustomers,includingoutwardtransport.Itisoftenalignedwithmarketingandformsanimportantlinkwithdownstreamactivities.●Recycling,returnsandwastedisposal.Evenwhenproductshavebeendeliveredtocustomers,theworkoflogisticsmaynotbefinished.Theremight,forexample,beproblemswithdeliveredmaterials–perhapstheywerefaulty,ortoomanyweredelivered,ortheywerethewrongtype–andtheyhavetobecollectedandbroughtback.Sometimesthereare 14LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTassociatedmaterialssuchaspallets,deliveryboxes,cablereelsandcontainers(thestandard20footlongmetalboxesthatareusedtomovegoods)whicharereturnedtosuppliersforreuse.Somematerialsarenotreused,butarebroughtbackforrecycling,suchasmetals,glass,paper,plasticsandoils.Finallytherearematerialsthatcannotbeusedagain,butarebroughtbackforsafedisposal,suchasdangerouschemicals.Activitiesthatreturnmaterialsbacktoanorganisationarecalledreverselogisticsorreversedistribution.●Location.Someofthelogisticsactivitiescanbedoneindifferentlocations.Stocksoffinishedgoods,forexample,canbeheldattheendofproduction,movedtonearbyware-houses,putintostoresnearertocustomers,passedontobemanagedbyotherorganisa-tions,orarangeofalternatives.Logisticshastofindthebestlocationsfortheseactivities–oratleastplayasignificantroleinthedecisions.Italsoconsidersrelatedquestionsaboutthesizeandnumberoffacilities.Theseareimportantdecisionsthataffecttheoveralldesignofthesupplychain.WediscusslocationdecisionsinmoredetailinChapter5.●Communication.Alongsidethephysicalflowofmaterialsistheassociatedflowofinforma-tion.Thislinksallpartsofthesupplychain,passinginformationaboutproducts,customerdemand,materialstobemoved,timing,stocklevels,availability,problems,costs,servicelevels,andsoon.Co-ordinatingtheflowofinformationcanbeverydiffi-cult,andlogisticsmanagersoftendescribethemselvesasprocessinginformationratherthanmovinggoods.Christophersupportsthisviewbysayingthat,‘Supplychaincompet-itivenessisbaseduponthevalue-addedexchangeofinformation’.4TheCouncilofLogis-ticsManagementalsohighlightsthecombinationofmaterialsandinformationflowintheirdefinition:Logisticsistheprocessofplanning,implementingandcontrollingtheefficient,cost-effectiveflowandstorageofrawmaterials,in-processinventory,finishedgoodsandrelatedinformationfrompointoforigintopointofconsumptionforthepurposeofconformingtocustomerrequirements.5Dependingonthecircumstances,manyotheractivitiescanbeincludedinlogistics.Some-timesanorganisationmightincludesalesforecasting,productionscheduling,customerservicemanagement,overseasliaison,thirdpartyoperations,andsoon.Theimportantpointisnottodrawarbitraryboundariesbetweenfunctions,buttorecognisethattheymustallworktogethertogetanefficientflowofmaterials.IntheexampleofAugulla,logisticsmaynotbeorganisedparticularlywell;youmightconsidertheproblemsthatthisbringsandhowyoumightstartimprovingthings.LOGISTICSIINPRACTICEAugullaLimitedInitsBombayfactory,AugullaLimitedstraightforward,butthecompany’schair-makesarangeofbasicclothessuchasplainman,PradhirAugulla,isdisappointedattheT-shirtsandunderwear.Theprocessisfairlytimeittakesaproducttoreachthefinalcus- THECONTEXTOFLOGISTICS15LOGISTICSINPRACTICEcontinuedtomer.Heisconsideringbuyingothercom-abouttheaveragetimestakenbydifferentpaniesinthesupplychaintoseeifhecanactivities,startingwiththepurchaseoffibresimproveoverallperformance.Tohelpwithontheopencommoditymarketandendingthisdecisionhehascollectedinformationwithdeliverytothefinalcustomer.Startofsupplychainwithfibreavailableontheopencommoditymarket:■Storefibreincommoditywarehouses(140days)■Buyfibreandmovetospinners(11days)■Atspinners:storerawfibre(21days)spintoformyarn(13days)storeyarnasfinishedgoods(11days)■Buyyarnandmovetoknitters(8days)■Atknitters:storeyarn(6days)knittoformfabric(9days)storeworkinprogressasgreystock(12days)dyestandardcolourandfinishfabric(7days)storefabricsasfinishedgoods(8days)■BuyfabricandmovetoAugullaLimited(7days)■AtAugullaLimited:storefabric(12days)cuttoformcomponents(5days)storebufferofcomponents(6days)sewcomponentstoformgarments(14days)storegarmentsasfinishedgoods(18days)■Delivertoregionaldistributioncentreandstore(21days)■Delivertolocalwholesalerandstore(17days)■Delivertoretailshopandstore(19days)Endofsupplychainwhencustomerbuysgarmentfromshop.Youcanseethatittakesanaverageof365daysformaterialstomovethroughthesup-plychain.Themainoperationsofspinning,knitting,dyeing,cuttingandsewingonlytake48days,andvariousaspectsoflogisticsfilltherest.Sources:PradhirAugullaandcompanyrecordsOrganisinglogisticsItisprobablyeasiesttoimaginetheactivitiesthatmakeuplogisticsinamanufacturer,withforklifttrucksunloadingpalletsfromlorriesandmovingthemaroundwarehouses.Butthe (a)Conventionalfunctionalstructure(b)MatrixtypeofstructureManagingManagingDirectorDirectorHumanFinanceLogisticsSalesResourceProductProductProductProductDirectorDirectorDirectorOthersABCDOthersDirectorCo-ordinationTransportWarehousingPurchasingofallLogisticsLogisticsLogisticsLogisticsABCDlogisticsFigure1.9Examplesoforganisationalstructure THECONTEXTOFLOGISTICS17sameprinciplesapplyinanyotherorganisation.Whenarockbandgoesontourtheycarryhugeamountsofequipment.Procurementbuyseverythingthatisneededonthetour,trans-portpacksitandmovesittothenextdestination,receivingmakessurethateverythingarrivessafely,warehousingkeepsthingssafeuntiltheyareneeded,materialshandlingmovesthingsbetweentrucksandthestage,locationdecideswheretoperform.Thesametypesofdecisionaremadewitheventhemostintangibleservice.Insurancecompanies,forexample,decidewhatkindofbranchnetworktohave,wheretolocateoffices,whotobuytelephoneandotherservicesfrom,howtodeliverinformationtocustomers,andsoon.Youcanseelogisticsineveryorganisation,anditobviouslycomesinahugenumberofdifferentforms.Theactivitiescanbearrangedinmanywayswithinanorganisation,andthereiscertainlynosingle‘best’arrangement.Asmallorganisationmighthaveonepersonlookingaftereverything.Amediumsizedorganisationmighthaveonedepartmentwithdifferentsectionsforpurchasing,transport,stockcontrol,distribution,andsoon.Alargeorganisationmighthavealogisticsdivisionemployingthousandsofpeopleandrunninghugetransportfleets.Sometimesalltheactivitiesareorganisedinasingledepartmentreportingtoalogisticsdirector;sometimestheyarepartofalargerdepartmentsuchasmarketingorproduction;sometimestheyarespreadoutinsmallpocketsthroughouttheorganisation;sometimestheyarecontractedouttothird-partysuppliers.Thecurrenttrendistowardsanorganisationwherelogisticsisasingleintegratedfunction,withalogisticsdirector–orequivalent–atitshead.Thisfollowsatraditionalfunctionalstruc-ture,withthelogisticsdirectorworkingwithdirectorsinproduction,finance,sales,humanresources,andsoon(asshowninFigure1.9a).Therearemanyvariationsonthis,withacommononefoundincompaniesorganisedaroundproductsorprojects.Thensomelogisticsmightexistineachdivision,withamatrixstructureallowingco-ordinationoftheoverallfunction(showninFigure1.9b).AIMSOFLOGISTICSLogisticsisresponsiblefortheflowofmaterialsthroughasupplychain.Thisfunctionisalsocalledsupplychainmanagement.Somepeoplearguethatlogisticsissomewhatnarrowerandconcentratesonthemovementwithinasingleorganisation,whilesupplychainmanage-menttakesabroaderviewofmovementthroughrelatedorganisations.Thisis,however,largelyanargumentoversemanticsratherthanrealdifferencesinpractice.Herewewillsticktotheconventionthatthetwotermsrefertoexactlythesamefunction.ThisviewissupportedbytheInstituteofLogisticsandTransport–themainprofessionalbodywithintheUK–whogivethefollowingdefinitions.6LOGISTICSisthetime-relatedpositioningofresources,orthestrategicmanage-mentofthetotalsupply-chainTheSUPPLY-CHAINisasequenceofeventsintendedtosatisfyacustomer.Somepeoplealsotalkaboutlogisticsmanagement,businesslogistics,distributionmanage-ment,materialsmanagement,merchandising,oraseriesofotherterms.Sometimesyouhavetobecarefulasthesetermscanrefertospecificpartsofthesupplychainorslightlydifferentactivities.Whensomeonetalksabout,say,‘distributionmanagement’youshouldbeclearaboutwhethertheymeantransport,physicaldistribution,thewholeoflogistics,orsomeotherfunction. 18LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWithourbroadview,logisticsmanagershavetwomainaims.Thefirstistomovematerialsinto,through,andoutoftheirownorganisationasefficientlyaspossible.Thesecondaimistocontributetoanefficientflowthroughthewholesupplychain.Traditionally,managersconcentrateonthefirstofthese,focusingonthosepartsofthesupplychainthattheydirectlycontrol.Hopefully,ifeachorganisationlooksafteritsownlogisticsproperly,materialswillmoveefficientlythroughthewholechain,thusachievingthesecondaim.Tosomeextentthisistrue.Itisnot,however,inevitableandorganisationsreallyneedamorepositiveapproachtoco-operation.Wewilldiscussthisinthenextchapter.Here,though,welookatthemoreimmediateaimsoflogisticswithinanindividualorganisation.Wehavesaidthatmanagersaimforanefficientmovementofmaterials–butwhatexactlydowemeanby‘efficient’?Thereareseveralanswerstothis,includingfastdeliveries,lowcosts,littlewastage,quickresponse,highproductivity,lowstocks,nodamage,fewmistakes,highstaffmorale,andsoon.Althoughtheseareallworthygoals,theyarereallyindicatorsratherthanrealaims.Tofindtherealaimoflogistics,wemustrelateittothewiderobjectivesoftheorganisation.Ultimately,thesuccessofeveryorganisationdependsoncustomersatisfaction.Ifitdoesnotsatisfycustomers,itisunlikelytosurviveinthelongterm,letalonemakeaprofit,havehighreturnonassets,addshareholdervalue,orachieveanyothermeasureofsuccess.Soorganisationsmustdeliverproductsthatsatisfycustomers.Unfortunately,customersjudgeproductsbyawholeseriesoffactors.WhenyoubuyaDVD,forexample,youjudgeitscontents,appearance,howeasyitistobuy,howlongyouwait,howexpensiveitis,whethertherightDVDwasdelivered,whetheritwasdamaged,howcourteouslyyouweretreatedbysalesstaff,andsoon.Someofthesefactorsclearlydependonlogistics–theavailabilityoftheDVDdependsonstocks;thedeliverytimedependsontransport;damageispreventedbygoodmaterialhandling;thepriceisaffectedbylogisticscosts.Sowecanphrasetheoverridingaimoflogisticsintermsofcustomerservice.Ithastoorganisethemovementofmaterialsinthebestwaytoachievehighcustomersatisfaction.Anyorganisationcangiveoutstandingcustomerserviceifitispreparedtoallocateenoughresources.Theproblem,ofcourse,isthatmoreresourcescomewithhighercosts.Thereisalimittotheamountthatcustomerswillpayforaproductand,therefore,ontheservicethatcanbegiven.Thenarealisticaimforlogisticsbalancestheservicegiventocustomerswiththecostofachievingit.TheoverallAIMOFLOGISTICSistoachievehighcustomersatisfaction.Itmustprovideahighqualityservicewithlow–oracceptable–costs.Wecanphrasethisbalanceintermsofperceivedcustomervalue.Logisticsaddsvaluebymakingproductsavailableintherightplaceandattherighttime.Ifaproductisavailableattheplaceitisneeded,logisticsissaidtohaveaddedplaceutility;ifitisdeliveredattherighttime,logisticshasaddedtimeutility.Thenwecanphrasetheaimoflogisticsintermsofgettingthehighestcustomerutilityorperceivedvalue.Inessence,wearetryingtomaximisethedifferencebetweenperceivedvalueandactualcosts.Peopleoftensummarisetheaimsoflogisticsasgetting,‘therightmaterials,totherightplace,attherighttime,fromtherightsource,withtherightquality,attherightprice’.Thisisbroadlycorrect,butitdependsonhowwedefine‘right’.Indifferentcircumstances,logisticsisjudgedbycompletelydifferentmeasuresofperformance.Whenyoupostletters,yousometimeswantthemdeliveredquickly,sometimesascheaplyaspossible,sometimeswithhighsecurity,sometimesataspecifiedtime,andsoon.Managershavetodesignlogisticsthatareflexible THECONTEXTOFLOGISTICS19enoughtosatisfyavarietyofneeds.Therearetwoaspectstothis.Thefirstisconcernedwithplanning,whenmanagerstakeastrategicviewanddesignthebestpossiblesupplychainfortheircircumstances.WelookatthesestrategicdecisionsinChapters3and4.Thesecondconcernisaboutexecution,whenmaterialsmovethroughthischainasefficientlyaspossible.Harringtonsummarisesthisdoublerolebysayingthat,‘logisticsisboththegluethatholdsthematerials/productpipelinetogetherandthegreasethatspeedsproductflowalongit’.7IMPORTANCEOFLOGISTICSEssentialandexpensiveLogisticsisessentialforeveryorganisation.Christopher8saysthat,‘Logisticshasalwaysbeenacentralandessentialfeatureofalleconomicactivity’.ShapiroandHeskett9agree,sayingthat,‘Therearefewaspectsofhumanactivitythatdonotultimatelydependontheflowofgoodsfrompointoforigintopointofconsumption’.Withoutlogistics,nomaterialsmove,nooper-ationscanbedone,noproductsaredelivered,andnocustomersareserved.Notonlyislogisticsessential,butitisalsoexpensive.Organisationsmayreducetheirover-headsasmuchaspossible,buttheyareoftenleftwithsurprisinglyhighlogisticscosts.Unfor-tunately,itisdifficulttoputafiguretothese,andthereisagooddealofuncertaintyinthearea.Normalaccountingconventionsdonotseparateexpenditureonlogisticsfromotheroperatingcosts,andthereissomedisagreementabouttheactivitiestoinclude.Asaresult,veryfeworganisationscanputaprecisefigureontheirlogisticsexpenditure,andmanyhavealmostnoideaofthecosts.Thecostoflogisticsvarieswidelybetweendifferentindustries.Buildingmaterials,suchassandandgravel,haveveryhighlogisticscostscomparedwith,say,jewellery,pharmaceuticalsandcosmetics.However,oneruleofthumbsuggeststhatlogisticscostsare15–20percentofturnover.TheUSAhasaGDPof$10trillion,soitmightspend$1–2trilliondollarsayearonlogistics,withhalfofthisspentontransport.10Youhavetointerpretsuchfigurescarefullyasotherstudiesgivedifferentviews.TheUKgovernment,forexample,saysthat12percentoftheGDPcomesfromwholesaleandretailtradesand6percentcomesfromtransportandstorage.11Thesefiguressuggestthatoveralllogisticscostsareconsiderablyhigher–perhapssupportinganearlierestimatebyChilderleythatlogisticsaccountedfor32.5percentoftheUKGDP.12LOGISTICSINPRACTICEKonigshavenSuppliersKonigshavenSuppliersisafoodwholesaler,proving.Togetaclearerpicture,thecom-deliveringtosupermarketsinsouthernDen-panyranasurveyinonemainwarehouse.Itmark.Itsstandardaccountingsystemsdousedsomeestimatesandsimplifications,butnotidentifyseparatelogisticscosts,andthisfeelsthatthefollowingfiguresgiveareason-makesitdifficulttoidentifyareaswithpartic-ableview.Thesefiguresshowthecostsularlyhighcosts,orthosethatneedim-incurredforeachg100,000ofnetsales. 20LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinueda.Costofsales:g58,000h.Deliverytocustomers:g5000ThecostofpurchasingproductsCostsoftakinggoodsoutofthesoldontocustomers,includingwarehouseanddeliveringtoadministrationofthepurchasingcustomersofficei.Debtfinancing:g2500b.Transportinwards:g3000CostsoffinancingplantandCostofbringinggoodsfromequipmentsuppliersanddeliveringtothewarehousej.Informationprocessing:g2000Includingallaspectsoforderc.Othercostsofdeliverytoprocessingwarehouse:g4000Ageneralcategorycoveringanyk.Returnsandrecycling:g500othercostsofrelationswithCostofrecoveringpalletsandanysuppliersothermaterialsreturnedtothewarehoused.Warehousingandhandling:g7000Costsofreceivingmaterials,Thesefiguresareopentosomeinterpret-checking,sorting,movingtotheation,buttheyshowthattransportaccountswarehouseandstoringfor12percentofsalesandwarehousinge.Stockfinancing:g1000for8percent.SeveralothercostsmightThecostoffinancingstock,beincludedinlogistics,includingsomepur-includingdebtchargeschasing,sales,informationprocessingandrecycling.f.Salesforce:g12,000SalariesandcostsofthesalesofficeSources:companyreportsandpublicityg.Specialpromotions:g3000Includingpresentations,visitsandsamplesDespitethedifferencesinthesefigures,everyoneagreesthatlogisticscanbeveryexpen-sive.Whetheritisgettingmoreexpensiveisopentodebate.Somepeoplesaythatfuel,land,safety,environmentalprotectionandemployeecostsareallrisingandmakinglogisticsmoreexpensive.Theyarguethatthisisalong-termtrendthatwillinevitablycontinue.Anopposingviewsaysthatimprovementsinlogisticsaremorethancompensatingforpricerises,andtheoverallcostisfalling.Byimprovingmethodsandreplacingoutdatedpractices,logisticscostscontinuetofallasaproportionofproductvalue.Thetruepicturedependsoncircumstanceswithineachorganisation.EffectsonfinancialperformanceAsanexpensivefunction,logisticshasanimpactonanorganisation’soverallfinancialperformance.Wecangivemanyillustrationsofthis,butwillstartwiththeeffectsonthereturnonassets(ROA). THECONTEXTOFLOGISTICS21Thereturnonassetsisdefinedasthepre-taxprofitearnedbyanorganisationdividedbythevalueoftheassetsemployed.profitsearnedReturnonassets=assetsemployedThisgivesameasureofhowwellavailableresourcesareusedand,ingeneral,thehigherthevalue,thebettertheorganisation’sperformance.Assetsareusuallydescribedascurrent(cash,accountsreceivable,stocks,andsoon)orfixed(property,plant,equipment,andsoon).Improvingtheflowofmaterialsreducestheamountofstock.Thisclearlylowerscurrentassets,butwecanarguethatitalsoreducesfixedassetsandincreasesprofit.ThisargumentissummarisedinFigure1.10.●Currentassets.Moreefficientlogisticsreducesthecurrentassetsthroughlowerstocklevels.Reducingtheinvestmentinstockcanalsofreeupcashforothermoreproductivepurposesandreducetheneedforborrowing.●Fixedassets.Fixedassetsincludeproperty,plantandequipment.Logisticsisaheavyuseroftheseresources,andthewarehouses,transportfleets,materialshandlingequipmentandotherfacilitiesneededtomovematerialsthroughthesupplychainformamajorpartoffixedassets.●Sales.Bymakingamoreattractiveproduct,ormakingitmorereadilyavailable,logisticscanincreasesalesandgivehighermarketshare.●Profitmargin.Moreefficientlogisticsgivesloweroperatingcosts,andthisinturnleadstohigherprofitmargins.CurrentStocksassetsAssetsProperty,Fixedequipment,assetsplant,etc.ReturnonCustomerassetsSalessatisfactionOperatingProfitProfitcostsmarginProductPricefeaturesFigure1.10InfluenceoflogisticsonROA 22LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●Price.Logisticscanimprovetheperceivedvalueofproducts–perhapsmakingthemmoreeasilyavailable,givingfasterdeliveryorshorteningleadtimes.Moreattractiveproductscangetpremiumprices.Asyoucansee,thefirsttwopointsgivelowerassets,whilethelastthreeincreaseprofits.AlloftheseeffectsraiseROA,andconsequentlyaffectothermeasuresofperformance,suchasshareprice,returnoninvestment,borrowing,andsoon.WORKEDEXAMPLEJ.Mitchellcurrentlyhassalesof£10millionayear,withastocklevelof25%ofsales.Annualholdingcostforthestockis20%ofvalue.Operatingcosts(excludingthecostofstocks)are£7.5millionayearandotherassetsarevaluedat£20million.Whatisthecur-rentreturnonassets?Howdoesthischangeifstocklevelsarereducedto20%ofsales?SolutionTakingcostsoverayear,thecurrentpositionis:Costofstock=amountofstock×holdingcost=10million×0.25×0.2=£0.5millionayearTotalcosts=operatingcost+costofstock=7.5million+0.5million=£8millionayearProfit=sales−totalcosts=10million−8million=£2millionayearTotalassets=otherassets+stock=20million+(10million×0.25)=£22.5millionReturnonassets=profit/totalassets=2million/22.5million=0.089or8.9%Thenewpositionwithstockreducedto20%ofsaleshas:Costofstocks=10million×0.2×0.2=£0.4millionyearTotalcosts=7.5million+0.4million=£7.9millionayearProfit=10million−7.9million=£2.1millionayearTotalassets=£20million+(£10million×0.20)=£22millionReturnonassets=2.1million/22million=0.095or9.5%Reducingstocksgivesloweroperatingcosts,higherprofitandasignificantincreaseinROA.SummarisingtheimportanceLogisticshastheawkwardcombinationofbeingbothessentialandexpensive.Itaffectscustomersatisfaction,theperceivedvalueofproducts,operatingcosts,profitandjustabouteveryothermeasureofperformance.Novichsaysthat,‘Poorlogisticsarethecauseofroughly THECONTEXTOFLOGISTICS2350percentofallcustomercomplaints’.13Noorganisationcanexpecttoprosperifitignoreslogisticsandorganisinglogisticsproperlycangiveahugecompetitiveadvantage.Wecan,then,summarisetheimportanceoflogisticsbysayingthatit:●isessential,asallorganisations,eventhoseofferingintangibleservices,relyonthemove-mentofmaterials●isexpensive,withcostsoftenformingasurprisinglyhighproportionofturnover●directlyaffectsprofitsandothermeasuresoforganisationalperformance●hasstrategicimportancewithdecisionsaffectingperformanceoverthelongterm●formslinkswithsuppliers,developingmutuallybeneficial,long-termtradingrelation-ships●formslinkswithcustomers,contributingtocustomersatisfactionandaddedvalue●hasamajoraffectonleadtime,reliabilityandothermeasuresofcustomerservice●determinesthebestsizeandlocationoffacilities●givespublicexposurewithvisiblelocations,advertisingontrucks,‘corporatecitizenship’,andsoon●canberisky,becauseofsafety,healthandenvironmentalconcerns●prohibitssomeoperations,suchasmovingexcessiveloadsordangerousgoods●canencouragegrowthofotherorganisations–suchassuppliersandintermediariesofferingspecialisedservices.❑Everyorganisationcreatesproductstosatisfycustomerdemand.Theoperationsthatcreatetheseproductsneedaneffectiveandefficientflowofmaterials.Inthissense,‘materials’areallthegoodsandservicesneededtocreateproducts.❑Logisticsisthefunctionthatisresponsiblefortheflowofmaterialsinto,throughandoutofanorganisation.❑Materialsmovethroughaseriesofrelatedactivitiesandorganisationsbetweeninitialsuppliersandfinalcustomers.Theseformasupplychain.Eachproducthasitsownsupplychain.■■■■■■■■■❑Therearemanypossiblestructuresforsupplychains,butthesimplestviewhasmaterialsconvergingonanorganisationthroughtiersofsuppliers,andproductsdivergingthroughtiersofcustomers.❑Althoughitisasinglefunction,logisticsconsistsofaseriesofrelatedactivities.Theserangefromprocurementatthebeginningofoperations,throughtophysicaldistributionattheend.❑Anoverallaimforlogisticsistoachievehighcustomersatisfactionorperceivedproductvalue.Thismustbeachievedwithacceptablecosts.❑Everyorganisationdependsonthemovementofmaterials,andthewaythisisdoneaffectscosts,profits,relationswithsuppliersandcustomers,customerservice,andvirtuallyeveryothermeasureofperformance.CHAPTERREVIEW 24LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTIn1996asurveybyDeloitte&ToucheinCanada14foundthat98percentofrespon-dentsdescribedlogisticsaseither‘critical’or‘veryimportant’totheircompany.Thesamesurveyemphasisedtherateofchangeinthearea,withover90percentoforganisationseithercurrentlyimprovingtheirsupplychainorplanningimprovementswithinthenexttwoyears.CASESTUDYAceDairiesAceDairiesgivesahomedeliveryserviceformilk,dairyproductsandarangeofrelatedgoods.RogerSmitheramhasrunthedairyforthepasttwelveyears.Hisproductisacombinationofgoods(theitemshedelivers)andservices(thedeliveryandassociatedjobshedoesforcustomers).AttheheartofoperationsisaninformationsystemwhichcontainsfulldetailsofallRoger’s500customers,includingtheirregularorders,specialorders,wheretodeliver,howtheypay,andsoon.Everydaythesystemcalculatesthelikelysalesofallproductsintwodaystime.Rogeraddssomemarginofsafety,allowsforlikelyvariationsandpasseshisordertoUnigateDairyinTotnesinDevon(about150kmaway).ThisUnigatedepotactsasawholesalerformilkmeninWalesandthesouthwestofEngland.ThefollowingeveningitdeliverstoaholdingdepotinCamborne,andthentakesRoger’sgoods10kmtoacoldstoreinHayle.At5.30thefollowingmorningRogercollectstheorderfromhiscoldstoreandstartsdeliveringtocustomers.Thisnormallytakesuntil1.30intheafternoon,butonFridayshespendsmoretimecollectingmoneyandoftenfinishesafter5.00pm.ThereareseveralspecificproblemsfacingAceDairies.Thereis,forexample,somevariationindailydemand,soRogerhastocarrysparestock.Hecannotcarrytoomuch,asdairyproductshaveashortlifeandanythingnotdeliveredquicklyisthrownaway.Rogeraimsatkeepingthiswastedownto2percentofsales.Therearealsoproblemsmaintainingaserviceduringholidays,orwhenUnigatehasdiffi-cultieswiththeirdeliveries.PerhapsRoger’smainconcernismaintaininghissalesoverthelongterm.Demandfordoorstepdeliveriesisdeclining,aspeoplebuymoremilkatsuper-markets.ThenumberofmilkmeninHaylehasdeclinedfromtenin1987tothreein2002.MostofRoger’scustomershavebeenwithhimformanyyears,buthegeneratesnewcustombycanvassing,deliveringleaflets,specialoffers,carryingarangeofotherproducts,andsoon.Source:RogerSmitheramandinternalreports THECONTEXTOFLOGISTICS25CASESTUDYQuestions●Describethesupplychainformilk.●WheredoesAceDairiesfitintothis?WhatspecificactivitiesformthelogisticsinAceDairies?●WhatarethemainproblemsthatAceDairieshaswithlogistics?PROJECTWebsitesYoucanfindahugeamountofinformationaboutlogisticsondifferentwebsites.Manyoftheseadver-tiseservices,butothersareaimedatgivinginformationandofferingadvice.SearchtheWebandcollectalistofusefulsites.Thefollowinglistgivesausefulstartingpoint.www.iolt.org.uk–InstituteofLogisticsandTransportintheUKwww.lmi.org–LogisticsManagementInstitutewww.clm.org–CouncilforLogisticsManagementintheUSAwww.supply-chain.org–SupplyChainCouncilwww.cips.org–CharteredInstituteofPurchasingandSupplywww.infochain.org–CanadianAssociationofLogisticsManagementDISCUSSIONQUESTIONS1.Isittruethateveryorganisationhastomovematerialstosupportitsoperations?WhatdoservicecompanieslikeInternetserviceprovidersmove?Givesomeexamplesfromdif-ferenttypesoforganisationtosupportyourviews.2.Howimportantislogisticstothenationaleconomy?Whatproportionofemploymentandgrossdomesticproductisduetologistics?Howhasthisproportionchangedovertime?3.Thesupplychainisaconvenientnotion,butorganisationsareonlyreallyinterestedinmakingproductsthattheycanselltocustomers.Providedtheyhavereliablesuppliesofmaterials,andreasonabletransportforfinishedproducts,logisticsisirrelevant.Doyouthinkthisistrue?4.Veryfeworganisationsdealwiththefinalcustomerforaproduct.Mostoperationsworkupstreamandformonestepofthesupplychain,oftenpassingmaterialstointernalcustomerswithinthesameorganisation.Howdoesthetypeofcustomeraffecttheorgan-isationoflogisticsandthemeasuresofcustomersatisfaction?5.Thecostoflogisticsvarieswidelyfromorganisationtoorganisation.Whatfactorsaffectthesecosts?Arethecostsfixedorcantheybecontrolled?6.Howcouldyoufindthebestbalancebetweenservicelevelandcosts? 26LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTREFERENCES1.UnitedNations(2001)IndustrialStatisticsYearbook,UN,NewYork.2.PorterM.E.(1985)CompetitiveAdvantage,FreePress,NewYork.3.CooperM.C.,LambertD.M.andPaghJ.D.(1997)Supplychainmanagement,InternationalJournalofLogisticsManagement,8(1),2.4.ChristopherM.(1996)EmergingIssuesinSupplyChainManagement,ProceedingsoftheLogisticsAcademicNetworkInauguralWorkshop,Warwick.5.CouncilofLogisticsManagement,promotionalmaterialandwebsiteatwww.clm.org.6.InstituteofLogistics,(1998to2001)Members’Directory,InstituteofLogisticsandTransport,Corby.7.HarringtonL.(1996)Untappedsavingsabound,IndustryWeek,245(14),53–8.8.ChristopherM.(1986)TheStrategyofDistributionManagement,Heinemann,Oxford.9.ShapiroR.D.andHeskettJ.L.(1985)LogisticsStrategy,WestPublishing,StPaul,MN.10.USStatisticalAbstract(2001)SurveyofCurrentBusiness,DepartmentofCommerce,WashingtonDC.11.OfficeofNationalStatistics,(2001)AnnualAbstractofStatistics,HMSO,London.12.ChilderleyA.(1980)TheimportanceoflogisticsintheUKeconomy,InternationalJournalofPhysicalDistributionandMaterialsManagement,10(8).13.NovichN.S.(1990)Leading-edgedistributionstrategies,TheJournalofBusinessStrategy,November/December,48–53.14.FactorR.(1996)Logisticstrends,MaterialsManagementandDistribution,June,17–21.FurtherreadingTherearemanybooksonlogistics,andthefollowinglistgivesausefulstartingpoint.ArnoldJ.R.T.(1996)IntroductiontoMaterialsManagement(2ndedn)PrenticeHall,EnglewoodCliffs,NJ.BrewerA.M.,ButtonK.J.andHensherD.A.,(2001)HandbookofLogisticsandSupplyChainManagement,Pergamon,London.ChristopherM.(1998)LogisticsandSupplyChainManagement,FTPrenticeHall,London.CoyleJ.J.,BardiE.J.andLangleyC.J.(1996)TheManagementofBusinessLogistics(6thEdition),WestPublishing,StPaul,MN.DixC.andBairdC.(1998)FrontOfficeOperations,AddisonWesley,Reading,Massachusetts.GattornaJ.L.andWaltersD.W.(1996)ManagingtheSupplyChain,Palgrave–nowPalgraveMacmillan.HandfieldR.B.andNicholsE.L.(1998)IntroductiontoSupplyChainManagement,PrenticeHall.HillE.R.andFredendallL.(1999)BasicSupplyChainManagement,St.LuciePress.Simchi-LeviD.,KaminskyP.andSimchi-LeviE.(1999)DesigningandManagingtheSupplyChain,Irwin/McGrawHill,NewYork.WatersD.(1999)GlobalLogisticsandDistributionPlanning,KoganPage,London. CHAPTER2IntegratingtheSupplyChainCONTENTS■Aimsofthechapter■Achievingintegration■Progressinlogistics■Chapterreview■Currenttrendsinlogistics■Casestudy–Friedland■IntegratinglogisticswithinanTimbersasa.organisation■Project–Supplypartnerships■Integrationalongthesupply■Discussionquestionschain■ReferencesAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■OUTLINEthewaythatlogisticshasdevelopedovertime■SEEhowlogisticsisrespondingtopressuresforchange■DISCUSSthebenefitsofcreatingasingle,integratedlogisticsfunction■DESCRIBEwaysofachievinginternalintegration■APPRECIATEthebenefitsoffurtherintegrationalongthesupplychain■DESCRIBEdifferentapproachestothisintegration 28LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROGRESSINLOGISTICSEarlyviewsDespiteitsobviousimportance,logisticshasnotalwaysreceiveditsfairshareofattention.Historically,organisationsputalltheireffortintomakingproductsandgavelittlethoughttotheassociatedmovementofmaterials.Managersrecognisedthattransportandstoragewereneeded,buttheywereviewedastechnicalissuesthatwerenotworthmuchattention–theyweresimplytheunavoidablecostsofdoingbusiness.Someearlyworkinthe1920sbegantolookmorecarefullyatthetransportoffinishedgoods.1–3In1962,though,Druckercouldstilldescribelogisticsas,‘theeconomy’sdarkcontinent’4andsaythatthisformed‘themostsadlyneglected,mostpromisingareaof…business’.Sincethentherehavebeenconsider-ablechanges.Perhapsthemainreasonforchangewastherecognitionthatlogisticswasexpensive.Bythe1970s5,6and80s7–10surveysweresuggestingthatthemovementandstorageofmaterialstypicallyaccountedfor15–20percentofrevenue.Inthelastchapterwesaidthatitisdifficulttogetaccuratefiguresforthis,andin1994Hillcouldstillsaythat,‘manydistributorsareunawareofthecostsofthedistributionservicetheyprovide’.11However,logisticshadbeenidentifiedasahighcostfunction,andonewhereorganisationscanmakesignificantsavings.WORKEDEXAMPLEJLFrancisco&PartnersrunawholesalefruitbusinessaroundRiodelPlata.Innormalcircumstancesthecompanymakesagrossprofitof5%ofsales.Aconsultant’sreporthasrecentlysuggestedthat22%oftheiroperatingcostsareduetologistics,andthatimprovedefficiencymightreducethisby10%.Howmuchextraprofitwouldthisgener-ate?Iftheydonotimprovelogistics,howmuchwouldsaleshavetorisetogetthesameincreaseinprofit?SolutionGrossprofitis5%ofsales,soifwetakesalesof$100,operatingcostsamountto$95.Atpresent,22%ofthis,or95×0.22=$20.90,isduetologistics.Ifthecompanyreducesthecostoflogisticsby10%,itwouldsave20.90×0.1=$2.09.Assumingthattherearenochangestothesellingpriceorothercosts,thisisadirectcon-tributiontoprofit.A10%reductioninlogisticscostsraisesprofitfrom$5to$7.09,oranincreaseof42%.Withoutthereductioninlogisticscosts,thecompanywouldhavetoincreasesalesby42%togetthesameincreaseinprofit.PressurestoimprovelogisticsAswellaspotentialsavings,manyotherfactorsareencouragingorganisationstoimprovethemanagementoftheirsupplychains.Thefollowinglistsuggestssomeofthesepressures: INTEGRATINGTHESUPPLYCHAIN29●Customersaremoreknowledgeable,anddemandhigherquality,lowercostsandbetterservice.●Competitionisgettingfiercer,andorganisationsmustlookateveryopportunitytoremaincompetitive.●Thereischangingpowerinthesupplychain.Verylargeretailchains,suchasWal-Mart,Tesco,Toys-R-UsandMcDonald’s,demandcustomisedlogisticsfromtheirsuppliers.●Otherchangesinretailmarketsincludethegrowthof24-houropening,homedeliveries,out-of-townmalls,retailparks,telephoneandon-lineshopping.●Internationaltradecontinuestogrow.ThisisencouragedbyfreetradeareassuchastheEuropeanUnionandNorthAmericanFreeTradeArea.●Organisationsareintroducingnewtypesofoperation,suchasjust-in-time,leanopera-tions,timecompression,flexiblemanufacturing,masscustomisation,virtualoperations,andsoon.●Someorganisationsareturningfromaproductfocus(wheretheyconcentrateontheendproducts)toaprocessfocus(wheretheyconcentrateonthewayproductsaremade).Thisencouragesimprovementtooperations,includinglogistics.●Therehavebeenconsiderableimprovementsincommunication.Theseallowelectronicdatainterchange(EDI),itemcoding,electronicfundtransfer(EFT),e-commerce,sharedknowledgesystems,andothernewpractices.●Organisationsareoutsourcingperipheralactivitiesandconcentratingontheircoreopera-tions.Logisticsisausefulareaforthird-partyoperators,withspecialisedcompaniesofferingarangeofservices.●Organisationsareincreasingco-operationthroughalliances,partnerships,andotherarrangements.Thisintegrationisimportantforlogistics,whichisusuallythemainlinkbetweenorganisationsinasupplychain.●Managersarerecognisingthestrategicimportanceofthesupplychain.●Attitudestowardstransportarechanging,becauseofincreasedcongestiononroads,concernsaboutairqualityandpollution,broaderenvironmentalissues,governmentpoli-ciesfortherealcostofroadtransport,privatisationofrailservices,deregulationoftrans-port,andahostofotherchanges.Thisis,ofcourse,onlyapartiallistandtherearemanyotherpressuresforchange,includinguncertainmarketconditions,politicalchange,deregulationofbusiness,risingcosts,shortageofskilledstaff,fluctuatingexchangerates,andsoon.Inthenextsection,wewillseehowlogisticsisrespondingtothesepressures. 30LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCURRENTTRENDSINLOGISTICSImprovingcommunicationsLogisticscontinuallymeetsnewchallenges,andischangingfasternowthanatanytimeinthepast.Perhapsthemostobviouschangeistheincreasinguseoftechnology.Someofthisappearsdirectlyinthemovementofgoods–suchaselectronicidentificationofpackages,satellitetrackingoflorriesandautomaticguidancesystems–butthegreatestimpacthascomewithcommunications.Whenacompanywantstobuysomething,ittypicallyhastogenerateadescriptionofthegoods,requestforprice,purchaseorder,orderconfirmation,contractterms,shippingpapers,financialarrangements,deliverydetails,specialconditions,invoices,andsoon.Inthepast,allofthese–andmountainsofotherpaperwork–hadtobeprintedandpostedbetweenorgani-sations.Thiscouldmakeevenasimpletransactionseemcomplicatedandtimeconsuming.Telephonesdidnothelpmuch,asSamGoldwynpointedout,‘averbalcontractisn’tworththepaperit’swrittenon’.Inthepastfewyearstechnologyhasrevolutionisedthesecommunications.Initialprogresscamewithfaxmachinesthatcouldsendelectroniccopiesofdocumentsbetweendistantlocationsinsecondsratherthandays.Thedrawbackwithfaxmachinesisthatdocu-mentsproducedbyonecomputerstillhavetobeprinted,fedintoafaxmachine,transmittedovertelephonelinestosomeoneelsewhoreadsthetextandenterstheinformationtotheirowncomputer.Bythe1990stheobviousnextstephadarrivedwithelectronicdatainterchange(EDI).Thisallowedremotecomputerstoexchangedatawithoutgoingthroughanyintermediaries.Earlyusersweresupermarkets,wholinkedtheirstockcontrolsystemsdirectlytosuppliers’orderprocessingsystems.Thesupermarketcheckoutsrecordedsalesofeachitem,andwhenstocksgotlowthesystemautomaticallysentamessageaskingforanotherdelivery.ThisuseofEPOS–electronicpoint-of-salesdata–gavelesspaperwork,lowertransactioncosts,fastercommunications,fewererrors,moreintegratedsystems,andcloserbusinessrelations.By1997about2000companiesintheUKusedEDIfortradewithsuppliers.12Overthenextfewyearselectronictradingbecamemoresophisticatedandwidespread.Themush-roomingofe-mailwasfollowedbyallkindsofe-business,e-commerce–andsoon‘e-anything’.Theefficienttransferofinformationhasbeenparticularlyusefulforpurchasing,whichhasdevelopedintoe-purchasingore-procurement.Thiscomesinmanyforms,allbasedonthedirectexchangeofdatabetweenasupplier’scomputerandacustomer’s.TwomainversionsareB2B(business-to-business,whereonebusinessbuysmaterialsfromanotherbusiness)andB2C(business-to-customer,whereafinalcustomerbuysfromabusiness).By2002around83percentofUKsuppliersusedB2B,13andtheworldwidevalueofB2BtradewasoverUS$2trillion.14TwoassociatedtechnologieshavedevelopedtosupportEDI.Thefirstisitemcoding,whichgiveseverypackageofmaterialmovedanidentifyingtag.Thetagisusuallyabarcodeormagneticstripethatcanbereadautomaticallyasthepackagemovesthroughitsjourney.Thenthelogisticssystemknowswhereeverypackageisatanytime,andautomaticmaterialshandlingcanmove,sort,consolidate,packanddelivermaterials.Thesecondtechnologyiselectronicfundtransfer(EFT).Whenthedeliveryofmaterialsisacknowledged,EFTautomaticallydebitsthecustomer’sbankaccountandcreditsthesupplier’s.Thiscompletestheloop,withEDItoplaceorders,itemcodingtotrackthemove-ment,andEFTtoarrangepayment. INTEGRATINGTHESUPPLYCHAIN31ImprovingcustomerserviceItisnormallyineveryone’sintereststomakelogisticscostsaslowaspossible.Logisticsmanagerswantlowcostssothattheyremaincompetitive,andtheiruserswanttopayaslittleaspossible.Manyorganisationshavereducedtheirlogisticscoststolevelsthataffecttheirwholeoperations.Lowertransportcosts,forexample,makeitfeasibletosellproductsoverawidergeographicarea.Thecostoftransportfor,say,Japanesemanufacturersissolowthattheycanoffergoodsatpricesthatarecomparabletothoseofferedbydomesticcompanies.Similarly,efficienttransportcanmoveproductsquicklyoverlongdistances,sothereisnoneedtobuildtraditionalwarehousesclosetocustomers.Whilestrivingforlowercosts,organisationsobviouslyhavetomaintaintheirservicelevels.Improvedlogisticsmeansgivingtheservicethatcustomerswantatthelowestpossiblecost.Aproblem,ofcourse,isfindingthefeaturesthatcustomersreallywantandthelevelofservicetheyarewillingtopayfor.Thesevarywidelyindifferentcircumstances,butakeyfactoristheleadtime.Thisisthetotaltimebetweenorderingmaterialsandhavingthemdeliveredandavailableforuse.Again,itisnormallyineveryone’sinteresttomakethisdelayasshortaspossible.Whencustomersdecidetobuysomething,theywantitdeliveredassoonaspossible;supplierswanttokeepcustomershappywithfastservice,andwithnoproductshangingaroundandcloggingthesupplychain.Ideally,theleadtimeshouldbeasclosetozeroaspossible,andoneapproachtothisusessynchronisedmaterialmovement.Thismakesinfor-mationavailabletoallpartsofthesupplychainatthesametime,sothatorganisationscanco-ordinatematerialmovements,ratherthanwaitformessagestomoveupanddownthechain.Anotherkeyfactorforcustomersatisfactionispersonalisedproducts.Insteadofbuyingastandardtextbook,forexample,youdescribethecontentsyouwantandapublishersuppliesavolumewithexactlythesespecifications.Thisismasscustomisation,whichcombinesthebenefitsofmassproductionwiththeflexibilityofcustomisedproducts.ItusesB2Ctogivedirectcommunicationsbetweenafinalcustomerandamanufacturer,anditneedssupplychainsthatareflexible,thatmovematerialsveryquickly,andrespondtovaryingconditions.DellComputerswasoneofthefirstcompaniestousemasscustomisation.Theydonotbuildstandardcomputers,butwaituntilacustomerplacesanorderontheirwebsite.Thentheybuildacomputerforthespecificorder.Logisticsmakessurethatthenecessarymate-rialsarealwaysavailableformanufacturing,anditdeliversthefinishedmachinequicklytothecustomer.Dellworksocloselywiththeirsuppliersthattheyhavedeveloped‘virtualintegration’,wheretheyallseemtobepartofthesamecompany.ThisworkswellwithDell,whohave50maincomponents,butwoulditworkwithacarmanufacturerandtheirthreethousandcomponents?Flexiblemanufacturingherewouldputseverepressuresonthesupplychain,butthe‘3DayCarProgramme’suggeststhat80percentofcarsintheUKcouldbebuilttoorderby2010.15,16OthersignificanttrendsApartfromincreasingtechnologyandemphasisoncustomersatisfaction,thereareseveralotherimportanttrendsinlogistics.Thefollowinglistincludessomeofthemostsignificant.●Globalisation:Improvedcommunicationsandbettertransportmeanthatphysicaldistancesarebecominglesssignificant.Organisationscanbecomeglobalinoutlook,buying,storing,manufacturing,movinganddistributingmaterialsinasingle,worldwide 32LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTmarket.Asaresult,internationaltradeandcompetitionarecontinuingtorise.Organ-isationsusedtolookforcompetitorsinthesametown,butnowtheyarejustaslikelytocomefromanothercontinent.Efficientlogisticsmakesaglobalmarketfeasible,andotherfactorsthatencourageinternationaltradeincludelessrestrictedfinancialsystems,consumerdemandforimportedproducts,removalofimportquotasandtradebarriersandthegrowthoffreetradeareas.Youcanseetheeffectsinmanufacturing,whereproducerslookforeconomiesofscaleinlargefacilitieslocatedinareaswithlowproductioncosts.Theunitproductioncostislow,andefficientlogisticskeepsthedeliveredpricedown.ThisisthereasonwhyGermancompaniesopenlargeplantsinPoland,AmericancompaniesworkinMexicoandJapanesecompaniesworkinChina.●Reducednumberofsuppliers:Inthepast,organisationshaveusedalargenumberofsuppliers.Thisencouragedcompetition,ensuredthattheygotthebestdealandmain-tainedsecuredeliveriesifonesupplierranintodifficulties.Thecurrenttrend,however,istoreducethenumberofsuppliersanddeveloplong-termrelationshipswiththebest.Asweshallseelater,workingcloselywithasmallnumberoforganisationscanbringconsid-erablebenefits.●Concentrationofownership:Largecompaniescangeteconomiesofscale,andtheyhavecometodominatemanysupplychains.Thereare,forexample,manyshopsandtransportcompanies–butthebiggestonescontinuetogrowattheexpenseofsmallones.Theresultisacontinuingconcentrationofownership,whichyoucanseeinmanylogisticssectorsrangingfromfoodwholesalerstocruiselines.●Outsourcing:Moreorganisationsrealisethattheycanbenefitfromusingspecialisedcompaniestotakeoverpart,orall,oftheirlogistics.Usingathirdpartyformaterialsmovementleavesanorganisationfreetoconcentrateonitscoreactivities.McKinnonsaysthat,‘Outsourcinghasbeenoneofthedominantbusinesstrendsofthe1980sand1990s’17andsurveyssuggestthataround30percentoflogisticsexpenditureisoutsourcedintheEU.18●Postponement:Traditionally,manufacturersmovefinishedgoodsoutofproductionandstoretheminthedistributionsystemuntiltheyareneeded.Whentherearemanyvaria-tionsonabasicproduct,thiscangivehighstocksofsimilarproducts.Postponementmovesalmost-finishedproductsintothedistributionsystem,anddelaysfinalmodifica-tionsorcustomisationuntilthelastpossiblemoment.Youcanimaginethiswith‘package-to-order’,whereacompanykeepsaproductinstock,butonlyputsitinaboxwrittenintheappropriatelanguagewhenitisabouttoshipanorder.Manufacturersofelectricalequipment,suchasPhillipsandHewlett-Packard,usedtobuildintotheirproductsthetransformersandplugsneededfordifferentmarkets.Thentheyhadtokeepseparatestocksofproductsdestinedforeachcountry.Nowtheymakethetransformerandcablesasseparate,externalunits.Theyonlykeepstocksofthebasic,standardproducts,andcustomisethemfordifferentmarketsbyaddingthepropertrans-formersandplugsatthelastminute.Theresult,ofcourse,ismuchlowerstocks.Inthesameway,Benettonusedtodyeyarndifferentcolours,knitsweatersandkeepstocksofeachcolourtomeetvaryingdemand.Nowtheyknitsweaterswithundyedyarn,keepmuchsmallerstocksofthese,anddyethefinishedsweaterstomeetactualorders. INTEGRATINGTHESUPPLYCHAIN33●Cross-docking:Traditionalwarehousesmovematerialsintostorage,keepthemuntilneeded,andthenmovethemouttomeetdemand.Cross-dockingco-ordinatesthesupplyanddelivery,sothatgoodsarriveatthereceivingareaandaretransferredstraightawaytoaloadingarea,wheretheyareputontodeliveryvehicles.Thisdramaticallyreducesstocklevelsandassociatedadministration.Therearetwobasicformsofcross-docking.Inthefirst,packagesaremoveddirectlyfromarrivingvehiclesandontodepartingones.Thisdoesnotreallyneedawarehouseandasimpletransferpointisenough.Inthesecondformthereissomeadditionalworkasmaterialsarriveinlargerpackageswhichareopened,brokenintosmallerquantities,sorted,consolidatedintodeliveriesfordifferentcustomersandtransferredtovehicles.Cross-dockingcandeveloptothepointwherenothingactuallymovesthroughaware-house.Anystockiskeptwithinvehicles,givingstockonwheels.Arelatedarrangementusesdrop-shipping,wherewholesalersdonotkeepstockthemselves,butco-ordinatethemovementofmaterialsdirectlyfromupstreamsupplierstodownstreamcustomers.Aswarehousingisexpensiveandtime-consuming,thesemethodscangivemuchmoreeffi-cientflows,andallowmethodssuchasquickresponseandefficientcustomerresponse(whichwediscussinChapter7).●Directdelivery:MorecustomersarebuyingthroughtheWeb,orfindingotherwaysoftradingearlierinthesupplychain,suchasmailorderorbuyingdirectlyfrommanufac-turers.Thishasthebenefitsofreducingleadtimes,reducingcoststocustomers,havingmanufacturerstalkingdirectlytotheirfinalcustomers,allowingcustomersaccesstoawiderrangeofproducts,andsoon.Italsomeansthatlogisticshastomovesmalldeliv-eriesquicklytofinalcustomers.ThishasencouragedthegrowthofcouriersandexpressparceldeliveryservicessuchasFedEx,UPSandDHL.●Otherstockreductionmethods:Keepingstockisexpensive,soorganisationscontinuallylookforwaysofreducingtheamountstoredinthesupplychain.Therearemanywaysofdoingthis.Oneapproachusesjust-in-timeoperationstoco-ordinateactivitiesandminimisestocklevels.Anotherapproachhasvendormanagedinventory,wheresuppliersmanageboththeirownstocksandthoseheldfurtherdownthesupplychain.Improvedco-ordinationreducesoverallcostsandcangiveeconomiesofscale.●Increasingenvironmentalconcerns:Thereisgrowingconcernaboutairpollution,waterpollution,energyconsumption,urbandevelopmentandwastedisposal.Logisticsdoesnothaveagoodreputationforenvironmentalprotection–demonstratedbytheemis-sionsfromheavylorries,useofgreenfieldsitesforwarehouses,callsfornewroadbuilding,useofextensivepackaging,shipsillegallyflushingtheirfueltanks,oilspillagesfromtankeraccidents,andsoon.Onthepositiveside,logisticsismovingtowards‘greener’practices.Operatorsusemoreenergyefficientvehicles,controlexhaustemissions,reusepackaging,switchtoenviron-mentallyfriendlymodesoftransport,increaserecyclingthroughreverselogistics,addsafetyfeaturestoships,developbrown-fieldsites,andsoon.Theyincreasinglyrecognisethatcarefulmanagementcanbringbothenvironmentalprotectionandlowercosts.Afairassessmentmightbethatlogisticsismakingprogressonenvironmentalissues,butithassomewaytogo.●Morecollaborationalongthesupplychain:Organisationsinasupplychainincreasinglyrecognisethattheyhavethesameobjectives–whicharesatisfiedfinalcustomers.They 34LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTshouldnot,therefore,competewitheachother,butshouldco-operatetogetfinalcustomersatisfaction.Thisisanimportantpoint.Itmeansthatcompetitorsarenototherorganisationswithinthesamesupplychain,butareorganisationsinothersupplychains.Christopher19summarisesthisbysayingthat‘supplychainscompete,notcompanies’.InsummaryWecouldcontinuethislist,describingalltypesofchangesinlogistics.Ouraim,though,isnottobeexhaustive,buttoillustratesomeofthemaintrends.Thesearenotindependent,butareallrelated.Increasingtechnology,forexample,cangivelessstock,lowercosts,shorterleadtimes,highercustomersatisfaction,andsoon.Ifwetakeanoverviewofthetrends,wecansuggestthreemainthemes.Thefirstlooksforamoreefficientflowofmaterialsthroughthesupplychain.Itmight,forexample,givefasterdeliveries,reducestocklevels,reducehandling,orgivelowercosts.Thisapproachischaracterisedbyleanlogistics,20,21whichgrewfromtheideasofleanoperations,andtriestoremoveallwastefromthesupplychain.Itscharacteristicapproachistoanalyseoperations,andthensystematicallyremoveallthewastedeffort,move-ment,materials,time,andotherresources.Thisseemsasimpleidea,butitcangivedramaticimprovementsinperformance.Thesecondthemehaslogisticsbecomingmoreflexibleandresponsive.Itmight,forexample,giveacustomisedserviceorrespondquicklytochangingdemands.Thisapproachischaracterisedbyagilelogistics,22whichfocusesoncustomersatisfaction.Thethirdthemelooksatincreasingintegrationofthesupplychain.Organisationscannotworkinisolation,butmustco-operatewithotherorganisationsinthesupplychaintoachievetheirwiderobjectives.Unfortunately,peopleoftenassumethatthereissomeconflictbetweenthesethreethemes.Theyassume,forexample,thatleannessneedsstandardoperationswhichreduceflexibility,orthatintegrationneedsmorecomplicatedsystemsthatincreasecosts,orthatagilityneedsextraresourcesthatloweraverageutilisation.Tosomeextentthisistrue,butthethreethemesarenotmutuallyexclusiveandwecandesignlogisticsthatarelean,agileandintegrated.23,24ThreeimportantthemesforlogisticsconsiderLEANNESS,AGILITYandINTEGRATION.Ideally,logisticsshouldaimforallthreeofthese.INTEGRATINGLOGISTICSWITHINANORGANISATIONProblemswithfragmentedlogisticsFigure2.1summarisesourviewoflogisticswithinanorganisation,whereaseriesofrelatedactivitiesaddvaluetothefinalproduct.Theseactivitieshavetraditionallybeenmanagedsepa-rately,sothatanorganisationmighthaveadistinctpurchasingdepartment,transportdepart-ment,warehouse,distributionfleet,andsoon.Unfortunately,dividinguplogisticsinthiswaycreatesanumberofproblems.Purchasingmightlookforthemostreliablesuppliers,inventorycontrolforlowunitcosts,warehousingforfaststockturnover,materialsmanagementforeasyhandling,transportforfullvehicleloads,andsoon.Theseaimsallseemworthy,soitmightbesensibleforeachactivitytojudgeitsownperformanceinthemostappropriateway.Unfortunately,wesoonhit INTEGRATINGTHESUPPLYCHAIN35PhysicaldistributionProcurementOutwardtransportInwardtransportReturnsWarehousingReceivingStockcontrolPickingMaterialshandlingConsolidatingSuppliersOperationsCustomersCommunicationsLocationFigure2.1Summaryoflogisticsactivitiesproblemswhentheaimscomeintoconflict.Forexample,warehousingmightsavemoneybyreducingthestockofrawmaterials–butthisleadstomorefrequentshortagesandraisesthecostsofexpeditingforpurchasingandemergencydeliveriesfortransport.Similarly,purchasingcanreduceitsadministrativecostsbysendingfewer,largerorderstosuppliers–butthisincreasesstocklevelsandraisestheamountofmoneytiedupinthewarehouse.Usingseatransportratherthanairfreightreducestransportcosts–butincreasestheamountofstockheldinthesupplychain.Inreality,thedifferentactivitiesoflogisticsareverycloselyrelated,andpoliciesinonepartinevitablyaffectoperationsinanother.LOGISTICSINPRACTICERPTurnerCorp.RPTurnerCorp.makespipelinevalvesforforwaysofreducingthecostoflogistics.IttheoilindustryinwesternCanada.ItbuyssoonfoundthatseparatefunctionsworkedmaterialsfromJapan,theUSAandeasternmoreorlessindependently.Thiswassome-Canada,manufacturesvalvesinEdmonton,timesalltooobviouswhenthethreemainAlbertaandshipsthefinishedproductstodepartments–Marketing,ProductionandoilfieldsintheNorth.Finance–wereindifferentlocations.Pro-ThecompanygrewbyemphasisingtheductionwasinEdmonton,asthenearesthighqualityofitsproducts,whichworkreli-majorcitytotheoilfields;MarketingwasinablyintheharshweatherconditionsoftheCalgaryneartooilcompanyheadquarters;Arctic.TransporttoremotecustomersisFinance(includingprocurement)wasinexpensive,andin2000thecompanylookedVancouverneartheportandfinancial 36LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedcentre.Toappreciatethepotentialprob-■anarrowrangeoffinishedgoodstogivelems,youhavetorememberthatCanadaislongproductionrunsabigcountry,soProductionwasathousand■locationsneartosupplierssothattheykilometresawayfromFinance,500kilome-couldgetrawmaterialsquicklytresawayfromMarketingandovertwo■stableproductiontogiveefficientopera-thousandkilometresfromdeliverypoints.tionsThecompanywasrewardingdifferent■emphasisontheefficientmovementofdepartmentsfordifferenttypesofperform-materialsthroughoperationsance.Notsurprisingly,whenthedepart-■realisticsalesforecaststhatallowedeffi-mentswereaskedfortheirpriorities,theycientplanning.haddifferentviews.Financewanted:Marketingwanted:■lowstockseverywhere■highstocksoffinishedgoodstosatisfy■fewlocationstogiveeconomiesofscalecustomerdemandsquicklyandminimiseoverallcosts■awiderangeoffinishedgoodsalways■largebatchsizestoreduceunitcostsheldinstock■make-to-orderoperations■locationsneartocustomerstoallow■pessimisticsalesforecaststhatdis-deliverywithshortleadtimescouragedunderusedfacilities.■productiontovaryoutputinresponsetoDespitegoodcommunications,thecustomerorderscompanyfeltthatitwastoowidelyspread■emphasisonanefficientdistributionout.ItdecidedtocentraliseoperationsatitssystemmainplantinEdmonton.Thisbroughtthe■anoptimisticsalesforecasttoensurelogisticsfunctionsgeographicallycloserproductionwasgearedupforactualtogether,andmajorreorganisationoverthedemand.nexttwoyearsbroughtaunifiedviewofProductionwanted:thesupplychain.■highstocksofrawmaterialsandworkinSources:RayTurnerandinternalcompanyreportsprogresstosafeguardoperationsTheproblemsatRPTurnerarealmostinevitableiflogisticsisdividedintoseparatefunc-tions.Eachpartwillmoveinadifferentdirection,andthereisduplicatedeffortandwastedresources.Imagineawholesalerwhohasonefleetofvehiclesrunbymaterialsmanagementtobringmaterialsinfromsuppliers,andaseparatefleetrunbydistributiontodeliverthesamegoodsouttocustomers.Thismightwork,butyoucanpicturetheduplicatedeffortandwasteinmanagingtwoseparatevehiclefleets.Anotherorganisationmighthavethreestocks–rawmaterials,workinprogressandfinishedgoods–eachrunbydifferentdepartmentsandusingdifferentstandardsandsystems.Afragmentedsupplychainalsomakesitdifficulttoco-ordinatetheflowofinformationthroughdifferentsystems.Supposeaproductiondepartmentknowsthatitisrunningshortofamaterialandneedsanewdelivery.Thisinformationshouldpassseamlesslytopurchasing.If,however,ithastopassfromonesystemtoanotherthereisagreaterchanceoferror,uncertainty,delayandinefficiency–resultinginlatedelivery,emergencyorders,expeditingandshortages. INTEGRATINGTHESUPPLYCHAIN37Toputitbriefly,fragmentinglogisticsintodifferentpartshasthedisadvantagesof:●givingdifferent,oftenconflicting,objectiveswithinanorganisation●duplicatingeffortandreducingproductivity●givingworsecommunicationsandinformationflowsbetweentheparts●reducingco-ordinationbetweentheparts–leadingtolowerefficiency,highercostsandworsecustomerservice●increasinguncertaintyanddelaysalongthesupplychain●makingplanningmoredifficult●introducingunnecessarybuffersbetweentheparts,suchasstocksofworkinprogress,additionaltransportandadministrativeprocedures●obscuringimportantinformation,suchasthetotalcostoflogistics●givinglogisticsalowstatuswithinanorganisation.BringingactivitiestogetherTheobviouswayofavoidingtheseproblemsistoconsiderlogisticsnotasaseriesofdistinctactivities,butasasingleintegratedfunction.Thenallthepartsworktogethertogetthebestoverallresultfortheorganisation.ThisiswhySheehy,formerChairmanofBAT,couldsay,‘Ibelievethatawelldesigned,integratedlogisticssystemisavitalprerequisiteforcommer-cialsuccess’.25■INTEGRATINGLOGISTICSwithinanorganisationhasalltherelatedactivi-tiesworkingtogetherasasinglefunction.■Thisisresponsibleforallstorageandmovementofmaterialsthroughouttheorganisation.■Ittacklesproblemsfromtheviewpointofthewholeorganisation,andlooksforthegreatestoverallbenefit.Inpractice,itisdifficulttointegrateallthelogisticswithinanorganisation.Thesupplychainconsistsofmanydifferentactivities,withdifferenttypesofoperation,usingdifferentsystemsandgeographicallydispersed.Theusualapproachhastheintegrationdevelopingovertime.Onedepartmentmightslowlytakeoverallaspectsoforderingandreceivingrawmate-rials.Anotherdepartmentmightslowlytakeoverallaspectsofdeliveringfinishedproductstocustomers.Someorganisationsaretemptedtostopwhentheyreachthisstage,andtheyworkwithtwofunctions:●materialsmanagement,alignedwithproductionandlookingaftertheinwardsflowofrawmaterialsandtheirmovementthroughoperations;and●physicaldistribution,alignedwithmarketingandlookingattheoutwardflowoffinishedgoods.However,thisstillleavesanartificialbreakinwhatisessentiallyacontinuousfunction.Theobviousstepistocombinethetwointoasinglefunctionresponsibleforallmaterialmove-mentinto,throughandoutoftheorganisation.Thiscompletestheinternalintegrationofanorganisation’slogistics.Despitetheobviousbenefitsofintegratedlogistics,therecanstillbepracticaldifficulties.Perhapstheobviousoneisfindingsomeonewiththeknowledge,enthusiasm,abilityand 38LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTauthoritytocarrythroughnecessarychanges.Thisneedsaseniormanagerwhohasthenecessarypowertostartthechanges–witheffectsthenpercolatingthroughalllevelsoftheorganisation.Newpracticesandrelationshipscomefromindividualsworkingtogether,developingaculturethatisbasedonteamworkandco-operationratherthanself-interestandconflict.Anotherfactorthatencouragesinternalintegrationistheanalysisoftotallogisticscost.Wecandefinethisas:Totallogisticscost=transportcost+warehousecost+stockholdingcost+packagingcost+informationprocessingcost+otherlogisticsoverheadsThetraditionalviewconsideredeachoftheseseparatecostsasindependent,soreducing,say,thetransportcostautomaticallyloweredthetotalcost.Inthe1960sorganisationsbegantotakea‘systems’viewoflogistics,andanalysetheinteractionsbetweenactivities.Itbecameclearthatreducingthecostofoneactivityincreasedthecostofanother–andthetotallogis-ticscostmightbereducedbyincreasingtheamountspentoncertainactivities.Lewisetal.26gaveanearlyexampleofthis.Theyfoundthatairfreightwasmuchmoreexpensivethanalter-nativeroadtransport,butfasterdeliveryeliminatedtheneedforlocalstocksandwarehouses,andgaveconsiderableoverallsavingsOneotherimportantfactorforintegrationistheavailabilityofintegratedinformationandcontrolsystems.Managersneedasystemtocollect,store,analyse,distributeandpresentinfor-mationrangingfromthestrategicaimsoftheorganisationdowntodetailsofeachtransac-tion.Mostorganisationsuselocalnetworksorintranetsforthis,buttheInternetisincreasinglyseenasanefficientrouteforlogisticsinformation.Theinformationcanbeusedbyacontrolsystemthatassessescurrentcircumstances,makesdecisionsandimplementstheresults.Aninformationsystemmightshowthatstocksarerunninglow,andacontrolsystemusesthisinformationtoplaceanorderwithsuppliers.LOGISTICSINPRACTICEInternationalBusinessSystemsInternationalBusinessSystems(IBS)istheafter‘theflowofgoodsandinformationinlargestinternationalvendorofsoftwareforsuchawaythatyougivebettercustomersupplychainmanagement.Itislistedonserviceandachieveshorterleadtimes,withtheStockholmStockExchange,butworkslesscapitaltiedup,therebyreleasinginternationallywithmorethan5000cus-resourcesformoreprofitableactivities’.tomersin40countries.ItwasformedinTheIBSsystemhasmodulesbased1969,andnowhas2400employeeswork-aroundcoreactivitiessuchaspurchasing,ingin90offices.distribution,sales,finance,production,andIBSoffermanysoftwareproductsinclud-soon.Thesemodulescontainmanydiffer-ingarangeoffullyintegratedmodulesthatentcomponentsfororderprocessing,fore-improveperformanceofthesupplychain.casting,salesanalysis,Internettrading,barInotherwords,theyprovidetheinforma-coding,warehousemanagement,barcodes,tionandmanagementcontrolsforlookinginventorymanagement,vendormanaged INTEGRATINGTHESUPPLYCHAIN39LOGISTICSINPRACTICEcontinuedinventory,spareparthandling,customersupplychainhelpsorganisationstomanagerelationsmanagement,aftersalessupport,theirintegratedlogisticsand‘putstheminprojectmanagement,andsoon.controlofthesupplychain’.TheaimofIBSistogiveasophisticatedSources:IBSpromotionalmaterialandwebsiteatsystemthatiscomprehensive,buteasytowww.ibsuk.comrunanduse.Concise,well-presentedandrapidinformationaboutallaspectsoftheStagesinintegrationWehavenowdescribedhowlogisticshasmovedfrombeingalowpriority,fragmentedfunc-tion,toastrategic,integratedone.Thisisamajorchange,whichtypicallygoesthroughthefollowingstages:Stage1Separatelogisticsactivitiesarenotgivenmuchattentionorconsideredimportant.Stage2Recognisingthattheseparateactivitiesoflogisticsareimportantforthesuccessoftheorganisation.Stage3Makingimprovementsintheseparatefunctions,makingsurethateachisasefficientaspossible.Stage4Internalintegration–recognisingthebenefitsofinternalco-operationandcombiningtheseparatefunctionsintoone.Stage5Developingalogisticsstrategy,tosetthelong-termdirectionoflogistics.Stage6Benchmarking–comparinglogistics’performancewithotherorganisations,learningfromtheirexperiences,identifyingareasthatneedimprovementandfindingwaysofachievingthis.Stage7Continuousimprovement–acceptingthatfurtherchangesareinevitableandalwayssearchingforbetterwaysoforganisinglogistics.ByStage4anorganisationhasintegratedlogistics,andthelastthreestagesshowhowthefunctioncanbeimproved.Stage5emphasisestheneedforastrategicview,Stage6looksatotherorganisationsforcomparisonsandlessons,andStage7recognisesthatlogisticsmustcontinuallyevolve.However,thisisnottheendofthestory.Onceanorganisationhaseffi-cient,integratedandstrategiclogistics,itcanstartlookingatintegrationalongmoreofthesupplychain.INTEGRATIONALONGTHESUPPLYCHAINProblemswithfragmentedsupplychainsWehavedescribedthebenefitsofintegratinglogisticswithinanorganisation.Nowwecanextendthisargument,andsuggestthesamebenefitsforintegratinglogisticsalongmoreofthe 40LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT(a)SeparatefunctionswithinanorganisationLogisticsactivitiesSuppliersCustomersOperations(b)IntegrationwithintheorganisationLogisticswithinternalintegrationSuppliersCustomersOperations(c)IntegrationalongthesupplychainLogisticswithexternalintegrationSuppliersCustomersOperationsFigure2.2ThreelevelsoflogisticsintegrationABCDEFGH1Week12345623Customer4Demand10010510010010010056Retailer7Demand1001051001001001008Openingstock1001001051001001009Closingstock10010510010010010010Buys100110951001001001112Localwholesaler13Demand1001109510010010014Openingstock1001001109510010015Closingstock1001109510010010016Buys100120801051001001718Regionalwholesaler19Demand1001208010510010020Openingstock1001001208010510021Closingstock1001208010510010022Buys10014040130951002324Manufacturer25Demand100140401309510026Openingstock1001001401001309527Closingstock1001401001309510028Makes100180016060105Figure2.3Varyingdemand INTEGRATINGTHESUPPLYCHAIN41supplychain.Ifeachorganisationonlylooksatitsownoperations,thereareunnecessaryboundariesbetweenthem,disruptingtheflowofmaterialsandincreasingcosts.Externalintegrationremovestheseboundariestoimprovethewholechain.Christopheradvisesthismove,sayingthat‘Mostopportunitiesforcostreductionand/orvalueenhancementlieattheinterfacebetweensupplychainpartners’.22Thiseffectivelygivesthreelevelsofintegration.Thefirsthaslogisticsasseparateactivitieswithinanorganisation;thesecondhasinternalintegrationtobringthemtogetherintoasinglefunction;thethirdhasexternalintegration,whereorganisationslookbeyondtheirownoperationsandintegratemoreofthesupplychain(asillustratedinFigure2.2).■OrganisationswithinthesamesupplychainshouldCO-OPERATEtogetfinalcustomersatisfaction.■Theyshouldnotcompetewitheachother,butwithorganisationsinothersupplychains.Forrester27describedoneinterestingeffectofafragmentedsupplychain.Imaginearetailerwhonoticesthatdemandforaproductrisesby5unitsinaweek.Whenitistimetoplacethenextorder,theretailerassumesthatdemandisrising,andorderstenextraunitstomakesureithasenough.Thelocalwholesalerseesdemandrisebytenunits,soitordersanextra15unitstomeetthegrowth.Theregionalwholesalerseesdemandriseby15units,soitordersanother20units.Asthismovementtravelsthroughthesupplychain,arelativelysmallchangeinfinaldemandisamplifiedintoamajorvariationforearlysuppliers.WORKEDEXAMPLEInasimplesupplychain,eachorganisationholdsoneweek’sdemandinstock.Inotherwords,eachbuysenoughmaterialsfromitssupplierstomakeitsclosingstockattheendoftheweekequaltothedemandduringtheweek.Demandforaproducthasbeensteadyat100unitsaweek.Oneweek,demandfromfinalcustomersisfiveunitshigherthanusual.Assumingthatdeliveriesareveryfast,howdoesthisaffectmovementsinthesupplychain?SolutionThespreadsheetinFigure2.3showsthisforthefirstweekwhendemandof100unitsmovesthroughthesupplychain.Foreachtier,youcansee:■demand–whichequalstheamountboughtbythenexttierofcustomers■openingstockatthebeginningoftheweek–whichequalsitsclosingstockinthepreviousweek■closingstockattheendoftheweek–whichmustequaldemandintheweek■numberofunitsbought–whichequalsdemandplusanychangeinstock:buys=demandmet+(closingstock–openingstock) 42LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedInweek1everythingisgoingsmoothly,withtheusual100unitsflowingdownthesupplychain.Theninweek2customerdemandgoesupto105units.Theretailermustbuy105unitstomeetthisdemand,plusanadditional5unitstoraiseitsclosingstockto105.Soitbuys110unitsfromthelocalwholesaler.Thelocalwholesalerhastosupplythis110units,plusanadditional10unitstoraiseitsclosingstockto110units.Soitbuys120unitsfromtheregionalwholesaler.Theregionalwholesalerhastosupplythis120units,plusanother20unitstoraiseitsclosingstockto120units.Soitbuys140unitsfromthemanufacturer.Inweek3wegetthereverseeffectascustomerdemandreturnsto100units.Theretailernowreducesclosingstockto100units,soitonlyhastobuy95unitsfromthelocalwholesaler.Thelocalwholesalerreducesitsclosingstockby15,soitonlyhastobuy80fromtheregionalwholesaler.Theregionalwholesalerreducesitsclosingstockby40,soitonlybuys40fromthemanufacturer.Themanufacturerwouldliketoreduceitsclosingstockby100units,butitsdemandisonly40unitssoitstopsproductionandmeetsalldemandfromstock.Avariationincustomerdemandoffiveunitsinoneweek,hasmademanufacturingvaryby180unitsaweek,withaneffectcontinuingforseveralmoreweeks.BenefitsofintegrationConfederatedBottlersusedtodeliverbottlesfromtheirmainplantinElizabethvilletoabreweryinJohnston,115milesaway.Thebreweryfilledthebottlesandtookthemtoadistri-butioncentre20milesoutsideElizabethville.Bothcompaniesusedtheirowntruckstodeliverproducts,returningempty.Eventually,theyformedajointtransportcompanythatusedthesametrucksforbothdeliveries.Notsurprisingly,thetransportcostsalmosthalved.Thisexampleshowsoneobviousbenefitofintegration,buttherearemanyothers.Anyuncertaintyinthesupplychain–suchastheamplifiedvariationofdemandseeninthelastexample–encouragesorganisationstoholdhigherstockstogivethemselvesamarginofsafety.Thesestocksincreasecostsandmakethechainslowtoreacttochangingconditions(whencustomersdemandnewproducts,allthestocksofoldproductsinthesupplychainhavetobesold-onbeforethenewonesappear).Ifyoucontinuethinkingalongtheselines,youfindthefollowingbenefitsfromexternalintegration:●genuineco-operationbetweenallpartsofthesupplychain,withsharedinformationandresources●lowercosts–duetobalancedoperations,lowerstocks,lessexpediting,economiesofscale,eliminationofactivitiesthatwastetimeordonotaddvalue,andsoon●improvedperformance–duetomoreaccurateforecasts,betterplanning,higherproduc-tivityofresources,rationalpriorities,andsoon●improvedmaterialflow,withco-ordinationgivingfasterandmorereliablemovements INTEGRATINGTHESUPPLYCHAIN43●bettercustomerservice,withshorterleadtimes,fasterdeliveriesandmorecustomisation●moreflexibility,withorganisationsreactingfastertochangingconditions●standardisedprocedures,becomingroutineandwell-practicedwithlessduplicationofeffort,information,planning,andsoon●reliablequalityandfewerinspections,withintegratedqualitymanagementprogrammes.Manyorganisationshavemovedtowardsexternalintegration28andasurveybyP-EConsultingin199729foundthat57percentofcompanieshadsomeformofintegrationoftheirsupplychains.Morethan90percentofcompaniesexpectedfurtherintegration,withaquarterlookingfor‘fullyintegrated’systems(althoughtherewereclearlydifferentopinionsaboutwhatthismeant).Thebenefitsofexternalintegrationmaybeclear,buttherearemanypracticaldifficultiesofachievingthem.Manyorganisationssimplydonottrustothermembersofthesupplychain,andtheyarereluctanttoshareinformation.Evenwithsufficienttrust,therecanbeproblemswithdifferentpriorities,competition,dataexchange,appropriatesystems,skills,security,thecomplexityofsystems,andsoon.Thisraisestheobviousquestionofhowtoachieveintegration?ACHIEVINGINTEGRATIONCo-operationandconflictNormally,asupplychainconsistsofdistinctorganisations,eachworkingfortheirownbenefit.Sowhyshouldtheyco-operate?Whyshouldonecompanyworktobenefitanother?Theansweristhatexternalintegrationbringsbenefitsthatcanbesharedamongallmembersofthesupplychain,asyoucanseeinthePermanFrèreexample.LOGISTICSINPRACTICEPermanFrèrePermanFrèreisasmallmanufacturerbasedtics.Asanexample,somepartsweremadeinBrussels.ItexportsmostofitsproductsbyPermanFrèreinBrussels,senttotheirandhasafinishedgoodswarehousenearwarehouseinOstende,deliveredtovantheportofOstende.VanRijnisoneofitsRijn’swarehouseinRotterdam,andthencustomers,alsobasedinBrussels.ItimportsbroughtbacktoBrussels.Itwasfairlyeasytomostofitsmaterialsandhasarawmateri-organisedeliveriesdirectlybetweenthealswarehouseneartheportofRotterdam.companies.Thisgaveamuchshorterjour-ThetwocompanieshavetradedforneyacrossBrussels,reducedtransportandmanyyearsandin2001theystartedlookinghandlingcosts,removedexcessstocks,sim-forwaysofincreasingco-operation.Itwasplifiedadministration,andreducedtheleadsoonobviousthattheycouldmakeanum-timefromfivedaystothreehours.Theyalsoberofsmalladjustmentstoimprovelogis-co-ordinateddeliveriestotownsinnorthern 44LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedFrance,sothatonevehiclecoulddelivertime,butcouldnotfindanymechanismforproductsfrombothcompanies.overcomingthem.BothcompaniesbenefitedfromtheseSources:GeorgesPermanandinternalcompanychanges.Whentheywereintroducedpeo-reportspleinbothcompaniessaidthattheyhadbeenawareoftheproblemsforalongThefirstproblemwithexternalintegrationisovercomingthetraditionalviewoforgan-isationsasadversaries.Whenanorganisationpaysmoneytoitssuppliers,peopleassumethatonecanonlybenefitattheexpenseoftheother.Iftheorganisationgetsagooddeal,itauto-maticallymeansthatthesupplierislosingout:ifthesuppliermakesagoodprofit,itmeansthattheorganisationpaystoomuch.Thisadversarialattitudehasmajordrawbacks.Supplierssetrigidconditionsand,astheyhavenoguaranteeofrepeatbusiness,theyseenopointinco-oper-ationandtrytomakeasmuchprofitfromeachsaleaspossible.Atthesametime,organisationshavenoloyalty,andtheyshoparoundtogetthebestdealandremindsuppliersofthecompe-tition.Eachisconcernedonlywiththeirownobjectivesandwill–whenconvenienttothem-selves–changespecificationsandconditionsatshortnotice.Theresultisuncertaintyaboutthenumberandsizeoforders,constantlychangingsuppliersandcustomers,changingproductsandconditions,differenttimesbetweenorders,noguaranteeofrepeatordersandchangingcosts.Toavoidtheseproblems,organisationshavetorecognisethatitisintheirownlong-terminteresttoreplaceconflictbyagreement.Thisoftenneedsamajorchangeofculture.Thefollowingtablesuggestssomespecificadjustments.FactorConflictviewCo-operationviewProfitOneorganisationprofitsatBothshareprofitstheexpenseoftheotherRelationshipOneisdominantEqualpartnersTrustLittleConsiderableCommunicationLimitedandformalWidespreadandopenInformationSecretiveOpenandsharedControlIntensivepolicingDelegationandempowermentQualityBlameforfaultsSolvingsharedproblemsContractRigidFlexibleFocusonOwnoperationsCustomersDifferenttypesofco-operationThereareseveralwaysthatorganisationscanco-operate.Theycan,ofcourse,simplydobusi-nesstogether.Ifanorganisationhasagoodexperiencewithasupplier,itwillcontinuetousethemandoversomeperiodwilldevelopavaluableworkingrelationship.Sometimestheco-operationismorepositive,suchassmallcompaniesmakingjointpurchasestogetthesamequantitydiscountsaslargercompanies;EDIlinkstoshareinformation;combiningloadsto INTEGRATINGTHESUPPLYCHAIN45reducetransportcosts;agreedpackagesizestoeasematerialhandling,listsofpreferredsuppliers,andsoon.Thekeypointwiththeseinformalarrangementsisthatthereisnocommitment.Thisisprobablyhowyoushop,asyouhavefavouriteshopsbutarenotobligedtousethem.JapanesecompaniestakethisapproachfurtherformingKeiretsu–whicharegroupsoforganisationsthatworktogetherwithoutactuallyformingpartnerships.Aninformalarrangementhastheadvantageofbeingflexibleandnon-binding.Ontheotherhand,ithasthedisadvantagethateitherpartycanendtheco-operationwithoutwarning,andatanytimethatsuitsthem.Thisiswhymanyorganisationspreferamoreformalarrangement,withawrittencontractsettingouttheobligationsofeachparty.Thesearecommonwhenorganisationsseethemselvesasworkingtogetherforsometime.Anelec-tricitycompany,forexample,mightagreetosupplypoweratafixedpriceforthenextthreeyears,providedacustomerbuyssomeminimumquantity.Moreformalagreementshavetheadvantageofshowingthedetailsofthecommitment,sothateachsideknowsexactlywhatithastodo.Ontheotherhand,theyhavethedisadvantageoflosingflexibilityandimposingrigidconditions.In2001,forexample,therewerepowercutsinCaliforniawhenelectricitysuppliersfoundthattheirlong-termcontractswithcustomersspecifiedpricesthatweretoolowtocovertherisingcostsofgeneration.StrategicalliancesWhenanorganisationandasupplierareworkingwelltogether,theymaybothfeelthattheyaregettingthebestpossibleresultsandneithercouldbenefitfromtradingwithotherpartners.Thentheymightlookforalong-termrelationshipthatwillguaranteethattheirmutualbene-fitscontinue.Thisisthebasisofastrategicallianceorpartnership(showninFigure2.4).Thesupplierknowsthatithasrepeatbusinessforalongtime,andcaninvestinimprove-mentstoproductsandoperations;theorganisationknowsthatithasguaranteed–andcontin-uallyimproving–supplies.Thesearrangementsarenowcommon,andyouoftenhearstatementslike‘AbbeyNationaltreatsitssuppliersaspartners’.30EllramandKrausepreferthetermsupplierpartneringandgivethefollowingdefinition.31SUPPLIERPARTNERINGis‘anongoingrelationshipbetweenfirms,whichinvolvesacommitmentoveranextendedtimeperiod,andamutualsharingofinformationandtherisksandrewardsoftherelationship.’Thefollowinglistgivesthemainfeaturesofalliances:●organisationsworkingcloselytogetheratalllevels●seniormanagersandeveryoneintheorganisationssupportingthealliance●sharedbusinessculture,goalsandobjectives●opennessandmutualtrust●long-termcommitment●sharedinformation,expertise,planningandsystems●flexibilityandwillingnesstosolvesharedproblems●continuousimprovementsinallaspectsofoperations●jointdevelopmentofproductsandprocesses●guaranteedreliableandhighqualitygoodsandservices●agreementoncostsandprofitstogivefairandcompetitivepricing●increasingbusinessbetweenpartners. AdversarialInformalContractualFormalMinorityJointVerticalco-operationallianceinvestmentventureintegrationArm’sMedium-termLong-termRelationshipUnspecifiedlengthcontractcontractInformationLittleMoreFullsharingTradewithMuchLessLittlecompetitorsComingCultureDifferentSharedtogetherFigure2.4Spectrumofrelationships INTEGRATINGTHESUPPLYCHAIN47Partnershipscanleadtochangesinoperations.Forexample,thestabilityofapartnershipmightencouragesupplierstospecialiseinonetypeofproduct.Theygivesuchacommitmenttothealliancethattheyreducetheirproductrange,maketheseasefficientlyaspossible,andconcentrateongivingasmallnumberofcustomersaveryhighqualityservice.Theyshareinformationwithcustomerswithoutthethreatthatthiswillbeusedtogetsomeformoftradingadvantage.Atthesametime,customersreducetheirnumberofsuppliers,astheynolongerneedtolookaroundtogetthebestdeals.Japanesecompanieswereamongthefirsttodevelopstrategicalliances,andatthetimewhenToyotahadformedpartnershipswithits250suppliers,GeneralMotorswasstillworkingseparatelywith4000suppliers.Itcanbedifficulttoformasuccessfulpartnership.Ausefulstartingpointistoanalysecurrentoperationsandfutureplanstoseeifallianceswouldbeuseful.Acompanycannotreallyexpectanybenefitsfromanallianceifitonlybuysafewmaterials,orischangingitsmanufacturingbase,orissensitiveaboutconfidentiality,orcannotfindreliablesuppliers.Mostorganisations,however,canseepotentialbenefits,andtheyshouldstartlookingatpossiblearrangements.Typicallytheyformaprojectteamtoidentifypotentialpartners,defineobjectives,settimetables,listresourceimplications,negotiateterms,andsoon.Whenthisprojectteammakesitsinitialreport,potentialpartnerscanbeapproachedandnegotiationsbegin.Thefollowingexampleshowshowonecompanysetaboutthis.LOGISTICSINPRACTICEPetro-CanadaPetro-Canada(PC)isthelargestoilcompanytheirownapproach.ThishadtargetsofinCanada,with4500employeesandoverreducingcostsby15%inafirstphase,and$6billioninsales.Itowns750millionbarrelseventuallyby25%.ofprovedreserves,butitsmainincomePCquicklyrealisedthatwithoutguaran-comesfrom1700retailpetrolstations.Theteedproductqualityitcouldmakenofur-CanadiangovernmentoriginallyfoundedPCtherprogress,soitconsolidateditsuseoftocompetewithmajorinternationalcompa-totalqualitymanagement.Thisincludednies,anditstillowns18%oftheshares.Deming’s32‘14principles’whichadviseInthe1990sPCstartedtoformstrategicorganisationsnottobuyproductsontheallianceswithitsmajorsuppliers.Itwasbasisofcostalone,buttoincludearangelookingforwaysofreducingcosts,andoffactorssuchasquality,reliability,timing,supplierpartnershipswereaclearoptionfeatures,trust,andsoon.foracompanythatspentover$2billionaNowithaddonethepreparation,PCyearonmaterialsotherthanoil.couldstarttalkingtoprospectivepartners.ItTofindthebestwayofformingstrategicchosethesefromcompaniesthatitcurrentlyalliances,PCbenchmarkedothercompa-didmostbusinesswith,andthosewhosenieswhoreportedahistoryofsuccessfulproductswerecritical.Therewerealreadypartnerships,includingMotorolaandDowlong-standing,informalrelationshipswithChemicals.Inpractice,growingpressuretomanyofthese,andPCextendedthemtoimproveperformancemeantthatPChadcreatemoreformalalliances.Importantcon-togetresultsquickly,andtheydevelopedsiderationswerethatthesupplierswere 48LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedcommittedtohighquality,emphasisedcus-withresearch,training,systemsandtomersatisfaction,andhadthepotentialtopracticesbecome‘thebestofthebest’.2.assesstheriskandbenefitsofpartner-ThisgavePCitslikelypartners,andtheships,settingaimsandtargetsnextstagewastoformjointdevelopment3.benchmarkotherpartnershiparrange-teams,includingrepresentativesfromthementspurchasinganduserdepartments.Because4.selectqualifiedsuppliersofthetimepressure,thisteamlookedfor5.formjointteamstomanagetheinitia-quickimprovements.Theiraimwastogettiveandmoveitforwardtheinitiativemoving,getsomequick6.confirmthepartnership’sprinciples,returns,generateenthusiasmfortheideas,commitments,relationshipsandobliga-andthenmovethepartnershipforwardtionsoverthelongerterm.7.formalisethetermsandconditionsWecansummarisePC’sapproachto8.continuetrainingandimproving.developingpartnershipsinthefollowingstages:Sources:internalcompanyreportsandwebsiteatwww.petro-canada.com1.preparetheorganisationforalliancesOfcourse,formingapartnershipisonlythefirststep,anditstillneedsalotofefforttomakeitasuccess.Somefactorsthatcontributetoasuccessfulpartnershipincludeahighlevelofachievedservice,realcostsavings,agrowingamountofbusiness,compatibilityofcultures,andsoon.Rowley33gaveamoregenerallistofkeyfactorsasmanagementcommitment,acontractspecifyingcostsandresponsibilities,agreedperformanceindicators,agreedobjectives,sharedcultureandjointinformationsystems.Lambertetal.34summarisedtheseas:●drivers,whicharethecompellingreasonsforformingpartnerships,suchascostreduction,bettercustomerservice,orsecurity●facilitators,whicharethesupportivecorporatefactorsthatencouragepartnerships,suchascompatibilityofoperations,similarmanagementstyles,commonaims,andsoon●components,whicharethejointactivitiesandoperationsusedtobuildandsustaintherelationship,suchascommunicationchannels,jointplanning,sharedriskandrewards,investment,andsoon.Alliancesarecertainlynotthebestanswerineverycircumstance.Somepurchasesaresosmall,ormaterialsaresocheap,thattheeffortneededforanallianceisnotworthwhile;some-timesmanagersdonotwanttolosecontrolorshareinformation;sometimesanorganisationmaynotbeabletofindapartnerwillingtomakethenecessarycommitment;organisationalstructuresorculturesmaybetoodifferent;itmaybeimpossibletoreachthenecessaryleveloftrust;theremaybenobodywiththenecessaryskillsandenthusiasm,andsoon.Severalyearsafterstartingitssupplierpartnershipinitiative,Petro-Canadastillbought20–40%ofmaterialsthroughtraditionalsupplier–customerrelationships. INTEGRATINGTHESUPPLYCHAIN49However,itisclearthatalliancesarebecomingincreasinglypopular.AsEwer35says,wehave‘thepowerfulcombinationofimprovedtechnologywhichcanenablebetterpartnering,agrowingconsensusthatpartneringenabledbye-B2Bisessential,andagrowingpublicprofileforpartneringissuesingeneral’.VerticalintegrationIfanorganisationwantstogobeyondpartnerships,ithastoownmoreofthesupplychain.Onecommonarrangementhasanorganisationtakingaminorityshareinanothercompany.Thisgivesitsomesayintheiroperations,butitdoesnotnecessarilycontrolthem.Amanu-facturer,forexample,mighttakeaminorityshareinawholesaler,togetsomeinfluenceinthewaythatitsproductsaredistributed.Anotheroptionisfortwoorganisationstostartajointventure,wheretheybothputupfundstostartathirdcompanywithsharedownership.Amanufacturerandsuppliermighttogetherformatransportcompanyformovingmaterialsbetweenthetwo.Themostcommonarrangementhasoneorganisationsimplybuyingotherorganisationsinthesupplychain.Thisincreasesitslevelofverticalintegration.VERTICALINTEGRATIONdescribestheamountofasupplychainthatisownedbyoneorganisation.Ifanorganisationbuysmaterialsfromoutsidesuppliersandsellsproductstoexternalcustomers,itdoesnotownmuchofthesupplychainandhaslittleverticalintegration(asshowninFigure2.5).Iftheorganisationownsinitialsuppliers,doesmostofthevalueaddingSuppliersOperationsCustomersTypeofverticalPartsownedbyintegrationtheorganisation(a)Little(b)Backward(c)Forward(d)HighFigure2.5Differentlevelsofverticalintegration 50LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENToperations,anddistributesproductsthroughtofinalcustomers,itownsalotofthesupplychainandishighlyverticallyintegrated.Iftheorganisationownsalotofthesupplysideithasbackwardorupstreamintegration;ifitownsalotofthedistributionnetworkithasdown-streamorforwardintegration.Insomecircumstancesverticalintegrationisthebestwayofgettingdifferentpartsofthesupplychaintoworktogether.FordofAmerica,forexample,hasatdifferenttimesownedeverythingfromsteelmillsthroughtodistributornetworksandrepairshops.Moreoften,widespreadverticalintegrationwouldbeveryexpensive,leadingtohugeorganisationsthatspreadtheirresourcestoothinly,needingspecialisedskillsandexperiencethatoneorganisa-tiondoesnothave,reducingflexibilitytorespondtochangingconditions,andsoon.Soverticalintegrationisnotnecessarilydesirable,anditisusuallyimpossibleforeventhebiggestorganisationtoownmuchoftheirsupplychains.Heinz,forexample,cannotbuyallthefarmers,processors,steelmills,canners,wholesalers,retailersandotherorganisationsinthesupplychainfortheirbakedbeans.LOGISTICSINPRACTICEGZRexamIn1996RexamPharmaceuticalPackaging■Shorterlead-times–fromimprovedco-andGraficaZanniniformedajointventureordination,proceduresandadministra-calledGZRexam.Itsprimaryaimistosup-tion.WithEliLillytheyreducedleadplypackagingtothepharmaceuticalindus-timesfromsixtotwoweeks,withjust-tryinEurope.Thisisanimportantarea,asin-timedeliveriesforspecificorders.over50%ofpharmaceuticalcompanies’■Higherquality–withuniformstandards,productrecallsarecausedbyfaultsincollaborationinqualityinitiatives,lessprintedmaterial,andeachrecallcostssev-relianceoninspectionsandacommit-eralmillionpounds.menttolong-termimprovements.GZRexamlooksforthebenefitsofpart-nershipswithitscustomers.JohnSteven-Oncetheobjectivesofapartnershipson,theSalesandMarketingDirector,says,havebeenagreed,thetwokeyfactorsfor‘ThedaysoftheconventionalsupplychainsuccessatGZRexamarecommitmenttowhereeveryoneexistedasanindependentthelong-termsuccessofthepartnershipentity…arenolonger’.Hequotesthreeandgoodcommunicationbetweenevery-reasonsforpartnerships:oneconcerned.■Lowercosts–duetobetterco-ordination,Source:StevensonJ.(1999)Partnering–eliminationofduplicatedeffort,lessImprovingtheSupplyChain,LogisticsFocus,7(2)9–11bureaucracy,quantitydiscounts,andeconomiesofscale.GZRexamestimatesthatitcansaveupto60%ofpackagingcoststhroughpartnerships. INTEGRATINGTHESUPPLYCHAIN51❑Inthepast,logisticsdidnotreceivemuchattention.Moreorganisationsnowrecogniseitsimportance.Byorganisinglogisticsproperly,costcanbereduced,customerserviceimproved,andotherorganisationalobjectivesachieved.❑Therearemanypressuresonlogistics.Itisrespondingtothesebyintroducingnewpracticesandmethods.Perhapsthemostobviouschangesarerelatedtonewtechnologyforimprovingcommunications.❑Therearethreeimportanttrendstowardslean,agileandintegratedlogistics.Thesearenotmutuallyexclusive,andanorganisationcanmakeprogresson■■■■■■■■allthree.❑Traditionally,logisticshasbeenorganisedasaseriesofdistinctactivitieswithinanorganisation.Thisinevitablyleadstoconflictsandinefficiencies.Abetterapproachdevelopsasingleintegratedfunctionthatisresponsibleforalllogistics.❑Integrationcanbedifficultandinvolvemajorchanges.Thereare,however,manybenefits,andmostcompanieshavemovedinthedirectionofinternalintegration.❑Therearealsothebenefitsofextendingintegrationtomoreorganisationsinthesupplychain.Thereareseveralwaysoforganisingthisexternalintegration,rangingfrominformalagreementstoverticalintegration.Themostpopularhassomeformofstrategicallianceorpartnership.CHAPTERREVIEWCASESTUDYFriedlandTimbersasaJohannKlassenistheManagingDirectorofFriedlandTimbersasa.whichmakesspecialisedwoodproductsfortheconstructionindustry.Hehasrecentlybeenworriedbylatedeliveriestosomeimportantcustomers.Theindustryisverycompetitive,andJohannknowsthatcustomerswillgotoothersuppliersifhecannotguaranteedeliveries.Themarketingmanagerisparticularlyupsetbecausehehasworkedwiththesecustomersforalongtime,andpromiseddeliveriesthatwerenotmade.Johannaskedtheproductionmanagerforanexplanation.Shetoldhimthat‘Ourownsupplierswerelateindeliveringcertaintypesofwood.Thisshortageofakeyrawmaterialdisruptedourproductionplans.Wecannotbeblamedforthis.If 52LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedanyoneinthecompanyistoblame,itisthewarehousemanagerwhodoesnotkeepenoughstocksofrawmaterialstocoverforlatedeliveries.’Johannthenwenttothewarehousemanagertoseewhatwashappening.‘Therecan’tbeanythingwronghere’,hewastold.‘Stockshavebeenclimbingforthepastyear,andlastmonththeywereatanalltimehigh.Inpart,thisisadeliberatedeci-sion,asIwanttoimproveservicelevelstoproduction.Inpart,though,stocksseemtohavejustdriftedupwards.Nowwehavehighstocksofmostitems,buttherearestilloccasionalshortages.Thesehighstocksarecausingmeproblemswithspace,andarestretchingmybudget.Ithinkthattheblameliesinpurchasing,whodonotordertheamountsthatwerequest.’Johannsawthatsomestocksweredriftingupwardsbecausepurchasingwerebuyinglargequantitiesofsomematerials.Atthesametime,theyweredelayingsomepurchases,andthisproducedtheshortages.ThepurchasingmanagerexplainedtoJohann,‘Letmeremindyouthateightmonthsagoyouinstructedmetoreducematerialscosts.Iamdoingthisbytakingadvantageofthediscountsgivenbysuppliersforlargerorders.OftenIordermorethanrequestedundertheassumptionthatwewillneedthematerialatsomestage,soIgetadiscountandthematerialisalreadyinstockwhenweneedit.Sometimeskeepingthingsinstockwouldtaketoomuchspaceorbetooexpensive,sothenImightdelayanorderuntilIcancombineitwithotherstogetbiggerdiscounts.’Johannthoughtthathewasnearthesourceofhisproblems,andmightaskforthepurchasingpoliciestobereviewed.Thenhetalkedtothetransportmanagerwhowasnotsosure.‘Itismuchmoreefficientformetobringlargerquantitiesintothecompany’,hesaid.‘Ifyoureducetheaverageordersize,thetransportcostswillrise.Ourbudgetisalreadybeingsqueezed,aswehavetopayforexpensiveexpressdeliv-eriesofmaterialsthatproductionclassifyasurgent.Ifyoulowertheordersize,therewillbemoreshortages,moreexpressdeliveriesandevenhighercosts.’Johanntalkedtosomemajorsupplierstoseeiftheycouldsomehowimprovetheflowofmaterialsintothecompany.Unhappily,whilehewastalkingtoonecompany,theyraisedthequestionoflatepayments.ThiswascontrarytoFried-land’sstatedpolicyofimmediatepaymentofinvoices,soheaskedtheaccountingsectionforanexplanation.Hewasgiventheunwelcomenewsthat‘Thecompany’sinventoryandtransportcostsaresohighthatweareshortofcash.Wearedelayingpaymentstoimproveourcashflow.Asitis,wehadtouseabankoverdrafttopaysuppliersforlastmonth.’ INTEGRATINGTHESUPPLYCHAIN53CASESTUDYcontinuedLaterthatdayJohannfoundthatthelatecustomerdeliverieswhichhadstartedhisinvestigation,wereactuallycausedbypoorsalesforecastsbythemarketingdepartment.Theyhadseriouslyunderestimateddemand,andplannedproductionwastoolow.AlltheemployeesatFTweredoingtheirbest,butthingsseemedtobegoingwrong.CASESTUDYQuestions●Whydoallthelogisticscostsseemtoberisingatthesametime?●WhatdoyouthinkarethebasicproblemsinFriedland?●WhatwouldyourecommendJohanndo?PROJECTSupplyPartnershipsFindaparticularproductwhosesupplychainiseasytostudy,suchaspetrol,atelephoneservice,cars,arestaurantchain,oracomputergame.Discusstheamountofintegrationinthesupplychain.Whatalternativesarethereforintegration?Seeifdifferentorganisationsmakingsimilarproductshavethesameapproach,andexplainanydifferences.Saywhytheexistingpatternsoflogisticshavedeveloped,anddiscussthebenefitsofthislevelofintegration.DISCUSSIONQUESTIONS1.Whatdoyouthinkarethemainfactorsthatencouragelogisticstochange?Howisitrespondingtothesepressures?Whatchangesdoyouthinktherewillbeinthenextdecade?2.Whenlogisticsisdividedintoseparatefunctions,eachislikelytohaveitsownobjectives.Isthisnecessarilyabadthing,orcantherebepositivebenefits?3.Anintegratedsupplychainisaconvenientnotion,butitdoesnotreflectrealoperations.Anorganisationisonlyreallyconcernedwithitsowncustomersandsuppliers,anddoesnothavetimetoconsiderotherorganisationsfurtheralongthechain.Doyouthinkthatthisistrue? 54LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT4.WhenChristopher19saysthat‘supplychainscompete,notcompanies’whatexactlydoeshemean?5.DeckerandvanGoor36saythatintegrationinthesupplychaincanbeatthelevelof:●Physicalmovement●Sharedinformation●Integratedcontrol●IntegratedinfrastructureWhatdotheymeanbythis?REFERENCES1.ShawA.W.(1916)AnApproachtoBusinessProblems,HarvardUniversityPress,Cambridge,MA.2.ClarkF.E.(1922)PrinciplesofMarketing,Macmillan,NewYork.3.BorsodiR.(1927)TheDistributionAge,D.Appleton,NewYork.4.DruckerP.(1962)Theeconomy’sdarkcontinent,Fortune,April,4,p.103.5.RayD.(1976)Distributioncosting,InternationalJournalofPhysicalDistributionandMaterialsManagement,6(2),73–107.6.LittleW.I.(1977)Thecellularflowlogisticscostingsystem,InternationalJournalofPhysicalDistributionandMaterialsManagement,7(6),305–29.7.FirthD.,DenhamF.R.,GriffinK.R.andHeffernanJ.etal.(1980)(eds)DistributionManagementHandbook,McGraw-Hill,London.8.RayD.,GattornaJ.andAllenM.(1980)Handbookofdistributioncostingandcontrol,InternationalJournalofPhysicalDistributionandMaterialsManagement,10(5),211–429.9.McKibbinB.N.(1982)CentreforPhysicalDistributionManagementnationalsurveyofdistributioncosts,FOCUSonPhysicalDistribution,1(1),16–18.10.DelaneyR.V.(1986)Managerialandfinancialchallengesfacingtransportleaders,TransportationQuarterly,40(1),35.11.HillG.V.(1994)Assessingthecostofcustomerservice,inCooperJ.(ed.)LogisticsandDistributionPlanning(2ndedn),KoganPage,London.12.Stafford-JonesA.(1997)Electroniccommerce:thefuturewithEDI,LogisticsFocus,5(9),9–10.13.MROSoftware(2001)SupplyingtheGoods,MROSoftware,London.14.TheGartnerGroup(2001)Websiteatwww.gartner.com.15HolwegM.,JudgeB.andWilliamsG.(2001)The3DayCarchallenge:carstocustomerorders,LogisticsandTransportFocus,3(9),36–44.16.3DayCarProgramme(2001)Websiteatwww.cf.ac.uk/3DayCar.17.McKinnonA.C.(1999)Theoutsourcingoflogisticalactivities,Ch.14inWatersD.(ed.)GlobalLogisticsandDistributionPlanning,KoganPage,London.18.MarketlineInternational(1997)EULogistics,MarketlineInternational,London.19.ChristopherM.(1996)EmergingIssuesinSupplyChainManagement,ProceedingsoftheLogisticsAcademicNetworkInauguralWorkshop,Warwick.20.JonesD.,HinesP.andRichN.(1997)Leanlogistics,InternationalJournalofPhysicalDistributionandLogisticsManagement,27(3/4),153–73.21.WomackJ.andJonesD.(1996)LeanThinking,Simon&Schuster,NewYork.22.ChristopherM.(1999)Globallogistics:theroleofagility,LogisticsandTransportFocus,1(1).23.RowleyJ.(2001)Leanandagile,LogisticsandTransportFocus,3(6),52–7. INTEGRATINGTHESUPPLYCHAIN5524.EvansB.andPowellM.(2000)Apragmaticviewofleanandagile,LogisticsandTransportFocus,2(10),26–32.25.SheehyP.(1988)Quality–thespringboardtosuccess,FocusonPhysicalDistributionandLogisticsManagement,7(8),3–9.26.LewisH.T.,CullitonJ.W.andSteelJ.D.(1956)TheRoleofAirFreightinPhysicalDistribution,HarvardBusinessSchool,Boston,MA.27.ForresterJ.(1961)IndustrialDynamics,MITPress,Boston,MA.28.GuiniperoL.C.andBrandR.R.(1996)Purchasing’sroleinsupplychainmanagement,InternationalJournalofLogisticsManagement,7(1),29–37.29.P-EConsulting(1997)EfficientCustomerResponse–SupplyChainManagementfortheNewMillennium?P-EConsulting,Surrey.30.AbbeyNational(2002)Websiteatwww.abbeynational.plc.uk.31.EllramL.M.andKrauseD.R.(1994)Supplierpartnershipsinmanufacturingversusnon-manufacturingfirms,InternationalJournalofLogisticsManagement,5(1),43–53.32.DemingW.E.(1986)OutoftheCrisis,MITPress,Cambridge,MA.33.RowleyJ.(2001)OutsourcingacrossbordersinEurope,LogisticsandTransportFocus,3(1),54–6.34.LambertD.M.,EmmelhainzM.A.andGardnerJ.T.(1996)Developingandimplementingsupplychainpartnerships,InternationalJournalofLogisticsManagement,7(2),1–17.35.EwerG.A.(2001)Viewpoint,LogisticsandTransportFocus,3(2),2.36.DeckerH.andvanGoorA.(1998)ApplyingActivity-basedCostingtoSupplyChainManagement,Proceedingsofthe1998LogisticsResearchNetworkConference,CranfieldUniversity. PARTIIPlanningtheSupplyChainThisbookisdividedintothreeparts.Thefirstpartgaveageneralintroductiontothesubjectofsupplychainmanage-ment.Thisisthesecondpart,whichdiscussestheplanningneededforasupplychain.Therearesixchaptersinthispart.Chapter3discussesthestrategicsignificanceoflogistics,alternativestrategies,andthechoiceofmostappropriate.Chapter4discussestheimplemen-tationofthisstrategyandapproachestochange.Chapter5showshowtheshapeofthesupplychainissetbythelocationoffacilities.Chapters6and7describesomeapproachestoplanningresources.Chapter8showshowtomeasureandimproveperformance.Thispartofthebooklooksatdifferenttypesofplanning.Itstartswiththelogisticsstrategywhichsetsthesceneforallotherdecisionsinlogistics.Thenitdescribesdifferentaspectsofplanning,makingsurethatthesupplychaincanworkeffi-ciently.Thelastpartofthebookfocusesondifferentactivitiesoflogistics. CHAPTER3LogisticsStrategyCONTENTS■Aimsofthechapter■Casestudy–HessingenHerb■StrategicdecisionsFarm■Logisticsstrategy■Project–Missionandstrategy■Strategyoptions■Discussionquestions■Designingalogisticsstrategy■References■ChapterreviewAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■SEEhowalogisticsstrategyfitsintoanorganisation’sbroaderdecisions■OUTLINEthestrategicimportanceoflogistics■DEFINEalogisticsstrategyandDISCUSSitsfocus■DISCUSSalternativelogisticsstrategies■APPROACHthedesignofalogisticsstrategy 60LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTSTRATEGICDECISIONSTypesofdecisionSomedecisionsareveryimportanttoanorganisation,withconsequencesfeltovermanyyears.Otherdecisionsarelessimportant,withconsequencesfeltoverdaysorevenhours.Wecanusetheirimportancetoclassifydecisionsas:●Strategicdecisionsaremostimportantandsettheoveralldirectionoftheorganisation;theyhaveeffectsoverthelongterm,involvemanyresourcesandarethemostrisky●Tacticaldecisionsareconcernedwithimplementingthestrategiesoverthemediumterm;theylookatmoredetail,involvefewerresourcesandsomerisk●Operationaldecisionsarethemostdetailedandconcernactivitiesovertheshortterm;theyinvolvefewresourcesandlittleriskAtraditionalviewhasseniormanagersmakingthestrategicdecisionsthatsettheirorgan-isationonitscourse.Thesestrategicdecisionsgivetheobjectives,constraintsandcontextforthetacticaldecisionsmadebymiddlemanagers.These,inturn,givetheobjectives,constraintsandcontextforoperationaldecisionsmadebyjuniormanagers.Thisisstilltheusualapproachtodecisions,butnewstylesofmanagementandimprovedtechnologyhaveencouragedchanges.Nowyourarelyseesuchastricthierarchy,evenamongconventionallyrigidorganisationslikethearmedforces.Mostdecisionsarediscussed,negotiatedandagreedratherthansimplypasseddown.Thereisalsoagrowingrecognitionthatthebestpersontomakeadecisionisthepersonmostcloselyinvolved–andthisisoftenajuniormanagerwhoisonthespotratherthanaremote,seniormanager.Youcanseethiseffectwithempowerment(whichdevolvesdecisionstothelowestpossiblelevel)‘delayering’(toremoveunnecessarylayersofmanagement)andleanorganisations(whichremoveallunnecessaryactivities).Thereareseveraltypesofstrategicdecision(asshowninFigure3.1).Peopleusedifferentnamesforthese,butthemostcommonare:●mission–astatementtogivetheoverallaimsoftheorganisation;●corporatestrategy–whichshowshowadiversifiedcorporationwillachieveitsmission;●businessstrategy–whichshowshoweachbusinesswithinadiversifiedcorporationwillcontributetothecorporatestrategy;●functionalstrategies–whichdescribethestrategicdirectionofeachfunction,includinglogistics.Essentiallythehigherstrategiessetthegoalsandgeneraldirectionoftheorganisation,andthefunctionalstrategiesshowhowtoachievethese.Sothebusinessstrategyshowswhathastobedone,andthelogisticsstrategyshowshowthesupplychainwillhelpachievethis.Ifanorgan-isationhasabusinessstrategyofbeingthelowestcostproviderofsomeproduct,thelogisticsstrategyshowshowitwillreducelogisticscoststoaminimum;iftheorganisationisworkingtogetfastdeliveriestocustomers,thelogisticsstrategydefinespoliciesforachievingthis.Thisassumes,ofcourse,thatlogisticsreallyhasastrategicrole.Perhapsweshouldreviewtheevidencetosupportthis. LOGISTICSSTRATEGY61MissionForthewholeorganisationCorporatestrategyForeachBusinessBusinessBusinessbusinessunitstrategy1strategy2strategy3ForeachFunctionalFunctionalFunctionalfunctionstrategy1strategy2strategy3Figure3.1TypesofstrategicdecisionStrategicroleoflogisticsThelasttwochaptersshowedthatlogisticsisessentialforeveryorganisation,eventhosesupplyingintangibleservices.Wesaidthatitisconcernedwithmajordecisionsthathaveaclearstrategicimpact,suchasthedesignofthesupplychain,sizeandlocationoffacilities,relationswithotherorganisations,partnershipsandalliances.Weshowedthatlogisticsisamajoruserofresources,includingtransportandstorage;ithasanimpactonorganisationalperformance,includingprofitandfinancialmeasuressuchasthereturnonassets;itaffectsleadtime,perceivedproductvalue,reliabilityandothermeasuresofcustomerservice;itgivespublicexposure,raisessafetyandenvironmental,issues,encouragessomeoperationsandprohibitsothers.Youcanseemoreevidenceofthestrategicroleoflogisticsinmissionstatements,whichoftenhavesomeexplicitreferencetothesupplychain.Itis,ofcourse,notsurprisingthatcompaniesofferingspecialisedlogisticsservicesrefertothesupplychainintheirmissions.ThemissionofRoadwayExpress,anAmericantransportcompany,says:Wewillcontributetocustomersuccessandsatisfactionbyprovidingreliable,responsive,andefficientservice.Ourprincipalproductwillbeless-than-loadtransportationon2-dayandlongerlaneswithinNorthAmerica,andoninternationallanestoandfromNorthAmerica.1Similarly,MerciaSoftwareisthelargestEurope-basedproviderofsoftwareforsupplychainmanagement,andtheysaythat:Mercia’smissionistoprovidecustomerswithoptimumvaluebusinesssolutionsindemandandsupplychainplanning.2 62LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTRetailersoftenformthelinkstofinalcustomers,andtheirlong-termsurvivaldependsontheirabilitytomanagesupplychainsandmovematerialsefficiently.BootstheChemistsays:Ourvisionistobetheworld’sleadingretailerofproductsandservicesthathelpmakeourcustomerslookgoodandfeelgood.3Sainsbury’sobjectivesinclude:Toprovideunrivalledvaluetoourcustomersinthequalityofthegoodswesell,inthecompetitive-nessofourpricesandintherangeofchoiceweoffer.Toachieveefficiencyofoperation,convenienceandcustomerserviceinourstores….4Neitherofthesestatementsmentionslogisticsdirectly,buttheybothemphasisethesupplyofproductstocustomers,andtheirimplicitrelianceonlogistics.Thepoint,ofcourse,isthatthelong-termsurvivalofeveryorganisationdependsontheflowofmaterialsthroughitssupplychains.Thestrategicimportanceoflogisticsstemsfromthebasicfactthatwithoutlogisticstherecanbenooperations–andnoorganisation.Youcanseethismessageclearlyinmanymissionstatements.GKN,forexample,includeacommitment:Totreatoursuppliersfairlyasanintegralpartofourtotalcapabilitytoserveourcustomers.5Wecouldcontinuediscussingtheevidenceforastrategicroleforlogistics,butthefactsaresoclearthatthereislittlepoint.Thisis,however,arelativelynewopinion.Formanyorganisa-tionstherecognitionthatlogisticshasastrategicimpactisoneofthemostimportantdevel-opmentsofrecentyears.Itchangesthewaythattheymanagethesupplychain,andlinksitmorecloselywithotherstrategicdecisions.Logisticshasanew,prominentroleandgetsthesameattentionasothercorefunctions.Seniormanagersmakethedecisions,basedonmorerelevantinformationandabroaderviewoftheorganisation’sobjectives.Therecognitionthatlogisticshasalong-termeffectonoverallperformancehasmoveditfromtheperipherytothecentreofdecisionmaking.LOGISTICSSTRATEGYDefinitionAllthelong-termdecisionsaboutlogisticsformalogisticsstrategy.TheLOGISTICSSTRATEGYofanorganisationconsistsofallthestrategicdecisions,policies,plansandculturerelatingtothemanagementofitssupplychains.Thelogisticsstrategyformsalinkbetweenthemoreabstract,higherstrategiesandthedetailedoperationsofthesupplychain.Whilethecorporateandbusinessstrategiesdescribegeneralaims,thelogisticsstrategyconcernstheactualmovementofmaterialsneededtosupporttheseaims.ThebusinessstrategyofUPScallsfor‘outstandingservice’toitscustomers,andthistranslatesintoalogisticsstrategyoforganisingaveryfastparceldeliveryservicetoalmostanypointintheworld. LOGISTICSSTRATEGY63DiscussionLogisticsOtherseniorandmanagersmanagersagreementBusinessstrategyLogisticsstrategyLowerlogisticsdecisionsFigure3.2RoleoflogisticsmanagersinstrategicdecisionsThehigherstrategiessetthecontextforthelogisticsstrategy.However,logisticsmanagersdonotsimplyrespondtothiscontext,theyactivelycontributetoitsformulation.Theirviewsonwhatlevelsofperformanceareactuallyachievablebylogisticsformoneoftheinputsforthedesignofhigherstrategies(asshowninFigure3.2).ForUPStherecognitionthatitreallycanachieveefficientlogisticsallowsittohaveabusinessstrategyofaimingatoutstandingservice.Thereare,ofcourse,manyfactorsotherthanlogisticstoconsiderindesigningabusinessstrategy.Buttheamountthatlogisticscontributestotheformulationofhigherstrategiescanhaveasignificanteffectonoperations.Atoneendofaspectrum(showninFigure3.3)areorganisationswherelogisticscontributeshardlyanythingtothehigherstrategies.Logisticsmanagerssimplyacceptthehigherstrategiesdesignedbyothers,anddesignoperationstoLogisticsLogisticsmanagersLogisticsmanagersmanagersgivegivesomeinputandgivemajorinputlittleinputandsupporthigheranddetermineonlyimplementstrategieshigherstrategieshigherstrategiesFigure3.3Differentamountsofinputfromlogisticsmanagers 64LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTmakesurethesecanbeachieved.Attheotherendofthespectrumareorganisationswhoselogisticsreallydictatethehigherstrategies.TheChannelTunnel,forexample,offersauniquelogisticsservice,andallitshigherstrategiesarebasedonitslogisticsoperations.FocusofthelogisticsstrategyOrganisationscanonlysurvivebysupplyingproductsthatcustomersviewassomehowbetterthanthosefromcompetitors.Logisticsaffectstheleadtime,availability,cost,customersupport,damage,andsoon–andhencethecustomers’viewofaproduct.Inthissense,logis-ticsactuallycontributestothedesign,quality,perceivedvalueandsuccessofaproduct.Butwhichfactorsaremostimportantforthiscontributionandshouldbeemphasisedinalogisticsstrategy?Wecanstarttoanswerthisbytakingatraditionalviewfrommarketingwhichsaysthatorganisationscompetebyconcentratingonthe‘fourPs’–product,place,promotionandprice.Herelogisticshasaroleinthe‘product’(throughitscontributiontotheoverallproductpackage),‘place’(throughitsdeliveryofmaterials)and‘price’(throughitseffectonoperatingcosts).Alogisticsstrategycouldusefullyemphasisethesefeatures.Abroaderviewsaysthatcustomersareconcernedwithcost,quality,servicelevel,relia-bility,availability,flexibility,deliveryspeed,location,sourcing,supplierrelations,environ-mentalimpact,recycling,andawholerangeofotherthings.Thesealldependondifferentaspectsoflogistics.Indifferentcircumstances,therefore,almostanyfacetoflogisticscanbeimportantforcustomersatisfaction,andcouldbeemphasisedbythelogisticsstrategy.Inprac-tice,alogisticsstrategyismostlikelytoemphasisethefollowing:●Cost:Mostorganisationswantlowcosts,butsomeadoptapositivestrategyofminimisingtheirlogisticscosts.Thisleadstohigherprofitsfortheorganisationandlowerpricesforcustomers.●Customerservice:Logisticscontrolsstocklevels,deliverytimes,speedofresponse,andothermeasuresofcustomerservice.Byconcentratingthelogisticsstrategyoncustomerservice,organisationscangetalong-termcompetitiveadvantage.●Timing:Customersgenerallywantproductsassoonaspossible,soacommonlogisticsstrategyguaranteesfastdeliveries.Timingcanalsomeanrapidsupplyofnewproducts,ordeliveringatthetimespecifiedbyacustomer.●Quality:Customersdemandhigherqualityinallproducts.Acommonlogisticsstrategyguaranteeshighqualityservice,eventhoughitcanbedifficulttosayexactlywhatwemeanby‘highqualitylogistics’(wereturntothisquestioninChapter12).●Productflexibility:Thisistheabilityofanorganisationtocustomiseproductstoindividualspecifications.Onelogisticsstrategyisbasedonaspecialisedorcustomisedservice,suchasPickfords’removals.●Volumeflexibility:Changinglevelsofbusinesscancausesevereproblemsforlogistics,asyoucanseeduringthemorningrushhourinanymajorcity.Volumeflexibilityallowsanorganisationtorespondquicklytochanginglevelsofdemand.●Technology:Logisticsusesawiderangeoftechnologiesforcommunications,trackingloads,sortingparcels,identifyingproducts,recordingstockmovements,andsoon.Someorganisationshaveastrategyofdevelopingandusingthelatesttechnologies. LOGISTICSSTRATEGY65●Location:Customersgenerallywantproductstobedeliveredasclosetothemaspossible.Thismightmeanthatabookclubdeliversdirectlytoyourdoor,ashophasaconvenientlocationinatowncentre,orawholesalerhasaregionallogisticscentreneartomajorcities.Onelogisticsstrategyistoprovideaserviceinthebestpossiblelocation,suchasbusstationsintowncentres.Inprinciple,organisationsshoulddoeverythingwell,givinglowcost,goodcustomerservice,fastdelivery,flexibility,usinghightechnology,andsoon.Inpractice,thisisunreal-istic.Organisationshavetocompromise,perhapsbalancingthelevelofservicewiththecostofprovidingit.Effectivelytheychooseaspecificfocusfortheirlogisticsstrategy,showingwhichfactortheyconsidertobemostimportant.Someorganisations,suchasRyanair,focusoncost,givingacheapservice;others,suchasFedEx,focusondeliveryspeed;othersfocusonreliability;oracustomisedservice,andsoon.Oneofthekeydecisionsforlogisticsmanagersischoosingthestrategicfocus.LOGISTICSINPRACTICETheSchenkerGroupTheSchenkerGroupwasfoundedinGer-Wewillearnourcustomers’trusteveryday,manymorethan125yearsago,andhasandwewillnevertaketheirbusinessforbeenworkinginternationallyeversince.granted.Theyemploy28,000people,servingcus-Ourcustomersareourpartnersinbusi-tomersin1000locations.Schenkernowness.Theirneedswillbeourneeds.providearangeoflogisticsservices,includ-Schenkeralsodescribethewaysthattheyinginternationalairandoceanfreight,willachievecustomersatisfaction,suchas:logisticsmanagementandlandtransport.Wewillserviceourcustomersinaninnova-Theyprovideseamlessmovementofcus-tive,pro-activemanner.Wewillalwaysbetomerproductsandinformationacrossawareofhowourserviceimpactstheirglobalsupplychains,usingthelatesttech-business.nologyanddevelopingsophisticatedsys-temsfore-commerce.However,theirThisoverridingstrategyofcustomersat-strategicfocusisoncustomerservice.isfactionsetsthesceneforallotherlogisticsSchenkeropenedintheUSAin1947andactivities.WhentheyworkwithCopelandnowhave46officesinmajorcities.AllofCorporationinAlabama,theirprimarygoaltheseareISO9002certified,whichisinlineremainscustomersatisfaction,buttowiththeirstrategyofcompletecustomerachievethistheyhavetoattainthesecond-satisfaction.Thisstrategyisclearfromtheirarygoalsofshorterstockcycles,fasterstatementthat,‘Ourcustomersareourdelivery,lowerstocksandlowercosts.future.Withoutthem–thereisnofuture.’Source:promotionalmaterialandwebsitesatTosupportthisview,thecompanygivesawww.schenker.comandwww.schenkerusa.comnumberofguarantees,startingwith:Ourcustomerswillalwaysbethecentreofourcompleteattention. 66LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTSTRATEGYOPTIONSEachorganisationdesignsitsownlogisticsstrategy,buttheyoftenmovealongsimilarlines.ThelogisticsstrategiesofFordandVolkswagen,forexample,arebroadlysimilar,asarethestrategiesofLufthansaandAirFrance.Thisallowsustodescribeafewgenericstrategies.MichaelPorter6suggestedthattherearetwobasicstrategies:●costleadership,makesthesame,orcomparable,productsmorecheaply;●productdifferentiation,makesproductsthatcustomerscannotgetfromothersuppliers.LyonsBakeriescompetebycostleadership,sellingstandardcakesatlowprices;LaPatisserieFrançaisecompetesbyproductdifferentiation,sellingcakesthatarenotavailableanywhereelse.Similarly,easyJetcompetebycostleadership,offeringthecheapestfares;Execujetcompetebyofferingauniquelyluxuriousservice.Inlogistics,thesetwoapproachesareusuallyphrasedintermsofleanandagilestrategies.AswesawinChapter2,organisationswithafocusonleanlogisticsareaimingatlowcosts;thosewithafocusonagilelogisticsareaimingathighcustomersatisfaction.LeanstrategiesNoorganisationcancompletelyavoidthecostoflogistics,sothenextbestoptionistomakeitascheapaspossible.Thenareasonableobjectiveistominimisethetotalcostoflogistics,whileensuringacceptablelevelsofcustomerservice.Thisapproachisgeneralisedintoleanlogistics.TheaimsofaLEANSTRATEGYaretodoeveryoperationusinglessofeachresource–people,space,stock,equipment,time,andsoon.Itorganisestheefficientflowofmaterialstoeliminatewaste,givetheshortestleadtime,minimumstocksandminimumtotalcost.Earlyworkonleanoperationswasdoneinthemotorindustry,ledbyToyota.7,8Thisworkconcentratedon‘leanproduction’butthemethodsgotsuchgoodresultsthattheyspreadintootherareas,eventuallydevelopinga‘leanenterprise’.Theapproachissummarisedinfivemainprinciples:9●value–designingaproductthathasvaluefromacustomer’sperspective●valuestream–designingthebestprocesstomaketheproduct●valueflow–managingtheflowofmaterialsthroughthesupplychain●pull–onlymakingproductswhenthereiscustomerdemand●aimofperfection–lookingforcontinuousimprovementstogetclosertotheaimofperfectoperations.Thefirstoftheseprinciples,‘value’,setsthetargetfortheorganisation,seeinghowtoaddvalueforthefinalcustomeroftheproduct.Thesecondprinciple,‘valuestream’,designsameansofmakingthisproduct,andeffectivelysetstherequirementsofthesupplychain.Thelastthreeprinciplesreferdirectlytothesupplychain.Thethird,‘valueflow’,getsanefficientflowofmaterials,eliminatingwaste,interruptions,waitinganddetours.Thefourthprinciple, LOGISTICSSTRATEGY67‘pull’,showshowtocontroltheflowofmaterialsbypullingthemthrough(wereturntothisthemeinChapter7).Thefifthprinciple,‘aimofperfection’,describesacontinuingsearchforimprovement.Thisisacommonthemeformanagementinitiativeswhichoftensaythatareasofwasteshouldbecontinuallyidentifiedandeliminated.RobertTownsendsaysthat,‘Allorganisationsareatleast50%waste–wastepeople,wasteeffort,wastespaceandwastetime’.10Duringtheirdevelopmentwork,Toyotaidentifiedthefollowingareasofthesupplychainwherethiswasteismostlikelytooccur:11●Quality–thatistoopoortosatisfycustomers(eitherexternalorinternal).●Wrongproductionlevelorcapacity–makingproducts,orhavingcapacity,thatisnotcurrentlyneeded.●Poorprocess–havingunnecessary,toocomplicatedortime-consumingoperations.●Waiting–foroperationstostartorfinish,formaterialstoarrive,forequipmenttoberepaired,andsoon.●Movement–withproductsmakingunnecessary,long,orinconvenientmovementsduringoperations.●Stock–holdingtoomuchstock,increasingcomplexityandraisingcosts.Aleanstrategylooksforwaysofeliminatingthiswaste.Thetypicalapproachdoesadetailedanalysisofcurrentoperations,andthenremovesoperationsthataddnovalue,elimi-natesdelays,simplifiesmovements,reducescomplexity,useshighertechnologytoincreaseefficiency,looksforeconomiesofscale,locatesneartocustomerstosavetravel,andremovesunnecessarylinksfromthesupplychain.Onewarningisthatlowcostsdonotautomaticallymeanleanoperations.Leanoperationsmaintaincustomerservicewhileusingfewerresources–theydonotjustminimisecosts.Agreengrocercouldminimiseitsinventorycostsbyhavingnostock,butitwouldnotgeneratemuchcustomersatisfaction.Somepeoplealsosuggestthatleanoperationsmightworkinthemassproductioncarindustry,butlessonsdonotnecessarilytransfertoothersupplychains.Inparticular,leanoperationsmightnotworkwhentherearevariableanduncertainconditions.Analternativeisamoreflexiblestrategybasedonagility.AgilestrategyAnagilestrategyconcentratesontheothersideofthe‘efficientversusresponsive’–orleanversusagile–debate.Itssupporterssaythatleanoperationsputtoomuchemphasisoncosts,andcannotdealwithchangingconditions,increasingcompetition,ormoresophisticatedanddemandingcustomers.Ifdemandforaproductissteadyat100unitsaweek,leanlogisticswillremoveallthewasteandhaveenoughcapacitytodeliverthese100units.Unfortunately,ifdemandsuddenlyrisesto110units,leanoperationscannotcope.Asmarketsaredemandingmorevarietyandcustomisation,logisticsshouldbemoreflexible.TheaimofanAGILESTRATEGYistogiveahighcustomerservicebyrespondingquicklytodifferentorchangingcircumstances.Therearetwoaspectsofagility.First,thereisthespeedofreaction;agileorganisationskeepaclosecheckoncustomerdemandsandreactquicklytochanges.Second,istheabilitytotailorlogisticstodemandsfromindividualcustomers.Theseare,ofcourse,differentaspectsof 68LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTcustomerservice,andtheimplicationisthatend-customersatisfactionisaprimeconcern,evenifthiscomesatsomewhathigherprice.Organisationsthatputalotofemphasisoncustomersatisfactionaresaidtohaveacustomerfocus.Thejustificationforthisstrategycomesfromtheobviousimportanceofcustomers.Withoutcustomersanorganisationhasnosales,noincome,noprofit,nobusiness–andsoonnoorganisation.AsMichaelPerryofUnileversays,12‘Tosustaincompetitiveadvan-tagerequiresatotalcommitmenttoyourcustomer’.Organisationswithacustomerfocuswilltypically:●aimforcompletecustomersatisfaction●allowcustomerseasyaccesstotheorganisation●findexactlywhattheywant●designlogisticstomeet,orexceed,thesedemands●beflexibleandrespondquicklytochangingcustomerdemands●getareputationforoutstandingqualityandvalue●doafter-salescheckstomakesurethecustomersremainsatisfied●lookoutwardssothattheyarealwaysintouchwithcustomers,potentialcustomers,competitors,andsoon.Organisationswithsatisfiedcustomershavetheobviousbenefitofbringingthembackwithrepeatbusiness–rememberingtheruleofthumbthatitcostsfivetimesasmuchtoattractanewcustomerasitdoestoretainanexistingone.Satisfiedcustomersalsoattractnewbusiness,astheyrecommendagoodservicetofourorfiveotherpeople–comparedwithdissatisfiedcustomerswhowarnadozenpotentialcustomersaboutabadexperience.LeanversusagileAtfirstsighttheaimsofleanandagileoperationsseemcontradictory.Onelookstominimisecosts,andseescustomerserviceasaconstraint;theotherlookstomaximisecustomerservice,andseescostsasaconstraint.Thisseemstoleadtoimportantdifferences.FactorLeanlogisticsAgilelogisticsObjectiveEfficientoperationsFlexibilitytomeetdemandsMethodRemoveallwasteCustomersatisfactionConstraintCustomerserviceCostRateofchangeLong-termstabilityFastreactiontochangingcircumstancesMeasuresofProductivity,utilisationLeadtime,servicelevelperformanceWorkUniform,standardisedVariable,morelocalcontrolControlFormalplanningcyclesLessstructuredbyempoweredstaffInpractice,ofcourse,thereisnotsuchacleardividebetweenthetwostrategies.IfasupplierimprovesEDIlinkswithitscustomers,itcanbothreducecostsandincreasecustomerservice–becomingbothleanerandmoreagile.Similarly,amanufacturersellingmaterialsthrougha LOGISTICSSTRATEGY69websiteandawholesalerintroducingcross-dockingbecomebothleanerandmoreagile.Bothstrategiesacceptthatcustomersatisfactionandlowcostsaredominantthemes,buttheyusedifferentdescriptionsoftheprocesstoachievethem.Organisationsneednotchooseonestrategyattheexpenseoftheother.EvansandPowell13discusstheuseofbothstrategiesandconcludethat‘leanandagilearenotmutuallyexclusive,theybothhavetheirmerits,butalsolimitations,especiallyifanindividualaspectistaken,inisolation,totheextreme’.StrategicalliancesAthirdstrategydevelopstheideasofintegrationthatwediscussedinChapter2.Anorganisa-tioncanputsomuchemphasisoncloseco-operationwithotherpartsofthesupplychainthatithasastrategyofformingallianceswithsuppliersandcustomers.Thepurposeofthisstrategyistogetefficientsupplychains,withallmembersworkingtogetherandsharingthebenefitsoflong-termco-operation.Usualreasonsforastrategyofformingpartnershipsincludebettercustomerservice,increasedflexibility,reducedcosts,avoidanceofinvestmentinfacilities,andlackofexpertisewithintheorganisation.InEuropeoveraquarterofalllogisticsexpenditureusesspecialisedcontractsuppliers,usuallyinsomeformoflong-termpartnership.Themostcommonareaforpartnershipsistransport,wherearoundthreequartersofcompaniesusecontractproviders.Otherareasforcollaborationincludewarehousing,import/exportservices,materialsstorageandinformationprocessing.LOGISTICSINPRACTICEEllisandEverardEllisandEverardisamajordistributorofAmongthebenefitsEllisandEverardgetchemicals.Ithasaturnoverof£600millionfrompartnershipsare:workingfrom70locationsintheUSAandEurope,andemploying2000people.■fasterdecisionmakingThecompanyhasbeendeveloping■highersalesandeasierintroductionoflong-termpartnershipsformanyyears,andnewproductsisconsideredaleaderinthefield.Ithas■stability,makinglong-termplanningpartnershipsforwardwithcustomers(sucheasierandmorereliableasMerck,3MandSterlingorganics)and■removalofunproductiveadministrationbackwardwithsuppliers(suchasICI,Solvay■on-timepaymentsfromcustomersInteroxandJunbunzlauer).Around95%of■easierintroductionofnewinitiatives,itssupplies,and6%ofcustomerdemandsuchasEDIforstocklevelsandauto-aremetthroughpartnerships.ChrisWhin-maticdeliveryscheduling.cup,DirectorofSales,saysthat,‘Partner-Sources:companyannualreports,Partnershipshipsmakeourlivessimpler,andassuchSourcingLimited’swebsitesatwww.pslcbi.commoreproductiveandeffective’. 70LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTOtherstrategiesWehavedescribedthreegeneralstrategiesbasedonleanness,agilityandalliances.Thereareseveralothergeneralstrategies,whereorganisationsemphasiseotheraspectsofperformance.Herewewillmentionafewofthemorecommon.●Time-basedstrategiesInthesimplestview,time-basedstrategiesaimforaguaranteedfasterdeliveryofproducts.Benefitsfromthesestrategiesincludelowercosts(byhavinglessstockinthesupplychain,lessexpediting,andsoon),improvedcashflow(bynothavingtowaitsolongforpayment),lessrisk(byreducingchangestoorders,obsoletestock,andsoon)andsimpleroperations(byeliminatingdelaysandunnecessarystores).Themainassumption,though,isthatfasterdeliverygivesbettercustomerservice.Thisisnotnecessarilytrue,andyoucanfindmanyexamplesoffasterlogisticsreducingthequality.Adeliverycompanymightspeed-uporderprocessing,butincreasethenumberofmistakes;anairlinemightrushpassengersandmakethemfeeluncomfortable;ashippinglinemightreducedelaysbystoppinginfewerports.Oneimportantstrategybasedontimeistimecompression.Thisissimilartotheleanstrategy,butconcentratesonwastedtimeinthesupplychain.Itsaimistoeliminateallthenon-value-addingtime.Beesley14,15saysthat‘IntypicalUKmanufacturingsupplychainsatleast95%oftheprocesstimeisaccountedasnon-valueadding’.Thereisclearlyscopeforreducingthetimematerialsspendinthesupplychainandgettingtheassociatedbenefits.Carteretal.16discusssevenwaysofdoingthis:1.simplification–makingoperationssimpler2.integration–improvinginformationandmaterialflows3.standardisation–usingstandardproceduresandmaterials4.concurrentoperations–movingawayfromserialoperationsandtowardsparallelworking5.variancecontrol–ensuringhighqualityandavoidingwaste6.automation–toimproveeffectivenessandefficiency7.resourceplanning–toremovebottlenecksandensureasmoothflowofmaterials.Asyoucansee,mostofthesearegeneralsuggestionsforimprovementratherthanspecificfeaturesoftimecompression.Youwould,ofcourse,expectthis.Astrategythatfocusesononeaspectofperformancecannotignorealltheothers;itstillhastoachieveperformancethatisacceptablewhenjudgedbyarangeofdifferentcriteria.●EnvironmentalprotectionstrategiesAsmall,butincreasing,numberoforganisationsaredevelopingstrategiesbasedaroundenvi-ronmentalprotection.TheBodyShop,forexample,designsproductswithnaturalingredientsandbasedonsustainabledevelopment.Itusesthesameprinciplesinitslogistics,withreusablecontainersandrecyclingofmaterials.Therearegoodreasonsforotherorganisationstoadoptsimilarpoliciesofenvironmentalprotection.In1993asurveyofUKcompaniessuggestedthatmostwereawareofenvironmentalpres-sures–mainlyfromEUandgovernmentregulations–buttheyonlychangedtheirpracticeswhenthereweresignificantcostbenefits.17Themajorenvironmentalconcernswerewasteandpackagingdisposal(25%ofrespondents),noiseandemission(23%),publicperceptionofHGVs(15%),fueluse(12%)androadcongestion(11%).Only19%ofcompaniesreporteda LOGISTICSSTRATEGY71logisticsenvironmentalpolicy.Despitehugeamountsofdiscussioninthearea,therehavebeenrelativelyfewchangessincethissurvey.Mostorganisationsassumethat‘goinggreen’raisescosts.Theremaybesomebenefitsfromcustomerapproval,butinacompetitiveenvironmentitisdifficulttojustifythehigherover-heads.Thereality,though,isthatmanyprogrammesforenvironmentalprotectionactuallyreducecosts.Betterinsulationofwarehouses,forexample,giveslowerheatingbills.Inthesameway,regularmaintenanceofroadvehiclesreducesbothfuelconsumptionandemissions,asdoesminimisingthedistancetravelled,avoidingcongestion,travellingoutsidepeakhoursandavoidingbuilt-upareas.Packagingisanotherareawithlargepotentialsavings.Youmaybesurprisedwhenapackofchocolatebiscuitshasthreelayersofwrapping–butthisisonlytheconsumerwrapping,andyoudonotseethethreelayersofindustrialpackagingthatprotectsgoodsduringtransport.Carefuldesignandreusablecontainerscansavemuchofthispack-agingandconsiderablyreducecosts.●IncreasedproductivitystrategiesThesestrategiesuseavailableresourcesasfullyaspossible.Facilities,suchaswarehouses,havehighfixedcostsandusingthematfullcapacityspreadsthesecostsovermoreunits.Itfollowsthatincreasingtheutilisationofresourcesreducesthedeliveredcostofproducts.Thisisreallyavariationofaleanstrategy,butthereareimportantdifferences.Imagineafacilitythatisworkingat60%ofcapacity.Obviously,thereissparecapacitythatisraisingunitcosts.Theleanapproachwouldlookforwaysofremovingthe40%sparecapacity–andthencontinuelookingforfurtherreductionsovertime.Ahighproductivitystrategyismorelikelytoacceptthepresentcapacity,andstartlookingforalternativeusesfortheexcess.Anofficeorwarehousemightrentoutspace,whileavehiclefleetmightcarrymaterialsforotherorganisations.●Value-addedstrategiesThesupplychainconsistsofaseriesofactivities,eachofwhichaddsvaluetothefinalproduct.Thenareasonablestrategyhasanorganisationaddingasmuchvalueaspossible.Thisvalueis,ofcourse,takenfromthecustomer’sperspective.Organisationscanalsoaddvaluebyaddingtimeandplaceutility,ordoingmoreworkontheproduct.Imagineacompanythatdeliverswashingmachinestocustomers’houses.Itaddsvaluebydeliveringtotheplaceandandatthetimepreferredbycustomers,orbydoingmoreworksuchasinstallingthemachines,testingthem,givinginstructionsontheiruse,removingoldmachines,offeringservicecontracts,andsoon.●DiversificationorspecialisationstrategiesThesestrategieslookattherangeofservicesofferedbylogistics.Someorganisationshavestrategiesofdiversification,offeringthewidestrangeofservicesandsatisfyingasmanycustomersaspossible.Thisistheapproachofadepartmentstorewhichsellseveryproductyoucanimagine.Otherorganisationshaveastrategyofspecialisinginaverynarrowrangeofservices,butbeingthebestproviderintheirchosenarea.Theytargetafewcustomersandprovideaservicethatcannotbefoundanywhereelse–likeabespoketailor.Sometransportcompanies,forexample,haveastrategyofdiversificationandmoveeverykindofloadfromlettersthroughtooversizeloads.Othershaveastrategyofspecialisationin,say,smallpack-ages,highsecurityortankerdeliveries. 72LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●GrowthstrategiesManyaspectsoflogisticsgeteconomiesofscale,andlargeroperationscangivebothlowercostsandbetterservice.Onecommonstrategy,then,isbasedongrowth.Thereareseveralwaysofachievinggrowth,perhapstakingovercompetitors,expandingthegeographicalareacovered,diversifyingintomorelogisticsactivities,movingdifferenttypesofmaterials,orsimplyincreasingmarketshare.LOGISTICSINPRACTICETescoplcTescoisthelargestsupermarketchaininthe■23Extrasataround100,000squarefeetUK,with700storestaking16%ofthefood■274Superstoresataround40,000retailmarket.ItalsohasstoresinAsiaandsquarefeetcentralEurope,givingtotalsalesof£25bil-■96Compactsuperstoresataroundlionayearin1000stores,with250,00020,000squarefeetemployees.Theirstrategyisbasedonlow■38Metrostoresataround2000squarecost,butalsoincludesgrowth,highcus-feettomerserviceandincreasingproductrange.■45Expressstoresataround2000squareThecorepurposeofTescois,‘Creatingfeetvalueforcustomers,toearntheirlifetime■216otherstores.loyalty’.Thisleadstoabusinessstrategybasedaroundfourelements–strongUKTherangeofproductsofferedbythesecorebusinessoffoodretailing,non-foodstoreshasalsochanged,withtheExtrassales,retailservicessuchaspersonalfinanceandlargersuperstoresofferingafullrangeandinternationaloperations.Thelogisticsofnon-foodproducts,andgrowingsalesstrategysupportsthisbusinessstrategy,ofservicesfrompersonalfinancialservicewithahugelogisticsnetwork.Thishastopharmacies.Thereareplanstoopenevolvedovertimetomeetchangingcus-100moreExpressstoresonEssopetrolsta-tomerdemands,‘Followingthecustomer–tionforecourts,andextendingopeningascustomers’shoppinghabitschange,wehourssothat300storesareopen24hourschangeandrespondbyprovidingnewaday.productsandservices’.Forthelongerterm,asignificantchangeYoucanseethiseffectintheirstores.InforTesco’slogisticsisthegrowthofe-the1970smostofTesco’ssaleswereinfairlycommerce.Thisbusinessgrewfrom13,500smallsupermarketsintowncentres.Overcustomersin1999,to370,000in2000,thenext20yearsitclosedmanyoftheseandamillionin2001.With£300millionofsmallerstoresandfocusedonlargerones–annualsalesand70,000deliveriesaweek,upto100,000squarefeet–inout-of-townTescohasbecomethelargeston-linegro-developments.Morerecently,Tescohascerintheworld.adoptedaflexibleapproach,buildingaSources:companyannualreportsandwebsiterangeofshopstosuitvariousneeds.In2001www.tesco.co.ukithad18millionsquarefeetofsalesareain: LOGISTICSSTRATEGY73DESIGNINGALOGISTICSSTRATEGYSettingthesceneTheimportantpointaboutalogisticsstrategyisthatitdoesnothappenbychance,butneedscarefuldecisions.Sowecanask,‘Howdoorganisationsmakethesedecisions?’Whyshouldacompanybaseitslogisticsstrategyonflexibilityratherthancost?Whydoesonecompanychoosetospecialise,whileasimilaronechoosestodiversify?Thestartingpointfordesigningalogisticsstrategyexaminesthehigherstrategiesandseeshowlogisticscancontributetothese.Thenwecansummarisetheresultsinalogisticsmission.Thisgivesasimplestatementoftheaimsforsupplychainmanagement,likethefollowingexample.Ourmissioninlogisticsistocontributetocorporateaimsbymovingthematerialsneededbyproduc-tionintothecompany,movingworkinprogressthroughthecompany,andmovingfinishedproductsouttocustomers.Weaimtogiveaflexible,reliableandcosteffectiveservicethatcompletelysatisfiesourcustomers,bothinternalandexternal.18Logisticsmissionsareusefulforsettingthescene,andshowingtheoveralldirectionandprior-ities.Theyaremuchlesscommonthanmissionstatementsforthewholeorganisation,buttheycansufferfromthesameweaknesses.Organisationstendtobeambitiousandincludeaimsofbeing‘acknowledgedleaders’,‘thebest’,‘worldclass’,andsoon.Smith19saysthatsuchflowerystatementsfailinthreeways.First,theyareover-ambitious,settingtargetsthattheorganisationscannotrealisticallyachieve.Second,theyaresovaguethatnoonecantellwhetherthemissionisactuallybeingachievedornot.Third,theymisstheopportunityofusingapowerfultoolthatcanreallyhelpmanagethelogistics.Itisusefultostartdesigningastrategywithalogisticsmission,butthenextstepsarelessclear.Thereiscertainlynosinglebeststrategyforanyparticularcircumstance,andthereisnostandardprocedurefordesigningagoodstrategy.Gooderham20says:Noone‘right’waytodevelopandimplementstrategyexists.Thekeytosuccessfulplanningistogetthebestfitbetweenthechosentoolsandtechniques,theorganisation’scurrentculturecapabilitiesandbusinessenvironmentandthedesiredoutcome.Thisleadstotheusualadviceoffindingthebestbalancebetweentheorganisation’sinternalstrengthsandtheexternalconstraints–matchingwhattheorganisationisgoodattowhatcustomerswant.Sonowwehavethreefactorsthatmanagersmustconsiderwhendesigningalogisticsstrategy–thehigherstrategies,thebusinessenvironmentandtheorganisation’sdistinctivecompetence(showninFigure3.4).1.Higherstrategiessettheorganisation’sgoalsandthecontextforalllogisticsdecisions.Themissionsetstheoverallaims,andthecorporateandbusinessstrategiesshowhowtheseaimswillbeachieved.Thelogisticsstrategymustsupportthesehigherstrategies.If,forexample,thebusinessstrategycallsforhighcustomerservice,thelogisticsstrategymustshowhowlogisticswillachievethis.2.Thebusinessenvironmentconsistsofthefactorsthataffectlogistics,butoverwhichithasnocontrol.Theseinclude:●customers–theirexpectations,attitudes,demographics 74LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTHigherstrategiesProductsCustomersMarketEmployeesconditionsOrganisation’sLogisticsBusinessdistinctiveResourcesTechnologystrategyenvironmentcompetenceEconomicFacilitiesclimateOtherinternalOtherexternalstrengthsfactorsFigure3.4Factorsinthedesignofalogisticsstrategy●marketconditions–size,location,stability●technology–currentavailability,likelydevelopments,rateofinnovation●economicclimate–grossdomesticproduct,rateofgrowth,inflation●legalrestraints–traderestrictions,liabilityandemploymentlaws●competitors–number,easeofentrytothemarket,strengths●shareholders–theirtargetreturnoninvestments,objectives,profitneeded●interestgroups–theirobjectives,strengths,amountofsupport●socialconditions–customers’lifestyles,changingdemands,significanttrends●politicalconditions–stability,amountofgovernmentalcontrol,externalrelations.3.Allcompetingorganisationsworkinasimilarbusinessenvironment.Eachcanonlysucceedifithasadistinctivecompetencethatsetsitapartfromcompetitors.Thisisdefinedbythefactorsthatareundertheorganisation’scontrol,andwhichitusestodistinguishitself.Adistinctivecompetencestemsfromanorganisation’sassets,whichinclude:●customers–theirdemands,loyalty,relationships●employees–skills,expertise,loyalty●finances–capital,debt,cashflow●organisation–structure,relationships,flexibility●products–quality,reputation,innovations●facilities–capacity,age,reliability●technology–currentlyused,plans,specialtypes●processes–structures,technologyused,flexibility LOGISTICSSTRATEGY75●marketing–experience,reputation●suppliers–service,flexibility,partnerships●otherassets–knowledge,innovation,patents.Inessence,thebusinessenvironmentanddistinctivecompetenceshowwhereanorganisationisnow,andthehigherstrategiesshowwhereitwantstobeinthefuture.Thelogisticsstrategyshowshowtomovefromonetotheother.LogisticsauditWecangetaclearideaofcurrentoperationsbydoingalogisticsaudit.Thisdescribesthedetailsofallcurrentlogisticsactivities.ThepurposeofaLOGISTICSAUDITistocollectrelevantinformationaboutexistingpracticesandperformanceoflogistics.Itgivesasystematicreviewofcurrentoperations,describingtheprocedures,costs,resources,utilisation,performance,products,andallotherrelevantdetails.Therearetwomainpartstoalogisticsaudit,essentiallygettinginformationaboutthebusinessenvironmentanddistinctivecompetence.First,anexternalauditlooksattheenvironmentinwhichlogisticswork.Thisreviewsthenatureofcustomers,typesofdemand,acceptedservicelevels,locations,competitorsandtheiroperations,benchmarksandcomparisons,servicesavailable,trendsintheindustry,economicconditions,geographicalandpoliticalconstraints,andanyotherrelevantexternalinformation.Second,aninternalauditlooksatthewaythingsaredonewithintheorganisationandidentifiesareasforimprovement.Itreviewsthestructureofthesupplychain,warehouselocationsandsize,stockholdings,methodsofmaterialshandling,achievedservicelevels,leadtimes,transportarrangements,orderprocessing,damage,productivity,andanyotherrelevantinternalinformation.YoucanseethatthisapproachissimilarinprincipletoaSWOTanalysis,whichlistsanorganisation’s:●Strengths–whattheorganisationdoeswell,featuresitshouldbuildon●Weaknesses–problemstheorganisationhas,areasitshouldimprove●Opportunities–openingsthatcanhelptheorganisation●Threats–hazardsthatcandamageit.Strengthsandweaknessesconcerntheorganisation’sinternaloperationsandshowitsdistinc-tivecompetence.Opportunitiesandthreatsrelatetoexternalfeatures,concentratingonthebusinessenvironment.ASWOTanalysisbySynergisticLogisticalServiceslistedtheirstrengthsasexpertise,innovationandlocalcontacts;weaknessesassmallsize,localoperationsandgapsinexperience;opportunitiesfromtheincreasinguseofinformationtechnology,growinginterestinlogistics,andservice-basedlocaleconomy;threatsfromlargercompetitors,highoverheadsandapossibletake-over.Bythisstagewehavetheaimsoflogisticssetoutinalogisticsmission.Wealsohavedetailsofcurrentperformancefromtheaudit.Weknowwherewewanttogo,andwhereweareatthemoment.Thenextstageistoidentifygapsbetweenthesetwoandshowhowtobridgethegaps. 76LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTDevelopingthestrategyUsually,thesinglemostimportantfactorforalogisticsstrategyisthetypeofdemand.Aleanstrategy,forexample,worksbestwhendemandisstable–oratleastpredictable.Itismostsuccessfulwhentherearefewchangestocustomers,products,orlogistics,andwhenpriceisanimportantfactorforcompetition.Thisistypicalofcommoditiesorstaplefooditems,wherethelowestcostisthemaindeterminantofsuccess.Ontheotherhand,anagilestrategyworksbestfororganisationsofferingawiderrangeofproducts,wheredemandvariesandislesspredictable.Itismostsuccessfulfororganisationsthatdonotreallyknowdemanduntilcustomersplaceorders,withmake-to-orderoperationsormass-customisation,suchasthefashionindustry.Itwouldbeusefultohavesomeformalprocedurethatconsidersfactorssuchasthetypeofdemand,andthensuggeststhebestlogisticsstrategy.Unfortunately,wehavealreadysaidthatthereisnosingle‘best’strategy,andnomethodthatalwaysgivesagoodsolution.Thebestthatwecandoisusesomeguidelines.Novich,21forexample,recommendsfourstepsfordesigningastrategy–understandandmeasurecustomerneeds,findtheweaknessesofcurrentlogistics,benchmark,andsimplifythewholelogisticsystem.Amoresystematicapproachbuildsontheanalyseswehavealreadymentioned,andhasthefollowingeightsteps:1.Doalogisticsaudit.Theexternalauditgivesananalysisofthebusinessenvironmentinwhichlogisticswork.Itshowsthefactorsthatleadtosuccessinthisenvironment,andtheimportanceofeachone.2.Theinternalauditanalyseshigherstrategiesfromalogisticsviewpoint,givingthecontextandoverallaimsforlogistics,itsstrategicfocusandperhapsincludesalogisticsmission.3.Designthegeneralfeaturesofsupplychainsthatcanbestdeliverthedesiredservices.Thisincludesthedesignofthenetwork,locationoffacilities,capacity,technologyused,andsoon.4.Setspecificgoalstoshowwhateachlogisticsactivitymustachieve.Theinternalauditshowshowwellthecurrentlogisticsachievethesegoals,andidentifiesareasthatneedimproving.5.Designthebestorganisationalstructure,controlsandsystemstosupportthelogisticsnetwork.6.Benchmarklogistics,lookingattheperformanceofleadingorganisations,definingmeas-urestocompareactualperformancewithplanned,optimalandcompetitors’performances.7.Implementthestrategy,settingtheconditionsforlowerlevelsoflogisticsdecisions.8.Monitoractualperformance,continuallylookforimprovements,keepthestrategiesuptodate,andgivefeedback.Thesestepsgiveaguidelinefordesigningandimplementingalogisticsstrategy.Thefirsttwopointsfocusoncurrentcircumstances,andarebasedonalogisticsaudit.Steps3to5designthelogisticsstrategy,describingthegeneralfeaturesofthesupplychain,goalsandsupportingstructures.Rememberthatthestrategyonlydealswithbroadprinciplesoverthelongterm,anddoesnotgetinvolvedwiththetacticalandoperationaldetail.Step6looksatoperationsinthebestcompetitorsandseesifthereareanylessonstolearn.Thelasttwostepsareconcernedwithimplementation,andadjustmentstokeepthestrategyuptodate.Wediscusssomeissuesofimplementationinthenextchapter.Beforewegothere,however,weshouldmentionthepresentationofthelogisticsstrategy.Thismightseemaminorconcern,butthewaythestrategyispresentedcanbeanimportantfactorinitsultimatesuccess. LOGISTICSSTRATEGY77Alogisticsstrategyconsistsofasetofaims,procedures,structures,facilities,beliefs,systems,andsoon.Thesearetypicallypresentedinalogisticsplan.Thisplanmightcontainmanyparts,22withthefollowinglistincludingthemostcommon.●abroadsummary,givinganoverviewofthelogisticsstrategyandhowthisrelatestootherpartsoftheorganisation●theaimsoflogisticswithintheorganisation,whatperformancelevelsareneededandhowthesecanbemeasured●adescriptionofthewaythatlogisticsasawholewillachievetheseaims,whatchangesareinvolvedandhowthesewillbemanaged●adescriptionofhowtheseparatefunctionsoflogistics(procurement,transport,inven-torycontrol,materialshandling,andsoon)willcontributetotheplan,thechangesinvolvedandhowoperationscanbeintegrated●projectionstoshowtheresourcesneededbythestrategy●projectionsofthecostsandfinancialperformance●adescriptionofthewaythatthisstrategyaffectstherestofthebusiness,particularlyintermsofperformanceachievedandcontributiontocustomervalueandsatisfaction.LOGISTICSINPRACTICEBjorg’sPharmaceuticalsBjorg’sPharmaceutical(BP)isabiotech-tablesummarisestheresultswhencus-nologycompanythatdevelopsandmar-tomerswereaskedtoratetheimportanceketsspecialiseddrugsforAlzheimer’soffactorsonascaleof1(notimportant)todisease.Itisoneofthesmallercompanies5(veryimportant).competingagainstgiantinternationals,anditssuccesscomesfromconcentratingFactorAverageresponseonanichemarket.Samedaydelivery3.1Lastyear,BPwasconcernedthatamajorNextdaydelivery4.9competitorwasintroducingatreatmentthatwassimilartooneofitsownbest-Deliveredwhenpromised2.7sellingproducts.BPfeltthatthebestwayProductsdeliveredfromstock3.4tocompetewastoimproveitscustomerCostofproducts1.3servicebyopeningregionalwarehousesinNoerrorsindeliveredproducts2.8itsmajormarketsofNorthernEurope.Noerrorsinpaperwork1.5Thesewarehouseswouldguaranteesamedaydelivery.TomakesurethatthiswasaEaseoforderentry1.7sensiblemove,thecompanydidasurveyofEaseofpayment1.460majorcustomers.ThissurveyconfirmedEaseofaccesstocustomerrelations2.1thatdeliverytimewasbyfarthemostKnowledgeofcustomerrelations2.5importantfactortothem.Thefollowing 78LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedAlthoughsamedaydeliverywasfairlyBasedonthisinformation,BPadoptedimportant,itseemedthatmostcustomersnewpoliciestomeetthecompetition.First,wouldbehappywithnextdaydelivery.itcancelledtheplannedregionalware-Fromthesurvey,BPalsofoundthatitshouses,savingoveramilliondollarsayear.competitorsonlyguaranteednextdaySecond,itadoptedapolicyofnextdaydeliveryfor60%oforders.Anotherinter-deliveryfor95%oforders,givingitthebestestingfinding,wastheperceptionthatBPlogisticsperformanceintheindustry.Third,didnotshareinformationwithcustomers,itimproveditscommunications,publishinganddidnotpublishdetailsofproductleadmorematerialonitswebsitesandencour-times,productsthatmighthaveshortages,agingcustomerstocontactthem.likelydelays,andsoon.Source:internalcompanyreports❑Strategicdecisionsaffectanorganisationoverthelongterm.Thereareseveraltypesofstrategicdecision.Higherstrategiessetthegeneralgoalsanddirectionfortheorganisation,whilefunctionalstrategiesshowhowthesewillbeachieved.❑Thestrategicimportanceoflogisticsisclearfromitsroleasanessentialfunction,itsinclusioninmissionstatements,itsinvolvementinimportantdecisions,itseffectonlong-termperformance,andsoon.❑Alogisticsstrategydescribesthelong-termdecisions,plans,policiesand■■■■■■■■cultureforlogistics.Itisafunctionalstrategythatshowshowlogisticswillcontributetoanorganisation’ssuccess.❑Manyaspectsoflogisticscanhaveastrategicimportance;thefocusofthestrategyshowswhichisconsideredmostimportant.Wecanusethefocustodescribesomegenericlogisticsstrategies.Commononesfocusonleanoragilelogistics,developingpartnerships,timebasedstrategies,andsoon.❑Alogisticsstrategyhastobedesigned,bearinginmindtheaimsdescribedinhigherstrategies,strengthsoftheorganisationandthebusinessenvironment.Thereisno‘best’strategyforanyparticularcircumstance.❑Althoughwecangiveguidelines,thereisnostandardmethodofdesigningalogisticsstrategy.Managershavetodoappropriateanalysesandbalanceanumberoffactorsbeforemakingtheirdecisions.CHAPTERREVIEW LOGISTICSSTRATEGY79CASESTUDYHessingenHerbFarmConradandElizabethKolemovedintoHessingenFarmin1983.Overthepastfewyearstheirincomefrommilkandtraditionalcropshasdroppedbecauseoflowermarketprices.Theyhavesupplementedthisincomefromothersources,includingtheconversionofoldbarnsintoholidayhomes.EightyearsagoElizabethtookoverasmallfieldandstartedgrowingherbs.Shesoldasmallrangeofherbstolocalpeoplewhowantedfresh,organicproduceforcooking.Passingtouristswouldalsobuyanunusualsouvenir,andtheherbbusinessbegantogrow.FiveyearsagoElizabethstartedgrowingmoreunusualherbs,expandedhergrowingareaintoasecondfieldandopenedavisitors’centre.Peoplenowcametolookatthegrowingandpreparationofherbs,andtastesamplesinvariousfoods.ThreeyearsagoElizabethintroducedanewrangeofherbproducts.Thiswasamajorexpansion,convertingsomeofthefarmbuildingsintoa‘herbkitchen’andmakingproductsforcooking(sauces,dressingsandmarinades),perfumes(posies,pot-pourriandsachetsofdriedherbs)andwhatshecalled‘healthystuff’(herbmixturestraditionallysaidtohavebeneficialeffects).Thefarmisnowwidelyadvertisedasatouristattraction.Thewebsiteisparticularlyuseful,asEliza-bethusesittocollectorders.Shecurrentlydelivers100parcelsaweektoregularlocals(uptoabout50kmaway)andposts200parcelstomoredistantcustomers.Herbsstartedasasmallbusinesstogenerateadditionalincomeforthefarm,buthavenowbecomeitsmainactivity.Elizabethisconsideringanotherexpansion.Shecouldexpandtheproductrangeevenfurtherandmovealltheprocessingtoanindustrialestate15kmaway.Supportingthiswouldneedsalesaroundtentimesthecurrentpostalsales.Elizabethplanstogeneratethesebyintroducingamail-ordercatalogueandincreasinguseofthewebsite.CASESTUDYQuestions●HowdoesElizabethcurrentlyorganiseherlogistics?Whatdoyouthinkareheraimsandpriorities?●Whatwouldbetheeffectoftheexpansiononlogistics?WhatproblemswouldElizabethface,andwhatoptionsdoesshehavetoovercomethem? 80LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROJECTMissionandStrategyManyorganisationsrefer,eitherexplicitlyorimplicitly,tologisticsintheirmission.Sometimesyoucanfindstatementsabouttheroleoflogisticsincorporatestrategies,objectives,aims,publicityandrelateddocuments.Searchthroughthedocumentspublishedbydifferenttypesoforganisation,andseehowtheymentionthestrategicroleoflogistics.Youmight,forexample,lookforreferencesmadebycertaintypesofmanufacturer,airlinesorbanks.Whatdifferencesaretherebetweendifferentindustries,andcompaniesinthesameindustry?DISCUSSIONQUESTIONS1.Towhatextentislogisticsastrategicfunction?Doesitreallyhavealong-termeffectonanorganisation?Isitpossibletobe‘essential’butnot‘strategic’?2.Whencustomersjudgeproducts,theyincludefactorslikeavailability,leadtimeandafter-salesservice–andthesearepartoflogistics.Isitreasonabletosay,therefore,thatlogisticsplaysaroleinthedesignofaproduct?3.Whatarethemainoptionsforalogisticsstrategy?4.Whatfactorsaffectthechoiceoflogisticsstrategy?Takeanorganisationthatyouarefamiliarwith,andsayexactlyhowyouwouldsetaboutdesigningalogisticsstrategy.5.Thereisonlyone‘best’logisticsstrategyinanycircumstances,andmanagersshouldlookforthis.Doyouthinkthisistrue?6.In1996asurveyofCanadianlogisticscompanies23,24listedthemainbenefitsexpectedfromoutsourcinglogisticsasfollows.Factor%ofcompaniesReducetotalcost79Focusoncorecompetency67Improvefinancialperformance66Improvecustomerservice53Improveflexibility53Accesstonewtechnologyorsystems41Enhancecompetitiveness41Increasecapacity37Providealternativelogisticschannels29Increasemarketshare21Broadermarketcoverage20Arethesebenefitslikelytobedifferentinothercountries,ortohavechangedoverthepastfewyears?REFERENCES1.RoadwayExpressCompanyAnnualReportsandwebsiteatwww.roadway.com.2.Merciapromotionalmaterialandwebsiteatwww.mercia.com. LOGISTICSSTRATEGY813.BootsCompanyAnnualReportsandwebsiteatwww.boots-plc.com.4.J.SainsburyCompanyAnnualReportsandwebsiteatwww.j-sainsbury.co.uk.5.GKNCompanyAnnualReportsandwebsiteatwww.gknplc.com.6.PorterM.E.(1985)CompetitiveAdvantage,FreePress,NewYork.7.OhnoT.(1988)ToyotaProductionSystem,ProductivityPress,NewYork.8.WomackJ.,JonesD.andRoosD.(1990)TheMachinethatChangedtheWorld,Rawson,NewYork.9.WomackJ.andJonesD.(1996)LeanThinking,Simon&Schuster,NewYork.10.TownsendR.(1970)UptheOrganisation,CoronetBooks,London.11.MondenY.(1983)ToyotaProductionSystem,IndustrialEngineeringandManagementPress,Atlanta,GA.12.PerryM.(1996)TalkattheMarketingCouncil,London.13.EvansB.andPowellM.(2000)Synergisticthinking:apragmaticviewof‘lean’and‘agile’,LogisticsandTransportFocus,2(10),26–32.14.BeesleyA.(1995)Timecompression–newsourceofcompetitivenessinthesupplychain,LogisticsFocus,3(5),24–5.15.BeesleyA.(1999)Timecompressioninthesupplychain,Ch.11inWatersD.(ed.)GlobalLogisticsandDistributionPlanning,KoganPage,London.16.CarterR.,MelnykP.L.andHandfieldS.A.(1994)IdentifyingSourcesofCycleTimeReduction,QuorumBooks,Texas.17.SzymankiewiczJ.(1993)Goinggreen–thelogisticsdilemma,FocusonLogisticsandDistributionManagement,12(5),36–41.18.WatersD.(2001)StrategicLogistics,EasternLogisticsForum,NewYork.19.SmithR.J.(2000)Thelogisticsmission,Members’Directory,pp.22–7,TheInstituteforLogisticsandTransport,Corby.20.GooderhamG.(1998)Debunkingthemythsofstrategicplanning,CMAmagazine,May.21.NovichN.S.(1990)Leading-edgedistributionstrategies,TheJournalofBusinessStrategy,November/December,48–53.22.MurrayR.E.(1980)Strategicdistributionplanning,ProceedingsoftheEighteenthAnnualConferenceoftheNationalCouncilofPhysicalDistributionManagement.23.Deloitte&ToucheConsultingGroup(1996)CanadianTrendsinSupplyChainManagementandLogisticsServiceOutsourcing,Deloitte&Touche,Toronto.24.FactorR.(1996)Logisticstrends,MaterialManagementandDistribution,June,17–21. CHAPTER4ImplementingtheStrategyCONTENTS■Aimsofthechapter■Casestudy–Passenger■Relatingstrategytolowerinterchangedecisions■Project–Structureofasupply■Areasfordecisionsinchainimplementation■Discussionquestions■Managingchange■References■ChapterreviewAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■DESCRIBEthestepsinvolvedinimplementingalogisticsstrategy■APPRECIATEtheproblemsofimplementation■CONSIDERthedecisionsneededforimplementingthelogisticsstrategy■RECOGNISEtheimportanceofcontinualchangeinthesupplychain■DISCUSSthemanagementofchange,particularlytherateofchange IMPLEMENTINGTHESTRATEGY83RELATINGSTRATEGYTOLOWERDECISIONSLinkswithlowerdecisionsInthelastchapterwelookedatthedesignofalogisticsstrategy.Thiscontainsallanorgan-isation’slong-termdecisions,policies,plansandculturerelatingtologistics.Seniormanagersdesignthelogisticsstrategy,andthentheremainingmanagershavetoseehowthestrategyaffectstheirwork.Theyhavetoanswerquestionssuchas:●Howdoesthestrategyaffectthelogisticsnetwork?●Shouldwechangeourwarehouseandtransportoperations?●Willourapproachtoplanningandschedulingchange?●Dowehave,orcanweget,thenecessaryresources?●Dowehave,orcanwetrain,peoplewiththenecessaryskills?●Howwillthestrategyaffectpresentandpotentialcustomers?●Whataretheimpactsonstaff,facilities,organisation,technology,andsoon?Asyoucansee,thesearenotstrategicquestions,buttheyareconcernedwithmoredetailedtacticalandoperationaldecisions.Sothelogisticsstrategyleadstomoredetailed,lowerleveldecisions.Astrategicdecisiontosellproductsthroughawebsiteleadstomedium-termtacticaldecisionsaboutwarehousing,investmentinstock,transport,materialshandling,recruitingandtraining,customerservice,andsoon.Thesetacticaldecisions,inturn,leadtoshort-termoperationaldecisionsaboutresourcescheduling,inventorycontrol,expediting,vehicleroutes,andsoon.Thedistinctionsbetweenstrategic,tacticalandoperationaldecisionsarenotreallythisclear.Inventory,forexample,isastrategicissuefordecisionsaboutbuildingawarehouseforfinishedgoodsorshippingdirectlytocustomers,atacticalissuewhendecidinghowmuchtoinvestinstock,andanoperationalissuewhendecidinghowmuchtoorderthisweek.Customerserviceisastrategicissuewhendesigningthesupplychain,atacticalissuewhenorganisingtransportfordelivery,andanoperationalissuewhenschedulingthenextdelivery.Theimportantpointistorecognisethatthestrategyleadstoawholeseriesofrelateddecisionsatdifferentlevels.Whatyoucalltheselevelsandwhereyoudrawtheboundariesisamatterofconvenience.Whenwetalkabout‘implementingalogisticsstrategy’wemeanmakingthelowerdeci-sions,andtranslatingthegeneralaimsofthestrategyintopositiveactions.Weactuallydowhatisnecessarytoachievetheaimsofthestrategy.Soimplementationtakesusfromthefairlyvagueaspirationsofthestrategytothenuts-and-boltsofhowtomovematerials.StrategiesonlybecomeeffectivewhentheyareIMPLEMENTED.Thismeansthatthelong-termaimsaretranslatedintolowerdecisions,andtheworkiscarriedouttoachievethem. 84LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICETescoplcInthelastchapterweshowedhowtheover-■improvingstockreplenishment–ridingstrategyofTescoisbasedonitscoremovingfrombatchtocontinuousre-purposeof‘Creatingvalueforcustomers,toorderingwithtillssendinghourlyreportsearntheirlifetimeloyalty’.Thisleadstopoli-ofgoodssold;thishasincreasedavail-ciesoflowcost,growth,highcustomerabilityby1.5%,reducedstocksby10%serviceandincreasingproductrange.andsignificantlyincreasedproductivityThelogisticsstrategysupportsthese■directdeliveryoffast-movingitems,suchaimsthroughthedesignandworkingofitsascarbonateddrinks,inpacksthatgosupplynetwork.Implementingthelogisticsstraightondisplaywithnounpackingorstrategymeanstranslatingtheaimsintoshelf-fillingpositiveactions.Theseinclude:■improvingstoredesign–givingstores■aconcertedefforttogiveevenbetterthatareeasierforbothstaffandcus-customerservicetomerstouse,andarecheapertobuild■improvingbuying–with,forexample,■paperlesscommunicationsgivingfasternewnon-foodsourcinghubsinHongandmorereliabledeliveriesKong,India,ThailandandCentralEuropethatensurecompetitiveprices■anewknowledge-managementsystembybuyingproductsonaglobalscaleinallbusinessesaroundtheworld,makingiteasiertoimprovecommuni-■improvingdistribution–includinganewcationsandshareknowledge.state-of-the-artfreezercentreinDaventryandagrocerycentreinThurrockSources:companyannualreportsandwebsitewww.tesco.co.ukDifficultieswithimplementationItcanbedifficulttotranslatealogisticsstrategyintolowerdecisions.Thisisobviouslytruewhenthestrategyispoorlydesigned,andlowermanagershavetotranslatevagueconceptslike‘globalleadership’intoactualoperations.Itcanalsobetruewhenthereisagoodstrategythathasbeenproperlydesigned.Astrategybasedongoodcustomerservice,forexample,seemssensibleandmightbetranslatedintoatargetofdeliveringallorderswithintwoworkingdays.Nowmanagershavetodesignthedetailedlogisticsprocedurestoachievethis,andthisiswherethedifficultiesappear.Itmightsimplybeimpossibletoachievethistarget,oritmightbeachievable,butonlyatveryhighcostorwithtoomuchstrainonthesupplychain.Therearetwooptionsatthispoint.First,managerscansaythatthestrategyhasbeencare-fullydesigned,andeveryonemustworkharderorfindnew,innovativewaysofachievingthetargets.Thismightseemtoorigid,butmanagersmaybelievethatgoalsshouldbedemandingenoughtostretchtheorganisation.Second,managerscansaythatthepracticaldifficultiesaretoogreat,andthattherewasamistakeinsettingunrealistictargets.Thisismoreworrying,as IMPLEMENTINGTHESTRATEGY85itmeansthatthelogisticsstrategywasbadlydesignedandalltheworkhasbeenwasted.Italsosuggeststhatthestrategydesignersdonothaveaclearenoughviewofoperations.Anobviouspointwhendesigningalogisticsstrategy,istomakesurethatitcanbeimple-mented,andthatthelong-termplansleadtorealistictacticalandoperationaldecisions.Ideallythestrategyshouldsetgoalsthataredemanding(forcingtheorganisationtoperformaswellasitcan)butachievable(sothatitcanactuallybeimplemented).Unfortunately,thereisacommonproblemhere,especiallywithorganisationsthatarerigidhierarchies.Thenonegroupofseniormanagersdesignsthestrategies,whileadifferentgroupofmorejuniormanagersimplementsthem.Thetwogroupshavedifferentobjectives,goals,information,experienceandskills.Evenwithgoodcommunications,seniormanagersbecomeremotefromoperations–theyseethefinancialratios,buthavelittleideahowthelogisticsarereallyimplemented.Ontheotherhand,peopleworkingwiththedetailsofday-to-dayoperations,havelittletimeforcorporateideals.Loftyaimssuchas‘beingacknowledgedleaders’havenorelevanceforsomeonewhoisrushingtomakeanoverduedelivery.Thefollowinglistgivessomecommonproblemswithimplementinglogisticsstrategies:●peoplewhodesignthestrategiesarenotresponsiblefortheirimplementation●strategiesarebadlydesigned,perhapswiththewrongaimsorfocus●itisimpossible,orverydifficult,toimplementthemproperly●theydonottakeenoughaccountofactualoperations,perhapsbecausetherewerenotbroadenoughdiscussions●theyareover-ambitious,orsomehownotrealistic●theyignorekeyfactors,oremphasisethewrongfeatures●peopleonlypaylip-servicetosupportingthestrategies●enthusiasmforthestrategiesdeclinesovertime.Onesurprisinglycommonmistakeistodesignalogisticsstrategyandthenthinkaboutimple-mentingit.Theobviouswaytoavoidthisistothinkaboutimplementationallthewaythroughthedesign,andalwaysconsiderthepracticaleffectsofanypolicies.Thisneedswide-spreadparticipationinthedesignprocess,particularlyfromthosemostcloselyinvolvedwithimplementation.Someotherfactorsthathelpdeviseastrategythatcanbeusedare:●anorganisationalstructurethatisflexibleandallowsinnovation●formalproceduresfortranslatingthestrategyintoreasonabledecisionsatlowerlevels●effectivesystemstodistributeinformationandsupportmanagementdecisions●opencommunicationswhichencouragethefreeexchangeofideas●acceptancethatstrategiesarenotfixed,butcontinuetoevolveovertime●controlsystemstomonitorprogress●convincingeveryonethatthestrategyisbeneficial,sotheyconscientiouslyplaytheirpartinimplementation●developinganorganisationalculturethatsupportsthestrategy.AREASFORDECISIONSINIMPLEMENTATIONTypesofdecisionWhenlookingatimplementation,itisconvenienttodescribetwotypesofstrategicdecision.Thefirsttypesetsouttheprinciplesweworkwith,andthesecondtypeshowshowtheorgan-isationwillachievetheseprinciples.So‘rapiddeliveryofcustomerorders’isaprinciplethat 86LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTMissionCorporatestrategyBusinessstrategyLogisticsmissionLogisticsstrategyDecisionsaboutprinciplesDecisionsaboutimplementationLogisticstacticsLogisticsoperationsFigure4.1Levelsofdecisioninlogisticstheorganisationisadopting,while‘buildingwarehousesclosetocustomers’isapracticalwayofachievingthis:‘easycustomeraccess’isaprinciple,while‘usingwebsitestocollectorders’isonemeansofdoingthis.Allthesedecisionsarestrategic,astheyclearlyhavelong-termconse-quences.However,thefirsttypeismoreconcernedwithaimsanddesigns,andthesecondtypeismoreconcernedwithpracticalitiesandimplementation.Inthelastchapterwelookedmoreattheaimsanddesigns;herewewilllookatthepracticalitiesofimplementingthese(asillustratedinFigure4.1).AtraditionalviewissummarisedbyBallou1whosaysthatwhenmovingtotheimplemen-tationofastrategy,weneedtoconcentrateonfourareas;customerservice,facilitylocation,inventorypolicyandtransport.Thisisafairlyrestrictedview,andonlyconsidersafewofthefunctionsoflogistics.AmoreinclusiveviewisgivenbyHelmingandZonnenberg,2whosuggestdecisionsinfiveareas:supplychainconfiguration,enablingpractices,strategicrela-tionships,organisationandapplicationofinformationtechnology.Theyalsoemphasisetheimportanceofimplementationbysaying,‘Companieshurlstaggeringsumsofmoneyandhumanresourcesattheirsupplychaininfrastructure,onlytofailatimplementingtheirsupplychainstrategy’.Anevenbroaderviewofimplementationsaysthatweshouldconsiderdecisionsineveryfunctionoflogisticsfromprocurementthroughtofinaldelivery.Wewilllookatthesedeci-sionsinthenextfewchapters.Here,though,wewillconsidersomegeneralfeaturesthatsettheoverallstructureofthesupplychain.Inparticular,wewilllookatthelocationoffacilities,ownershipandoutsourcing,enablingpracticesandcapacity. IMPLEMENTINGTHESTRATEGY87StructureofthesupplychainFromanorganisation’spointofview,thesupplychainforaproductconsistsoftiersofsuppliersfeedingmaterialsfromoriginalsourcesintoitsoperations,andthentiersofcustomersmovingmaterialsouttothefinalcustomers(asshowninFigure4.2).Inpractice,therearemanyvariationsonthisbasicmodel.Somesupplychainshavefewtiersofcustomersandsuppliers,whileothershavemany;somechainshaveverysimpleflowsofmaterials,whileothershavecomplexandconvolutednetworks.Differenttypesofproductsclearlyneeddifferentstructuresintheirsupplychain,andbuildingsandneedsafardifferentchaintoDVDplayers.Importantfactorsaretheproduct’svalue,bulk,perishability,availability,profitability,andsoon.Sandhaslowvalue,isbulkyandisreadilyavailable,soitisbesttohaveashortsupplychainwiththesuppliersascloseaspossibletothefinalcustomer.DVDplayersaresmall,havehighvalue,andaremadeinspecialisedfactories,sotheyhavealongerchain.Differentstrategiesalsoleadtodifferenttypesofsupplychain,soacompanyfocusingonfastdeliverywillbuildadifferentchaintoonefocusingonlowcosts.Otherfactorsthataffectthestructureofthesupplychainarethetypeofcustomerdemand,economicclimate,avail-abilityoflogisticsservices,culture,rateofinnovation,competition,marketandfinancialarrangements.Organisationsshouldconsiderallsuchfactors,andthendesignanappropriatestructurefortheirsupplychains.Inotherwords,theydecidethetypesofintermediary(whoformthesuppliersandcustomersinthechain),numbersoftheseintermediaries,warehousingarrange-ments,workdoneinlogisticscentres,customersservedfromeachcentre,modesoftransport,deliveryspeed,andsoon.Perhapsthekeyquestionshereconcernthesupplychain’slengthandbreadth(illustratedinFigure4.3).ThirdSecondFirstFirstSecondThirdtiertiertierOrganisationtiertiertiersuppliersuppliersuppliercustomerscustomerscustomersOperationsintheorganisationFigure4.2Structureofasupplychain 88LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT(a)ShortandwidesupplyQuarrychainforindustrialsandCustomer1Customer2Customer3(b)PartofalongandnarrowInitialsuppliersupplychainforpharmaceuticalsComponentmakerManufacturerWarehouseExporterInternationalforwarderBondwarehouseInternationaldistributorNationallogisticscentreFigure4.3Differentshapesofsupplychain●Supplychainlengthisthenumberoftiers,orintermediaries,thatmaterialsflowthroughbetweensourceanddestination.Wemightthinkofasupplychainintermsofsuppliers,wholesalersandretailers.Inreality,somesupplychainsareshorterthanthiswhen,forexample,producersselldirectlytofinalcustomers.Ontheotherhand,supplychainsareoftenlongerwithmanyintermediaries,perhapsincludingseveralstagesofmanufacturingeachofwhichisconnectedthroughintermediaries.Similarly,exportersmightuseaseriesoflogisticscentres,transportoperators,agents,freightforwarders,brokersandagentstomovematerialsthroughdifferentpartsoftheirjourney.●Supplychainbreadthisthenumberofparallelroutesthatmaterialscanflowthrough.Youcanimaginethisintermsofthenumberofroutesouttofinalcustomers.Cadbury’shasabroadsupplychain,whichmeansthatyoucanbuytheirchocolateinahugenumberofretailers;Thornton’shasanarrowerchain,andmostoftheirchocolatesellsthroughtheirownshops;PigalleetFilshasaverynarrowchainandtheyonlyselltheirchocolateintwoshopsinBelgium.Thebestchoiceoflengthandbreadthdependsonmanyfactors,withthreeofthemostimportantbeingtheamountofcontrolthatanorganisationwantsoveritslogistics,thequalityoftheserviceandthecost.Amanufacturerdeliveringdirectlytocustomershasashort, IMPLEMENTINGTHESTRATEGY89narrowsupplychain.Thisgivesalotofcontroloverlogistics,butitmaybedifficulttoachieveeitherhighcustomerserviceorlowcosts.Broadeningthechaingiveshighercustomerservice,butitincreasescostsandreducesthemanufacturer’scontrol.Makingthesupplychainlongandnarrowcanuseintermediariestoreducecosts,butthemanufacturerlosessomecontrolandthecustomerservicedoesnotimprove.Makingthesupplychainbothlongandbroadremovesmostcontrolfromthemanufacturer,butcustomersgetgoodservice.Wecanillustratesomeoftheoptionsforasupplychainwithabasicproduct,suchasshoes.Figure4.4givesasimplifiedviewofsomeoptions,assumingthatfinalcustomerdemandismetbyeitherdirectsales(mailorder,websitesorfactoryshops)orretailers(specialisedshoeshops,clothesshops,supermarkets,largemultipleretailers,smallmultipleretailersormixedretailers).Thenwecanaddothertypesofretailer,suchasshoppingclubs,discountstores,retailware-houses,anddoor-to-doorsales.Wecanalsoadddifferenttypesofintermediaries,suchasmanu-facturers’wholesalers,retailers’wholesalers,buyinggroups,agents,brokers,co-operatives,andsoon.Thentherearespecialisedservicessuchastransport,warehousing,finance,freightforwarders,andsoon.Thewholepicturesoonbecomesverycomplicated.Aseriesofanalysescanhelpmanagerswiththeirdesignofasupplychain.Theobviousonesestimatethetotalcostofdeliverytofinalcustomers,andthetimeneededtosatisfyanorder.Theymightincludelesstangiblefactors,suchastheefficiencyofthesupplychains,orcustomersatisfaction.Unfortunately,thereisneverasingle‘best’solutionandultimatelytheyhavetochoosethecompromisethatcomesclosesttoachievingtheaimsofthelogisticsstrategy.Onecleartrend,though,istowardsshortersupplychains.Organisationsofeverytypearerealisingthattheycanreducecostsandincreasecustomerservicebymovingmaterialsquicklythroughashortsupplychain.Thisusuallymeansremovinglayersofintermediaries,andconcentratinglogisticsinfewerfacilities.Manufacturersincreasinglydealdirectlywiththeirfinalcustomers,removingmanyofthetraditionaltiersofintermediaries.WithintheManufacturerImportsLogisticscentreDomesticsalesExportDistributorWholesalerDirectsalesLargeSmallSupermarketClothesSpecialistMixedMailorderWebsiteFactorymultiplemultipleretailershoeretailershopretailerretailershopsPublicPublicInstitutionsIndustryFigure4.4Simplifiedsupplychainfordistributingshoes 90LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTEuropeanUnionthefreemovementofmaterialsmeansthatcompaniescanreplacenationalwarehousesbyasingleEuropeanlogisticscentre.Similarly,efficienttransportwithintheUnitedStatesallowscompaniestoworkfromonemajorcentre.LocationoffacilitiesThestructureofthesupplychainsetsthenumberofparticipants,includingwholesalers,warehouses,logisticscentres,andsoon.Thenextquestionconcernsthebestlocationforeachofthese.Thebestlocationforfacilitiesdependsonmanyfactors.Awarehouse,forexample,mightbeneartofactories,customers,transportorareaswithdevelopmentgrants.Thelocationclearlyhasaneffectonlogisticsperformance.Ifanorganisationwantsfastdelivery,itwilluselocalwarehousesthatarephysicallyclosetofinalcustomers;ifitwantslowcosts,itwillconcentratestocksinlarge,centralisedwarehousesthatareinevitablysomedistanceawayfromcustomers;ifitimportsandexportsalotofmaterialsitmightusewarehousesneartoportsorrailtermi-nals;ifitmanufacturesgoods,itwillhaveastockoffinishedproductsnearthefactory.Questionsoflocationshouldbetackledverycarefully,astheyhaveaconsiderableimpactoverthelongterm.Onceafacilityisopenitisdifficulttocloseitdownormoveit.Animpor-tantpoint,though,isthatlocationisnotanisolateddecision.Itleadstoaseriesofrelateddecisionsabouttheworkdoneineachlocation,sizeofeachfacility,leveloftechnologyused,layoutofresources,customerstoservefromeachlocation,andsoon.WelookatlocationinmoredetailinChapter5.OwnershipandoutsourcingInChapter2weshowedthatoneorganisationdoesnothavetoownasupplychaintogetthebenefitsofintegration.Suppliersandcustomerscangetmutualbenefitsbyworkingtogether,typicallyinastrategicalliance.Wehaveconcentratedonsupplier–customerpartnerships,astheseareeasiesttoimagineandtheyhavemosteffectonthesupplychain.However,asimilararrangementcancoverawholerangeofservices,suchaselectricitysupply,bankingservice,andofficecleaning.Acommonformofpartnershipforlogisticshasaspecialisedcompanylookingafterallofanorganisation’stransport.Thisarrangementhastheadvantagesofaneffi-cientandexperiencedspecialisttolookafterthetransport,whiletheorganisationcanconcen-trateonitscoreoperations.Butwhystopattransport?Anorganisationcanformpartnershipswithothercompaniestolookafterwarehousing,purchaseofmaterials,materialshandling,andmanyoftheotherfunctionsoflogistics.Whenonecompanyusesothercompaniestorunitslogistics,itiscalledthirdpartyorcontractlogistics.Laterinthebookwewilllookatthesearrangementsforwarehousing(Chapter8)andtransport(Chapter11).Inessence,though,theuseofthirdpartylogisticsisaspecialtypeof‘make-or-buy’decision.Sometimesitisbettertokeeplogisticswithintheorganisation,andatothertimesitisbettertouseaspecialist.Rowleysummarisesthebenefitsbysayingthat‘Theresultsofsuccessfuloutsourcingareserviceimprovement,costreductionandqualityenhance-ment’.3Afullerlistofpotentialbenefitsincludes:●lowerfixedcosts,withcustomersonlypayingforservicestheyuse●specialistsupplierswhohaveexpertiseandusethebestsystemsandpractices●supplierscancombineworkfromseveralcustomerstogeteconomiesofscale●guaranteedhigh,andagreed,levelsofcustomerservice IMPLEMENTINGTHESTRATEGY91●flexiblecapacity,dealingeffectivelywithpeaksandtroughsindemand●lowerexposuretoriskfrom,say,varyingdemand●increasedgeographicalcoverageandlocalknowledge●aconvenientwayofenteringnewmarkets.Ofcourse,therearedisadvantagestobesetagainstthis,suchasreducedcontrol,inabilitytorespondtounusualcircumstances,morecomplicatedcommunications,conflictingobjec-tives,lesscontrolovercosts,andsoon.Nonetheless,theadvantagesofthirdpartyarebecomingclearer,withmoreorganisationsmovinginthisdirection.Surveys4putthevalueoftheEuropeanlogisticsmarketatover$150billion,withcontractlogisticsaccountingfor$40billionandrisingby8%ayear.LOGISTICSINPRACTICEEuropeancontractlogisticsContractlogisticsisahugebusinessinlogistics.ThesearecontinuingtogrowatEurope.Datamonitorestimatethetotalcostabout8%ayear,butgrowthwillbefasteroflogisticswas$150billionin1999,withinItalyandSpainwhichcurrentlyhave26%ofthisinvolvingthirdpartysuppliers.largelogisticsmarkets,butrelativelylowBy2003theproportionofcontractedbusi-levelsofoutsourcing.nesswillbe30%higher–increasingtheThetwomainissuesfacingcontractmarketfrom$38billionto$57billion.logisticsareconsolidationoflogisticsintoGermanyisthebiggestEuropeanmar-fewer,largecompanies,andgeographicalketforlogisticsservices(28%ofthetotal)expansionofthesecompanies.TheEuro-followedbyFrance(20%)andtheUKpeanUnionhasencouragedtradethrough-(17%).Becauseeachoftheeconomieshasoutanintegratedmarket,andlargerdevelopeddifferently,andbecauseofthelogisticscompaniesareemergingtoservicedifferentlogisticsrequirements,theuseofthewholemarket.Fewofthesecompaniesthirdpartiesvariesquitewidely.IntheUKareexpandingbyorganicgrowth,butarealmost40%oflogisticsiscontracted,whilelookingformergers,acquisitionsandstrate-inGreeceitisnearer12%.Ifyoumultiplygicallianceswithotherlogisticscompanies.thesizeofthelogisticsmarketbythepro-Sources:Anon.(1999),Europeancontractlogis-portionthatisoutsourced,youseethattics,LogisticsandTransportFocus,1(3),EuropeanGermany,FranceandtheUKeachspendlogistics2000andotherreportsfromwww.data-about$10billionayearonthirdpartymonitor.comEnablingpracticesEnablingpracticesaretheactivitiesassociatedwiththesupplychainthatallowittoworkefficiently.Wemight,forexample,saythatreliableinformationprocessingisanenablingpracticethatallowslogisticstofunctionproperly. 92LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAfteranorganisationhasdesignedthestructureofitssupplychain,andfoundthebestlocationsforfacilities,therearemanywaysofmanagingtheflowofmaterialsthroughthechain.Itcould,forexample,usejust-in-timemethodstoreducestocks,EDItolinkwithpart-ners,orprocurementviawebsites.Theseactivitiesarenotnecessarilypartofthesupplychainitself,ortheymaynotbeconsideredcoreactivities.Theydo,however,ensureasmoothflowofmaterialstohelpthesupplychainworkasplanned.Inabuscompany,themaintenanceofvehiclesdoesnotcontributedirectlytothemovementofpeople,butitisanenablingpracticethathelpsthecompanyworkproperly.Theideaoftheenablingpracticesassupportersoflogisticscanbeimportant.Ifyoulookataseriesoforganisationsinthesamebusiness,itislikelythattheywillhaveevolvedinsimilarways,andhavesimilarstructuresfortheirsupplychains.Mostwhiskydistillersordetergentmanufacturershavesupplychainswiththesamegeneralshape.Theycannot,therefore,competebyhavingabettersupplychainstructure,buttheycanuseenablingpracticestogetacompetitiveadvantage.Theseallowdifferentmethodsandprocedurestoimproveperformance.CapacityThecapacityofasupplychainisthelargestamountofmaterialsthatcanflowthroughitinagiventime.Alorrymighthaveacapacityof25tonnesthatitcancarryonajourney,whileanairlinehasacapacityof450passengersonaflight,awarehousecanunload210lorriesaweek,oraretailshopcanserve120customersanhour.Notallpartsofachainhavethesamecapacity,sotheoverallcapacityissetbythepartwiththesmallestindividualcapacity.Thisformsthebottleneck.Ifwholesalingformsthebottleneckwithacapacityof200unitsofaproductanhour,thissetsthecapacityofthewholesupplychain–evenifotherpartshaveamuchhighercapacity(asshowninFigure4.5).Theonlywayofincreasingthecapacityofthesupplychainistoincreasethecapacityofthebottleneck;addingmoreresourceselsewherehasnoeffect,itonlyincreasestheamountofsparefacilitiesandreducestheutilisation.Thisseemsanobviouspoint,butyoucanoftenseecompaniesspendingmoneyonthewrongareas–forexampleanairlinebuyingmoreplanes,whenitspassengernumbersarelimitedbyitslandingslotsatanairport.Capacity400300800450200700850500300(unitsperhour)Maximumflowofmaterials=200unitsperhourBottlenecklimitingcapacityFigure4.5Capacityofasupplychainsetbythebottleneck IMPLEMENTINGTHESTRATEGY93Togetasmoothflowofmaterialsthroughthesupplychain,wehavetomakesurethateachparthasanappropriatecapacity.Thismeansthattheoverallcapacitymatchestotaldemand,andthecapacityofeachpartismatched,sothattherearenorestrictivebottlenecks.WeconsidertheseproblemsofcapacityplanninginChapter6.LOGISTICSINPRACTICERalstonEnergySystemsRalstonEnergySystemss.r.o.(RES)worksinmainsiteinPrague,whileotherswerere-theCzechRepublicasanaffiliateofexportedtoothercountries.ThiswarehouseEvereadyBatteryCompany(EBC).EBChaswas50kmfromPragueandwasrunundermanufacturingplantsinAmerica,Europecontractbyaspecialisedinternationallogis-andAsia,andhasdistributionbranchesinticscompany.Thesecondwarehousewasaalmosteverycountryoftheworld.Itsmain‘saleswarehouse’runbyRESonitsmainproductsareitsleadingbrandrangeofbat-site.Thisorganisedthedistributionofprod-teriesandtorches.uctsmadeinPrague,whichwereeitherdes-Until1998RESrantwowarehousestinedforthedomesticCzechmarket,orwithintheCzechRepublic(illustratedinFig-exported.Localtransportfromthesalesure4.6).Thefirstwasabondedwarehousewarehousewasorganisedbyadomesticusedtostoreimportedmaterials.SomeofcompanythatgaveagoodandflexiblethesematerialsweretransferredtotheRESservice.TwoothertruckingcompanieswereExportsTwotruckingcompaniesBondedSalesImportsProductionwarehousewarehouseTruckingcompanyInternationalDomesticlogisticsmarketcompanyFigure4.6SummaryoflogisticsatRalstonEnergySystemss.r.o. 94LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedinvolvedinexportandimportoperations.■Flexiblewarehousingspace;RESThesaleswarehousewasaboutthreetimesexpandedintotheUkraine,andthenewthesizeofthebondedwarehouse.operatorcoulddealwiththeirincreasedThisstructurehadanumberofrequirementsweaknesses:■Variablewarehousingcosts–basedon■Thesaleswarehousewasleasedfromathevolumesactuallystoredandproc-companywhichtwoyearspreviouslyessed,withoutthesubstantialfixedcostshadbecomeacompetitorofRES.The■Variabledistributioncosts–againbasedcompanydidnotfeelthatitwasappro-ontheamountsactuallymovedpriatetostorefinishedgoodsinacompetitor’sfacilities■Increasedservicequality–withnewmethodsandprocedures■Thesaleswarehousehadbecometoosmall,andRESwashavingtostore■Associatedservicesfromtheoperator–finishedgoodsinthemanufacturingsuchaslabelling,displayrackassembly,plantpreparationofpromotionalbundles,andsoon■Thesaleswarehousehadpoorarrange-mentsforloadingandunloadingtrucks,■Savingoverheadcostsofmanagementwhichsignificantlyincreasedthetimesinthewarehouseneeded■Extendingopeningtimesfrom0700to■AllgoodsimportedintotheCzech1900republicweresenttothebondedware-■Removingtheconflictofinterestwithahouse,andwerethenmovedbyweeklycompetitor-ownedwarehousetransporttothemanufacturingplant■ManagingremotestockinSloveniafrom■Localdistributorschargedhighratesforthesamefacilities.eachtruckloaddelivered.Themovetookplacewithoutanydis-RESlookedforasolutionthatwouldruptionstoservice.Oneweektwo-thirdsofimprovelogisticsandsolvetheirproblems.thestockwastransferredtothenewware-Theirsolutionwastooutsourcelogisticstohousewhilestaffcontinuedworkingfromathirdparty.Theynegotiatedanagree-theremainingstock.Thefollowingweekmenttorunthebondedwarehousewithastaffmovedacrossandstartedworkingnewoperator,whoalsotookoverdistribu-fromthenewwarehouse,wheretheyweretionfromthesaleswarehouse.RESeffec-followedbytheremainingone-thirdoftivelycloseditssaleswarehouse,andstock.Overall,themovetookabouttwomovedtheseactivitiestothenewoperator.yearstoplanandimplement.Therewerevariousproblemsanddisrup-tionsforabouteightmonths,andthenSource:internalreportseverythingsettleddownandgaveamuch-improvedservice.Thenewservicebroughtthefollowingbenefits: IMPLEMENTINGTHESTRATEGY95MANAGINGCHANGEChangeisinevitableThedesignofalogisticsstrategyisbasedonarangeofinternalandexternalfactors.Unfortu-nately,theseareconstantlychanging.Withintheorganisationtherearechangestoemployees,goals,products,plans,processes,costs,suppliers,customers,andsoon.Externallytheorganisationhastodealwithchangingcustomers,markets,economicconditions,competitors,technology,andsoonAconsequenceofthesecontinuouschanges,isthatthelogisticsstrategyalsohastoevolveovertime.Managerscannotdesignastrategyandthenjustworkonitsimplementation–theyalsohavetokeepadjustingstrategy.Asthestrategyevolves,theoperationsofthewholelogisticsfunctionmustadjustandmoveforward.Newpracticesaffecteveryone.Unfortunately,thispresentsaproblem,asmostofusdonotreallylikechanges.Wemightclaimtowelcomechange,asitstopsusfromstag-natingandgettingbored.Thetruth,however,isthatchangesneedalotofeffort,forcingustoabandonoldandfamiliarpractices,tolearnnewskills,newwaysofdoingthings,newproce-dures,andtoformnewrelationships.Changemovesusawayfromareasonablypredictablefuturetoonewithuncertaintyandrisk.Manyorganisationsprefertosticktotheiroldpractices.Unfortunately,thisallowsmoreflexiblecompetitorstogainanadvantage,andtheirperformanceinevitablydeclines.Somesignsthatanorganisationisnotchangingtomeetnewcircumstancesinclude:●lowsalesandfallingmarketshare,asoldproductsareovertakenbycompetitors●manycustomercomplaints,particularlyaboutqualityanddeliverydates●relianceonafewcustomers,especiallywithlong-term,fixed-pricecontracts●old-fashionedattitudesandoperations●poorindustrialrelations,withlowemployeemoraleandhighstaffturnover●poorcommunicationswithintheorganisationandwithtradingpartners●toomuchinflexibletopmanagementwithnonewappointments●inward-lookingmanagerswhoareoutoftouchwithoperationsorcustomers.Changeisanormalpartofbusinessandifwedonotrespondwewillfallbehindcompetitors.Tobemorepositive,weshouldwelcomechangeasitcreatesopportunities,improvesworkconditions,givesbetterpracticesandperformance,andmoreinteresting,better-paidandmoresecurejobs.Thisnewattitudedoesnothappenbychance,butitneedscarefulmanagement.Onesuggestionisthatorganisationsneedachampion,orchangemanager,wholeadsthemawayfromtheirpresentposition.Thismanagerhasthevisiontoseehowanorganisationcanimprove,andtheabilitytomoveitintherightdirection.Unfortunately,thiscanbeatrau-maticjourney,andorganisationstypicallymovethroughaseriesofstages:5,61.Denial–whereemployeesdenythatthereisaneedforchange2.Defence–defendingthecurrentwayofdoingthingsandcriticisingnewproposals3.Discarding–beginningtomoveawayfromtheoldwaysandtowardsthenewones4.Adoption–usingthenewwaysandacceptingthattheyarebeneficial5.Integration–assumingthenewwaysarenormalandusingthemnaturally.Thekeypointisthatchangemustbemanaged.Peoplehavetodothingsdifferently,andtheymustbeconvincedthatchangesarebothessentialandbeneficial.Gettingthismessageacrossisthedifficultpartofchangemanagement. 96LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEConcernsaboutthesupplychainIn2001WarwickBusinessSchool’sOpera-desireformoreintegrationanditsactualtionsManagementGroupranasurveytoachievement.Feworganisationshadmadeidentifyconcernsaboutthesupplychain.anyrealprogressatall,andalmostnoneThemostcommonmanagementworrieshadachievedwidespreadintegration.Thewere:mainproblemstatedby88%oforganisa-tionswasthedifficultyofmergingsystemsCosts100%andconsolidatingEDI.Integrationofthesupplychain86%Similarly,57%oforganisationswereGlobalisation71%concernedaboutprocurement.ManyProcurement57%peopleregarde-businessasthemajorchallenge–andopportunity–facingbusi-Integrationofthesupplychainisclearlyness.Fortherespondentstothissurvey,aconcernofmostorganisations.Wewouldbetween50and70%oftheircostswereimaginethattheyareawareofthebenefitsattributedtopurchases.Yetlessthan40%ofcloserintegrationandaremovinginthisfeltthate-procurementwasastrategicissue,direction,probablythroughalliancesandandonly36%hadawrittenstrategyforpartnerships.Certainly70%ofrespondentse-procurement.saidthatmoreintegrationwasneededtoreducecosts.Sources:Anon.(2001)LogisticsandTransportHowever,thesurveyfoundthatthereFocus3(1),48–9andwww.lefevre.co.ukwasaconsiderablegapbetweenthestatedRateofchangeOneimportantfeatureofchangeistherateatwhichitoccurs.Someorganisationschangeveryquickly,suchasIntelwhichworksatthefrontiersoftechnologyandiscontinuallydevel-opingnewproducts.Otherschangeveryslowly,andevenmakeavirtueoutofstability,suchasMorgansportscarswhosebasicdesignoriginatedinthe1930s.Majorchangescanbeverydisruptive,soorganisationsgenerallypreferaseriesofsmalladjustments.ThisiterativeapproachgivescontinuousimprovementwhichisknownbytheJapanesenameofkaizen.Astreamofrelativelyminorchangescanbeabsorbedbytheorganisationwithoutmajorinterruptions.Thereisalsolittlerisk,asanyofthe‘improve-ments’thatdonotworkcaneasilybereversed.Overtime,thisincrementalapproachbuildsamomentumforimprovement,andmakessurethatthelogisticssystemisalwaysgettingbetter.Suggestionsforiterativeimprovementscomefrommanysources,suchascustomers,competitorsorsuggestionboxes.Sometimesthereisamoreformalarrangement,suchastheplan–do–check–actcycle,orDemingwheel(showninFigure4.7). IMPLEMENTINGTHESTRATEGY97PlanActDoCheckFigure4.7DemingwheelThisusesateamofpeoplewhopositivelylookforimprovementstologisticsusingthecycle:●plan–lookingattheexistinglogistics,collectinginformation,discussingalternatives,andsuggestingaplanforimprovement●do–wheretheplanisimplemented,anddataiscollectedonsubsequentperformance●check–whichanalysestheperformancedatatoseeiftheexpectedimprovementsactuallyappeared●act–iftherearerealimprovementsthenewarrangementsaremadepermanent,butiftherearenoimprovements,lessonsarelearntandthenewarrangementsarenotadopted.Theteamiscontinuouslylookingforimprovements,soatthispointtheyreturntothebegin-ningofthecycle,andconsidermorechanges.LOGISTICSINPRACTICEHotpointHotpointisamajorsupplierofdomestic■reducingcostsappliancesintheUK,ownedbyGE.In■increasingcustomerservicewhichhad1988itworkedasanindependentcom-fallentounsatisfactorylevelspany,butwasnotrespondingquickly■strengtheningthemanagementteamenoughtochangingconditions.Itdistrib-■renegotiatingpayandconditionsforuteditsownfinishedproducts,butthestaffoperationswereinefficientandcostswere■introducingsystemstomeasureandrisingrapidly.Thecompanydecidedtomonitorperformanceoverhaulitsdistribution,withtheaimsof: 98LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinued■reducingtheamountofdamagetoToachievethisservice,Hotpointproductsintransitdesignedawideandshortdistributionnet-■designingadistributionstrategyforthework,withsatellitedepotsaroundthenextfiveyears.countrygivingdailydeliveriestoallmaintownsandregularvisitstoruralareas.AsastartingpointthecompanyThesedepotsarelargelystockless,beingdesignedamissionfordistribution,whichfedeachdaywiththeirrequirements.Theywas:‘TodeliverHotpointgoodstothecus-arealsousedforthedistributionofpartstomer;whenexpectedandagreed;inthesentfromthenationaldistributioncentreatmannerexpected;ingoodcondition;atanPeterborough.acceptablecosttothecompany.’ThislaidThenewarrangementssetthesceneforthefoundationforanewculture,basedonlogisticsoverthenextdecade.Duringthiscustomersatisfactionandcompetitiveperiodthesupplychaingrewinimpor-performance.Ittookahugeeffortoftance,andbecamemoreresponsive.Leadcommunication,negotiation,training,timeswerereduced,morefrequentdeliver-changinglong-standingpractices,andiesweremade,stockswereloweredbyintroducingnewsystems.Thelogistics50%,operatingcostsweresignificantlyslowlyimproved,andprogresswasmoni-reduced,customerservicewasincreased,toredbybenchmarkingothercompanies,andstaffmoraleimproved.ThecompanysuchasTNT,ExelandTDG.wonaMotorTransportAwardfor‘Excel-AnimportantfactorforHotpointwaslence’.Changesmadethroughoutthecontroloverthesupplychain.Itputalotof1990smovedthedistributionsystemfromemphasisonitshomedeliveryservice,‘asleepingdinosaurtoacosteffectiveandwhereretailerstakeordersandHotpointcustomer-drivenentity’.deliverappliancesdirectlytocustomers.Thisalloweddriverstomakesuretheappli-Sources:GrangeC.(1999)Thelongandwindinganceswereingoodcondition,installedroad,LogisticsandTransportFocus1(4),36–41,GrangeC.(1999)Thelongandwindingroad,properlyandworking.HotpointaimedforapresentationtotheInstituteofLogisticsandhighqualityservice,withguaranteeddeliv-TransportAnnualConference,andwww.eryinaspecifiedtimeslot,removalofpack-hotpoint.co.ukaging,collectionofoldappliancesforrecycling,andsoon.BusinessProcessRe-engineeringSomepeoplesaythatsmallcontinuousimprovementstooperationsarenotthebestapproach.Theysuggestthatsmalladjustmentsonlytinkerwithdetailsandmakenorealdifference.Ifyouhaveapoorlogisticssystem,thewayofimprovingitisnottotinkerwiththedetails,buttotakeabroadstrokeandlookfordramaticimprovements.Thebest-knownapproachofthiskindisbusinessprocessre-engineering(BPR).HammerandChampy7definethisasfollows: IMPLEMENTINGTHESTRATEGY99BUSINESSPROCESSRE-ENGINEERINGisthefundamentalrethinkingandradicalredesignofbusinessprocessestoachievedramaticimprovementsincritical,contemporarymeasuresofperformance,suchascost,quality,serviceandspeed.Theideabehindre-engineeringisthatyoudonotlookforimprovementsinyourcurrentoperations,butyoustartwithablanksheetofpaperanddesignanewprocessfromscratch.Thisisratherlikerunninganoldcar.Youcantinkerwithitandkeepitgoingabitlonger,butthere-engineeringsolutionistobuyanewcar.Ifyouhaveapoorlogisticssystem,youshouldnotwastetimetinkeringtofindsmallimprovements,butshouldthrowawaythewholesystemanddesignanewonefromscratch.FordofAmericagaveoneclassicexampleofthisapproach.LOGISTICSINPRACTICEAccountspayableatFordIn1988theaccountspayabledepartmentsystem.Atthecentreofthiswastheirpur-ofFordofAmericahad500peoplework-chasingdatabase,sothenewsystemhad:ingwithastandardaccountingsystem.1.Thepurchasingdepartmentsentapur-Inthis:chaseordertoasupplierandupdated1.Thepurchasingdepartmentsentapur-thedatabasechaseordertothesupplierandacopy2.Thesuppliershippedthegoodstotheaccountspayabledepartment3.WhenthegoodsarrivedatFordthey2.Thesuppliershippedthegoodsorderedwerecheckedagainstoutstandingordersandsentaninvoicetoaccountspayableonthedatabase3.WhenthegoodsarrivedatFord,they4.Ifthedetailsmatched,thegoodswerewerecheckedandsenttostores.Ades-accepted,thedatabasewasupdatedtocriptionofthegoodsarrivingwassentshowthattheyhadarrived,andthetoaccountspayablesupplierwaspaid4.Accountspayablenowhadthreedescrip-5.Ifthedetailsdidnotmatch,thegoodstionsofthegoods–fromthepurchasingwerenotacceptedandweresentbackdepartment,supplierandarrivals.Ifthesetothesupplier.matchedtheypaidtheinvoiceSupplierssoonlearntthatthenewsys-5.Sometimesthepaperworkdidnottemwouldnotallowanymistakesindeliv-match,andproblemshadtobesortederies,andtheywerequicklyeliminated.Theout.Thistookalotofeffort,oftenlast-streamlinedsystemreducedFord’saccountsingseveralweeks.payabledepartmentto125people,givinga400%increaseinproductivity.Fordcouldhaveimprovedthissystem,andestimatedthattheymightsave25%ofSource:HammerM.andChampyJ.(1993)Re-staffingcosts.Insteadtheychoseamoreengineeringthecorporation,HarperCollins,NewYorkradicalsolutionandre-engineeredthewhole 100LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTBPRdoesnotgivenewmethods,butitconsolidatesseveralrelatedideas.Someofitsmainprinciplesforthesupplychainare:●asupplychainshouldbedesignedacrossfunctionsandallowworktoflownaturally,concentratingonthewholesupplychainratherthantheseparateparts●managersshouldstrivefordramaticimprovementsinperformancebyradicallyrethinkingandredesigningthesupplychain●improvedinformationtechnologyisfundamentaltore-engineeringasitallowsradicalnewsolutions●allactivitiesthatdonotaddvalueshouldbeeliminated●activitiesshouldbecarriedoutwheretheymakemostsense–informationprocessing,forexample,becomesapartoflogisticsratherthanaseparatefunction●decisionsshouldbemadewheretheworkisdone,andbythosedoingthework●youdonothavetobeanexperttohelpredesignasupplychain,andbeinganoutsiderwithoutpreconceivedideasoftenhelps●alwaysseethingsfromthecustomer’spointofview.OneimportantpointisthatBPRdoesnotreplacecontinuousimprovement.Itispossibletohaveaseriesofradicalimprovements,andstillintroducesmallercontinuousimprovements(asshowninFigure4.8).BPRisageneralapproachtochangeratherthanaformalprocedure,sowecannotsay,‘thisishowtore-engineeraprocess’.Perhapsbecauseofthis,organisationshavemixedexperienceswithitsuse.Somehavereportedoutstandingresults–liketheearlyworkintheIBMCreditCorporationwhichincreasedoutputbyafactorof100.Butaroundthree-quartersoforgan-isationsfailtogettheimprovementstheyhopedfor.8(a)Continuousimprovement(b)Businessprocessre-engineeringPerformancePerformanceTimeTime(c)Combinationofcontinuousimprovementandbusinessprocessre-engineeringPerformanceTimeFigure4.8Rateofperformanceimprovement IMPLEMENTINGTHESTRATEGY101❑Thelogisticsstrategysetstheoveralldirectionforlogistics.Implementingthestrategytranslatesthisintoaseriesoflowerdecisionsandactions.❑Unlessthestrategyisdesignedproperly,implementationcanbedifficultorimpossible.Toavoidtheseproblems,managersshouldconsiderimplementationduringthedesignofthestrategy,theyshouldinvolvethoseinvolvedinimplementation,andsoon.■■■■■■❑Somestrategicdecisionsareconcernedwithprinciples,whileothersaremoreconcernedwithachievingtheprinciples.Thefirstoftheseareconsideredmoreinthedesignofastrategy,whilethesecondareconsideredmoreintheimplementation.❑Importantdecisionsforimplementingthelogisticsstrategyincludethestructureofthesupplychain(length,breadth,numberoftiers,typeofintermediaries,andsoon),locationoffacilities,outsourcing,enablingpracticesandcapacity.❑Thesupplychainmustcontinuallyevolvetokeepupwithchangingconditions.Thesechangescanbedifficult,andneedcarefulmanagement.❑Animportantquestionconcernstherateofchange.Continuousimprovementusesaseriesofsmalladjustmentstobuildupamomentumforchange-overCHAPTERREVIEWtime.Businessprocessre-engineeringlooksformoreradicalchanges.CASESTUDYPassengerInterchangeInmostmajorcitiestheamountofcongestionontheroadsisincreasing.Someofthisisduetocommercialvehicles,butbyfarthemajorityisduetoprivatecars.Thereareseveralwaysofcontrollingthenumberofvehiclesusingcertainareas.Theseincludeprohibitionofcarsinpedestrianareas,restrictedentry,limitsonparking,trafficcalmingschemes,andsoon.Arelativelynewapproachhasroad-usercharging,wherecarspayafeetouseaparticularlengthofroad,withthefeepossiblychangingwithprevailingtrafficconditions.Generally,themosteffectiveapproachtoreducingtrafficcongestionistoimprovepublictransport.Theseservicesmustbeattractivetopeoplewhojudgethembyarangeoffactors,suchasthecomfortofseating,amountofcrowding,handlingofluggage,availabilityoffood,toilets,safety,facilitiesinwaitingareas,availabilityofescalatorsandlifts,andsoon.However,thedominantconsiderationsarecost,timeandreliability. 102LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedBusesareoftenthemostflexibleformofpublictransport,withthetimeforajourneyconsistingoffourparts:■joiningtime,whichisthetimeneededtogettoabusstop■waitingtime,untilthebusarrives■journeytime,toactuallydothetravelling■leavingtime,togetfromthebustothefinaldestination.Transportpoliciescanreducethesetimesbyacombinationoffrequentservices,well-plannedroutes,andbuspriorityschemes.Thenconvenientjourneysandsubsidisedtravelmakebusesanattractivealternative.Oneproblem,however,isthatpeoplehavetochangebuses,ortransferbetweenbusesandothertypesoftransport,includingcars,planes,trains,ferriesandtrams.Thenthereareadditionaltimesformovingbetweenonetypeoftransportandthenext,andwaitingforthenextpartoftheservice.Thesecanbeminimisedbyaninte-gratedtransportsystemwithfrequent,connectingservicesat‘passengerinterchanges’.Passengerinterchangesseemagoodidea,buttheyarenotuniversallypopular.Mostpeoplepreferastraight-throughjourneybetweentwopoints,evenifthisislessfrequentthananintegratedservicewithinterchanges.Thereasonisprobablybecausetherearemoreopportunitiesforthingstogowrong,andexperiencesuggeststhatevenstartingajourneydoesnotguaranteethatitwillsuccessfullyfinish.Inpractice,mostmajorcitiessuchasLondonandParishavesuccessfulinter-changes,andtheyarespreadingintosmallertowns,suchasMontpellierinFrance.Forthetenyearsupto2001thepopulationofMontpelliergrewbymorethan8.4percent,anditmovedfrombeingthe22ndlargesttowninFrancetotheeighthlargest.IthasgoodtransportlinkswiththeportofSète,anairport,inlandwater-ways,mainroadnetworksandafastraillinktoParis.In2001publictransportwasenhancedwitha15kilometretramlineconnectingmajorsitesinthetowncentrewithothertransportlinks.Atthesametime,buseswerereroutedtoconnecttothetram,cyclingwasencouragedforshortdistances,park-and-rideserviceswereimproved,andjourneysweregenerallymadeeasier.Asaresult,therehasbeenanincreaseinuseofpublictransport,areductioninthenumberofcarsinthetowncentre,andimprovedairquality.Whenthetramopenedin2000,athirdofthepopulationtrieditinthefirstweekend,anditcarriedamillionpeoplewithinsevenweeksofopening.In2005,asecondtramlinewilladd19kilometrestotheroutes.Sources:HellewellD.S.(2000)Improvingpassengerinterchange,LogisticsandTransportFocus,2(6),32–6;GemmellC.(2001)Anintegratedpublictransportsystem,LogisticsandTransportFocus,3(3),36–42;DTI(1998)Anewdealfortransport(WhitePaper,Cmnd3950),HMSO IMPLEMENTINGTHESTRATEGY103CASESTUDYQuestions●Aretheproblemsofmovingpeoplesignificantlydifferentfromtheproblemsofmovinggoodsorservices?●Whatarethebenefitsofpublictransportoverprivatetransport?Shouldpublictransportbeencouragedand,ifso,how?●Whatarethebenefitsofintegratedpublictransportsystems?PROJECTStructureofaSupplyChainHavealookatthesupplychainforafamiliarproduct,suchasabrandoflageroraCD.Describethestructureofthischain,emphasisingitslengthandbreadth.Whydoesithavethisparticularstructure?Discussthealternativestructuresandpointouttheirbenefitsanddisadvantages.DISCUSSIONQUESTIONS1.Whatexactlyismeantby‘implementingthelogisticsstrategy’?2.Wesuggestedadifferencebetweenstrategicdecisionsthatsettheprinciplesforlogistics,andthoseconcernedwiththepracticalitiesofimplementation.Doyouthinkthatthisisarealdifference?Whatkindofdecisionsfitintoeachcategory?3.Itisoftenmoredifficulttoimplementalogisticsstrategythantodesignone.Thisiswhymostlogisticsplansfailinthepracticeratherthanthetheory.Doyouthinkthatthisisnecessarilytrue?Whatcanorganisationsdotoimprovetheimplementation?4.Whatarethemainareasforstrategicdecisionsinlogistics?5.Supplychainsarenotusuallydesignedfromscratch,butevolveovertime.Whatprob-lemsdoesthiscreate?Canyousuggestabetterapproach?6.Canyoufindanyexamplesofgoodlogisticsstrategiesthathavegivenpoorresultsbecauseofpoorimplementation?Whatcouldhavebeendonebetter?REFERENCES1.BallouR.H.(1981)Reformulatingalogisticsstrategy,InternationalJournalofPhysicalDistributionandMaterialsManagement,11(8),71–83.2.HelmingW.andZonnenbergJ.P.(2000)Thefivefulcrumpointsofasupplychainstrategy,SupplyChainandLogisticsJournal,Winter.3.RowleyJ.(2001)OutsourcingacrossbordersinEurope,LogisticsandTransportFocus,3(1),54–6.4.Datamonitor(2000)EuropeanLogistics2000,Datamonitor,London.5.CubittB.(2000)Change:thefinalfrontier?LogisticsandTransportFocus,2(3),39–42.6.CarnallC.(1991)ManagingChange,Routledge,London.7.HammerM.andChampyJ.(1993)ReengineeringtheCorporation,HarperCollins,NewYork.8.HammerM.(1996)BeyondReengineering,HarperCollins,NewYork. CHAPTER5LocatingFacilitiesCONTENTS■Aimsofthechapter■Chapterreview■Importanceoflocation■Casestudy–Brenner■ChoosingthegeographicRefrigerationSalesregion■Project–Poorlocations■Infinitesetapproaches■Discussionquestions■Feasiblesetapproaches■References■Networkmodels■Furtherreading■LocationplanningAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■UNDERSTANDtheimportanceoflocationdecisions■DISCUSSfactorsthataffectthechoiceoflocation■DESCRIBEahierarchicalapproachtolocatingfacilities■USEaninfinitesetapproach,suchasthecentreofgravity■COMPARElocationsusingcostingandscoringmodels■USEmodelsforlocatingfacilitiesonnetworks■COMBINElocationdecisionsintoabroaderapproachtoplanning LOCATINGFACILITIES105IMPORTANCEOFLOCATIONLocationdecisionsInthelastchapterwelookedatthedesignofasupplychain.Thissetsthenumberandtypeoffacilitiesinvolvedinlogistics.Nowwearegoingtoseewherethesefacilitiesshouldbelocated.FACILITIESLOCATIONfindsthebestgeographiclocationsforthedifferentelementsinasupplychain.Locationdecisionsareneededwheneveranorganisationopensnewfacilities.WhenToyotabuildanewassemblyline,orCarrefouropenanewstore,orBurgerKingopenanewrestau-rant,orPfizerextendintonewmarkets,theyhavetomakedecisionsaboutthebestlocations.Theseareimportantdecisionsthataffecttheorganisation’sperformanceformanyyears.Ifanorganisationmakesamistakeandopensfacilitiesinapoorlocation–perhapsafteraninvestmentofmillionsofeuros–itcannotsimplyclosedownandmovetoabetterplace.Workinginthewronglocationcangiveverypoorperformance,butmovingcanbeequallydifficult.Theonlysolution,ofcourse,istochoosetherightlocationinthefirstplace.WhenNissanopenedafactoryinSunderlandinthenorth-eastofEngland,theyputalotofeffortintochoosingthebestsite,andnowhaveEurope’smostproductivecarplant.Butiftheyhadchosenapoorlocation,theycouldhavelowproductivity,unreliablesuppliers,poormaterials,low-qualityproductsandhighcosts.Therightlocationdoesnotguaranteesuccess,butthewronglocationwillcertainlyguaranteefailure.Thisiswhyyoudonotfindnightclubsinresidentialareaswheremostpeopleareretired,bigpetrolstationsoncountrylaneswheretheycannotattractpassingcustomers,factoriesincitycentreswheretheircostsaretoohigh,oroilrefineriesfarawayfromportswhereinwardtrans-portwouldbetooexpensive.Nonetheless,youcanfindexamplesoforganisationsworkinginthewrongplace–andgoingoutofbusiness.Sometimes,peopledonotrecognisethatalocationispoor,andsomesitesaroundtowncentreshaveastringofcafesorclothesshopsclosingdownshortlyaftertheyhaveopened.Someorganisationsforgetthatlocationdecisionsareforthelongtermandaretemptedbyshort-termbenefits,suchasdevelopmentgrants,temporaryrentreduc-tions,ortaxbreaks.Suchsweetenerscanbeattractive,buttheyrarelyformthebasisofgooddecisions.Youcanalsoseecaseswhereorganisationsmaketherightdecisions,butcircumstanceschange–suchasgaragesthatwereingoodlocationsbeforeanewbypassopened.Locationdecisionsareinvariablydifficult,andorganisationshavetoconsidermanyfactors.Someofthesecanbemeasured–oratleastestimated–suchasoperatingcosts,wagerates,taxes,currencyexchangerates,numberofcompetitors,distancefromcurrentlocations,developmentgrants,population,reliabilityofsupplies.Manyotherfactorsarenon-quantifiable,suchasthequalityofinfrastructure,politicalstability,socialattitudes,industrialrelations,legalsystem,futuredevelopmentsoftheeconomy,andsoon.Whenorganisationslookatallthecircumstances,theyoftencometosimilarconclusions.Thisiswhycertainareasortradingestatesbecomepopular,asmanyorganisationsidentifythemasthebestplacetolocate.Thisleadstocertaintrendsinlocation.Forexample,thousandsofplantshaveopenedintheMaquiladorasonMexico’snorthernborder.TheseaimforthelowoperatingcostsinMexico,whilebeingclosetothemajormarketoftheUSA.OtherrapidlygrowingareasareinChina,centralEuropeandthePacificRim.Withinthesebroadregions,specificareasarepopular,suchasShanghai,WarsawandSingapore. 106LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThereareothertrendsinlocation,suchasagrowingnumberofout-of-townmalls,super-marketsandretailestates.Themajortrendtowardsshortersupplychainsmeansthatlayersofintermediariesaredisappearing,andlogisticsisconcentratedinfewerfacilities.FreetradeandgoodtransportwithintheEuropeanUnion,forexample,encouragescompaniestoreplacenationalwarehousesbyasingleEuropeanlogisticscentre.Callcentresgiveaninterestingexampleoftheconcentrationofoperationsinfewerloca-tions.Goodcommunications–withlowbusinesstelephonecosts–meanthatorganisationsdonotneedsmallcallcentreswithineachcountryorregion,buttheycanopenahuge,effi-cientcentreinoneconvenientlocation.IBM,forexample,employ800peopleintheircentreinGreenocknearGlasgow,answeringquestionsfromcustomersin90countries.Delhihas40majorcallcentres,andisexpandingthisbusinesstoemployaquarterofamillionpeople.Whenyoucallthecustomerservicedepartmentofanymajorcompany,youdonotreallyknowthecontinentyouarecalling,letalonethecountry.AlternativestolocatingnewfacilitiesChoosingagoodlocationisoneofthemostcommonproblemsthatorganisationsface.Thereareseveralreasonswhytheyneedtoconsiderlocation,including:●theendofaleaseonexistingpremises●expansionintonewgeographicareas●changesinthelocationofcustomersorsuppliers●changestooperations-–suchasanelectricitycompanymovingfromcoalgeneratorstogas●upgradingfacilities–perhapstointroducenewtechnology●changestotransport–suchasaswitchfromrailtransporttoroad●changesinthetransportnetwork–suchastheopeningoftheChannelTunnelorroadbridgebetweenSwedenandDenmark●mergersoracquisitionsgivingduplicateoperationsthatmustberationalised.Youmightthinkthatonewayofavoidingtheproblemoflocatingnewfacilitiesissimplytoalterexistingones.Thisis,however,stillalocationdecision,asitassumesthecurrentsiteisthebestavailable.Inpractice,whenanorganisationwantstochangeitsfacilities–eitherexpand,moveorcontract–ithasthreealternatives:●expandorchangeexistingfacilitiesatanexistingsite●openadditionalfacilitiesatanothersitewhilekeepingallexistingfacilities●closedownexistingoperationsandmove.Asaruleofthumb,around45%ofcompaniesexpandonthesamesite,asimilarnumberopenadditionalfacilities,and10%closedownexistingoperationsandmove.Themostradicaloptionofcompletelyrelocatingoftenhasveryhighcostsandisdisruptive.Themostconservativeoptionofexpandingexistingfacilitiesinvolveslittleriskandcangiveeconomiesofscale.Evenwhennewfacilitiesareclearlyneeded,therearedifferentwaysofmanagingthem.Imagineamanufacturerthatisexpanding,andwantstoworkinanewmarket.Thisseemslikeastandardproblemoffindingthebestlocationfornewfacilities,butthereareseveralalterna-tivesthatarenotsoexpensive.Thefollowinglistgivesfiveoptionsinorderofincreasinginvestment: LOCATINGFACILITIES1071.Licensingorfranchising:localorganisationsmakeandsupplythecompany’sproductsinreturnforashareoftheprofit.2.Exporting:thecompanymakestheproductinitsexistingfacilitiesandsellsittoadistrib-utorworkinginthenewmarket.3.Localdistributionandsales:thecompanymakestheproductinitsexistingfacilities,butsetsupitsowndistributionandsalesforceinthenewmarket.4.Localassemblyandfinishing:thecompanymakesmostoftheproductinexistingfacilities,butopenslimitedfacilitiesinthenewmarkettofinishorassemblethefinalproduct.5.Fulllocalproduction:thecompanyopenscompletefacilitiesinthenewmarket.Ifitopensnewlocalfacilities,anorganisationhasthebenefitsofmorecontroloverprod-uctsandthesupplychain,higherprofits,avoidanceofimporttariffsandquotas,andcloserlinkswithlocalcustomers.Ontheotherhandithasmoreinvestment,riskandcomplexanduncertainoperations.Thebestchoicedependsonmanyfactors,suchasthecapitalavailable,organisation’sattitudetowardsrisk,targetreturnoninvestment,existingoperations,time-scale,localknowledge,transportcosts,tariffs,traderestrictionsandavailableworkforce.WORKEDEXAMPLEWarwickSuppliesisplanningtoexpandintoEurope.Itisconsideringanumberofoptions,eachofwhichhasafixedannualpayment(forrent,electricity,andotheroverheads)andavariablecostthatdependsonthroughput(handling,depreciation,staff,andsoon).Thefollowingtableshowsasimplifiedviewofthesecosts.AlternativeFixedcostVariablecostAexportingfromexistingfacilitiesg800,000g900Busingalocaldistributorg2,400,000g700Copenafacilityforlocalfinishingg9,000,000g520Dopenlimitedproductionfacilitiesg8,000,000g360Eopenlargerproductionfacilitiesg12,000,000g440Alternatively,Warwickcanavoidenteringthemarketbylicensingalocalmanufacturertomaketheproductinreturnforaroyaltyofabout2%ofsales.Howmightitapproachthisdecision,ifitisplanningonsellingabout10,000unitsayearwithacontributiontoprofitof10%?SolutionWehavealimitedamountoffinancialinformation,andcanusethisforabreak-evenanalysis.YoucanseefromFigure5.1thatalternativesCandEarenevercheapest.ThisleavesachoicebetweenalternativesA,BandD.■AlternativeAisthecheapestforthroughput,X,from0until:800,000+900X=2,400,000+700XorX=8,000 108LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinued■AfterthisalternativeBischeapestuntil:2,400,000+700X=8,000,000+360XorX=16,471■AfterthispointDremainsthecheapest.Withproductionof10,000unitsayear,alternativeB,usingalocaldistributor,ischeapestwithcostsof(2,400,000+10,000×700=)g9.4million.AlternativeA,exportingdirectlywithexistingfacilitiesisnotmuchmoreexpensiveat(800,000+10,000×900=)g9.8million,andisprobablyeasiertoorganise.OptionBhasanaveragecostofg940,andaddingacontributiontoprofitof10%givesasellingpriceof940×1.1=g1034,andtotalprofitofg940,000.IfWarwicknegotiatedaroyaltyof2%ofsales,theywouldgetaprofitofonly1034×0.02×10,000=g206,800.Ofcourse,thesefiguresonlygivethestartingpointforadecision.NowWarwickhavetolookatthemoredetailedcosts,theiraims,longertermplans,amountofcontroltheywant,andawholeseriesofotherfactors.250000020000001500000ABCDCostineuros1000000E50000001234567891011121314151617181920Production(inthousands)Figure5.1Break-evenanalysisforlocationofWarwickSupplies LOCATINGFACILITIES109CHOOSINGTHEGEOGRAPHICREGIONOverallapproachFacilitylocationinvolvesahierarchyofdecisions.Atthetopofthisarethebroaddecisionsaboutwhichgeographicregionstoworkin.Thencomemorelocalviewsthatconsideralter-nativecountriesorareaswithinthisregion.Thenwelookmorecloselyatalternativetownsandcitieswithinthisarea.Finallyweconsiderdifferentsiteswithinapreferredtown(asshowninFigure5.2).Inthe1990s,forexample,Marks&SpencerlookedatwaystoexpanditsretailnetworkincentralEurope.Itworkedwithafranchisee,andconsideredvariouscountries,includingtheoptionofopeningbranchesinPoland.ItlookedatcitieswithinPolandanddecidedtoopenabranchinWarsaw.AfterlookingatavailablesitesitopenedastorenexttotheCulturalPalaceinthecitycentre.Thebroaddecisionsaboutgeographicalregionsandcountriescomefromthebusinessstrategy.Anorganisationwithastrategyofglobaloperationsorexpansionmustcontinuallylookfornewlocations.Inthe1990sitwasMarks&Spencer’sbusinessstrategytoexpandandgetclosetonewcustomersthatledtoitsshopinPoland.By2001,however,thecompany’sstrategyhadchangedanditclosedmanyofitsEuropeanoperationstoconcentrateontheUKmarket(asafranchise,theWarsawbranchisnotaffected).Obviouschoicesforlocationaretogetclosetocustomers,orclosetosuppliers.ToyotaopenedplantsintheUSAtogetneartothemajorcarmarket,andExxonoperateintheGeographicalBusinessstrategyregionsforlocationsCulture,costs,Countriescustomers,andareassuppliers,etc.LocalconditionsCitiesandtownsAvailablesitesIndividualsitesFigure5.2Hierarchyofdecisionsforlocations 110LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTMiddleEasttogetneartosourcesofoil.Anotheroptionistoopenfacilitiesinareasthatgiveloweroperatingcosts.Manufacturersmovetoareaswithlowproductioncosts,evenwhenthesearesomewayfromboththeircustomersandsuppliers.Thisputsmorepressureonlogis-tics.Thesupplychainsbecomemorecomplicated,butlogisticshastobesoefficientthatlowerproductioncostsarenotswampedbyhigherlogisticscosts.Aproblemwithmovingtoareaswithlowcostoperationsisthattheymightgivehighertotalcoststhanexpected.Manypeopleassumethatlowwageratesautomaticallymeanlowtotalcost.Thisisnotnecessarilytrue,aslowwagescanbeaccompaniedbyverylowproduc-tivity:thereisnopointinhalvingwageratesifproductivityiscutbythreequarters.Atthesametime,manyoperations,particularlyinmanufacturing,areautomatedsothatwagesformaverysmallpartofoverallcosts.Itmakeslittlesenseforahightechnologycompanytomoveawayfromitsmainmarketsandworkinalowwageeconomywhenwagesonlyform2%ofcosts.Anotherproblemisthattransportcostschangequickly,andrisescanmakethemmoreimportantthanoperatingcosts.Large,efficientsteelmillsinJapan,TaiwanandSouthKorea,forexample,havelowoperatingcosts–butimportingcoalandironore,andtransportingfinishedsteelissoexpensivethattheirdeliveredpriceishigh.SouthAfricabreweriesmakeverygoodbeer,butlittleofitisexportedtoEuropebecauseofthehightransportationcosts.Oneexampleoftheseeffectscamein1980whenTandyCorporationdecidedtomoveproductionofitslatestcomputertoSouthKorea.Thenrisingshippingcosts,longleadtimesfortheseavoyagetotheUSA,thechangingvalueofthedollar,andmoreautomationintheprocess,encouragedthemtoreconsidertheirlocation.In1987theymovedbacktoFortWorth,Texasandreducedcostsby7.5%.Perhapstheoverridingconsiderationisthatcostsmaynotbeadominantfactorinloca-tion.Alogisticsstrategymightfocusonquality,flexibility,speedofresponse,reliability,customerserviceandsoforth,ratherthanlowestcost.Asweshallseeinthenextsection,thismeansthatorganisationsprefertolocateinareasthatarenearmarkets,havereliablesuppliers,goodinfrastructure,highproductivity,guaranteedqualityandskilledworkforce.LOGISTICSINPRACTICEMillicraElectronicComponentsMillicraElectronicComponentsgrewasaallplanningassemblyplantsinthePhilip-supplierofpartstothecarindustry.Untilpines.Thesewouldmeettherapidlygrow-1997theiroperationswerebasedinPitts-ingdomesticmarket,whichwascurrentlyburghandDetroit,andtheirmaincus-dominatedbyJapanesemanufacturerstomerswereassemblyplantsaround(Toyota22%,Mitsubishi21%,Honda12%Detroit.Althoughtheyhadalargelyauto-andNissan11%)andtheywouldgiveamatedprocess,theircostswerestillhighbylow-costproductionbaseforexporttoworldstandards,andtheyworkedinanothercountriesintheregion.intensivelycompetitivemarket.Millicramadeadecisiontojointhecar-In1998themainUScarmanufacturers–makersinthePhilippines.Theywerearela-GeneralMotors,FordandChrysler–weretivelysmallcompany,andratherthan LOCATINGFACILITIES111LOGISTICSINPRACTICEcontinuedspreadingoperationsoverthreesites,theyeasytorecruitstaffinManila,butlanguagedecidedtoclosetheirplantsinAmerica.andculturalproblemsbecamemoreobvi-Therewereseveraladvantagestothis:ouswhentheystartedtraining.Thecom-panyfounditdifficulttoimplementtheir■productioncostsinthePhilippinesnewprocedures,andtherewereaseriesofwouldbemuchlowerthaninAmericaproblemswithsupervision,trainingand■theycouldgeteconomiesofscalefromoperations,whichgavemuchlowerpro-asinglelocationductivitythanexpected.■theycouldintroducethelatestmethodsTherewerealsoproblemswithtrans-port.Shippingcostsrose,increasingtheandtechnologycostofimportingcomponentsanddeliver-■theywouldbenearagrowingmarket,ingfinishedproductstotheUS.Thelongwitheasytransportbacktotheirexistingseajourneysinevitablyincreaseduncer-customerstainty,tiedupstockinthesupplychainand■thePhilippinegovernmentgaveasixyearslowedresponsestobothcustomersandincometaxholidayandothertaxbreakssuppliers.By2001Millicra’soldcustomersinthe■therewasapoolofcheaplabourreadyUShadformedallianceswithanewlocalfortraining.supplier,anddemandinthePhilippinesThecompanyallowedsixmonthstowaslowerthanforecast.Theworldecon-moveequipmentandothermaterialsfromomywasslowing,particularlyinJapanandAmericaandanothersixmonthstoironouttheUSA,andmanylocaleconomiesmovedproductionproblems.Onlyoneortwoofintorecession.Millicracouldseenoendtotheirexperiencedmanagersmovedtothetheirproblems,andceasedtradinginPhilippines,andtheresttookearlyretire-August2001.mentormovedtootheremployers.AllofSources:MarozziJ.(1998)ChryslerandGMthehourlypaidworkersintheAmericanfollowFord’spathtoPhilippines,FinancialTimes,plantswerelaidoff.Millicrafounditfairly17AprilandinternalcompanyrecordsConsiderationsinchoosingregionsOrganisationshavetoconsidermanyfactorswhenchoosingthegeneralregionstoworkin.Thefollowinglistincludessomeofthemostimportant:●Locationofcustomers:Serviceprovidersmustgenerallybeclosetotheircustomers–whichiswhyyoufindshops,buses,libraries,restaurants,solicitors,banksandsoonintowncentres.Thesameargumentsholdformanufacturedproductswhichhaveahighcostofdeliverytofinalcustomers–whichiswhytherearemanylocalbakers,brewers,dairiesanddoubleglazingfactories.Sometimesbeingclosetocustomersisparticularlyimpor-tant,aswithjust-in-timeoperations(whichwedescribeinChapter7). 112LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●Locationofsuppliersandmaterials:Manufacturersaremorelikelytolocateneartosuppliesofrawmaterials,particularlyiftheseareheavyorbulky.Thisiswhycoal-burningpowerstationsareclosetocoalminesandpulpmillsareneartotimberforests.Someoperationshavetobeclosetoperishablematerials–encouragingfruitandvegetableprocessorstomoveclosetofarms,andfrozenseafoodcompaniesneartofishingports.●Culture:Itiseasiertoexpandintoanareathathasasimilarlanguage,culture,lawsandcosts,thantoexpandintoacompletelyforeignarea.AcompanycurrentlyoperatinginBelgiumwouldfinditeasiertoexpandinFrancethanin,say,Korea.ThedecisiontobuildDisneylandEuropenearParisgivesoneexamplewheremovingasuccessfulAmericanoperationtoaEuropeanculturemetwithlessinitialsuccessthanexpected.●Governmentattitudes:Nationalandlocalgovernmentpoliciescanseriouslyaffectanarea’sattractiveness.InvestmentinHongKong,forexample,hasfallensinceitsreturntorulebyChina.Manygovernmentsofferincentivesforcompaniestomoveintoanarea–butothersarelesswelcoming,perhapstryingtocontrolforeigninfluencesontheeconomy.Someareasencourageparticulartypesofindustry(particularlyhightech-nologyorfinancecompanies),butarelesskeenon,say,nuclear,chemicalorpollutingindustries.●Directcosts:Thesearethecostsofoperations,includingwages,materials,overheadsandutilities.Theycanvarywidely.Themostattractivelocationsofferacombinationoflowdirectcostsandhighperformance.Oftenthereisabalance,withhigherproductivitycomingathighercost.Manyorganisationsprefertolocateinhighcostareastogettheotherbenefitstheybring.●Indirectcosts:Therecanbemanyindirectcostsofdoingbusiness,includinglocaltaxesandchargesonthepayrollsuchassocialinsurance,pensionandsocialcosts.Theremayalsobecontrolsoncompanyownership(oftenincludingacontrollinglocalpartner),currencyexchangeandrepatriationofprofits.●Exchangerates:Thesecanappearasindirectcosts,buttheyaremuchlesspredictable.Whatseemslikeagoodlocationoneyearcanbecomemuchlessattractiveafterare-alignmentofcurrencyvalues.●Socialattitudes:Somecountriesputmoreemphasisonsocialwelfarethanothers,andtheremaybehigherunionmembershiporemphasisonindividualratherthancorporatebenefits.Otherareasdonotnecessarilyadmire‘highproductivity’methodsandtheremightbehigherabsenteeismandstaffturnover.●Organisation:Anorganisationcankeepaclosecheckonnewoperationsbycontrollingthesefromexistingheadquartersandgivinglocaloperationsverylittleautonomy.Thisis,however,inflexible,anditdoesnotallowlocalorganisationstoadapttotheirowncondi-tionsordevelopskills.Analternativeistodevolvedecisions.Thenacompanymightbecomeinternational(maintainingitsheadquartersinthehomecountryandrunningworldwideactivitiesfromthere),multinational(openingsubsidiaryheadquartersaroundtheworldsothateachareaislargelyindependent)orglobal(treatingthewholeworldasasingle,integratedmarket). LOCATINGFACILITIES113●Operations:IfyougointoaMcDonald’shamburgerrestaurantanywhereintheworldyouwillseevirtuallyidenticaloperations.Itiseasiertocontroloperationsinthisway,butitlosesthebenefitoflocalknowledgeandpractices.Otherorganisationsblendintothelocalenvironmentandadapttheiroperationssotheyaremorefamiliartotheirhostcountries.LOGISTICSINPRACTICEMcDonald’sinMoscowIn1990theworld’slargestMcDonald’stherestaurant.Potatoeswereplentiful,buthamburgerrestaurantwith700seatstheywerethewrongtypetomakeMcDon-openedjustoffPushkinSquareinMoscow.ald’sfries.SeedpotatoeswereimportedThisisoperatedjointlybyMcDonald’sofandgrown.RussiancheesewasnotsuitableCanadaandlocalRussiancompanies.forcheeseburgers,soadairyplantwasMcDonald’shasopenedbranchesthrough-openedtomakeprocessedcheese.outtheworld,butthiswasoneofthemostWhentherestaurantopeneditwasadifficult,withnegotiationsstartingtwentyhugesuccess,with27,000peopleapplyingyearspreviouslywiththeSovietUnion.forasinglejob,50,000peopleservedadayTheinsideoftherestaurantisexactlyasandqueueshalfamilelongoutsidetheyouwouldexpect,withthestandardrestaurant.Nowthereare58outletsinRus-menu,colourschemeanddecor,stafftrain-siaandaworkforceof450.Butthepathising,levelsofcleanlinessandcooking.stillnoteasy.RussiasufferedaneconomicEverythingfollowsthestandardMcDon-collapsein1998,andthishasaffectedald’spattern,butthiswasonlyachievedwages,salesandprofits.Theinitialsetupafterconsiderableeffort.Aswellastheini-costwassohighthattherestaurantdoestialpoliticaldifficulties,thereweremajornotexpecttomakeaprofitintheforesee-practicalproblems.BeefinMoscowwasablefuture.notreadilyavailableandthequalitywasSources:companyreportsandCockburnP.,Bigvariable.McDonald’shadtoimportbreed-Mac,bigtrouble,Independent,14/11/2000ingcattleandstartabeeffarmtosupplyINFINITESETAPPROACHESAftermakingadecisionaboutthegeographicalregionandcountry,anorganisationhastolookinmoredetailattheareas,towns,citiesandindividualsites.Thereareseveralwaystheycanapproachthesedecisions,andthebestdependsonspecificcircumstances.Oneapproachthatisnotrecommendedispersonalpreference.Therearemanyexamplesofpoorlocationswheremanagerssimplychoseasitetheyliked–perhapsinthetowntheylivedorgrewupin,ortheareatheyspenttheirholidays.Ofcourse,suchdecisionscanbesuccessful,buttheirmainweaknessisunreliability.Itisalwayssafertodosomeanalysesthantorelyonintuitionandguesswork. 114LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTTwodistinctapproachestolocationdecisionsare:1.Infinitesetapproach–whichusesgeometricargumentstofindthebestlocation,assumingthattherearenorestrictionsonsiteavailability.2.Feasiblesetapproach–wherethereareonlyasmallnumberoffeasiblesites,andanorgani-sationhastochoosethebest.Aninfinitesetapproachfindsthebestlocationinprincipleandthenlooksforasitenearby;afeasiblesetapproachcomparessitesthatarecurrentlyavailableandchoosesthebest.Theseapproachesareoftenusedtogether,withaninfinitesetapproachfindingthebestlocationinprinciple,andthenafeasiblesetapproachcomparingavailablesitesneartothis.Wewillstartbydescribinganinfinitesetapproach,andthenmoveontolookatmethodsforcomparingsites.SimplemodelsHoover1wasthefirstpersontospecifythethreebasicalternativesforlocation.First,afacilitycanbelocatedneartocustomers;thisgivesgoodcustomerserviceandlowcostsfortransportouttocustomers,buthighcostfortransportinfromsuppliers.Second,itcanbelocatedneartosuppliers;thismovesproductsquicklyintothesupplychain,giveslowcostsforinwardtransport,buthighcostsforoutwardtransport.Third,itcanbelocatedatsomepointbetweensuppliersandcustomers,givingacompromisewithreasonableserviceandlowercosts(asillus-tratedinFigures5.3and5.4).Customers(a)NeartocustomersSuppliersCustomers(b)NeartosuppliersSuppliersCustomers(c)CompromisepositionSuppliersFigure5.3Alternativechoicesoflocation LOCATINGFACILITIES115CostTotalcostInwardOutwardtransporttransportLocationsneartoLocationsnearcustomerstosuppliersFigure5.4VariationintransportcostwithlocationAsimplewayoffindingthebestcompromiselocationcalculatesthecentreofgravityofsupplyanddemand.2Theco-ordinatesofthecentreofgravityare:∑XWii∑YWiiX0=Y0=∑Wi∑WiWhere:(XY)aretheco-ordinatesofthecentreofgravitywhichgivesthefacilitylocationo,0(XY)areco-ordinatesofeachcustomerandsupplier,ii,iWisexpecteddemandatcustomeri,orexpectedsupplyfromsupplieriiWORKEDEXAMPLEVanHendrickIndustriesisbuildingacentrallogisticscentrethatwillcollectcomponentsfromthreesuppliers,andsendfinishedgoodstosixregionalwarehouses.Thelocationsoftheseandtheamountssuppliedordemandedareshowninthefollowingtable.Whereshouldtheystartlookingforasite?LocationX,Yco-ordinatesSupplyordemandSupplier191,840Supplier293,3560Supplier33,8680Warehouse183,2624Warehouse289,5416 116LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedLocationX,Yco-ordinatesSupplyordemandWarehouse363,8722Warehouse411,8538Warehouse59,1652Warehouse644,4828SolutionFigure5.5showsaspreadsheetforthesecalculations.Asyoucansee,thecentreofgravityisX=45.5andY=50.3,whichyoucancheck00bycalculating:∑XWii16,380X0===45.5∑Wi360∑YWii18,108Y0===50.3∑Wi360Agoodplacetostartlookingforlocationsisaround(45.5,50.3).Asthisisveryclosetowarehouse6itmightbebettertoexpandonthissiteratherthanlookforanentirelynewlocation(asshowninFigure5.6).ABCDEF1Centreofgravity234XYWeightX*WeightY*Weight5Supplier61918403640320729335605580210083386802406880910Warehouse1118326241992624122895416142486413363872213861914144118538418323015591652468832166444828123213441718Totals36016380181081920CentreofX=45.521GravityY=50.3Figure5.5Calculationofcentreofgravity LOCATINGFACILITIES117100S390W3W4807060CentreofgravityW250W640S230W120W5S11000102030405060708090100Figure5.6LocationsforvanHendrickIndustriesThecentreofgravitycangiveareasonablelocation,butwecaneasilyshowoneofitsweaknesses.SupposeyouworkinAlberta,Canadaandwanttodeliver20tonnesofmaterialsadaytoEdmontonand40tonnesadaytoCalgary.Thesetwocitiesareconnectedbyastraightroad300kmlong(seeFigure5.7).Ifthecostsofgettingdeliveriesfromsuppliersarethesameregardlessoflocation,wherewouldyoubuildawarehouse?Thecentreofgravityis((40×300+20×0)/60=)200kmfromEdmonton.Awarehouseherewouldhavetodeliver200×20tonne/kilometrestoEdmontonand100×40tonne/kilo-metrestoCalgary,givingatotalof8000tonne/kilometres.ButifyoubuiltthewarehouseinCalgary,youwouldonlyhavetomove20×300=6000tonne/kilometrestoEdmonton.Thisgivesoneruleofthumb,whichsaysthatagoodlocationisinthecentreofhighestdemand.EdmontonCalgary300km200km100km20tonnesCentreof40tonnesgravityFigure5.7Weaknessofthecentreofgravitymethod 118LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAdjustingthemodelWecanimprovethebasiccentreofgravitymodelinmanyways.Wecan,forexample,useactualroaddistancesratherthanthestraight-linedistancesofourcalculation.Oftenthespeedofdeliveryismoreimportantthanthedistance,sowecanreplacedistancebytraveltime,orwecanusesomemoredirectmeasureofcost.Wecanalsoadjustthebasiccalculation,perhapsreplacingthestraightforwardtonne/kilometremeasurebyaweightedvalueorsomefunctionofcost.Anotherapproachistouseaniterativecalculationwhichkeepssearchingforabetterlocation.Onemethodofthiskindtakesaninitiallocation,andtheniterativelyimprovesitusingtheequations.3xn+1=∑cwx/djjjj∑cw/djjjyn+1=∑cwy/djjjj∑cw/djjjwhere:xn+1andyn+1arethenextiteratedvaluesforthefacilityco-ordinatesxandyaretheco-ordinatesofcustomersandsuppliersjjc=costofmovingoneunitofmaterialaunitdistancejw=weightmovedtoorfromlocationjjd=distancefromthelastiteratedpositionofthefacilitytolocationjjInfinitesetapproachesonlyneedalimitedamountofdata,typicallythelocationsofcustomersandsuppliersandsomemeasureofdistanceorcost.Buteventhisdatahastobeapproximated,asfeworganisationsknowexactlywhotheircustomerswillbeuntiltheystartlocaloperations.Anotherproblemisthatthelocationsuggestedmightnotbepractical.Theremaybenosuitablesiteavailableanywherenearthesolution,oravailablesitesmaybetooexpensive,orfurtherdevelopmentmaybeprohibited,ortheremaybenoroadsorworkforce,orthesolutionmightbeatthetopofamountainorinthesea.Togetaroundsuchproblems,wecanusethealternativeapproachofidentifyingavailablesitesandchoosingthebest.LOGISTICSINPRACTICEWarehouselocationsintheUSAFormanyproductswecanusethepopula-IntheUKthecentreofgravityofpopu-tionofanareaasasurrogateforthelationisneartoBirmingham,andthisdemand.ThepopulationofStockholmismightbeausefulplacetostartlookingforthreetimesthepopulationofOslo,soweafacility.IntheUSAthecentreofgravityofcanassumethatthedemandforawidepopulationisinTerreHaute,Indiana.rangeofproductsisalsothreetimesasWecangofurtherwiththisapproachlarge.Thenwecanlookatthepopulationandfindthebestlocationsfortwoormoredistribution,andusethecentreofgravityoffacilities.WithcontinentalUSAasanpopulationtoapproximatethecentreofexamplewegetthefollowingresults.gravityofdemand. LOCATINGFACILITIES119LOGISTICSINPRACTICEcontinuedNumberBestlocationsAveragedistanceoffacilitiestoacustomer1TerreHaute,IN859miles2Chillicothe,OH;Fresno,CA490miles3Allentown,PA;Paducah,KY;Fresno,CA378miles4Caldwell,NJ;Cincinnati,OH;Stockton,CA;Dallas,TX322miles5Summit,NJ;Macon,GA;Dallas,TX;Stockton,CA;Gary,IN268milesWithtenfacilities,theaveragedistanceanddemographicdata,anddoesthiskindtoacustomeris174miles.Thesefiguresofanalysestofindthebestlocationsforarebasedonrawpopulationdata,butweservingdifferenttypesofmarket.couldrefinetheapproachtolookatdiffer-Sources:Anon.(1998)Areyouputtinggoodsinentpartsofthepopulationortargetmar-therightlocation?Purchasing124(6),115andkets.AlotofsoftwarecombinesgeographicreportbyChicagoConsultingFEASIBLESETAPPROACHESCostingmodelsFeasiblesetapproachesidentifyavailablesites,comparethem,andfindthebest.Anobviousanalysiscalculatesthetotalcostofworkingfromeachlocationandfindsthecheapest.Inprac-tice,manyofthecostsofrunningafacilityarefixedregardlessofitslocation.Theninsteadoflookingatthetotalcost,wecanconcentrateonthosecoststhatvary,particularlythetransportandoperatingcosts.Totalvariablecost=Operatingcost+Inwardtransportcost+OutwardtransportcostofafacilityLocationsneartocustomershavehighercostsofinwardtransport,andthoseneartosuppliershavehighercostsofoutwardtransport,sothebestlocationislikelytobesomewhereinbetween.Anobviousproblem,though,isthatwedonotknowtherealcostsbeforeweactu-allyopenafacility.How,forexample,canweknowthecostofoutwardtransportwhenwedonotknowinadvancewhoourcustomerswillbeorhowmuchtheywilldemand?Evenifwehavegoodforecastsofdemand,thecostswillchangeovertimeandtheanalysisbecomesoutdated.Asaresult,thesecostcalculationsareusefulforcomparisons,buttheyarenotnecessarilythecoststhatwillactuallybeincurred.Ifwecanonlyusethecostsforcomparisons,wemightaswellmakethecalculationsaseasyaspossible.Forexample,theoperatingcostsinnearbylocationsmightbevirtuallythesame,sowecanremovethesefromtheequationandconcentrateoftransportcosts.Itisdiffi-culttofindtheexactcostofdeliveringtoanyparticularcustomer,sowecanassumethatthetransportcostisproportionaltothedistancemoved.Inpractice,ofcourse,thecostdependsonmorethandistance,andisalsoaffectedbythetypeofvehicles,frequencyofjourneys, 120LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTroutestaken,waysofcombiningcustomerorders,organisationofdrivers,orderpatterns,andsoon.Nonetheless,weareonlyusingthesefiguresforcomparison,socanuseanyreasonableapproximations.Anothershortcutusesmapreferencesorco-ordinatestofindtherectilineardistancebetweenpoints.DifferenceinDifferenceinRectilinearDistance=+Xco-ordinatesYco-ordinatesThenwecanusethissimplemeasuretoidentifythelocationwiththelowesttotalvalueofload×rectilineardistancemoved.WORKEDEXAMPLEBannermanIndustrieswanttobuildadepottoservesevenmajorcustomerslocatedatco-ordinates(100,110),(120,130),(220,150),(180,210),(140,170),(130,180)and(170,80).Averageweeklydemands,invehicleloads,are20,5,9,12,24,11and8respectively.Threealternativelocationsareavailableat(120,90),(160,170)and(180,130).Whichisthebestsiteifoperatingcostsandinwardtransportcostsarethesameforeachlocation?SolutionFigure5.8showsamapforthisproblem.Asoperatingandtransportinwardcostsarethesameforallthreelocations,weonlyneedawayofcomparingthecostsoflocaldeliveriesfromeach.Forsimplicitywewillusetherectilineardistancetocustomers.ThenthedistancefromAtocustomer1is:differencein+differencein=(120–100)+(130–110)=40Xco-ordinatesYco-ordinatesThecalculationsforthisproblemaregiveninFigure5.9,whichshowsthatsiteBisclearlybest.250420065B15032C1100A7500050100150200250Figure5.8MapforBannermanIndustries LOCATINGFACILITIES121ABCDEFGH1CustomerSiteASiteBSiteC2LoadDistanceDistance*LoadDistanceDistance*LoadDistanceDistance*Load312040800120240010020004254020080400603005391601440807206054064121802160607208096075241002400204808019208611100110040440100110097860480100800604801011Totals858059607300Figure5.9ComparisonofsitesWecanuseaversionofthiscostingmodeltofindthebestnumberoffacilities.Theargu-mentrunsasfollows.●Ifanorganisationconcentratesactivitiesinafewkeylocations–suchasmainlogisticscentres–inwardtransportconsistsoflargedeliveriesmadetoafewfacilitiesandthecostislow.However,thefewfacilitiesare,onaverage,furtherawayfromcustomersandtheoutwardtransportcostishigh.●Iftherearealargenumberofspread-outfacilities–suchasretailshops–inwardtransportconsistsofsmalldeliveriestomoredestinationsandthecostishigh.Thefacilitiesare,onaverage,nearertocustomers,sotheyhavethebenefitsofhighercustomerserviceandloweroutwardtransportcost.(a)Fewfacilitiesgivelowcostforinwardtransport,buthighcostforoutwardtransport➛(b)Morefacilitiesgivehigh➛costforinwardtransport,butlowcostforoutwardtransport➛➛Figure5.10Variationintransportcostwithnumberoffacilities 122LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCostTotalcostInwardtransportOperationsOutwardtransportOptimalnumberNumberofoffacilitiesfacilitiesFigure5.11Findingtheoptimalnumberoffacilities●Operatingcostsalsovarywithfacilitysize,withlargerfacilitiesgenerallymoreefficientandgivingeconomiesofscale.Remember,though,thatlargerfacilitiesdonotnecessarilygiveeconomiesofscale,andtherecanbereal‘diseconomies’causedbyhighercostofsupervision,co-ordination,communicationandsoon.Figure5.10showshowthesetransportcostsvary.IfweplottransportandoperatingcostsagainstthenumberoffacilitieswegetthepatternshowninFigure5.11.Thishasaclearmini-mumwhichcorrespondstotheoptimalnumberoffacilities.Inpractice,ofcourse,beforewemakesuchadecisionwehavetoconsidermanyotherfactors,suchasmanagementcosts,com-munications,fixedcosts,employmenteffects,customerservice,informationflows,andsoon.ScoringmodelsCostingmodelscangiveusefulcomparisons,buttheyhaveweaknesses,includingthediffi-cultyoffindingaccuratecosts,datathatdependsonaccountingconventions,coststhatvaryovertime,customerlocationsnotbeingknowninadvance,ordersizesnotknowninadvance,factorsthatcannotbecosted,andsoon.Itisoftenbettertoavoidtheseproblemsandusesomeothermethodforcomparison.Themostcommonalternativeisascoringmodel.Scoringmodelsemphasisethefactorsthatareimportantforlocations,butwhichcannoteasilybecostedorquantified.Forexample,anattractivelifestyleinonelocationwouldcertainlybenefitemployees,reduceemployeeturnoverandassistinrecruiting–butwecouldnotassignarealisticcostormeasuretothelifestyle.ThisisacommonproblemandAndel4quotesacommercialestateagent’sviewthat,‘Moreoftenthannot,thedecisiononsiteselec-tionisbaseduponfactorsyoucan’talwaysputinamatrixorexpressquantitatively.’Evenifwecannotquantifytheimportantfactors,westillneedtoidentifythem.Gooley5saysthattheimportantfactorsinlocationdecisionsaretheinfrastructure,proximityofsuppliersandcustomers,politicalandtaxconsiderations,andinternationaltradeconditions.Amorecompletelistoffactorsincludes: LOCATINGFACILITIES123●Intheregionandcountry●availability,skillsandproductivityofworkforce●localandnationalgovernmentpolicies,regulations,grantsandattitudes●politicalstability●economicstrengthandtrends●climateandattractivenessoflocations●qualityoflife–includinghealth,education,welfareandculture●locationofmajorsuppliersandmarkets●infrastructure–particularlytransportandcommunications●cultureandattitudesofpeople.●Inthecityorarea●populationandpopulationtrends●availabilityofsitesanddevelopmentissues●number,sizeandlocationofcompetitors●localregulationsandrestrictionsonoperations●communityfeelings●localservices,includingtransportandutilities.●Inthesite●amountandtypeofpassingtraffic●easeofaccessandparking●accesstopublictransport●organisationsworkingnearby●totalcostsofthesite●potentialforexpansionorchanges.Althoughwecannotquantifythesefactorsdirectly,wecanmoveinthisdirectionbygivingeachascore.Thisiswhathappenswithhotels:youcannotmeasurethequalityofanhotel,butwhenyouseethatonehasbeenawardedfivestarsyouknowthatitisverygood.Thisisthebasisofscoringmodels,whichhavethefollowingfivesteps:Step1decidetherelevantfactorsinadecisionStep2giveeachfactoramaximumpossiblescorethatshowsitsimportanceStep3considereachlocationinturnandgiveanactualscoreforeachfactor,uptothismaximumStep4addthetotalscoreforeachlocationandfindthehighestStep5discusstheresultandmakeafinaldecision.WORKEDEXAMPLEWilliams-Practarconsideredfivealternativelocationsforanewwarehousefortheirmusicdistributionbusiness.Aftermanydiscussionstheycompiledalistofimportantfactors,theirmaximumscores,andactualscoresforeachsite.Whatistherelativeimportanceofeachfactor?Whichsitewouldyourecommend? 124LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedFactorMaximumscoreABCDEClimate1086975Infrastructure20121615813Accessibility1068799Constructioncost531421Communityattitude1068748Governmentviews522343Closenesstosuppliers151010131310Closenesstocustomers201210151710Availabilityofworkforce512453SolutionThemostimportantfactorsaretheavailableinfrastructureandclosenesstocustomers,with20pointseach.Theclosenessofsuppliersisabitlessimportantwithupto15points,andthencomeclimate,accessibilityandcommunityattitudewithupto10pointseach.Constructioncost,governmentviewsandavailabilityofworkforceareleastimportant.Addingthescoresforeachlocationgives:LocationABCDETotalScores6063776962ThesescoressuggestthatlocationCisthebest.Thecompanyshouldnowconsiderallotherrelevantinformationbeforecomingtoafinaldecision.Ratherthanchangingthemaximumscoreforeachfactor,somepeopleprefertogiveeachfactorthesamemaximumscore,butmultiplytheactualscorebyaweighttoshowitsimpor-tance.Intheexampleabovewemightgiveeachfactorascoreoutoften,andthenmultiplythescoresforclimateby1.0,thescoresforinfrastructureby2.0,thescoresforaccessibilityby1.0,thescoresforconstructioncostby0.5andsoon.ImportantfactorsforscoringmodelsThelistofimportantfactorsandweightgiventoeachobviouslydependsonthecircum-stances.Manufacturerslookforeconomiesofscalebybuildinglargefacilitiesthatareoftenneartorawmaterials.Thendecisionsaboutthelocationforanewfactoryaredominatedby:●availabilityofaworkforcewithappropriateskills●labourrelationsandcommunityattitudes●environmentandqualityoflifeforemployees●closenessofsuppliersandservices LOCATINGFACILITIES125●qualityofinfrastructure●governmentpoliciestowardindustry.Ontheotherhand,servicescannotbekeptinstock,sotheylookforsmallerlocationsthatareneartocustomers.Theirdecisionsaboutlocationputmoreweighton:●populationdensity●socio-economiccharacteristicsofthenearbypopulation●locationofcompetitorsandotherservices●locationofotherattractionssuchasretailshops●convenienceforpassingtrafficandpublictransport●easeofaccessandconvenientparking●visibilityofsite.Theobjectivesinlocatingfactoriesandservicesareclearlydifferent,whichiswhytowncentreshaveshopsbutnofactories,andindustrialestateshavefactoriesbutnoshops.LOGISTICSINPRACTICEIntelinCostaRicaDeloitte&ToucheFantusdevelopedalistdevelopment.ToencourageIntel,Costaoffactorsthathigh-techindustriesconsiderRicaofferedeightyearsfreeofincometax,intheirlocationdecisions.Thisincludes:followedbyfouryearsathalfrate,duty-freeimportofmaterials,andunrestrictedmove-Essentialfactors:mentofmoneyintoandoutofthecountry.■skilledandeducatedworkforceInaddition,theygrantedlicensestoforeign■proximityofresearchinstitutionsairlinestoincreasethenumberofinterna-■attractivequalityoflifetionalflights,builtanewpowersub-station■accesstoventurecapital.forthesite,reducedtheircostofelectricityImportantfactors:by28%,andreducedtheliabilityforcor-■reasonablecostofdoingbusinessporationtax.■establishedtechnologyindustryInteldecidedtolocatea$300million■adequateinfrastructuresemiconductortestingandassemblyplant■favourablebusinessclimateandneartoSanJosé,whichstartedworkinregulations.1998and,withintwoyears,employed2000people.Desirablefactors:ChuckMulloy,aspokesmanforIntel,■establishedsuppliersandpartnerssaid:‘Whenweareconsideringasitewe■communityincentives.useamultifacetedsetofcriteria.IncentivesIntelCorporationistheworld’sleadingarepartofthis.’producerofsemiconductordevices.IntheSources:WallStreetJournalSpecialReport,25mid1990sitwasplanninganewexpan-September2000,andwebsiteatwww.interactive.sion,andCostaRicawaskeentogetthewsj.com 126LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTNETWORKMODELSSometimesitisdifficulttorelatethetwoapproacheswehavedescribedtoactualroadlayoutandgeographicfeatures.Thereare,however,manydatabasesofroadnetworksthatautomati-callyfindthebestroutesbetweentwopoints,suchasMicrosoftAutoRouteExpressandSoftkeyJourneyPlanner.Typically,yousupplythepostcodeofstartingandfinishinglocations,andthepackagefindstheshortest,fastestorcheapestroute,orroutewithsomeotherfeatures.Thenitgivesdetailsofthejourney,locationsandanyotherrelevantinformation.Suchsystemscanbeputintovehicles,andcombinedwithglobalpositioningandtrafficmonitoringsystemstofindthebestroutefromanycurrentpositiontoanendpoint.Theseelectronicmapsofroadnetworksallowanotherapproachtolocation,whichisbasedonactualroadlayouts.Ahugenumberofmodelshavebeenbuiltforthiskindofanalysis,sowewillillustratetypicalapproachesbytwostandardmodels,knownasthesinglemedianproblemandthecoveringproblem.SinglemedianproblemImagineanetworkoftownsconnectedbyroads.Therearedemandsforsomeproductineachtown,andyouwanttolocateadepottodelivertothesetowns.Inprinciplethebestlocationcouldbeanywhereonthenetwork,andmightbeonaroadsideratherthaninoneofthetowns.However,astandardanalysis6showsthatthebestlocationisalwaysinatown.Thismakestheproblemmucheasier,asweonlyhavetocomparelocationsineachtownandiden-tifytheonethatgivesthebestvalueforsomemeasureofperformance.Acommonmeasureisaveragetraveldistanceortime,andfindingtheshortestiscalledthesinglemedianproblem.Theeasiestwaytofindthesinglemedianstartswithamatrixoftheshortestdistancesbetweentowns.Inpractice,wecanfindthisfromrouteplanningsoftware,orusingsomesurrogatemeasuresuchasthestraight-lineorrectilineardistance.Tofindtheshortestaveragedistance,wehavetocombinethesedistanceswiththeloadscarried.Sowemultiplythedistancesbythedemandsateachtown,togetamatrixoftheweight-distances.Thenweaddtheseforeachtown,andfindthelowestoverallvalue.WORKEDEXAMPLEIanBrucedeliversgoodstoeighttowns,withlocationsanddemandsasshowninFigure5.12.Hewantstofindthelocationforalogisticscentrethatminimisestheaveragedeliverytimetothesetowns.Whereshouldhestartlooking?SolutionThisisasinglemedianproblem,sowestartwithamatrixshowingtheminimumdistancesbetweeneachtown,asshowninFigure5.13.ThismatrixalsoshowstheweighttobemovedincolumnB.Ifwetakeonecolumn,sayC,thisshowsthedistancefromacentrelocatedinALtoeachothertown.IfwemultiplythisdistancebythecorrespondingweightincolumnB,wegettheweight-distanceforeachtown.Thenaddingthesedownthecol-umngivesthetotalweight-distanceforalogisticscentreinAL,showninRow12. LOCATINGFACILITIES127WORKEDEXAMPLEcontinuedWeight-distanceofacentreatAL=(10×0)+(15×15)+(25×22)+(20×24)+(20×31)+(10×28)+(10×32)+(15×36)=3015RepeatingthiscalculationforeachoftheothertownsallowsustocomparethecostsacrossRow12.Asyoucansee,townENhasthelowesttotalcost,andisthesinglemedian.Ianshouldstartlookingforalocationaroundthistown.20108DI109GO1515ALBE714228ENHT520156CP6FR2510Figure5.12MapofIanBruce’sproblemABCDEFGHIJ12WeightALBECPDIENFRGOHT3AL100152224312832364BE1515089161417215CP2522801712625176DI202491707138127EN203116127061558FR1028146136021119GO103217258152101410HT15362117125111401112Totals12530151475148513301275139520801690Figure5.13SpreadsheetofcalculationsforIanBruce 128LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCoveringproblemSometimestheaveragedistanceortimetoafacilityislessimportantthanthemaximumtime.Classicexamplesofthisarefireenginesandambulanceswhichtrytorespondtoemergencieswithinamaximumtime.Inthesameway,suppliersoftenguaranteedeliverieswithinoneworkingday.Thisisanexampleofthecoveringproblem.Therearetwoversionsofthecoveringproblem.Inthefirstversion,wearelookingforthesinglelocationthatgivesthebestservicetoalltowns–inotherwordswewantthelocationthatgivesthelowestvalueforthemaximumtimeneededtoreachanytown.If,say,wechooselocationAthelongesttimetoreachanycustomeris4hours,butifwechooselocationBthelongesttimetoreachanycustomerisonly3hours–solocationBisclearlybetter.Tosolvethisproblemwesimplycomparethelongestjourneytimesfromeachlocation,andchoosethelocationwiththeshortestofthese.Thesecondversionofthecoveringproblemspecifiesalevelofservicethatmustbeachieved.Thismightneedanambulancetoarrivewithintenminutes,oraparceltobedeliv-eredwithinfourhours.Theproblemisthentofindthenumberoffacilitiesneededtoachievethis,andtheirbestlocations.Forbothoftheseproblemsthebestlocationmight,inprinciple,beatanypointoftheroadnetwork.However,wecanagainusethestandardfindingthatthebestlocationisalwaysinoneofthetowns.Thisisacommonresultfornetworkproblems,anditmakesthemmucheasiertosolve.WORKEDEXAMPLEFigure5.14showspartofaroadnetwork,withthetraveltime(inminutes)shownoneachlink.Wherewouldyoulocateadepottogivebestcustomerservice?Howmanydepotswouldbeneededtogiveamaximumjourneyof15minutes?SolutionWecould,ofcourse,dothecalculationsforthiscoveringproblem,findingthemaximumtimeforeachtownandidentifyingthebest,andthenfindingthecombinationoftownsthatgivesservicetimesoflessthan15minutes.Thereisnoneedforthis,asalotofsoft-waresolvesnetworkproblemsandFigure5.15showsaprintoutfromasimplepackage.Asyoucansee,ifasinglelocationisneededthepackagerecommendstownC,givingamaximumjourneyof25minutes.Ifthisistoomuch,facilitiesatAandIwillreducethemaximumjourneyto15minutes. LOCATINGFACILITIES129G4E1536BJ101014F563ACI151015D10HFigure5.14RoadnetworkshowingtraveltimeinminutesbetweenlocationsABCDEFGHIJK1Coveringproblem23Distancematrix45ABCDEFGHIJ6A01024102929252035327B10014201919153025228C2414015115152511149D102015026203010252910E29191126064238311F291952060102161012G2515153041002712713H203025102321270152014I352511258612150515J322214293107205016Maximum353025302929303035321718SinglelocationC19Maximumtime252021TwolocationsAI22A023B1024C1125D1026E827F628G1229H1530I031J532Maximumtime1015Figure5.15Solutiontothecoveringproblem 130LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOCATIONPLANNINGWehavedescribedseveralapproachestolocation,butthesearebynomeanstheonlyones.Usefulmodelsrangefromsimplerulesofthumb(suchas,‘locateneartoasimilaroperationthatisalreadyworkingsuccessfully’)throughtomorecomplexmethods(suchasmathemat-icalprogramming).Whichevermethodsyouchoose,theyneednotworkinisolation.Wecould,forexample,useaninfinitesetapproachtofindthebestgeneralarea,followedbyafinitesetapproachtocompareavailablesitesnearby.Amoreformalprocedurehasthefollowingfivesteps:Step1Identifythefeaturesneededinanewlocation,determinedbythebusinessandlogis-ticsstrategies,structureofthesupplychain,aims,customers,andotherrelevantfactors.Lookforregionsandcountriesthatcanbestsupplythese.Step2Withintheidentifiedregion,useaninfinitesetapproach–suchasthecentreofgravityorsimilarmodel–tofindthebestareaforlocations.Step3Searcharoundthisareatofindafeasiblesetofavailablelocations.Step4Useafeasiblesetapproach–suchasacostingmodelorscoringmodel–tocomparethesealternatives.Step5Discussallavailableinformationandcometoadecision.Locatingfacilitiesisalwaysdifficult,anditisimportantenoughfororganisationstolookateveryavailableanalysisbeforereachingaconclusion.Animportantpointisthatthishierarchyoflocationdecisionsshouldfitintothelogisticsstrategy.Ifthelogisticsstrategycallsforshortdeliverytimes,thenfacilitiesmustbeinlocationsthatcanachievethis;ifthestrategycallsforlowcosts,facilitieswillprobablybecentralisedtogeteconomiesofscale.Wecandescribeausefulapproachforco-ordinatinglocationdecisionswithotherdecisionsaboutthesupplychain.Forthis,westartbyrecallingwhatwewantthesupplychaintodo,thenexaminethecurrentsupplychain’sperformance,identifyanyproblemsanddesignwaysofovercomingthese.Tobemorespecific,wecanusethefollowingprocedure:1.Examinetheoverallaims,lookingatthelogisticsstrategyandotherplanstoidentifytheaimsandgoalsoflogisticsintermsofcustomerservice,costs,timing,andsoon.2.Doalogisticsaudit,describingthedetailsofthecurrentlogisticssystem,includingthelocationoffacilities,networkconnectingthese,measuresofperformance,andindustrybenchmarks.3.Identifymismatches,wheretherearedifferencesbetweentheaims(fromstep1)andactualperformance(fromstep2).4.Examinealternativesforovercomingthemismatch,lookingingeneraltermstoseewhereandhowthestructureofthesupplychaincanbeimproved.5.Locationdecisions,havingsetthegeneralfeaturesofthesupplychain,lookindetailatthefacilitiesneeded.Useappropriatemodelstofindthebestlocationsandsizesforthesefacilities.6.Confirmthelocations,makingsurethatthelocationsidentifiedinstep5reallyarebest,andworkwiththestructureidentifiedinstep4.7.Implementandmonitorthesolutions,doingwhateverisneededtoexecutethechangesandcontinuingtocheckperformance.Inthisprocedureyoucanseethatpart4designsthegeneralfeaturesofthesupplychain.Thenpart5addssomedetailsbyfindingthebestlocations–usingthefive-stepprocedure LOCATINGFACILITIES131describedabove.Aswithmostplanning,thisismorecomplicatedthanitseems,andweusuallyneedtoiterativelyrevisetheplansuntilwefindasatisfactorysolution.Bypart6wehaveconfirmedthatthelocationsaregood,andcontinuetoimplementtheresults.Wereturntothisthemeofplanninginthenextchapter.❑Locationdecisionsfindthebestgeographicalpositionsforthefacilitiesinasupplychain.Theseareimportant,strategicdecisionswithlong-termeffectsonanorganisation’sperformance.❑Alocationdecisionisneededwheneveranorganisationexpands,contracts,ortherearemajorchangestoitsoperations.Thechoiceofbestlocationdependsonmanydifferentfactors.❑Thereisahierarchyoflocationdecisions.Thisstartswithadecisionaboutthe■■■■■■■regionorcountrytoworkin,whichisinfluencedbythelogisticsstrategy.Followingdecisionsidentifythebestarea,townandeventuallythespecificsite.❑Infinitesetapproachesusegeometricalargumentstoshowwherethebestlocationwouldbeinprinciple.Weillustratedthiswiththecentreofgravitymethod.❑Finitesetapproachescomparealimitednumberoffeasiblelocationsandfindthebest.Weillustratedthisbycostingandscoringmodels.❑Sometimesitisbettertoconsiderlocationinthecontextofanetworkoftownsandroads.Therearemanymodelsforthis,whichweillustratedbythemedianandcoveringproblems.❑Findingthebestlocationmustfitinwithbroaderbusinessandlogisticsplans.CHAPTERREVIEWWedescribedageneralapproachtoplanningwhichbringsthesedifferentideastogether.CASESTUDYBrennerRefrigerationSalesJohnBrennerhadworkedforthesamedomesticapplianceretailerforovertwentyyearswhenhesawanadvertisementfromanEastEuropeanmanufacturerwhichwantedtostartsellingitsbrandofappliancesintheUK.Johnansweredtheadver-tisementandspentayearpreparingandnegotiatingwiththemanufacturer.Themanufacturerwasnotkeentohaveallitsdistributiondonebyanewanduntriedcompany.IntheendJohnagreedtosetupacompanycalledBrennerRefrig-erationSales,andthemanufacturersagreedtogivehimexclusiverightsto 132LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinueddistributetheirproductsthroughoutBritainfortwoyears.Theagreementwouldbereviewedafterayearandrenegotiatedaftertwoyears.Johninvitedthreeotherdirectorstojointhecompany.Theirfirstproblemwastofindalocationfortheheadofficeandmainlogisticscentre.Thiscentrewouldreceiveappliancesdirectlyfromthemanufacturer,anddeliverthemtoretailersaroundthecountry.Thedirectorsrealisedthattheirfuturesuccessdependedonthissite,butfounditdifficulttoagreeonalocation.Theyconsideredpassingtheproblemtoafirmofmanagementconsultants,butoneofthedirectorsdiscoveredthatsimilarcompaniespaidupto£50,000foraninitialreportand£125,000foramoredetailedstudy.Thedirectorsfeltthatthiswastooexpensiveandtheywouldhavetosolvetheproblemthemselves.Thefollowingsummarygivesanideaoftheirdiscussions.■StefanMaiorworkedasaservicerepairmanformanyyearsbeforebeingpromotedtoservicemanager.Heisnow54yearsoldandislookingforanopportunitytomakesomemoneyforhisretirement.StefanarguesthatthelocationshouldbeinLeeds.TheappliancescouldbeshippedtoLiverpoolorHull,andthenbroughttoLeedsbytrain.Leedshasagoodtransportsystemanditisamajorpopulationcentre.TwoofthedirectorsliveinLeedsandtheyunderstandlocalconditions.■PradeshGuptahasadegreeinmechanicalengineering,andhasworkedasaneconomicconsultantineasternEurope.Heknowsthemanufacturerandisimpressedbytheirprogressiveattitudes.PradeshiscriticalofStefan’sapproachasbeingoldfashionedandrelyingmoreonwherehefeelsathomethanonanybusinesscriterion.HesaysthatthesaleofappliancesislikelytodependonthepopulationsotheyshouldlookatamapofBritain,seewherethemaincentresofpopulationare,seehowmanyappliancestheyexpecttosellineachofthese,andthendosomefairlystraightforwardanalysestofindthebestlocation.■FionaMcGregorworkedinaretailbank,specialisinginconsumerloans.Sheisnow32yearsoldandisambitiouslylookingforalong-termcareerthatisbothchallengingandfinanciallyrewarding.Shedoesnotliketheideaofonlyopeningalogisticscentre,butsaysthattheyshouldbecomemoredirectlyinvolvedinsalestofinalcustomers.Theywouldneedaheadoffice–probablyinLondon–acentralreceivingareaneartoaport,andshowroomsaroundBritain.Thefastestwayofdoingthisistotakeoveranexistingretailer,orseveralretailers,togivecoveragethroughoutthecountry. LOCATINGFACILITIES133CASESTUDYcontinued■JohnBrennersaysthatFionaMcGregor’sschemeistooambitious,whiletheothertwoputtheconvenienceofthecompanyabovethecustomers.Hesaysthereisonlyonewaytosellappliancesandthatistogivecustomersaproducttheywant,inalocationtheycangetto.John’sideaistoopenalogisticscentretoserveretailers,combinedwithacash-and-carrywarehouseforsalesdirecttocustomers.Tofindthebestlocationforthis,theyshouldseewheresuccessfuldistributorsalreadywork,andopentheirfacilitiesnearby.Theywouldneedalargedominatinglocationthatcustomerscanseefromalongwayoff,thattheypassfrequently,wheretheyregularlyvisittoshop,andwhereotherdistributorshavetraditionallybeenabletosell.Thetimeisnowgettingshortforadecision.Thedirectorsareconcernedthatiftheydelayanylongerthemanufacturerwillconsiderthemindecisive,andtheywillnothavetimetogiveagoodshowingattheirfirstyear’sreview.Tobuildentirelynewpremisescouldtakeayear.Alternativelytheycouldfindexistingpremisesthatareempty,ortheycouldrenttemporarypremisesuntilthecompanyfindsmoresuit-able,permanentpremises.CASESTUDYQuestions●IfyouwereadirectorofBrennerRefrigerationSales,whatwouldyoudonow?●WhatkindoffacilitiesdoesBrennerneed?Whatfactorsareimportantforthelocation?●Whatlocation–orlocations–wouldyourecommend?PROJECTPoorLocationsFindanexampleofanorganisationthathasopenedfacilitiesinthewronglocation,andseewhytheirdecisionswentwrong.Youmightfindashopthatseemstochangehandssurprisinglyquickly,oraclosedfactoryonanindustrialestate.Unfortunately,youcanfindmanyrecentexamples,aswellashis-toricalones(suchastheHillmancarplantoutsideGlasgow,andVictorianrailwaystationsbuiltfortownsthatneverdeveloped). 134LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROBLEMS1.MaiLaoIndustriesmanufacture70tonnesofgoodsaweekinfactoryAand50tonnesaweekinfactoryB.Themapco-ordinatesofthesefactoriesare(14,11)and(54,48)respectively.Thesegoodsaredeliveredto14maincustomerswhoseaverageweeklyrequirementsandco-ordinatesareshownbelow.Thecompanywantstoimproveitscustomerserviceanddecidestoopenalogisticscentre.Therearefourpossiblelocations,eachwiththesameoperatingcosts,locatedat(20,8),(61,19),(29,32)and(50,22).Whichoftheselocationsisbest?CustomerDemandCo-ordinatesCustomerDemandCo-ordinates14(11,16)816(12,69)211(30,9)92(27,38)38(43,27)104(51,6)47(54,52)116(43,16)517(29,62)123(54,16)610(11,51)1312(12,60)715(8,10)1418(12,3)2.Anewelectronicsfactoryisplannedinanareathatisencouragingindustrialgrowth.Therearefivealternativesites.Amanagementteamisconsideringthesesitesandhassuggestedtheimportantfactors,relativeweightsandsitescoresshownbelow.Whatistherelativeimportanceofeachfactor?Whichsiteappearsbest?FactorMaximumScoresforSitesScoreABCDEGovernmentgrants1024885Communityattitude12875105Availabilityofengineers151088105Experiencedworkforce202015151015Nearbysuppliers843632Educationcentres554115Housing5235323.Findthecentreofgravityofthedatainquestion1.Whatwouldbethetransportcostofadistribu-tioncentrelocatedthere?Canyoufindacheapersolution?4.Anassemblyplantisplannedtotakecomponentsfromfoursuppliersandsendfinishedgoodstoeightregionalwarehouses.Thelocationsoftheseandtheamountssuppliedordemandedareshowninthefollowingtable.Wherewouldyoustartlookingforasitefortheassemblyplant?LocationX,Yco-ordinatesSupply/DemandSupplier17,80140Supplier285,3580Supplier39,81120Supplier411,6270 LOCATINGFACILITIES135PROBLEMScontinuedLocationX,Yco-ordinatesSupply/DemandWarehouse112,4245Warehouse260,965Warehouse392,9425Warehouse48,7945Warehouse510,8360Warehouse659,9135Warehouse783,4950Warehouse885,30855.PierreMalpasseisopeningalogisticscentreforhisFrenchclothingoperations.Ifthelikelydemandisproportionaltothepopulation,whereshouldhestartlookingforlocations?6.Figure5.16showspartofaroadnetworkandpopulationofninetowns.Wherewouldyoustartlookingforalocationforanewwarehouse?2757DFC16172441E322014A3022I21BH167GFigure5.16NetworkforProblem6 136LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTDISCUSSIONQUESTIONS1.Ifacompanychoosesapoorsiteitcanalwaysmovetoabetterone.Suchchangeisanunavoidablepartofbusiness.Doyouthinkthisistrue?2.Whichareasoftheworlddoyouthinkwillhavethefastesteconomicdevelopmentoverthenexttwentyyears?Howwillthisaffectlocationdecisions?3.Whatcostsshouldbeconsideredinalocationdecision?Iscostalwaysanimportantfactor?Whatotherfactorsshouldbeconsidered?Whateffectdogovernmentgrantshave?4.Mathematicalmodelsforlocationtakeasimplifiedviewandtheyonlyincludethefewfactorsthatcanmosteasilybequantified.Sohowusefularetheyforrealdecisions?5.Whatfeatureswouldyouexpecttoseeincomputersoftwarethathelpswithlocationdecisions?Doasurveyofrelevantpackages.Howdotheywork,andwhatanalysesdotheydo?6.Differentculturesarethemainproblemoflocatingfacilitiesindifferentcountries.Theymakeitimpossibletostandardiseprocedures,haveconsistentoperations,compareperformance,oranythingelse.Doyouthinkthisistrue?REFERENCES1.HooverE.M.(1948)TheLocationofEconomicActivity,McGraw-Hill,NewYork.2.HaleyK.B.(1963)Sitingofdepots,InternationalJournalofProductionResearch,2,41–5.3.EilonS.,Watson-GandyC.D.T.andChristofidesN.(1971)DistributionManagement,Griffin,London.4.AndelT.(1996)Sitelocationtools,TransportandDistribution,June,77–81.5.GooleyT.B.(1998)Thegeographyoflogistics,LogisticsManagementDistributionReport,37(1),63–6.6.AhituvN.andBermanO.(1988)OperationsManagementofDistributedServiceNetworks,PlenumPress,NewYork.FurtherreadingDreznerZ.(1995)FacilityLocation:ASurveyofApplicationsandMethods,Springer-Verlag,Secausus,NJ.HarringtonJ.W.andWarfB.(1995)IndustrialLocation:PrinciplesandPractice,Routledge,London.HayterR.(1997)TheDynamicsofIndustrialLocation,JohnWiley,Chichester.SalvaneschiL.andAkinC.(eds)(1996)Location,Location,Location:HowtoSelecttheBestSiteforYourBusiness,OasisPress,CentralPoint,OR.SchriederjansM.J.(1999)InternationalFacilityAcquisitionandLocationAnalysis,QuorumBooks,Wesport,CT.WatersC.D.J.(1999)GlobalLogisticsandDistributionPlanning,KoganPage,London. CHAPTER6PlanningResourcesCONTENTS■Aimsofthechapter■Chapterreview■Typesofplanning■Casestudy–PrimalAutoparts■Capacityplanning■Project–Networkplanning■Adjustingcapacity■Discussionquestions■Tacticalplanning■References■Short-termschedules■FurtherreadingAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■DISCUSStheroleofplanninginlogistics■MEASUREthecapacityofasupplychain■USEastandardapproachtocapacityplanning■DISCUSSsomepracticaldifficultieswithcapacityplanning■SEEhowtodesignmedium-termtacticalplans■EXPANDthetacticalplansintoshort-termschedules 138LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTTYPESOFPLANNINGThelasttwochapterslookedatthedesignofasupplychain.Theyconsideredthestructure,basedonthetypeandnumberoffacilities,andthebestlocationsforthesefacilities.Nowwearegoingtoseehowtousethechainandhowmaterialsactuallymovethroughit.Thenexttwochapterslookatquestionsofplanning.Weseehowactivitiesalongthesupplychainareplanned,andhowresourcesarecontrolled.Allactivitieshavetobeplanned–whichmeansthatwedesigntimetablestoshowwhentheywillbedone.Deliveryplans,forexample,mightshowtheplannedschedulesfordeliv-eriesoverthenextmonth.Ifanorganisationdoesnotplanforthefuture,itcanonlyworkfromhour-to-hour,withoutanycontinuity,andinconstantdangerofmeetingunexpectedcircumstancesthatitcannotcopewith.Planningletsusfacethefuturewithsomeconfidence,ratherthandescendingintochaos.Planningthesupplychainstartswiththelogisticsstrategy,whichgivestheoverallaims.Moredetailsareadded,andwegetlong-termplanswhichshowhowtheseaimswillbeachieved.Theseplansare,inturn,expandedwithmoredetailsadded.Theplansmovedownthroughtheorganisation,wheretheyarecontinuallyexpandedanddescribedinmoredetail.YoucanseethisapproachtoplanninginCapitalTrainsCorporation.Theirbusinessstrategygivesageneraldescriptionoftheirproducts,whichprovidepublictransportaroundWash-ington.Thelogisticsstrategyshowshowtheyrunanetworkoftrainservicesforcommuters.Thenextlevelofplanningforecastsdemandfortheseservices,andthenmakessurethatthereMissionHigherstrategicCorporatestrategydecisionsBusinessstrategyFunctionalstrategyStrategicdecisionsforlogisticsLogisticsstrategyCapacityplansTacticaldecisionsAggregateplansforlogisticsMasterscheduleOperationalShort-termschedulesdecisionsforlogisticsFigure6.1Anapproachtoplanninglogistics PLANNINGRESOURCES139isenoughcapacitytomeetthis.Inotherwords,theybuyenoughtrainsandhireenoughstafftomeetforecastdemand.Thentheymoveontomoredetailedplans,whichgivetheirtimetableofservices,sayingwhichroutestheirtrainswillserveandwhentheywillarrive.Capitalthenexpandthesetimetablesintodetailedschedulesforindividualtrainsanddrivers,inspectors,materials,andanyotherresourcestheyneed.Asyoucansee,CapitalTrainsmovedownfromstrategicpolicies,throughcapacityplans,medium-termschedulesofoperations,andontodetailedtimetablesforalltheirresources.Thisistheusualapproachtoallplanning(showninFigure6.1).Peopleusedifferenttermstodescribetheselevelsofplanning,butthemostcommonare:●Capacityplans,whichmakesurethereisenoughcapacitytomeetlong-termdemand.●Aggregateplans,whichgivesummariesoftheworkdoneinrelatedactivities,typicallybymonthateachlocation.●Masterschedules,whichshowadetailedtimetableforallactivities,typicallybyweek.●Short-termschedules,whichshowdetailedtimetablesforjobsandresources,typicallybyday.Inthischapterwelookateachoftheseinturn.CAPACITYPLANNINGDefinitionsThecapacityofanoperationisitsmaximumthroughputinaspecifiedtime.Alloperationshavesomelimitontheircapacity:afactoryhasamaximumnumberofunitsitcanmakeaweek,auniversityhasamaximumintakeofstudents;anaeroplanehasamaximumnumberofseats,andalorryhasamaximumweightitcancarry.Sometimethestatedcapacityhasanexplicitreferencetotime,suchasamaximumnumberofcustomersthatcanbeservedinaday.Evenwhenitisnotmentionedexplicitly,everymeasureofcapacityreferstotime.Thenumberofseatsonanaeroplanesetsthecapacityasamaximumnumberofpassengersonaparticularflight;thenumberofroomsinahotelsetsthemaximumnumberofguestswhocanstayeachday.Sometimesthecapacityseemsobvious–suchasthenumberofseatsonabusorvolumeofatanker.Atothertimesthecapacityisnotsoclear.How,forexample,canyoufindthecapacityofasupermarket,airportortrainnetwork?Theusualanswerhasasurrogatemeasure,suchasthemaximumnumberofcustomerspersquaremetreoffloorspaceinashoppingmall,ortheminimumdistancebetweenplanes.Suchmeasurescomefromdiscussionandagreementratherthananyphysicallimit.Capacityisanimportantconceptforlogistics,asitdefinesthemaximumflowthroughthesupplychaininagiventime.TheCAPACITYofasupplychainsetsthemaximumamountofproductthatcanbedeliveredtofinalcustomersinagiventime.Mostorganisationsdonotliketoworkatfullcapacity,asthisputspressureonresourcesandpeople.Insteadtheyworkatalowerlevelthattheycansustainovertime.Weallowforthis 140LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTdisparitybydefiningdifferentkindsofcapacity.Ifyouimagineasupplychainthatisworkinginidealconditionswithnodisruptionsorproblemsofanykind,thenthemaximumthroughputisitsdesignedcapacity.Inreality,youseldomfindsuchidealconditions,andamorerealisticmeasureistheeffectivecapacity.Thisisthemaximumthroughputthatcanbesustainedundernormalconditions,andallowsfordisruptions,variationsinperformance,breakdowns,maintenanceperiods,andsoon.DESIGNEDCAPACITYisthemaximumpossiblethroughputinidealconditions.EFFECTIVECAPACITYisthemaximumrealisticthroughputinnormalconditions.ACTUALTHROUGHPUTisnormallylowerthaneffectivecapacity.BottlenecksNotallpartsofasupplychainhavethesamecapacity.Theremustbesomepartthatlimitsoverallthroughput,andthisformsabottleneck.IfyouwanttomovesomebulkymaterialsfromJohannesburgtoAmsterdam,youmightfindabottleneckatthedocksinCapeTown.Thispartofthesupplychainisworkingatfullcapacity,butotherpartshavesparecapacitythatisnotused.Thebottlenecksinasupplychainlimititsoverallcapacity(asshowninFigure6.2).BottleneckFlowofmaterialsFigure6.2ThebottleneckofasupplychainlimitsthecapacityWORKEDEXAMPLEThemainbottlingplantatJ&RSoftdrinkshasacapacityof80,000litresaday,andworksaseven-dayweek.Itfillsstandardbottlesof750ml,andthesearepassedtoapackingareawhichcanformupto20,000casesadaywith12bottleseach.Thepackingarea PLANNINGRESOURCES141WORKEDEXAMPLEcontinuedworksafive-dayweek.Thecasesaretakentowarehousesbyatransportcompanywhose8lorriescaneachcarry300cases,andmakeupto4tripsadayfor7daysaweek.Therearetwomainwarehouses,eachofwhichcanhandleupto30,000casesaweek.Localdeliveriesaremadefromthewarehousesbyafleetofsmallvansthatcanhandleevery-thingpassedtothembythewarehouse.Whatisthecapacityofthispartofthedistribu-tionsystem?HowcanJ&Rincreasethecapacity?SolutionWehaveinformationaboutfivepartsofthesupplychain,andcanusethistofindthecapacityofeachpartinconsistentunits,saybottlesaweek.■Thebottlingplanthasacapacityof80,000litresaday,or:7×80,000/0.75=746,666bottlesaweek■Thepackingareahasacapacityof20,000casesaday,or:5×12×20,000=1,200,000bottlesaweek■Thetransportcompany’slorriescanhandle300casesoneachjourney,sotheircapacityis:7×4×8×300×12=806,400bottlesaweek■Eachwarehousecanhandle30,000casesaweek,givingacapacityof:2×30,000×12=720,000bottlesaweek■Weonlyknowthatthecapacityofthedeliveryvansisgreaterthanthecapacityofthewarehouses.Thecapacityofthispartofthesupplychainisthesmallestoftheseseparatecapacities,andyoucanseefromFigure6.3thatthisis720,000bottlesaweekinthewarehouses.J&Rcanonlyincreasecapacitybyexpandingthewarehouses.Improvingotherpartsofthesupplychainwillhavenoeffectatall.Ofcourse,whenonebottleneckisremovedanotherisformed,andthiswillprobablybeatthebottlingplant.Wehavemadeanumberofassumptionshereaboutworkingdays,reliability,andsoonThesefactorswouldobviouslyhavetobetakenintoaccountbeforeanyrealdecisionsaremade.Itisobviousthatyoucanonlyincreasethecapacityofasupplychainbyaddingmorecapacityatthebottleneck.Unfortunately,youoftenseecaseswherethisisnotdone.Transportcompanies,forexample,thatrecruitmoremanagerstogiveleadership,whentheyareactuallyshortofdrivers;busstationsincreasethesizeofwaitingrooms,whencongestioninthearrivalsbayislimitingthenumberofbuses;airlinesusingbiggeraeroplaneswhenpassengerterminalsarealreadyover-crowded.Identifyingandovercomingbottlenecksisclearlynotaseasyasitseems. 142LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTBottleneckBottlingPackingTransportDeliveryplantareacompanyWarehousevansCapacityin746,6661,200,000806,400720,000>720,000bottlesperweekFigure6.3CapacityofdistributionatJ&RSoftdrinksMatchingcapacityanddemandTheaimofcapacityplanningistomatchtheavailablecapacityoffacilitiestothedemandsputonthem.Anymismatchcanbeexpensive.Ifcapacityislessthandemand,bottlenecksrestrictthemovementofmaterials,andcustomerservicedeclines;ifcapacityisgreaterthandemand,theorganisationcanmoveallitsmaterialsbutithassparecapacityandunderusedresources.Youcanseetheseeffectsinshops.Whenyougointosomeshopstherearenotenoughpeopleservingandyouhavetowait.Thecapacityoftheshopislessthandemand,andyouprobablygotoacompetitorwherethequeuesareshorter.Inothershopstherearemanypeoplewaitingtoservecustomers–sotherearenoqueues,butthecostofpayingtheseunderusedpeopleisaddedtoyourbill.Thankfully,thereisastandardapproachtocapacityplanningthatwecanillustrateinthefollowingworkedexample.WORKEDEXAMPLEAnneJenkinshasacontracttodeliver100computersystemsaweektoschoolsinSouthWales.Thesystemshavecustomisedsoftwareinstalled,whichtakesanhourtotestbeforedelivery.Thetestingisdonebytrainedstaff,whoachieveanaverageefficiencyof75%.Theyworkasingleeight-hourshiftfivedaysaweek,butcouldmovetodoubleshiftsorhaveovertimeatweekends.HowmanytestersshouldAnneemploy? PLANNINGRESOURCES143WORKEDEXAMPLEcontinuedSolutionEachtesterisavailablefor8×5=40hoursaweek.Averageefficiencyis75%,sotheiruse-fultimeis40×0.75=30hoursaweek.Eachcomputertakes1hourtotest,soeachemployeecantest30systemsaweek.Thisisequivalenttosaying:■designedcapacity=40unitsatesteraweek■effectivecapacity=30unitsatesteraweekThereareseveralwaysofmeetingthedemandof100unitsaweek:■Workingasingleshiftonweekdayswouldneed100/30=3.33testers.IfAnneonlyemploysfull-timetesters,shehastoroundthisupto4.Thentheutilisationofeachwouldbe3.33/4=0.83or83%.■Employing3testersfull-time,andonepart-timetesterfor1/3timewouldmeetallcapacitywith100%utilisation.■Usingovertimeattheweekendswouldneed3fulltimetesterswhoarewillingtofinish10testsattheweekend(working10/0.75=13.3hours).Wecouldcontinuelikethis,suggestingalternativeplans,addingallowancesforholidays,problems,varyingdemand,andsoon.Annenowneedstocompletehercapacityplan-ningbycomparingthesealternativesandimplementingthebest.Fromthisexample,youcanseethatthemainstepsincapacityplanningfindtheresourcesneeded,comparethesewiththeresourcesavailable,andthenlookatalternativeplansforovercominganydifferences.Tobemorespecific,we:1.examineforecastdemandandtranslatethisintoacapacityneeded2.findthecapacityavailableinpresentfacilities3.identifymismatchesbetweencapacityneededandthatavailable4.suggestalternativeplansforovercominganymismatch5.comparetheseplansandfindthebest6.implementthebestandmonitorperformance.Thisisastandardapproachtoallkindsofplanning,whichissometimescalledresourcerequirementplanning.Unfortunately,takingthestepsinthisstraightforwardsequencedoesnotusuallywork.Therecanbeahugenumberofpotentialplanstoconsider,anditisimpos-sibletolookatthemallindetail.Itisalsodifficulttocomparethealternatives,astheremaybecompetingobjectivesandnon-quantifiablefactors.Amorerealisticviewreplacesthesingleprocedurewithaniterativeone.Thisdesignsaplanandseeshowcloseitgetstoachievingitsobjectives;ifitperformsbadly,theplanismodifiedtofindimprovements.Ineffect,steps4and5arerepeateduntiltheygiveareasonablesolution.Thisiterativeprocedurerecognisesthatitisrarelypossibletofindthesingle‘best’plan,andwearereallylookingforonethatisgenerallyaccepted. 144LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCapacityDemandIncreaseincapacityCapacityTime(a)CapacitymoreorlessmatchesdemandDemandCapacityDemandTime(b)CapacityalwaysexceedsdemandTime(c)DemandalwaysexceedscapacityFigure6.4AlternativetimingofcapacityexpansionADJUSTINGCAPACITYProblemswithcapacityplanningThereareseveralpracticalproblemswithcapacityplanning.Youcanseeoneoftheseinthelastworkedexample,wheredemandcomesinsmallquantitiesandcantakealmostanyvalue,whilecapacitycomesinlargediscreteamounts.Typically,capacitycanbeincreasedbyopeninganothershop,employinganotherperson,usinganothervehicle,buildinganotherwarehouse,andsoon.Supposethatthethroughputofasupplychainrisessteadilyovertime.Capacityshouldbeincreasedatsomepoint,buttheincreasewillcomeasadiscretestep.Thereisnowayofexactlymatchingthediscretecapacitytoacontinuousdemand,sowehavetouseoneofthreebasicstrategies(asshowninFigure6.4).(a)moreorlessmatchcapacitytodemand,sothatthereissometimesexcesscapacityandsometimesashortage PLANNINGRESOURCES145CapacityCapacityDemandDemandTimeTime(a)Afewlargeincreases(b)MoresmallerincreasesFigure6.5Alternativesizeofcapacityexpansion(b)makecapacityatleastequaltodemandbyearlyexpansion,whichneedsmoreinvestmentinfacilitiesandgiveslowerutilisation(c)onlyaddcapacitywhentheadditionalfacilitieswouldbefullyused,whichhaslowerinvestmentandhighutilisation,butrestrictsthroughput.Eachofthesestrategiesisbestindifferentcircumstances.Factorsthatencourageanearlyincreaseincapacityincludehighcostofshortages,widelyvariabledemand,varyingefficiency,andlowcostofsparecapacity.Thecapacityofalargefurnitureshop,suchasMFI,islargelysetbythenumberofsalespeople.Thenatureofdemandandrelativecosts,meanthattheshopislikelytoincreasecapacityearlyandmakesurethattherearealwaysenoughstafftoservecustomers.Themainfactorthatencouragesadelaybeforeincreasingcapacityisthecapitalcost.Newmotorwaysareexpensiveandcontroversial,soexpansionsaredelayedforaslongaspossible,andtheyarecrowdedassoonastheyopen.Arelatedquestionaboutchangingcapacityconcernsthesizeofanychanges.Ifyouwanttohirefournewpeopleoverthenextfewmonths,shouldyourecruitthemallinonebigcampaign,orisitbettertoaddtheminsmallersteps.Anychangeincapacityislikelytocausesomedisruption,soitmightbebettertohaveafewlargeincreasesratherthanmoresmallerones(asshowninFigure6.5).Thebenefitsoflargeincreasesincludelongerperiodswithoutdisruptions,lessriskofnotmeetingunexpecteddemand,andtheexpansionmightgiveeconomiesofscale.Ontheotherhand,thereisnotsuchaclosematchtodemand,disruptionsmaybemoreserious,capitalcostsarehigher,utilisationislow,andtherearerisksifdemandchanges.Short-termadjustmentstocapacityCapacityplanningislargelyastrategicfunction.Organisationscanincreasetheoverallcapacityofasupplychainbyopeningawarehouse,designinganewprocess,openingnewoffices,ormovingtoanewlocation.Theycanreduceexcesscapacitybyclosingwarehouses,shuttingdownaplant,ortransferringfacilitiestootherproducts.Thesearestrategicdecisionswithlong-termconsequences.Butanorganisationcanalsoadjustcapacitybyleasingextraspace,workingovertime,employingtemporarystaff,orsub-contractingpartsoftheirwork. 146LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTTheseareclearlytacticalandoperationaldecisions.Itisfairertosay,then,thatcapacityplan-ningincludesdecisionsatalllevels;strategicplansgivetheoverallpicture,modifiedbyshortertermadjustments.Therearetwowaysofmakingtheseshort-termadjustmentstocapacity:●capacitymanagementadjustscapacitytomatchdemand●demandmanagementadjustsdemandtomatchavailablecapacity.Imagineawholesalerthatrunsa12,000squaremetrewarehouse.Thissetsthenormalcapacity.Ifthereisatemporaryincreaseinbusinessbecauseofordersfromanearbyconstruc-tionsite,thewholesalercanusecapacitymanagementandrentextraspaceforthedurationoftheconstructionproject.Alternatively,theremaybesomereasonwhythewholesalerdoesnotwanttoincreasecapacity,soitcanusedemandmanagementtoincreasepricesandreducedemandtomatchtheexistingcapacity.Anobviouswayofmakingshort-termadjustmentstocapacityistochangethehoursworked,byworkingovertimetoincreasecapacityorundertimetoreduceit.Waysofadjustingcapacityinclude:●changingtheworkpatterntomatchdemand●employingpart-timestafftocoverpeakdemands●usingoutsidecontractors●rentingorleasingextrafacilities●adjustingthespeedofworking●reschedulingmaintenanceperiods●makingthecustomerdosomework,suchaspackingtheirownbagsinsupermarkets.Suchadjustmentscannotbedonetoooftenortooseverely,astheycanhavesignificanteffectsonemployees,operationsandcustomers.Thealternativeistoadjustdemand,andtheobviouswayofdoingthisistochangetheprice.Thereis,however,onlyacertainamountofflexibilityhere.Pricesmustbehighenoughtocovercosts,lowenoughtobecompetitive,andnotchangetoomanytimestoconfusecustomers.Waystoadjustdemandinclude:●varytheprice●limitthecustomersserved,bydemandingspecific‘qualifications’●changethemarketingeffort●offerincentivestochangedemandpatterns,suchasoff-peaktravelrates●changerelatedproductstoencouragesubstitution,suchasholidaydestinations●varytheleadtime●useareservationorappointmentsystem●usestockstocushiondemand.ChangingcapacityovertimeSofarwehaveassumedthatcapacityisconstantovertime.Inpractice,theeffectivecapacityofasupplychaincanchangequitemarkedly.Eveniftherearenochangestotheoperations,thereareshort-termvariationsduetostaffillness,interruptions,breakdowns,weather,enthusiasmofemployees,andsoon.Imagineagroupofpeoplemovingheavymaterialsaboutawarehouse.Attheendofaneight-hourshifttheywillbetiredandtheireffectivecapacitywillbemuchlowerthanatthebeginningoftheshift,eventhoughtherehasbeennochangetotheirwork. PLANNINGRESOURCES147Thereare,however,othermoresystematicchangesincapacity.Oneofthemostobviousistheeffectofalearningcurve.Themoreoftenyourepeatsomething,theeasieritbecomesandthefasteryoucandoit(asshowninFigure6.6).Acommonshapeforalearningcurvehasthetimetakentodoanoperationfallingbyafixedproportion–typicallyaround10%–everytimethenumberofrepetitionsisdoubled.Ifyoutake10minutestodoajobforthefirsttime,thesecondtimetakesonly90%ofthis,or9minutes;thefourthtimetakes90%ofthetimeforthesecondrepetition,andsoon.Thefollowingtableshowsthetimesforrepetitionswiththis‘90%learningcurve’.NumberofrepetitionsTimeforthelast(mins)110.029.048.187.29166.56325.90645.311284.78Anotherreasonforsystematicchangesincapacitycomesfromageingequipmentandfacil-ities.Asequipmentgetsolderitseffectivecapacitydeclinesasitbreaksdownmoreoften,developsmorefaults,giveslowerquality,slowsdown,andgenerallywearsout.Sometimesthechangesareslow–likethefuelconsumptionofacar,whichrisessteadilywithage.Sometimesthechangeisveryfast,likeabolt,whichsuddenlybreaks.Thisdecliningperformanceisbynomeansinevitable,andtherearemanythings–rangingfrommobiletelephonestoteaservices–whoseperformancestaysthesameforlongperiods.Evenifperformancedoesdecline,therearewaysofslowingitseffects,suchaspreventivemaintenanceandrationalreplacementpolicies.TimeneededforataskNumberofrepetitionsFigure6.6Atypicallearningcurve 148LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTTotalcostCostperunittimeCostofbreakdownsMaintenancecostTimebetweenOptimaltimemaintenanceperiodsFigure6.7CostofmaintenanceWithpreventivemaintenance,equipmentisinspectedandvulnerablepartsarereplacedafteracertainperiodofuse.Byreplacingbitsthatareworn–oraremostlikelytowear–theequipmentisrestoredtogivecontinuing,satisfactoryperformance.Buthowoftenshouldwedothismaintenance?Ifitisdonetoooften,theequipmentrunsefficientlybutthemainte-nancecostsaretoohigh;ifitisnotdoneoftenenough,themaintenancecostsarelowbuttheequipmentstillbreaksdown.Onewayoffindingthebestcompromiseistoaddtogetherthecostsofmaintenanceandexpectedfailure.Ifweplottheseagainstthefrequencyofmainte-nance,wegetaU-shapedcurvethathasadistinctminimum.Thisminimumcostshowsthebesttimebetweenmaintenanceperiods(asshowninFigure6.7).Evenwithregularmaintenancetherecomesapointwhenrepairsbecometooexpensiveanditischeapertobuynewequipment.Thesereplacementdecisionscanbeexpensivewhenbuilding,say,anewlogisticcentreorshoppingmall.Therearemanywaysoftacklingreplace-mentdecisions,butacommononeextendstheapproachofpreventivemaintenance.Inotherwords,weaddthecostofoperatingequipmentoveranumberofyearsanddividethisbytheageatreplacementtogiveanaverageannualcost.WORKEDEXAMPLEJuanitaPrincepiohasrecordedthecostsofanautomaticguidedvehicle(AGV)thatmovesmaterialsaroundanassemblyhall.ThelongertheAGVworkswithoutmaintenance,thehigheraretheexpectedfailurecosts(shownbelow).Themaintenancealsoaffectstheresalevalue,givingavaryingcapitalcharge.Preventivemaintenancecanbedoneatacostof£1000andthisbringstheAGVbacktonewcondition.Whatisthebesttimebetweenmaintenanceperiods? PLANNINGRESOURCES149WORKEDEXAMPLEcontinuedMonthssincemaintenance012345Costofbreakdownsinmonth05015020016003000Capitalcharge1002004005008001200SolutionWecanfindthetotalmonthlycostofrunningtheAGVoversomeperiodbyaddingthetotalcostsofmaintenance,capitalandbreakdowns,anddividingthisbythenumberofmonthsintheperiod.Ifthemachineismaintainedeverymonththereisnocostforbreak-downs,butmaintenancecostsof£1000andcapitalchargeof£100,giveatotalof£1100eachmonth.Ifthemachineismaintainedeverytwomonthstheexpectedcostofbreak-downsis£0inthefirstmonthplus£50inthesecondmonth,capitalchargeis£200andmaintenancecosts£1000,givingatotalof£1250everytwomonths,or£625amonth.Ifthemachineismaintainedeverythreemonthstheexpectedcostofbreakdownsis£0inthefirstmonth,plus£50inthesecondmonth,plus£150inthethirdmonth,capitalchargeis£400andmaintenanceis£1000,givingatotalof£1600forthreemonthsor£533amonth.Repeatingthisgivesthefollowingvalues,whichsuggestaminimumcostof£475amonthwhenmaintenanceisdoneeveryfourmonths.Monthsbetween123456maintenanceMaintenancecost100010001000100010001000Costofbreakdownsinmonth05015020016003000Cumulativecostofbreakdowns05020040020005000Capitalcharge1002004005008001200Totalcost110012501600190038007200Averagecostpermonth11006255334757601200LOGISTICSINPRACTICECapacityofHeathrowAirportBAArunsevenairportsintheUK,includinganincreaseof4.7%overthepreviousyear.thethreeLondonairportsatHeathrow,PassengerdemandisparticularlystronginGatwickandStansted.IntheyeartoAprilthesouth-eastofEngland,wherethenum-2000,BAAhandled118millionpassengers,berofpassengersisforecasttodoubleover 150LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedthenext15years.TomeetthisrisingexpressraillinktoStPancras,improveddemand,BAAhasacontinuingprogrammeaccessroads,extensiontotheLondonofairportexpansion.UndergroundPiccadillyLine,and£1millionLondonHeathrowistheworld’sbiggestadayspentonupgradingtheexistingfourinternationalairport,andhandledover62terminals.Discussionshavealsostartedintomillionpassengersin2000.Thisriseof2%reducingthegapbetweenaeroplanesandayearismodestcomparedwithotherair-allowingmoretake-offsandlandings.portsaroundLondon.Stanstedhandled10Realistically,thecongestionatHeathrowmillionpassengers,ariseof33%,Gatwickislikelytocontinuefortheforeseeablegrewat3%to30millionpassengers,Lutonfuture.Thishasforcedgrowthatotherair-airportisdoublingitscapacityto10millionports.BritishAirwaysswitcheditsAfricanpassengersayear,andthesmallerLondonservicestoGatwickin1996,anditsSouthCityAirportisgrowingby9%ayearto2Americanservicesin1997.By1998,millionpassengers.Gatwickwasserving276destinations–ThereasonforHeathrow’srelativelyslowmorethananyotherEuropeangateway,growthisthattherunwaysand,moreobvi-includingHeathrow.Itspent£500millionously,thefourterminalsarealreadywork-toincreaseitscapacityfrom27milliontoingatfullcapacity.Afifthterminal,dueto30millionpassengers,andiscurrentlyincreasepassengercapacityto85millionaexpandingtoacapacityof40million.year,hasbeendelayedbyapublicenquiryStanstedisexpandingfrom8millionto15lastingfouryears–thelongest-everhearingmillionpassengersayear.LutonhasspentforadevelopmentprojectintheUK.If£170milliononnewfacilitiestobecomeeverythinggoessmoothly,theearliestpos-London’sfourthairport.sibleopeningdateis2006.Therearecon-Sources:EllsonC.(1998)London’sairportssetfortinuingimprovementstofacilitiestogiveexpansion,TheTimes,30April;SkapinkerM.smallerincreasesincapacity,includingan(1999),BAAplanstoexpandcapacityatexpressraillinktoPaddington,asecondGatwick,FinancialTimes,31MayandwebsitesTACTICALPLANNINGAggregateplansTacticalplansbridgethegapbetweenlongertermstrategicplansandoperationaldetails.Theyshowhowthecapacitywillbeused,anddevelopmedium-termtimetablesforactivities.Differentnamesareusedforthislevelofplanning,butthemostcommonareaggregateplansandmasterschedules.Aggregateplanningtakestheforecastdemandforlogisticsandusesthistodesignplansforeachtypeofactivityfor,typically,eachofthenextfewmonths.SupposethatProctorTrans-portforecastsdemandof800tonnesofmaterialstobedeliveredtoScandinaviaoverthenextyear.Capacityplansmakesurethatthereareenoughresourcestodeliverthis.Thenaggregate PLANNINGRESOURCES151plansdesignanoutlinescheduleforresources,perhapsplanningdeliveriesof100tonnesineachofthefirsteightmonths.Aggregateplansonlylookatfamiliesofactivitiesandarenotconcernedwithdetails.Theymightshowthenumberofcasesmovedthroughalogisticscentre,butdonotbreakthisdownintotypesofcaseorcontents.AGGREGATEPLANNINGmakesthetacticaldecisionsthattranslateforecastdemandandavailablecapacityintoschedulesforfamiliesofactivities.Aggregateplanstrytomeetforecastdemand,whileusingcapacityasefficientlyaspossible.Theytypicallyaimatlowcosts,highcustomerservice,stablethroughput,fullutilisationofresources,orsomeotherobjectives.Toachievethis,theycanadjustthevaluesofseveralvari-ables.Theymay,forexample,changethenumberofpeopleemployed,thehoursworked,theamountsofstock,theamountsubcontracted,demand,andsoon.Essentially,aggregateplan-nersarelookingforanswerstoquestions,like:●Shouldwekeepthroughputataconstantlevel,orchangeittomeetvaryingdemand?●Howshouldweusestockstomeetchangingdemand?●Shouldwevarythesizeoftheworkforcewithdemand?●Canwechangeworkpatternstomeetchangingdemand?●Shouldweusesubcontractorsoroutsideorganisationstocoverpeakdemands?●Canweallowshortages,perhapswithlatedelivery?●Canwesmooththedemand?Attheendoftheaggregateplanning,anorganisationhasschedulesforitsmajortypesofactivity,typicallyforeachmonth,ateachlocation.Thenextstageistoaddmoredetail,andthisisdoneinthemasterschedules.Amasterschedule‘disaggregates’theaggregateplanandshowstheplannedactivitiesfor,typically,eachweekoverthenextfewweeks.TheaggregateplanofProctorTransportmightshowdeliveriesof100tonnestoScandinavianextmonth.Thenthemasterschedulegivesmoredetails,perhapsshowing2deliveriesof9tonnestoDenmarkinweekone,3deliveriesof7tonnestoSwedeninweektwo,andsoon.TheMASTERSCHEDULEgivesatimetableforactivities,typicallyforeachweek.Itsaimistoachievetheactivitiesdescribedinaggregateplansasefficientlyaspossible.OverallapproachoftacticalplanningMasterschedulesaremoredetailedthanaggregateplans,sotheytendtobemorecomplicatedandmessy.Forbothofthem,however,wecanusethegeneralprocedurethatwedescribedearlierasresourcerequirementplanning.Rememberthatthishassixsteps:Step1translateforecastsandotherinformationintoademandforresourcesStep2findtheresourcescurrentlyavailableStep3identifymismatchesbetweenresourcesneededandavailableStep4suggestalternativeplansforovercominganymismatches 152LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTStep5comparetheseplansandfindthebestStep6implementthebestplanandmonitorperformance.Wecanusethisapproach(whichisillustratedinFigure6.8)foralltypesofplanning.Rememberthatsteps4and5areusuallyrepeateduntilareasonablesolutionisfound.Thisiterativeadjustmentcanbedonemanytimes,butitmuststopatsomepointwhentheplansbecomefinal.Atthispoint,theplannerscanmoveontothenextlevelofdetail.TakeforecastsandotherinformationfortheplanningperiodTranslatethisintoademandforresourcesFindtheresourcesavailableinthecurrentperiodIdentifymismatchesbetweendemandandavailabilityDesignaplantoovercomethesemismatchesMoveontothenextEvaluatetheplanplanningperiodNoRevisetheplanIstheplanandlookforacceptable?improvementsYesFinalisedetailsofthebestplanforthecurrentperiodImplementtheplanandmonitorprogressFigure6.8Aniterativeapproachtoplanning PLANNINGRESOURCES153WORKEDEXAMPLEA&BCoachesA&BCoachesofBlackpoolplantheircapacityintermsof‘coach-days’.Theyclassifytheirbusinessaseither‘fullday’,whicharelongdistancejourneys,or‘halfday’whichareshorterruns.Forecastsshowexpectedannualdemandsforthenexttwoyearstoaverage400,000full-daypassengersand750,000half-daypassengers.A&Bhave61coaches,eachwithaneffectivecapacityof40passengersadayfor300daysayear.Breakdownsandotherunexpectedproblemsreduceefficiencyto90%.Theyemploy86driverswhoworkanaverageof220daysayear,butillnessandotherabsencesreducetheirefficiencyto85%.Ifthereisashortageofcoachesthecompanycanbuyextraonesfor£110,000orhirethemfor£100aday.Ifthereisashortageofdriverstheycanrecruitextraonesatacostof£20,000ayear,orhirethemfromanagencyfor£110aday.Howcanthecompanyapproachitstacticalplanning?SolutionWecanapproachthisproblemusingthefirstfivestepsofthesix-stepprocedureoutlinedabove.Step1Translateforecastsandotherinformationintoademandforresources■400,000full-daypassengersareequivalentto400,000/40=10,000coachdaysayear,or10,000/300=33.33coaches.■750,000half-daypassengersareequivalentto750,000/(40×300×2)=31.25coaches.■Addingthesetwogivesthetotaldemandas64.58coaches.Eachcoachneeds300/220drivers,sothecompanyneedsatotalof88.06drivers.Step2Findtheresourcescurrentlyavailable■Thecompanyhas61coaches,buttheefficiencyof90%givesanavailabilityof61×0.9=54.9coaches.■Thereare86drivers,butanefficiencyof85%reducesthisto86×0.85=73.1drivers.Step3IdentifymismatchesbetweenresourcesneededandavailableWithoutdetailsofthetiming,wecanonlytakeoverallfigures.Thereisatotalshortageof64.58–54.9=9.68coachesand88.06–73.1=14.96drivers.Step4SuggestalternativeplansforovercominganymismatchesAssumingthatA&Bdonotwanttoreducedemand,theycaneitherbuyorhirecoaches,andemploydriversorhirethemfromanagency.Theonlyinformationwehaveaboutthesealternativesaresomecosts. 154LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinued■Tobuy10coacheswouldcost£1,100,000.Tohirecoachestomakeuptheshortagewouldcost9.68×300×100=£290,400ayear.Thereis,ofcourse,thealternativeofbuyingsomecoachesandhiringothers.■Tohire15driverswouldcost£300,000ayear,whileusingtemporarydriversfromanagencywouldcost14.96×220×110=£362,032ayear.Thereisalsotheoptionofhiringsomedriversandmakingupshortagesfromanagency.Step5ComparetheseplansandfindthebestWedonothaveenoughinformationtomakethefinaldecisions,andwehaveonlyout-linedsomeofthealternatives.Thisverylimitedanalysismightsuggestareasonablesolu-tionofbuyingeightcoachesandmakingupanyshortagesbyhiring,andhiring12driversandmakinguptheshortagefromtheagency.Whentheseplansarefinalised,A&Bcanstartlookingatmoredetailedplans.Thenextstagewoulddevelopaggregateplansfortypesofjourneyseachmonth,perhapsshowingthenumberofcontinentaljourneyseachmonth,andsoon.Thentheycouldbreaktheaggregateplansintomasterschedulesofjourneyseachweek,perhapsshowingthenum-berofjourneystotheNetherlandsinthefirstweek,andsoon.GeneratingalternativeplansThelastworkedexampleillustratesthegeneralapproachofplanning,butyoucanseethattherearemanypracticaldifficulties.Oneofthemostimportantconcernsthewaythatalter-nativeplansaregeneratedandcompared.Thereareusuallysomanypossibleplansthatwecannotevenlistthemall,letalonecomparetheirmerits.Therearealsosomanycompetingobjectivesandnon-quantifiablefactorsthatitisdifficulttofindanyplanthatsatisfieseveryone,letaloneidentifythe‘best’.Therearemanywaysofgeneratingalternativeplans,rangingfromsimpleintuitionthroughtosophisticatedmathematicalmodels.Themostappropriatedependsonseveralfactors,themostobviousbeingthebalancebetweenthecostofplanningandtheexpectedbenefits.Ifyouaremovinghugequantitiesofoilintankersandpipelines,costsarehighanditisworthputtingalotofeffortintoasophisticatedmodelthatguaranteesgoodresults.Ontheotherhand,asmallbusinessisunlikelytohavetheresourcesforthis,andwilluseasimplemethodthatwillgivereasonableresultswithalotlesseffort.Thefollowinglistshowsthemostcommonmethodsofgeneratingplans.1.Negotiations:Planningissocomplicatedthatthebestapproachisoftentonegotiateasolutionamongthepeoplemostcloselyconcerned.Thismaynotgivethebesttechnicalanswer,butitshouldhavethesupportofeveryoneconcerned.2.Adjustpreviousplans:Demandsonlogisticsmaynotchangemuchfromoneperiodtothenext,soausefulapproachistotakepreviousplansthatworkedsuccessfullyandupdate PLANNINGRESOURCES155theminthelightofcurrentcircumstances.Thishasthebenefitofbeingrelativelyeasyandgivingstableoperations.Unfortunately,theresultscanbeofvariablequality,theymaytakealongtimetodesign,andtheyrelyontheskillsoftheplanner.3.Otherintuitivemethods:Theseincludearangeofmethodsthatrelyontheskills,knowl-edgeandexperienceofplanners.Theytypicallyuseaseriesofheuristicrulesthathavebeensuccessfulinthepast.4.Graphicalmethods:Plannersoftenfinditeasiertoworkwithsomekindofgraphsordiagrams.Apopularformatusesagraphofcumulativedemandovertime,andthecorre-spondinglineofcumulativesupply.Theaimistogetthecumulativesupplylinenearlystraight–givingconstantthroughput–andascloseaspossibletothecumulativedemandline(asshowninFigure6.9).Therearemanydifferentformatsforsuchdiagrams.5.Spreadsheetcalculations:Oneofthemostpopularapproachestoplanningusesspread-sheets.Datacanbepresentedinavarietyofformatsthatshowtheeffectsofplans,andtheycanbeeasilymanipulatedinaseriesof‘what-if’analyses.6.Simulation:Simulationimitatesrealoperationsoversometypicalperiod.Supposeyouwantsomeinformationaboutalogisticsnetwork;youcouldsimplystandandwatchthenetworkforsometimetoseewhatwashappening.Unfortunately,thistakesalongtimetogetresultsandthingsmaynotworknormallywhileyouarewatching.Analternativeistosimulatetheprocess,basedonacomputermodelofthenetwork.Oncethishasbeendesigned,thecomputercangeneratetypicaljobsandfollowtheirprogressthroughthemodel,sothatanynumberofrealsituationscanbesimulated.CumulativedemandCumulativesupply18001600140012001000800Number6004002000123456789MonthFigure6.9Graphicalapproachtoplanning–plottingcumulativedemandandsupply 156LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT7.Expertsystems:Thesespecialisedprogramsallowcomputerstoduplicatethemethodsofskilledplanners.Thebasicskills,expertise,decisionsandrulesusedbyexpertsarecollectedinaknowledgebase.Auserofthesystempassesaproblemtoaninferenceengine,whichanalysestheproblem,relatesthistotheknowledgebaseanddecideswhichrulestouseforasolution.Expertsystemshavebeendevelopingformanyyears,andagrowingnumberoforganisationsreportusefulresults.8.Mathematicalmodels:Mostoftheapproacheswehavedescribedsofarrely,atleasttosomeextent,ontheskillsofaplanner.Moreformalmathematicalapproachesgiveoptimalsolutionswithoutanyhumanintervention.Themostcommonapproachusesmathematicalprogramming.Thiscanbecomplicatedandneedsconsiderableexpertise.Inpractice,aggregateplansincludesomanysubjectiveandnon-quantifiablefactors,thatoptimalsolutionsinthemathematicalsensedonotnecessarilygivethebestanswersfortheorganisation.PlanningcyclesAsyoucanseefromFigure6.8,planningisnotajobthatisdoneonceandisthenfinished.Itiscontinuous,andasplansforoneperiodarefinalisedandimplemented,planningmovesontothenextperiod.Theusualwayoforganisingthisistoworkonplansforseveralperiodsatthesametime;plansforthenearfuturearefixed,whilethoseforthemoredistantfuturearestilltentative.Planningisthendoneincycles.Inonecycleanorganisationmightfinaliseplansforthenextperiodandmakeprovisionalplansforthefollowingperiod,andoutlineplansfortheperiodafterthat.ThisgivesthepatternofplanningshowninFigure6.10.ItisReviseplanReviseplanReviseplan–fixedforperiodA–fixedforperiodB–fixedforperiodC–tentativeforB–tentativeforC–tentativeforD–outlineforC–outlineforD–outlineforEPeriodAPeriodBPeriodCTimePlanningcyclePlanninghorizonFigure6.10Revisionofplansduringcycles PLANNINGRESOURCES157difficulttogeneralise,butstrategicplansmightcoverthenextfouryearsandbeupdatedannually;aggregateplansmightcoverthenextyearandbeupdatedeveryquarter;masterschedulesmaycoverthenextthreemonthsandbeupdatedmonthly.Thispatternofrepeatedcyclesactuallymakesplanningaloteasier.Mostoperationsarerelativelystable,sotheplansforoneperiodcanbeusedasthebasisforplansinfollowingperiods.LOGISTICSINPRACTICEPiotrHucekTransportWiesiekTomacistheLogisticsManagerofWiesiekhasaspreadsheettohelpwithPiotrHucekTransportinPrague,Czechaggregateplanning.Helooksattheexist-Republic.Everymonthhedesigns,oringplans,andthenmakesadjustmentstoupdates,theaggregateplantocovertheallowforchangingcircumstances.Thenext6months.Hestartswithforecastsofspreadsheetdoestheassociatedcalcula-monthlydemandfordifferenttypesoftion,butlittleelse.Figure6.11showshowtransport,andcollectsotherrelevantinfor-hedevelopedaninitialidea.mationtodesignoutlineschedulesforeachAsyoucansee,Wiesiekstartedbylook-typeoftransportforeachmonth.Attheingatasmoothsupply,setattheaveragebeginningof2001hehadthefollowingdemandoverthesixmonths.Thisneededinformationforonetypeoftransport.sixmoreemployees,sotherewerecostsfortransferringpeopleintothefunctionintheMonthJanFebMarAprMayJunefirstmonth.OthercostscamefromtheForecast8010012513015075unuseddemandinthefirstfourmonthsThesefiguresareinnominal‘truckjour-andshortageinmonthfive.Theshortageneys’,andthecompanyuseseurosforcostwasparticularlyhigh,soWiesiekkeptinternalcosts.Thesemaincostsare:lookingforalternativeplansuntilhehadareasonablesolution.Hisobviousnextmove■Sparetransportthatisnotused=g1000wastoreduceavailabilityofvehiclesintheaunitheldatthemonthendfirstfourmonths,andthenincreaseitlater.■Shortageoftransport=g10,000aunitWhenhefinalisedanaggregateplan,atthemonthendWiesiekmovedontodesignthemaster■Costofmovinganemployeetothisschedule.Thisshowedthesupplyofvehi-functionfromotherjobs=g1000perclesofeachtypebyweek.Finally,short-employeetermschedulesweredesignedtoshow■Costofmovinganemployeefromthiswhateachindividualvehicleanddriverfunctiontootherjobs=g700perwouldbedoingeachday.employeeSource:companyreportsAtthebeginningoftheperiod16peoplewereemployed,eachofwhomcanmake5journeysamonth. 158LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTABCDEFGHI12LineDescription123456Total31Forecastdemand801001251301507566042Cumulativeforecastdemand8018030543558566066053Supplyrate11011011011011011066064Cumulativesupply11022033044055066066075Unusedsupply30402550010086Shortageofsupply00003503597Costofunusedsupply30000400002500050000010000010(Line5×D1000)118Costofshortage0000350000035000012(Line6×D1000)139Numberofemployees2222222222221410Costofmovingemployees60000000060001511Totalcost3600040000250005000350000045600016(Line7+Line8+line10)Figure6.11SpreadsheettohelpwithplanninginPiotrHucekSHORT-TERMSCHEDULESDefinitionsThemasterschedulegivesatimetablefordifferentactivities,typicallyforeachweek.Butthisisnottheendtoplanning,aswestillhavetodesigndetailedtimetablesforjobs,equipment,people,materials,facilitiesandallotherresourcesthatareneededbythemasterschedule.Thisisthepurposeofshort-termscheduling.SHORT-TERMSCHEDULESgivedetailedtimetablesforjobs,people,materials,equipmentandallotherresources.Short-termschedulesgivethesequencesofactivities,andthetimeswhentheyshouldbedone.‘SamtheFridge’runsarepairserviceandhisdailyscheduleliststhecustomertovisit(withtheorderandtimeofeachjob)andtheresourcesneeded(therepairpeople,tools,spareparts,vansandsoonneededforthejobs).Theaimoftheseschedulesistoorganisetheresourcesneededforthemasterschedule,givinglowcosts,highutilisations,orachievingsomeothermeasureofperformance.Designingtheseoperationalschedulesisoneofthemostcommonproblemsinanyorgan-isation.Asitissocommon,youmightthinkthatshort-termschedulingiseasy–butinprac-ticeitisnotoriouslydifficult.Tostartwiththerearesomanypossibleschedulestoconsider.Imaginethatyouhavetenjobsthatyoumustfinishtoday.Inhowmanydifferentwayscanyouarrangethetenjobs?Youcanchoosethefirstjobasanyoneoftheten;thenthesecond PLANNINGRESOURCES159jobcanbeanyoneoftheremainingnine,thethirdjobcanbeanyoneoftheremainingeight,andsoon.Thisgivesthenumberofpossibleschedulesas:10×9×8×7×6×5×4×3×2×1=3,628,800Ifyouhavearealproblemwithhundredsorthousandsofjobs,youhaveahugenumberofpossibleschedulestoconsider.Eachofthesehasdifferentfeatures,andperformswellbysomecriteria,butbadlybyothers.Youhavetobalanceeachtypeofperformance,andtakeintoaccountthecomplicationsofrealproblems,suchastheamountandtypeofequipment,numberandskillsofpeopleassignedtojobs,materialsneeded,patternsofworkflowthroughequipment,differentpriorityofjobs,objectivesoftheschedulers,andsoon.Theresultisthatapparentlysimpleschedulingjobsareactuallyverydifficulttosolve.Eilonetal.1notedthatthistypeofproblem‘hasbecomefamousforitseaseofstatementandgreatdifficultyofsolution’.ApproachtoschedulingYoucanimagineatypicalschedulingproblemintermsofasetofjobswaitingtouseequip-ment.Youwanttoorganisethejobstoachievesomeobjective.Themasterscheduleshowswhenjobshavetobefinished,sotheshort-termschedulesmusttakethesedatesintoaccount.Therearetwowaysofdoingthis:●Backwardscheduling,whereschedulersknowwhenajobhastobefinished.Thentheycanworkbackthroughalltheactivitiestofindthedatewhenthejobmustbestarted.●Forwardscheduling,whereschedulersknowwhenajobcanstart.Thentheycanworkforwardthroughallactivitiestofindthedatewhenthejobwillbefinished.Supposeyouaregivingatalkinthreeweekstimeandwantsomephotographstoillustratethis.Itwilltakeoneweektopreparethephotographs.Withbackwardschedulingyouknowthatthephotographsmustbereadyinthreeweeks,soyoucanpreparethemintwoweekstime.Withforwardscheduling,youpreparethephotographsasearlyaspossible–startingnowandfinishingnextweek.Thesetwoapproachessuggestgeneralprinciples,butweneedsomewayoffindingthebestorderforjobs.Theavailablemethodsarebasicallyvariationsonthelistgivenabovefortacticalplans,andrangefromnegotiationthroughtomathematicalprogramming.Themorecomplicatedmethodsareusuallytoodifficultandtime-consumingforshort-termschedules,andmostorganisationsusesimplemethods,oftenbasedonschedulingrules.Youseeanexampleofaschedulingruleinbankswhichschedulecustomerserviceattheirtellersintheorder‘firstcome,firstserved’.Ifyouhaveanumberofjobswaitingtouseasinglepieceofequipment,thetotalprocessingtimeisfixedregardlessoftheorderinwhichthejobsarescheduled(providingtheset-uptimeforeachjobisconstant,regardlessofthejobthatwasdonepreviously).Buttheorderoftakingjobsdoeschangeothermeasuresofperformance.Youcanseethisinthefollowingfourschedulingrules.1.Firstcome,firstserved:Thisisthemostobviousschedulingruleandsimplytakesjobsintheordertheyarrive.Itassumesnopriority,nourgency,oranyothermeasureofrelativeimportance.Itsdrawbackisthaturgentjobsmaybedelayedwhilelessurgentonesarebeingprocessed. 160LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT2.Mosturgentjobfirst:Thisruleassignsanimportance,orurgency,toeachjobandtheyareprocessedinorderofdecreasingurgency.Emergencydepartmentsinhospitals,forexample,treatthosewhoaremostseriouslyinneedfirst.Thebenefitofthisruleisthatmoreimportantjobshavehigherpriority.Unfortunately,jobsthathavelowprioritymaybestuckattheendofaqueueforaverylongtime.3.Shortestjobfirst:Ausefulobjectiveistominimisetheaveragetimespentinthesystem,where:timeinthesystem=processingtime+waitingtimeIfajobneedsonedayofprocessingbutitwaitsinthequeueforfourdays,itstimeinthesystemisfivedays.Takingthejobsinorderofincreasingdurationminimisestheaveragetimespentinthesystem.Itallowsthosejobsthatcanbedonequicklytomoveonthroughthesystem,whilelongerjobsareleftuntillater.Thedisadvantageisthatlongjobscanspendalongtimewaiting.4.Earliestduedatefirst:Thissortsjobsintoorderofdeliverydate,andtheonesthataredueearliestareprocessedfirst.Thishasthebenefitofminimisingthemaximumlatenessofjobs,butagainsomejobsmaywaitalongtime.WORKEDEXAMPLEZambrucciTransporthastoschedulethefollowingsixjobsforaheavyliftcrane.Howcanitdesignareasonableschedule?JobsABCDEFDurationindays128416210Targetcompletion12404448420(daysfromnow)SolutionThesimplestwayoftacklingthisproblemistousesomedecisionrules.Using‘firstcome,firstserved’givestheschedule:JobDurationStartFinishA12012B8620C41024D161240E22042F102152Thejobsarefinishedbyday52.Everysequenceofjobsisgoingtogivethissamecom-pletiontime,buttheywillperformdifferentlywhenjudgedbyothermeasures.Wecan, PLANNINGRESOURCES161WORKEDEXAMPLEcontinuedforexample,minimisetheaveragetimeinthesystembytakingjobsinorder‘shortestfirst’.Thisgivestheschedule:JobDurationStartFinishE202C426B8614F101424A122436D163652Theaveragetimeinthesystem(whichisthesameastheaveragefinishtime)is134/6=22.3days,comparedwith190/6=31.7daysfor‘firstcome,firstserved’.Byday36thisschedulehasfinishedfivejourneys,whilethepreviousschedulehadonlyfinishedthree.Wedonothaveenoughinformationtoschedulethejobsinorderofurgency,butwecanminimisethemaximumlatenessbytakingjobsinorderofduedate.Thisgivesthefol-lowingschedule.JobDurationStartFinishDuedateLatenessE20240A12214122F101424204B82432400C43236440D163652484Thisgivesamaximumlatenessof4daysforjobsDandF,andanaveragelatenessof10/6=1.7days.Theseareonlythreeschedulingrules,andwecouldusemanyotherstoachievediffer-entobjectives.LOGISTICSINPRACTICESchedulingatBombayTaxisBombayTaxishaveafleetof170carswork-around100ofthese,butatbusytimesingaroundgreaterBombay.Theyemploytherecanbeupto200.Theiraimistokeep210full-timedrivers,andavaryingnumberthetaxisinuseforalmost24hoursaday.ofpart-timedrivers.UsuallythereareThetaxisaremaintainedinthecom- 162LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedpany’sgarage.Thishassixbays,tenfull-tomerswhohaveblockbookings.Thesetimemechanics,fourpart-timemechanicsroutesarecontinuallymodifiedascus-andeightapprentices.Bombayalsoemploytomerstelephoneinwithnewjobs(which17controllers.Thesetaketelephonecallsareassignedtothenearestcarwithfreefromcustomers,schedulethework,andtime),orthecarspickuppassengerswhopassinstructionsontotaxis.Thecontrollershailthemonthestreets.keepacontinuouscheckonthelocationAswellasschedulingthecars,driversandworkofeachtaxi.androutes,thecontrollersdesignschedulesYoucanalreadyseethatBombayhaveforthemaintenanceandrepairofcars,todoarangeofscheduling.Theystartbyotherinternalworkinthegarage,workforschedulingthehoursworkedbycars,soexternalcustomersofthegarage,hoursthattherearealwaysenoughtaxisontheworkedbyallotherstaff,purchaseofpartsroadtomeetdemandfromcustomers.andmaterials,cleaningandmaintainingThentheyschedulethedriverstomakethebuilding,stafftraining,andallothersurethatthereareenoughdriversfortheoperationsofthebusiness.cars.ThecontrollersdesignroutesforeachSource:ChandrasekarJ.,(2001)Wherearethecab,startingwithcustomerswhomaketaxis?WesternOperationsSeminar,Torontoandadvancebookingsandalistofregularcus-companyreports❑Thelogisticsstrategygivesthegeneralshapeofthesupplychain.Afterthis,tacticalandoperationalplansareneededtomanagetheflowofmaterials.■■■Planningisessential,asitgivestimetablesforalltheactivitiesandresourcesinthesupplychain.❑Capacityisanimportantfeatureofasupplychain,asitsetsthemaximumamountofproductsthatcanbedeliveredtofinalcustomersinagiventime.Thecapacityofthewholechainissetbyabottleneck.❑Capacityplanningmatchestheavailablecapacitytodemand.Resourcerequirementplanninggivesastandardprocedurewhichiterativelysearchesforareasonablesolution.❑Therearemanypracticaldifficultieswithorganisingthecapacity,includingdiscretecapacitysizeandchangingcapacityovertime.❑Capacityplansfocusonthelongerterm,butwithshortertermadjustments.CHAPTERREVIEWTheysetthesceneformoredetailedtacticalandoperationalplanning. PLANNINGRESOURCES163❑Tacticalaggregateplansdescribetimetablesforfamiliesofactivitiesoverthemediumterm.Masterschedulesaddmoredetails,givingplansforindividualcontinuedactivities.Bothofthesecanusetheapproachofresourcerequirementplanning,withplansactuallydesignedbydifferentmethodsrangingfromnegotiationthroughtomathematicalprogramming.❑Short-termschedulesgivetimetablesfortheresourcesthatsupportthetacticalplans.Themostcommonapproachtoshort-termschedulingusessimplerulestogetreasonablesolutions.CHAPTERREVIEWCASESTUDYPrimalAutopartsPrimalAutopartsisasupplierofcarpartstocustomersinsouth-westernUSA.Itsourcesthesefromitsownmanufacturingplantsandfromothermanufacturers,primarilyinsouth-eastAsia.Itplanstoextenditsoperationstoincludecustomersinnorth-westernUSAandthewesternprovincesofCanada.GeorgeHaveringisaseniorpartnerforMayer,JonesandArmanti,andhasbeengiventhejobofdesigningrealisticalternativesforPrimal’sadditionallogisticsrequirements.What-everalternativehesuggestsmustbeintegratedwiththeexistingdistributionsystem.George’sproblemisthathedoesnotknowmuchaboutPrimal’sexistingopera-tions.Heknowsthattheyworkaswholesalers,keepingstocksinwarehousesuntildeliveredtocustomers.Thesecustomersaremainlymechanicsworkinginrepairworkshops.Theyhavetorepaircarsintheshortesttimepossible,soPrimalmustgiveatleastovernightdelivery,withpartsavailableatthestartofthenextworkingday.Thedemandforanypartisvariableanddifficulttoforecast.Somedemandisseasonal,suchasradiatorswhicharevulnerableduringseverewinters.AtpresentPrimal’smainwarehouseisnearSanFrancisco,withsmallerdepotsinLosAngeles,PhoenixandSaltLakeCity.Thelargestpartstheysupplyarebodies,whichcaneasilybecarriedbyroad,railorair.ThemostreasonableapproachforGeorgewouldbetostudytheexistingdistributionsystemandlookforwaysofexpanding.ThenPrimalcanusetheirexistingskillsandresourcestoserveawidercustomerbase,andspreadtheirfixedcosts. 164LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYQuestions●IfyouwereGeorgeHavering,howwouldyoustartyourstudy?Whatstepswouldyoufollow,andwhatwouldyouaimtoputinyourreporttoPrimal?●Whattypeoflogisticssystemsmightyouconsider?Howwouldyoucomparethesealternatives?●Whatinformationwouldyouneedforthisstudy,andhowwouldyoucollectit?PROJECTNetworkPlanningConsideranorganisationthathasawell-establishedlogisticsnetwork.Youmighttakealocalcompanyoranationalonesuchasasupermarket,airline,orcarmanufacturer.Describethemainfeaturesofthenetwork.Whatisthecapacityofthemainfacilities?Howdoyouthinkthesecapacitieswerechosen?Howdoesthecompanyplantheflowofmaterialsthroughitssupplychain?PROBLEMS1.Apurchasingdepartmentsendsoutabout100routineordersaday.Eachpersoninthedepartmentcandealwiththreeordersanhour,buthastodoassociatedpaperworkthattakesanaverageof40minutesanorder.Eachpersonalsolosesabout20%oftheirtimedoingotherthings.Thestandardworkingdayisfrom0900to1600fivedaysaweek,withanhouroffforlunch.Howmanyemployeesdoyouthinkthedepartmentshouldemploy?2.SeanHigginsestimatesthathisperiodicplantmaintenancecostsg50,000.Ifhedoesnotclosetheplantanddothismaintenance,hisbreakdowncostsriseasshownbelow.Howoftenshouldhemain-taintheplant?Timesincelastmaintenance(years)012345Annualcostofbreakdowns(g000)01040801502403.Awarehousehastomeetthedemandforaproductshownbelow.Eachunitofstockremainingattheendofamonthhasanotionalholdingcostof£20.Ifthereareshortages,20%ofordersarelostatacostof£200aunit,andtherestaremetbybackorders,atacostof£50aunit.Aproductiondepart-mentsendstheproducttothewarehouse.Designedcapacityofthisdepartmentis400unitsamonth,bututilisationseldomexceeds80%.Everytimetheproductionrateischangeditcosts£15,000.Howwouldyousetaboutdesigninganaggregateplanfortheproduct?Month12345678Aggregatedemand310280260300360250160100 PLANNINGRESOURCES165PROBLEMScontinued4.Eightjobsaretobeprocessedonasinglemachine,withprocessingtimesasfollows:JobABCDEFGHProcessingtime25384723Duedate1378301420236Howcouldyoudesignshort-termschedulesforthejobs?DISCUSSIONQUESTIONS1.Capacityisthemostimportantdecisioninthedesignofasupplychain,asitaffectstheamountofmaterialsthatcanbemoved.Doyoufindthisargumentconvincing?2.Tacticalplans–suchasaggregateplansandmasterschedules–areusefulformanufac-turing,buttheyarenotsorelevantforlogistics.Doyouthinkthatthisistrue?Whathappensifthereisnotacticalplanningforasupplychain?3.Whatdecisionsareinvolvedintacticalplanningforlogistics?4.Mathematicalmodelscanfindoptimalsolutionsforplanningandschedulingproblems.Bydefinition,thesesolutionsarethebest.Ifanorganisationusesanyothermethods,itisacceptingpoorresults.Whatdoyouthinkofthisview?5.Theremustbebetterwaysofschedulingjobsthanbyusingsimpleschedulingrules.Whatmethodsareavailable,andwhataretheiradvantagesandweaknesses?REFERENCES1.EilonS.,Watson-GandyC.D.T.andChristofidesN.(1971)DistributionManagement,Griffin,London.FurtherreadingComelJ.G.andEdsonN.W.(1995)GainingControl:CapacityManagementandScheduling,JohnWiley,NewYork.Dauzere-PeresS.andLasserveJ.B.(1994)AnIntegratedApproachtoProductionPlanningandScheduling,SpringerVerlag,Berlin.KlammerT.P.andKlammerT.(1996)CapacityManagementandImprovement,Irwin,Homewood,IL.MenasseD.(1993)CapacityPlanning:APracticalApproach,PrenticeHall,EnglewoodCliffs,NJ.MortonT.E.andPentictoD.W.(1993)HeuristicSchedulingSystems,JohnWiley,NewYork.ProudJ.F.(1999)MasterScheduling(3rdedn),JohnWiley,NewYork.VollmanT.E.,BerryW.L.andWhybarkD.C.(1996)ManufacturingPlanningandControlSystems(4thedn),RichardIrwin,Homewood,IL.WatersD.(2001)OperationsManagement,FinancialTimes/PrenticeHall,London. CHAPTER7ControllingMaterialFlowCONTENTS■Aimsofthechapter■Chapterreview■Materialrequirements■Casestudy–JITatPentagonplanningPlastics■ExtendingtheroleofMRP■Project–Planninginpractice■Principlesofjust-in-time■Discussionquestions■Achievingjust-in-time■Referencesoperations■Furtherreading■ExtendingJITalongthesupplychainAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■DESCRIBEthedistinctiveapproachofmaterialrequirementsplanning■USEMRPtotimetableordersanddeliveries■DISCUSSthebenefitsanddisadvantagesofMRP■EXTENDtheMRPapproachalongthesupplychain■DESCRIBEtheprinciplesofjust-in-timeoperations■DESIGNkanbansystemsforcontrollingJIT■DISCUSSthebenefitsanddisadvantagesofJIT■EXTENDJITalongthesupplychainforefficientconsumerresponse CONTROLLINGMATERIALFLOW167MATERIALREQUIREMENTSPLANNINGIntroductionInthepreviouschapterwedescribedanapproachtoplanninglogisticsbasedonresourcerequirementplanning.Thistakesthelogisticsstrategyandcontinuallyaddsmoredetailstogetcapacityplans,aggregateplans,masterschedulesandshort-termschedules.Theresultisasetoftimetablesshowingwhatallthefacilities,equipment,peopleandresourcesshoulddoatanytime.Thisseemsareasonableapproach,butitdoeshavedrawbacks.Itis,forexample,fairlyrigidandcanbeslowtoreacttochangingconditions.Ifacustomerurgentlywantsadelivery,wecannottellthemtowaituntilwefitthemintothenextplanningcycle.Anotherconcernarisesfromtherelianceonforecasts.Essentiallyplannerstakeforecastsofdemandforlogistics,andthenplanthesupplytomeetthis.Theproblem,ofcourse,isthatforecastsareoftenwrong.Awayofgettingaroundtheseproblemsistomatchthesupplyoflogisticstoactualdemand.Inotherwords,wewantsomewayoffindingtheknown,actualdemandratherthanusingunreliableforecasts.Thismightseemratheroptimistic,butthereareseveralcircum-stanceswhenweknowtheactualdemandinadvance.Wecanillustratethefirstofthesewithmaterialrequirementsplanning(MRP).Thisusesthemasterscheduletogiveatimetableforthedeliveryofmaterials.1DependentandindependentdemandTheconventionalapproachtoplanningassumesthatoveralldemandforaproductismadeupofindividualdemandsfrommanyseparatecustomers.Thesedemandsareindependentofeachother,sothedemandfromonecustomerisnotrelatedtothedemandfromanothercustomer.IfyouaresellingNikeshoes,theoveralldemandcomesfromhundredsofseparatecustomers,allindependentlyaskingforapairofshoes.Thisgivesanindependentdemand,whereplanningisdoneusingthestandardmethodswedescribedinChapter6.Thereare,however,manysituationswheredemandsarenotindependent.Onedemandforaproductisnotindependentofaseconddemandfortheproduct;ordemandforoneproductisnotindependentofdemandforasecondproduct.Whenamanufacturerusesanumberofcomponentstomakeaproduct,thedemandsforallcomponentsareclearlyrelated,sincetheyalldependontheproductionplanforthefinalproduct.Thisgivesdependentdemand.ThecharacteristicapproachofMRPisthatit‘explodes’amasterscheduletoplanthedeliveriesofrelatedmaterials.■MATERIALREQUIREMENTSPLANNINGusesthemasterschedule,alongwithotherrelevantinformation,toplanthesupplyofmaterials.■Itisusedfordependentdemand.YoucanseethedifferencesbetweenthetraditionalapproachandMRPinthewaythatrestaurantchefsplantheingredientsforaweek’smeals.Withthetraditionalapproach,thechefsseewhatingredientstheyusedinpreviousweeks,usethesepastdemandstoforecastfuturedemands,andthenmakesurethereisenoughingredientsinthepantrytocoverthese 168LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTStocklevelNormalstocklevel(a)StocklevelwithindependentdemandapproachProductionProductionDeliveryTimestartsendsarrivesStocklevel(b)StocklevelwithdependentdemandapproachNormalstocklevelDeliveryProductionProductionTimearrivesstartsendsFigure7.1Comparisonofstocklevelsforecastdemands.WiththealternativeMRPapproach,chefslookatthemealstheyaregoingtocookeachday,analysethesetoseewhatingredientstheyneed,andthenordertheingredi-entstoarriveattherighttime.Animportantdifferencebetweenthetwoapproachesisthepatternofmaterialstocks.Withindependentdemandsystems,stocksarenotrelatedtoproductionplanssotheymustbehighenoughtocoveranylikelydemand.Thesestocksdeclineduringoperations,butaresoonreplacedtogivethepatternshowninFigure7.1(a).WithMRP,stocksaregenerallylowbutriseasordersaredeliveredjustbeforeoperationsstarts.Thestockisthenusedduringproductionanddeclinestoitsnormal,lowlevel.ThispatternisshowninFigure7.1(b).TheMRPapproachMRPusesalotofinformationaboutschedules,productsandmaterials.Thiscomesfromthreemainsources: CONTROLLINGMATERIALFLOW169●masterschedule,givingthenumberofeveryproducttobemadeineveryperiod●billofmaterials,listingthematerialsneededforeveryproduct●inventoryrecords,showingthematerialsavailable.Abillofmaterialsisanorderedlistofallthepartsneededtomakeaparticularproduct.Itshowsthematerials,partsandcomponents–andalsotheorderinwhichtheyareused.Supposeacompanymakestablesfromatopandfourlegs.Theneachtopismadefromawoodkitandhardware;thewoodkithasfouroakplanks,sidepanels,andsoon.Thebillofmate-rialsforthisisshowninFigure7.2.Youcanseethateveryitemhasa‘level’numberthatshowswhereitfitsintotheprocess,andfiguresinbracketsshowthenumbersneededtomakeeachunit.Thefinishedproductislevel0;level1itemsareuseddirectlytomakethelevel0item,level2itemsareusedtomakethelevel1items,andsoon.Afullbillofmaterialskeepsgoingdownthroughdifferentlevelsuntilitreachesmaterialsthattheorganisationalwaysbuysinfromsuppliers.Bythistime,theremightbehundredsoreventhousandsofdifferentmaterials.MRPusesthisbillofmaterials,alongwiththemasterschedule,togetatimetableforthedeliveryofeachofthematerials.Supposeamasterscheduleshowsthatthecompanyplanstomake10tablesinFebruary.Itobviouslyneeds10topsand40legsreadyforassemblyatthebeginningofFebruary.Inprac-tice,thesearethegrossrequirements.Thecompanymaynothavetoorderthemall,asitmayalreadyhavesomeinstock,orhaveoutstandingordersthatareduetoarriveshortly.Ifwesubtractthesefromthegrossrequirementswegetthenetrequirementsformaterials.Thecompanyneeds40tablelegsbythebeginningofFebruary,butifitalreadyhas8instockandanorderof10thatisduetoarriveinJanuary,thenetrequirementisfor40–8–10=22.Netrequirements=grossrequirements–currentstock–stockonorderLevel0TableLevel1Legs(4)Top(1)WoodkitHardwareWoodkitHardwareLevel2(1)(1)(1)(1)OakplanksPinesidingDrawerLevel3(4)(4)pack(2)Figure7.2Partofabillofmaterialsforatable 170LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTMasterscheduleBillofmaterialsStockrecordsScheduledAnyotherCurrentstockdeliveriesfactorsGrossTimeandNetrequirementsMaterialneededrequirementssizeofordersFigure7.3SummaryofMRPprocedureNowweknowthequantitiestoorder,andwhentheseordersshouldarrive.Thenextstepistofindthetimetoplacetheorder.Forthisweneedtheleadtimes–andweplaceordersthisleadtimebeforethematerialsareactuallyneeded.Ifthecompanybuystabletopsandlegsfromsupplierswhogivealeadtimeoffourweeks,itneedstoplaceordersatthebeginningofJanuary.TheseorderswillarrivebytheendofJanuaryjustbeforeassemblyisduetostart.Finally,wehavetoconsideranyotherrelevantinformation,suchasminimumordersizes,discounts,minimumstocklevels,variationinleadtime,andsoon.Whenthecompanytakesallofthisintoaccountitgetsadetailedtimetablefororders.ThisprocedureisshowninFigure7.3.WecansummarisethisMRPprocedurebythefollowingsteps:●Step1:Usethemasterscheduletofindthegrossrequirementsoflevel0items.●Step2:Subtractanystockonhandandordersarrivingtogivethenetrequirementsforlevel0items.Thenscheduleproduction,withstartingtimestomeetthesenetrequirements.●Step3:Takethenextlevel.Usethebillofmaterialstotranslatethenetrequirementsfromthelastlevelintogrossrequirementsforthislevel.●Step4:Takeeachmaterialinturnand:●subtractthestockonhandandscheduleddeliveriestofindthematerialsneeded●usetheleadtimeandanyotherrelevantinformationtogivethesizeandtimingoftheseorders.Theniftherearemorelevelsofmaterials,gobacktostep3.●Step5:Finalisethetimetable,addinganyspecificadjustments. CONTROLLINGMATERIALFLOW171WORKEDEXAMPLESemple-Brownassemblekitchentablesusingbought-inpartsoffourlegsandatop.Thesehaveleadtimesoftwoandthreeweeksrespectively,andassemblytakesaweek.Thecom-panyreceiveordersfor20tablestobedeliveredinweek5ofaplanningperiodand40tablesinweek7.Ithascurrentstocksof2completetables,40legsand22tops.Whenshoulditorderparts?SolutionTheordersgivethefollowingproductionscheduleforfinishedtables–shownasthegrossrequirementsforlevel0items.Subtractingthecurrentstockoffinishedtablesgivesthenetrequirements.Thenallowingaweekforassemblygivesthestarttimes.Level0–kitchentablesWeek1234567Grossrequirements2040Openingstock22222Netrequirements1840Startassembly1840Scheduledcompletion1840The‘scheduledcompletion’showsthenumberofunitsthatbecomeavailableinaweek,whichisthenumberstartedtheleadtimeearlier.WehavealreadydescribedthebillofmaterialsforthisexampleasthefirsttwolevelsinFigure7.2.Wecanusethis,togetherwiththeassemblyplans,tofindgrossrequirementsforlevel1items–whicharelegsandtops.Inweek4thereisanetrequirementof18tables,whichtranslatesintoagrossrequirementof18×4=72legsand18×1=18tops.Sowecanfindthegrossrequirementsforlevel1materialsas:■legs:18×4=72inweek4,and40×4=160inweek6■tops:18inweek4,and40inweek6.Subtractingthestockonhandfromthesegrossrequirementsgivesthenetrequire-ments.Tomakesurethepartsarriveontime,theymustbeorderedtheleadtimeinadvance–whichis2weeksforlegsand3weeksfortops.Level1–legsWeek1234567Grossrequirements72160Openingstock40404040Netrequirements32160Placeorder32160Scheduleddeliveries32160 172LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedLevel1–topsWeek1234567Grossrequirements1840Openingstock2222222244Netrequirements36Placeorder36Scheduleddeliveries36Therearenomorelevelsofmaterials,sowecanfinalisethetimetableofeventsas:■week2:order32legs■week3:order36tops■week4:order160legsandassemble18tables■week6:assemble40tables.BenefitsofMRPTraditional,independentdemandsystemsforecastlikelydemandformaterials,andthenholdstocksthatarehighenoughtomeetthese.Toallowfortheinevitableerrorsintheirforecasts,organisationsholdmorestocksthantheyreallyneed.Theseextrastocksgiveameasureofsafety,buttheyalsoincreasetheinventorycosts.MRPavoidsthesecostsbyrelatingthesupplyofmaterialsdirectlytodemand.Benefitsthatcomefromthisdirectlinkinclude:●lowerstocklevels,withsavingsincapital,space,warehousing,andsoon●higherstockturnover●bettercustomerservice–withnodelayscausedbyshortagesofmaterials●morereliableandfasterdeliverytimes●lesstimespentonexpeditingandemergencyorders●MRPschedulescanbeusedforplanningotherlogisticsactivities.MRPcanalsogiveearlywarningofpotentialproblemsandshortages.IftheMRPschedulesshowthatsomematerialswillarrivetoolate,theorganisationcanspeedupdeliveriesorchangetheproductionplans.InthiswayMRPimprovesthewiderperformanceoftheorgani-sation–measuredintermsofequipmentutilisation,productivity,customerservice,responsetomarketconditions,andsoon.DisadvantagesofMRPTherearealsosomeproblemswithMRP,themostobviousbeingtheamountofinformationandcalculationthatitneeds.Thebasicinformationcomesfromadetailedmasterschedule,so CONTROLLINGMATERIALFLOW173MRPcannotbeusedwhenthereisnomasterschedule,themasterscheduleisnotdesignedfarenoughinadvance,itisinaccurateanddoesnotshowwhatactuallyhappens,orwhenplansarechangedfrequently.OtherrequirementsofMRPincludeabillofmaterials,informationaboutcurrentstocks,ordersoutstanding,leadtimes,andotherinformationaboutsuppliers.Manyorganisationssimplydonotrecordthisinformation.Othersfindthattheirinformationdoesnothaveenoughdetail,orisinthewrongformat,orisnotaccurateenough.Accuracyisparticularlyimportant,aslargenumbersofsmallstocktransactionscanintroduceerrors.Ordinarilytheseerrorsaresmallenoughnottomatter,asthereisenoughstocktogivecoveruntiltheerrorsaredetected.MRP,however,doesnothavethesereservestocks,sothereisnoroomforerrors.AnotherproblemwithMRPisitsinflexibility.Theonlymaterialsavailablearethoseneededforthespecifiedmasterschedule,sothiscannoteasilybeadjusted.Somegeneraldisadvan-tagesofMRPinclude:●reducedflexibilitytodealwithchanges●needsalotofdetailedandreliableinformation●systemscanbecomeverycomplex●theordersizessuggestedbyMRPcanbeinefficient●MRPmaynotrecognisecapacityandotherconstraints●canbeexpensiveandtimeconsumingtoimplement.LOGISTICSINPRACTICEBritishAirwaysplcBritishAirways(BA)isoneoftheworld’syearsbyimprovingefficiency,andlookedlargestairlines,withflightsto150destin-forevenfurthersavingsfollowingadropinationsover1200routes.Youcanimaginebusinessin2001/2.Aspartofthis,BAtheamountofmaterialsthatithastoCateringrevieweditsservicesandcost,movejusttoserve50millionmealsayearreducedthelengthofitssupplychainsandtopassengers.KitchensatHeathrowandmorepositivelymanagedlinkswithsupplyGatwickprepare250tonnesofchickenchainpartners.Italsoeffectivelyintroducedand40,000casesofwine,butthirdpartyMRPforseveralmillionitemsfrom300sup-suppliersaroundtheworldprovidemostpliers.Passengerbookingsprovidethemas-ofthefood.BAis,however,responsibleforterschedule,andtheseareusedtoallthenon-fooditems,suchascrockery,co-ordinatetheairlinesstocklevelsandwine,dryfoods,cutlery,andsoon.Atypi-deliveries.BymatchingsupplytoknowncalBoeing747flightcarriesarounddemand–therebyeliminatingwasteand45,000items.reducingstocks–BAsavesaround£4mil-BAisa‘fullservice’airline,whichmeanslionayear.Thecompany’soriginalinvest-thatitemphasisesserviceratherthanlow-mentwasrepaidwithinthefirstyear.estpossibleprice.Nonetheless,in1997itReducedcostsareonlyonebenefitofannouncedplanstosave£1billionoverfivethenewsystem.Lessstoragespacewas 174LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedneededatairports,leadtimeswereandevencustomer,BAhasameansofsig-reduced,therewaslesswastage,controlofnificantlyincreasingcustomerservice.materialswasimproved,shortageswereSources:CollingeP.andReynoldsP.(1997)Foodreduced,andsoon.Morereliableinforma-forthought,LogisticsFocus,5(9),2–8;JonesC.tionbecameavailable,andbyrecording(1998)Makingthemissinglink,LogisticsFocuseveryitemdemandedbyeveryroute,flight6(7),2–6;andwebsiteatwww.ba.comEXTENDINGTHEROLEOFMRPInitialideasWehaveoutlinedthebasicapproachofMRPandnowcanlookatwaysofimprovingtheresults.Forexample,thebasicproceduremightsuggestaseriesofsmall,frequentorders.Itmaybecheaperandmoreconvenienttocombineseveralofthesesmallordersintoonelargerone.Thisiscalledbatching.Therearefourcommonmethodsofbatching:1.Lot-for-lot–whereyouorderexactlythenetrequirementsuggestedbyMRPforeachperiod.Thishastheadvantageofminimisingtheamountofstock,butcangivehighordering,deliveryandadministrationcosts.2.Fixed-orderquantity–whereyoufindanordersizethatisconvenient,suchasatruck-load,acontainerload,oraneconomicorderquantity(whichwedescribeinChapter9).Whenyouwantadelivery,youalwaysorderthisamount,andputanyspareinstock.3.Periodicorders–whereyoucombinetherequirementsoversomefixedperiod,andplaceregularordersfordifferentquantities.Youmight,forexample,placeaweeklyorderfortheamountofmaterialsneededinthefollowingweek.Workingtoaregulartimetableissimpleandmakesorderingroutine.4.Batchingrules–whichusesaspecificproceduretocalculatethebestpatternoforders.Typicallytheylookforthecombinationofordersthatgivesthelowestoverallcost.Inpractice,thiscanbequiteadifficultschedulingproblem.2Anotherimprovementcomeswhenthesamematerialisusedfordifferentproducts.Thenwecombinethedemandsfromallproductstogivetheoverallgrossrequirement.Similarly,whenseveralmaterialsareorderedfromthesamesupplier,itobviouslymakessensetoaddthemalltoasingleorder.Nowthebatchingruleshavetoextendtocoverdifferentproducts,anddifferentmaterialsfromthesamesource.AmoresignificantextensiontoMRPaddsfeedbackforplanning.MRPusesthemasterscheduletogenerateordersformaterials,andthisscheduleusuallyhassomevariation.ButwesawinChapter2,thatthisvariationcanbemagnifiedinthesupplychaintogivewidely CONTROLLINGMATERIALFLOW175InventoryOtherBillofmaterialsrecordsinformationMaterialrequirementsMasterscheduleplanningScheduleformaterialusePurchaseplanInternalsupplyAdjustplansCapacityPurchasesrequirementsplanningNoYesNeedYesProblems?rescheduling?NoImplementplansFigure7.4Aclosed-loopMRPsystemvaryingdemandsforupstreamsuppliers.Theiroperationsmaynotbeabletodealwiththisvaryingdemand,particularlyduringthepeaks.Itisobviouslybettertoanticipatesuchprob-lemsduringtheplanningstage,sothatschedulesorcapacitycanbeadjustedbeforetheplansarefinalised.Inotherwords,weintroducefeedbackfromMRPtocapacityplanning.ThislinkingofcapacityplanningtoMRPiscalledcapacityrequirementsplanning.Overallsystemswithfeedbackofthiskindarecalledclosed-loopMRP,withonesystemsummarisedinFigure7.4.MovingtoMRPIIYoucanseehowcapacityrequirementsplanningextendstheMRPapproachfurtherintotheorganisation.WestartedbyusingMRPtoschedulethedeliveryofmaterials,andcannowuseitincapacityplanning.Butweneednotstophere.Materialsareonlyoneresource,andorganisa-tionshavetoscheduleothers,includingpeople,equipment,facilities,finances,transport,andso 176LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTon.SurelywecanusethesameMRPapproachtoconsidertheseotherresources.ThisthinkinghasledtoamajorextensionofMRPintoManufacturingResourcesPlanning,orMRPII.ImagineanorganisationthatusesMRPtogetatimetableforpurchasingmaterialsandpreparingmaterialsinternally.Ifitknowswhentheinternalmaterialshavetobeready,itknowswhentostartpreparingthem.Inotherwords,MRPcangiveschedulesfortheproduc-tionofcomponents.Butwecanusetheschedulesforcomponentstogettimetablesforproductionequipment,peopleworkingonit,rawmaterials,andotherresources.Andifweknowwhentherawmaterialsareneeded,wecanscheduleinwardtransport,drivers,qualitychecks,andsoon.Continuinginthisway,wecouldbuildanintegratedsystemthatwould‘explode’themasterscheduletogivetimetablesforallthejobs,equipment,operators,machines,andfacilitiesneededtoachieveit.Withthisapproach,MRPwouldschedulealltheoperations.However,thereisnoreasonwhyweshouldstopthere,andwecouldlookattheassociatedfinance,marketing,sales,humanresourcemanagement,andsoon.Eventuallywewouldgetacompletelyintegratedsystemthatwouldusethemasterscheduleasthebasisforplanningalltheresourcesinanorganisation.ThisistheaimofMRPII.■MRPIIgivesanintegratedsystemforsynchronisingallfunctionswithinanorganisation.■Itconnectsschedulesforallfunctionsandresourcesbacktothemasterschedule.Linkingallactivitiestothemasterschedulecangiveveryefficientlogistics.Therearenolatedeliveriesorshortages,nostocksofworkinprogressaccumulate,andproductsmovesmoothlythroughthewholeprocess.ThesebenefitshaveencouragedmanyorganisationstomovetowardsMRPII.Unfortunately,therecanbeseriouspracticaldifficulties.Tostartwith,itisdifficulttogetschedulesthateveryoneacceptsasbeinggoodandworkable.Amoreseriousproblem,though,isthedifficultyofintegratingallfunctionsandsystems.Manyorganisationshaveaskediftherewardsfromsuchcloseintegrationareworththeeffort.MRPtendstobeinflexible,soawholeorganisationruninthiswaymightbecomecumbersome,unwieldy,slowtorespondtochangingconditions.Becauseofthesedifficulties,manyorganisationshavemovedtowardsMRPII,buthavenotimplementedcompletesystems.Oftendifferentnamesareusedforthesepartialsystems,andyoumighthearaboutdistributionresourceplanningorlogisticsresourceplanning,wheretheMRPapproachisusedtoplanlogistics.Unfortunately,suchtermsareusedratherincon-sistently.Somepeople,forexample,usedistributionresourceplanningtodescribemorelimitedsystemswherethedemanddoesnotcomefromaproductionplan,butfromreceivedcustomerorders.WorkingwithotherorganisationsMRPIIcangenerateplansforallactivitiesandmaterialmovementswithinanorganisation.Butthisisstillnottheendofthestory.Followingthetrendforintegratingthesupplychain,wecanextendtheplanningtootherorganisations.ThisgivesthebasisofEnterpriseResourcePlanning(ERP).Supposeamanufacturer’sMRPsystemfindsthatitneedsadeliveryof100unitsofsomematerialatthebeginningofJune.Itusesthisinformationtoscheduleitspurchases. CONTROLLINGMATERIALFLOW177Co-ordinatedoperationsinallorganisationsMasterOrderandCustomerscheduledeliveryoperationsMaterialrequirementsplanningSupplierOrderandPurchasesoperationsdeliveryInternalMRPExternalERPFigure7.5EnterpriseresourceplanningHowever,EDI(electronicdatainterchange)canlinktheMRPsystemtothesupplier’ssystem,sothesupplierknowsinadvancewhenithastodeliverthismaterial,anditcanstartsched-ulingoperationstomakesurethatitisreadyintime.IfsecondtiersuppliersarelinkedtotheMRPsystemofthefirsttiersupplier,theycanalsostarttheirpreparations.Inthisway,themessagemovesbackwardsthroughthesupplychain,givingintegratedplanning(illus-tratedinFigure7.5).Inprinciple,thefreeflowofinformationneededbyERPisrelativelyeasytoorganisewithEDI,EFT,theInternetandothertoolsofe-business.However,itmightbedifficulttogetsuchcompletetrustbetweenorganisations,evenwhentheyarepreparedtoformalliances.Youcanalsoimaginethecomplexityofsystemsneeded,andthepracticalproblemsthatarise.Nonetheless,thisapproachhasconsiderablepotential,andisleadingtothenextstageof‘virtualenterpriseresourceallocation’.3 178LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICESAPAGERPsoftwarehasbeenavailablesincethecostof$15million.Ofthis,17%isforsoft-1990sandthemarkethasgrownveryware,14%forhardware,46%forprofes-quickly.Estimatesofworldsalesvaluevarysionalservicesand23%forinternalstaffwidely,butitprobablyreached$10billioncosts.Thetimetoimplementthesystemsayearbefore2000.varyfromunder18monthstoover30SAPwasfoundedinWalldorf,Germanymonths.Afterthis,benefitsbegintoappearin1972,andistheworld’slargest‘inter-inaboutayearandittakesaroundfiveenterprise’softwarecompany.Itemploysyearstobreakeven.25,000people,inmorethan50companiesPeterBurrisofMETAGroupsummarisesandhas‘10millionusers;30,000installa-theseresults5withthecomment:tions;1,000partners’.YoucanseehowTosaythatimplementingERM/ERPsolu-quicklyitsmarkethasgrownfromthefol-tionsrequiresanenormouscommitmentislowingrevenuesforERPinthemid1990s.4anunderstatement.Theyareexpensive,aretime-consuming,andrequirechangeYear1994199519961997invirtuallyeverydepartmentintheERPlicencerevenue692135017302370enterprise.($million)Sources:BraceG.andRzevskiG.(1998)Elephantsrarelypirouette,LogisticsFocus,6(9),14–18;Manyothercompaniessupplysuchinte-Anon(1999)ERMSolutionsandTheirValue,gratedsoftware,includingBAAN,JDMetaGroup,Stamford,CT;andwebsitesatEdwards,SSA,andPeopleSoft.Theirverywww.SAP.comandwww.metagroup.comlargesystemshaveanaverageinstallationPRINCIPLESOFJUST-IN-TIMEPrinciplesanddefinitionsJust-in-time(JIT)offersanotherwayofplanning.Itorganisesallactivitiessotheyoccuratexactlythetimetheyareneeded.Theyarenotdonetooearly(whichwouldleavematerialshangingarounduntiltheywereactuallyneeded)andtheyarenotdonetoolate(whichwouldgivepoorcustomerservice).Youcanseethiseffectwhenyouorderataxitocollectyouat08:00.Ifthetaxiarrivesat07:30youarenotreadyanditwastestimesittingandwaiting;ifitarrivesat08:30youarenothappyandwillnotusetheserviceagain.Whenthetaxiarrivesat08:00–just-in-timeforyourtrip–itdoesnotwastetimewaiting,andyouarepleasedthattheservicearrivesexactlywhenyouwantedit.JITseemsanobviousidea,butitcanhaveadramaticeffectonthewaythatmaterialsareorganised.Youcanseethiswithstocksofrawmaterials.Thetraditionalapproachbuysmate-rialsearlyandkeepstheminstockuntiltheyareneeded.MRPreducesstockbyco-ordinating CONTROLLINGMATERIALFLOW179thearrivalofmaterialswiththedemand.ButJITaimsatdeliveringmaterialsdirectlytooper-ationsandvirtuallyeliminatingstock.CompaniessuchasToyota6,7spentyearsdevelopingJITthroughthe1970s.TheirmethodsweresosuccessfulthatallmajororganisationsnowusesomeelementsofJIT.Wecanstartdescribingtheprinciplesbylookingattheeffectonstock,andthengeneralisetheapproachtootherareas.Themainpurposeofstockistogiveabufferbetweenoperations.Stocksarebuilt-upduringgoodtimes,tobeusedwhenthereareproblems.Thenifsomeequipmentbreaksdown,oradeliveryisdelayed,ordemandisunexpectedlyhigh,everythingcontinuestoworknormallybyusingthestocks.Thetraditionalviewofmanagersisthatstocksareessentialtoguaranteesmoothoperations.Theyallowforanymismatchesbetweenthesupplyanddemandformaterials.Inventorycontrolsystems(whichwedescribeinChapter9)definestocklevelsthatarehighenoughtocoverlikelyproblems.Unfortunately,withwidelyvaryingdemandorpoten-tialproblems,thesestocklevelscanbeveryhigh–andexpensive.MRPreducestheamountofstockbyusingthemasterscheduletomatchthesupplyofmaterialsmorecloselytodemand.Inpractice,thebatchingrulesofMRPaddsomestock,andtheykeepsomemoretoallowforuncertaintyandproblems.However,theprincipleisclear–themorecloselywecanmatchthesupplyofmaterialstodemand,thelessstockweneedtocarry.Ifwecancompletelyeliminateanymismatch,weneednostocksatall.Thisisthebasisofjust-in-timesystems(illustratedinFigure7.6).■JUST-IN-TIMEsystemsorganisematerialstoarrivejustastheyareneeded.■Byco-ordinatingsupplyanddemand,theyeliminatestocksofrawmaterialsandworkinprogress.Youcanseeanexampleofjust-in-timeoperationswiththefuelinalawnmower.Ifalawn-mowerhasapetrolengine,thereisamismatchbetweenthefuelsupplythatyoubuyfromagarage,anddemandwhenyouactuallymowthelawn.Youallowforthismismatchbykeepingstocksoffuelinthepetroltankandsparecan.Thisisthetraditionalapproachtoinventorycontrol,wherestocksarehighenoughtocoveranylikelydemand.Ifalawnmowerhasanelectricmotorthesupplyofelectricityexactlymatchesdemandandtherearenostocksoffuel.Thisisajust-in-timesystem.Sowhathappenswhentherereallyisamismatchbetweensupplyanddemand?Whatdoesasupermarketdowhenitsellsloavesofbreadoneatatime,butgetsthemdeliveredbythetruckload?Thetraditionalansweristoholdenoughstocktocoverthemismatch–thesuper-marketputsthetruckloadofbreadonitsshelvesuntilitissoldorgoesstale.JITsaysthatthisisamistake.Thereisanalternative,whichistoremovethemismatch.Thesupermarketmightapproachthisbyusingsmallerdeliveryvehicles,oropeningasmallbakeryonthepremises.NowwecansummariseJIT’sviewofstock:●Stocksareheldtocovershort-termmismatchesbetweensupplyanddemand.●Thesestocksservenousefulpurpose–theyonlyexistbecausepoorco-ordinationdoesnotmatchthesupplyofmaterialstothedemand.●Aslongasstocksareheld,therearenoobviousproblemsandnoincentiveformanagerstoimprovetheflowofmaterials.●Thenoperationscontinuetobepoorlymanaged,withproblemshiddenbystocks.●Therealansweristoimproveoperations,findthereasonsfordifferencesbetweensupplyanddemand,andthentakewhateveractionisneededtoovercomethedifferences. 180LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAsyoucansee,JITisbasedonverysimpleprinciples.Insteadofholdingstockstoallowforproblems,youidentifytheproblemsandsolvethem.Unfortunately,thisoftenputsnewpres-suresonlogistics.Withdeliveriesofbreadtoasupermarket,forexample,logisticsmanagershavetodesignnewsystemsthatcandeliversmall,frequentquantitiesoffreshbread.Notlinked–givingmismatchesStocklevelMaterialCustomerssupplyTimeHighstocklevelstocoverdifferencesbetweensupplyanddemand(a)TraditionalmethodofstockcontrolSomelinks–withsmallermismatchesStocklevelMaterialCustomerssupplyTimeLowerstocklevelsassupplyisclosertodemand(b)MRPsystemsStronglinks–nomismatchesMaterialCustomerssupplyNostocksassupplyexactlymatchesdemand(c)JITapproachFigure7.6Stocklevelswithdifferenttypesofcontrol CONTROLLINGMATERIALFLOW181WidereffectsofJITWehaveintroducedJITasawayofreducingstocklevels,butitismuchmorethanthis.JITinvolvesachangeinthewayanorganisationlooksatallitsoperations.Itssupportersdescribeitas‘awayofeliminatingwaste’,or,‘awayofenforcedproblemsolving’.Inthiswidersense,JITseesanorganisationashavingaseriesofproblemsthathinderefficientoperations.Theseproblemsincludelongleadtimes,unreliabledeliveries,unbalancedoperations,constrainedcapacity,equipmentbreakdowns,defectivematerials,interruptions,unreliablesuppliers,poorquality,toomuchpaperworkandtoomanychanges.Managerstrytogetaroundtheseprob-lemsbyholdinglargestocks,buyingextracapacity,keepingback-upequipment,employing‘trouble-shooters’,andsoon.Butthesemethodsonlyhidethesymptomsofproblems.Amuchmoreconstructiveapproachistoidentifytherealproblems–andsolvethem.Thisapproachleadstoanumberofchangesinviewpoint.●Stocks:Aswehaveseen,organisationsholdstockstocovershort-termdifferencesbetweensupplyanddemand.JITassumesthatthesestocksactuallyhideproblems.Organisationsshouldfindthereasonsfordifferencesbetweensupplyanddemand,andthentakewhat-everactionisneededtoremovethem.●Quality:Organisationshavedefinedsomearbitrarylevelofacceptablequality,suchas,‘wewillacceptonedefectinahundredunits’.JITrecognisesthatalldefectshavecosts,anditisbettertofindthecauseandmakesurethatnodefectsareproduced(supportingtheviewoftotalqualitymanagement).●Suppliers:JITreliestotallyonitssuppliers–soitsupportstheviewofcustomersandsuppliersworkingcloselytogetherinlong-termpartnershipspursuingcommonobjectives.●Batchsize:Operationsoftenuselargebatchsizes,astheyreduceset-upcostsanddisrup-tions.Butifdemandislow,theproductsmadeinlargebatchessitinstockforalongtime.JITlooksforwaysofreducingthebatchsizesothatitmorecloselymatchesdemand.●Leadtimes:Longleadtimesencouragehighstocks,astheyhavetocoveruncertaintyuntilthenextdelivery.JITaimsforsmall,frequentdeliverieswithshortleadtimes.●Reliability:JITisbasedoncontinuous,uninterruptedproduction,soalloperationsmustbereliable.If,say,equipmentbreaksdown,managersmustfindthereasonsandmakesureitdoesnothappenagain.●Employees:Someorganisationsstillhaveafrictionbetween‘managers’and‘workers’.JITarguesthatthisisameaninglessdistinction,asthewelfareofeveryonedependsonthesuccessoftheorganisation.Allemployeesshouldbetreatedfairlyandequitably.Bynow,youcanseethatJITisnotjustawayofminimisingstocks.Byco-ordinatingallactivities,itincreasesefficiencyandeliminateswaste. 182LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEJust-In-TimeatGuyLaRochelleInternationalGuyLaRochelleInternationalisoneofcustomers’tastes.Nowcustomersareguar-Europe’sleadingmanufacturersofcosmet-anteedproductsthathavebeenmadeicsandtoiletries.IthasamajorproductionwithinthepastfewdaysandhavenotplantnearLyonthatemploysmorethanspentweekssittingonawarehouseshelf.700people.WhenLaRochellereduceditsstockoflip-OneoftheproblemswithLaRochelle’sstickby$1millionitsaved$250,000ayear.marketisthespeedatwhichcustomers’TheirBabySoftbathoilhaschangedfromatasteschange.Tomaintainitsmarketshareproductionrunof60,000unitsevery30andmeetthesechangingdemands,Ladays,to10,000unitsevery5days;therunRochellehastobeflexible.Ithasimprovedof200,000unitsoflipstickevery65dayshasitsresponsetocustomersandreducedchangedto60,000unitsevery20days.costsbyintroducingjust-in-timemanufac-TheconversiontoJITiswell-supportedturing.Thishassmallbatchsizes,shortpro-andlikedbyLaRochelleemployees.Everyductionruns,lowstocks,fastchangeoveremployeenowhasavarietyofskills,andbetweenproducts,reliabledeliveryfromworksinateamratherthanasanindividual.suppliers,efficientshipmentofgoodstoSource:companyreportscustomers,andfastresponsetochangingKeyElementsinJITOneproblemwithJITisthatitonlyworkswellincertaintypesoforganisation.ThemostsuccessfulusersofJITarelarge-scaleassemblyplants,whichmakevirtuallyidenticalproductsinacontinuousprocess.Youcanseewhythisis,fromthefollowingarguments:●Everytimetherearechangestoaprocess,oritswitchesfrommakingoneproducttomakinganother,therearedelays,disruptionsandcosts.JITsaysthatthesechangeswasteresourcesandshouldbeeliminated.Inotherwords,JITneedsastableenvironmentwhereaprocessmakeslargenumbersofastandardproduct,atafixedrate,foralongtime.●Thisstableenvironmentcanreducecostsbyusingspecialisedautomation.ThenJITworksbestwithhighvolume,massproduction.●Thelevelofproductionmustallowasmoothandcontinuousflowofproductsthroughtheprocess.Eachpartoftheprocessshouldbefullyutilised,sotheprocessislikelytobeawell-balancedassemblyline.●Deliveriesofmaterialsaremadedirectlytotheassemblylineatjustthetimetheyareneeded.Suppliersmustbeabletoadapttothiskindofoperation.Itwouldbeimpractical CONTROLLINGMATERIALFLOW183tobringeachindividualunitfromsuppliers,sothenextbestthingistouseverysmallbatches.●Ifsmallbatchesareused,reordercostsmustbereducedasmuchaspossibleorthefrequentdeliverieswillbetooexpensive.●Leadtimesmustbeshortorthedelayinansweringarequestformaterialsbecomestoolong.Thismeansworkingcloselywithsuppliers,andencouragingthemtobuildfacilitiesthatarephysicallyclose.●Astherearenostockstogivesafetycover,anydefectsinmaterialswoulddisruptproduc-tion.Suppliersmust,therefore,betotallyreliableandprovidematerialsthatarefreefromdefects.●Ifsomethinggoeswrong,peopleworkingontheprocessmustbeabletofindthecause,taketheactionneededtocorrectthefault,andmakesurethatitdoesnothappenagain.Thisneedsaskilledandflexibleworkforcethatiscommittedtothesuccessoftheorganisation.ACHIEVINGJUST-IN-TIMEOPERATIONSPushandpullsystemsThesuccessofJITisnotsolelybasedonitsideaoforganisingactivitiesatjustthetimetheyareneeded,butonitsdescriptionofhowtoachievethis.Itworksby‘pulling’materialsthroughtheprocess.Inatraditionalprocess,eachoperationhasatimetableofworkthatmustbefinishedinagiventime.Finisheditemsarethen‘pushed’throughtoformastockofworkinprogressinfrontofthenextoperation.Unfortunately,thisignoreswhatthenextoperationisactuallydoing–itmightbeworkingonsomethingcompletelydifferent,orbewaitingforadifferentitemtoarrive.Atbest,thesecondoperationmustfinishitscurrentjobbeforeitcanstartworkingonthenewmaterialjustpassedtoit.Theresultisdelaysandincreasedstockofworkinprogress.JITusesanotherapproachto‘pull’workthroughtheprocess.Whenoneoperationfinishesworkonaunit,itpassesamessagebacktotheprecedingoperationtosaythatitneedsanotherunittoworkon.Theprecedingoperationonlypassesmaterialsforwardwhenitgetsthisrequest.Asyoucansee,thiskindofprocessdoesnothaveearlieroperationspushingworkthrough,buthasalateroperationpullingitthrough.Youcanseethedifferenceinatake-awaysandwichbar.Withthetraditionalpushsystem,someonemakesabatchofsandwichesanddeliversthemtothecounterwheretheysituntilacustomerbuysthem.WithaJITpullsystem,acustomerasksforaparticulartypeofsandwich,andthisisspeciallymadeanddeliv-ered–thuseliminatingthestocksofworkinprogress.Youcanalsoseethatthereisinevitablysomeleadtimebetweenanoperationrequestingmaterialandhavingitarrive.InrealJITsystems,messagesarepassedbackwardsthisleadtimebeforetheyareactuallyneeded.Mate-rialsarealsodeliveredinsmallbatchesratherthancontinuousamounts,soJITstillhassomestocksofworkinprogress.Thesestocksareassmallaspossible,soitwouldbefairertosaythatJITminimisesstocksratherthaneliminatesthem. 184LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEScandinavianHealthProductsScandinavianHealthProducts(SHP)sellamanager,identifiedtheproblemasthetrol-rangeof280productstocustomersinleysusedtomoveboxesbetweentheware-northernEurope.Theydeliverproductsbyhouseandfinishing.Thesetrolleyscarriedpost,withordersreceivedbye-mail,tele-overahundredboxes.Peopleintheware-phone,faxandpost.Theirmainproductshousesectionloadedupatrolley,andarevitaminpills,mineralsupplements,oilwhenitwasfulltheyusedaforklifttrucktocapsules,herbextractsandarangeofotherpushitthroughtothefinishingsection.naturalproductsthatfostergoodhealth.OnmostdaysthefinishingsectionOperationsinSHPcentreonfoursections:wouldgetasurgeofworkattheendofthedayasthewarehousesectionclearedtheir■Atthebeginningofeachdaythereceiptordersbeforegoinghome,andpushedsectionlooksatallneworders,checksthroughtwoorthreetrolleysjustbeforethethedetailsandsendsordersdowntothefouro’clockdeadline.Finishingcouldnotwarehouse.dealwiththeseintime,butworkedon■Thewarehousesectionlooksateachsomeduringovertimeattheendoftheirorder,collectstheproductsrequestedinworkingday,andlefttheremainderuntilaboxandpassesthistothefinishingthenextmorning.section.KurtBrandtfoundasimplesolutionto■Thefinishingsectionchecksthetheproblem.Hereducedtheworkingdayofpeopleinthefinishingsectionsothatcontentsofeachboxagainsttheorder,theyarrive15minuteslaterthanthoseinchecksthebill,addssomepromotionalthewarehouse.Inreturn,ratherthanwaitmaterialandsealsthebox.forthetrolleystobedelivered,theygoto■Thetransportsectionconsolidatesandcollectthemwhenevertheyrunoutofwrapstheboxes,andeachafternoonatwork.Thebigtrolleyswerereplacedwith4pmtheytaketheday’sorderstoasmallonesthatonlycarryfiveboxesandnationalparceldeliveryservicewhichwhichcanbepushedbyhand.Peopleinguaranteesdeliverybythefollowingthewarehousemakesurethattherearemorning.alwaysthreeorfourofthenewtrolleysThisprocessshouldworksmoothly,butthefilledandwaitingforthefinishingsectionfinishingsectionalwayscomplainedthattocollect.theyhadtoworklate,andordersoftenSources:companyreportsandBrandtK(2002)missedthepost.KurtBrandt,thelogisticsUsingJIT,PracticeSeminar,LogisticsQuest,OsloKanbansJITneedssomewayoforganisingtheflowofmaterialsthatarepulledthroughtheprocess.Thesimplestsystemmovesmaterialsbetweentwostagesincontainers.Whenasecondstage CONTROLLINGMATERIALFLOW185WhenfullthecontainerreturnstoFullcontainerthefollowingstageStage1ContainerbeingStage2makingfilledwithContainerofusingmaterialsmaterialsmaterialsmaterialsbeingusedEmptycontainerMovinganemptycontainertopreviousstagegivesamessagetorefillFigure7.7ThesimplestformofmessageforJITneedssomematerials,itsimplypassestheemptycontainerbacktothepreviousstageasasignaltofillit(seeFigure7.7).Thismethodisnotreliableenoughformostoperations,sotheusualalternativeuseskanbans.‘Kanban’istheJapaneseforacard,orsomeformofvisiblerecord.■KANBANSarecardsthatcontroltheflowofmaterialsthroughJIToperations.■Theyarrangethe‘pull’ofmaterialsthroughaprocess.Thereareseveralwaysofusingkanbans.Themostcommonsystem(showninFigure7.8)usestwodistincttypesofcard,aproductionkanbanandamovementkanban.●Allmaterialisstoredandmovedinstandardcontainers–withdifferentcontainersforeachmaterial.●Acontainercanonlybemovedwhenithasamovementkanbanattachedtoit.●Whenonestageneedsmorematerials–thatiswhenitsstockofmaterialsfallstoareorderlevel–amovementkanbanisattachedtoanemptycontainer.Thisgivespermis-siontotakethecontainertoasmallstockofworkinprogress.●Afullcontainerisfoundinthisstock,whichhasaproductionkanbanattached.●Theproductionkanbanisremovedandputonapost.Thisgivesasignalfortheprecedingworkstationtomakeenoughtoreplacethecontainerofmaterials. usingStage2materialskanbanMovementEmptyContainercontainerofmaterialsbeingusedFullcontainerandmovementkanbanmovementkanbanEmptycontainerandkanbanEmptyMovementcontainerFullcontainerinprogressStoreofworkkanbanEmptyProductioncontainerFullcontainerFullcontainerandproductionkanbanproductionkanbanEmptycontainerandContainerofmaterialsbeingfilledStage1makingmaterialsAtwo-cardkanbansystemFigure7.8 CONTROLLINGMATERIALFLOW187●Themovementkanbanisattachedtothefullcontainer,givingpermissiontomoveitbacktotheoperation.Althoughthissystemhasastockofworkinprogress,thisstockissmall.Whenafullcontainerisremoved,itisusuallytheonlycontainerinstock–andmaterialsarenotreplaceduntilthepreviousworkstationmakesthem.JITalmostalwaysusesaproductlayout–suchasanassemblyline–sothisstockofworkinprogressisreallyasmallamountthatiskeptintheline,andthereisnoactualmovement.Eachfullcontainerinthestorehasaproductionkanbanattachedtoit,sothenumberofthesekanbanseffectivelyfixestheamountofworkinprogress.Ifthereisonlyoneproductionkanban,itmeansthatthestockofworkinprogressislimitedtoatmostonecontainerofitems.Iftherearetwoproductionkanbans,thisdoublesthestockofworkinprogress,andmorekanbanswouldgiveevenhigherstocks.TheaimofJITistoworkwithminimumstocksand,therefore,aminimumfeasiblenumberofkanbans.Themainfeaturesofsuchkanbansystemsare:●Amessageispassedbackwardstotheprecedingworkstationtostartproduction,anditonlymakesenoughtofillacontainer.●Standardcontainersareusedwhichholdaspecificamount.Thisamountisusuallyquitesmall,andistypically10%ofaday’sneeds.●Thesizeofeachcontaineristhesmallestreasonablebatchthatcanbemade,andthereareusuallyonlyoneortwofullcontainersatanypoint.●Aspecificnumberofcontainersandkanbansisused.●Thestockofworkinprogressiscontrolledbythesizeofcontainersandthenumberofkanbans.●Materialscanonlybemovedincontainers,andcontainerscanonlybemovedwhentheyhaveakanbanattached.Thisgivesarigidmeansofcontrollingtheamountofmaterialsproducedandtimetheyaremoved.●Whileitissimpletoadminister,thissystemmakessurethatstocksofworkinprogresscannotaccumulate.JIThasdevelopedintomanydifferentforms.Acommononereplacesthemanualkanbanswithelectronicsignals.Thenacontrolsystemmonitorsmovementsofmaterialsusingbarcodesorotheritemcoding,anditsendsamessagebackwardstosignalwhenitistimetopreparemorematerials.BenefitsanddisadvantagesofJITWeintroducedJITasawayofloweringstocks,andsomeorganisationshavereducedtheseby90%.8Thisgivesanumberofrelatedbenefits,suchasreductioninthespaceneeded(upto40%less),lowerprocurementcosts(upto15%),lessinvestmentinstocks,andsoon.Ingeneral,JITgivesthefollowingbenefits:●lowerstocksofrawmaterialsandworkinprogress●shorterleadtimes●shortertimeneededtomakeaproduct●higherproductivity 188LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●higherequipmentcapacityandutilisation●simplifiedplanningandscheduling●lesspaperwork●improvedqualityofmaterialsandproducts●lessscrapandwastage●bettermoraleandparticipationoftheworkforce●betterrelationswithsuppliers●emphasisonsolvingproblemsintheprocess.Unfortunately,someofthesebenefitscanonlybeboughtatahighprice.Makinghighqualityproductswithfewinterruptionsbybreakdowns,forexample,canmeanbuyingbetterquality,moreexpensiveequipment.Reducedset-uptimesusuallyneedmoresophisticatedequipment.Smallbatchescanincreaseproductioncosts.Higherskillsintheworkforceincreasetrainingcostsandthesubsequentwagebill.Equipmentmustrespondquicklytochangingdemands,sotheremustbemorecapacity.OneofthemainproblemswithJITisitsinabilitytodealwithunforeseencircumstances.Accidentsorbreakdowns,forexample,caninterruptsuppliesandcauseproblemsinthesupplychain.Earlyin2001fuelsuppliesintheUKweredisruptedbyindustrialaction.CompaniesworkingwithJITfelttheeffectsimmediatelywhentheirmaterialswerenotdeliv-ered,whilethosewithhigherstockskeptworkingnormally.SomespecificproblemslistedbyJITusersinclude:●highrisksofintroducingcompletelynewsystemsandoperations●initialinvestmentandcostofimplementation●longtimeneededtogetsignificantimprovements●relianceonperfectqualityofmaterialsfromsuppliers●inabilityofsupplierstoadapttoJITmethods●needforstableproductionwhendemandishighlyvariableorseasonal●reducedflexibilitytomeetspecific,orchanging,customerdemands●difficultyofreducingset-uptimesandassociatedcosts●lackofcommitmentwithintheorganisation●lackofco-operationandtrustbetweenemployees●problemslinkingJITtootherinformationsystems,suchasaccounts●needtochangelayoutoffacilities●increasedstressinworkforce●inabilityofsomepeopletoacceptdevolvedresponsibilities.LOGISTICSINPRACTICEJITatHarley-DavidsonHarley-Davidsonwasoneofthefirstcom-thelocaldemand.TheseincludedHarley-paniestonoticetheeffectsofJIT.IntheDavidsoninAmerica,BSAinBritainand1960smanycountrieshaddomesticmanu-BMWinGermany.Butinthe1970sthefacturersofmotorcycleswhometmostofindustrychangeddramatically,andmany CONTROLLINGMATERIALFLOW189LOGISTICSINPRACTICEcontinuedwell-establishedcompanieswentbankrupt.Harley-DavidsonrecognisedthatitcouldTheirproblemwasthesuddennewcompe-onlycompetebyusingthesamemethods,titionfromtheJapanesecompaniesofandadoptedJITin1982.TheystucktoHonda,Yamaha,SuzukiandKawasaki.their‘materialsasneeded’programme–ThesefourcompaniescouldsupplytheirversionofJIT–throughinitialdifficul-motorcyclesanywhereintheworldwithtiesandarenowthrivinginaverycompet-higherqualityandlowercostthancom-itivemarket.Inafive-yearperiodHarley-petitors.In1978Harley-DavidsoninAmer-Davidsonreducedmachineset-uptimesbyicatried–butfailed–toprovethatthe75%,warrantyandscrapcostsby60%,Japanesecompaniesweredumpingmotor-andworkinprogressstocksby$22million.cyclesonthemarketatlessthanthecostofDuringthesameperiodproductivityrosemanufacture.Duringthesehearingsitwasby30%.shownthattheJapanesecompanies’oper-Source:companyreports,www.HarleyDavidson.comatingcostswere30%lowerthanHarley-Davidson’s.OneofthemainreasonswastheiruseofJITmanufacturing.EXTENDINGJITALONGTHESUPPLYCHAINEfficientconsumerresponseJITforcessupplierstochangethewaytheywork,withfastdeliveries,perfectquality,smallbatches,andcompletereliability.Theeasiestwayforthemtomeettheserequirements–whichalsoreinforcestheideaofanintegratedsupplychain–istoadoptJITmethodsthemselves.ThensecondtiersuppliersadoptJITtosupportfirsttiersuppliers,andsoon.Thisensuresthatthewholesupplychainisworkingtogetherwiththesameaimsandprinciples.ThisextensionofJITalongthesupplychainisknownbyavarietyofnames,includingquickresponse(QR),continuousreplenishmentplanning(CRP)andmorecommonlyefficientconsumerresponse(ECR).EFFICIENTCONSUMERRESPONSEpullsmaterialsthroughtiersoforgan-isationsinthesupplychain.EarlyworkinECRwasdoneinthefashionindustry.Thishadsevereproblemswithitsstockholdings,largelycausedbythetraditionalplanningofproductionaroundfourseasons.Atthestartof,say,thesummerseason,shopshadtobefullofnewproductsinthelateststyles.Thenshopsneededhighstockstogivecustomersawidechoice,andwholesalersneededhighstockstore-supplytheshopsatshortnotice.Tomakesurethatthesestockswereinplace,peakmanufacturingoccurredsometimebeforethestartoftheseason.Ifdemandfor 190LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTaproductwasparticularlyhigh,therewouldbeshortagesasmanufacturershadalreadymovedontomakingtheirautumnandwintercollections.Ifdemandwaslow,shopscouldnotreducetheirpurchasesastheclotheswerealreadysittingontheirshelvesandinwholesalers.Attheendofeachseasonthereweremajorsalesaswholesalersandretailerstriedtogetridoftheirlesspopularitems,andmajorrestockinginpreparationforthenextseason.Theindustryrealisedthatitcouldgethugesavingsifitsmootheditsoperations.Thewaytodothiswasnottohavehugestockssittinginthesupplychain,buttomoveitemsquickly,andrespondtocustomerdemandsbymoreflexiblemanufacturing.Nowtheyusejust-in-timeoperationsandlinkinformationsystemssothattheycan‘pull’materialsthroughthesupplychain.Whenaretailersellsanitem,theircashregisterautomaticallysendsamessagetothewholesalerrequestingareplacement.Inturn,thewholesaler’ssystemsendsamessagetothemanufactureraskingforadelivery.Themanufacturerisnotboggeddowninmakingexcessiveamountsofitemsthatarelatersoldatdiscounts,butrespondsquicklytothedemandandreplacesgarmentsthathaveactuallybeensold.WithECR,amessagepassesbackwardsthroughthesupplychain,andeachorganisationco-operatesinmovingmaterialsforwards.In1985theUSretailerJ.C.Penneyformedoneoftheworld’sfirstECRpartnershipswithBurlington(afabricmanufacturer)andLanierClothing(agarmentmaker).Asaresult,theyincreasedsalesby22%andreducedstocksby50%.9InterestinECRhasgrownsincethemid1990s.Thegrocerytradewasquicktoseethepoten-tialbenefits,andwhenyoubuyapacketofbiscuitsinasupermarketthetillautomaticallysendsamessagebacktothesuppliertosendareplacement,andthesupplier’ssystemsendsamessagetoitsownsupplier,andsoonbackthroughthechain.ECRextendsthebenefitsofJITtothewholesupplychain.Soitbringslowerstocks,bettercustomerservice,lowercosts,moreresponsiveoperations,improvedspaceutilisation,lesspaperwork,andsoon.OrganisationsintroducingECRinthe1990sreportedastringofbene-fits.QuakerOats,forexample,reportedathreefoldincreaseinstockturnover,65%lowerstocksand77%reductioninpaperwork.10IntegratedSystemsSolutionsreported3–4%increaseofservicelevel,40–50%reductioninstockand2–3timesincreaseofstockturnover.11FeaturesofECRItisnotnecessarilyphysicaltransportthatslowstheflowofmaterialsthroughasupplychain,buttheassociatedflowofinformation.Itmighttakeamonthforanorganisationtopreparethedetailsforapurchase,collectinformation,sendorders,arrangepayments,andsoon,whiledeliveryonlytakesaday.SoECRonlybecamefeasiblewhenapracticalmethodofcontrolwasdesigned.WithJITthiscamewithkanbans;withECRitcamewithEDI.ECRreliesonastringof‘enablers’,manyofwhichwehavealreadymet.Forastart,ECRonlyreallyworkswhenorganisationsandtheirsuppliersareworkingtogetherinpartnerships.ThisallowsfullEDIincludingpurchaseorders,invoices,planninginformation,point-of-salesdata,fundtransfer,andsoon.Eachorganisation’scontrolsystemsendsamessagetosuppliersandsignalstheneedformorematerialsusingan‘electronickanban’.Somesystemsgofurtherandhandovermoreresponsibilitytothesupplierinvendormanagedinventory.Thenthesupplierbecomesresponsibleformaintainingstocksattheircustomers’operations,checkingtheavailability,organisingdeliveriesandallotheraspectsofinventorycontrolthatmakesurestocksareavailablewhenneeded.Thereisnopointinhavingasophisticatedsignallingsystemifthephysicaldeliveryofmaterialsisslow.SoECRreliesonveryfastmovementofmaterials.Tosomeextent,thisneedsefficienttransport,butwehavealreadynotedBeesley’scomment12,13that:‘IntypicalUKmanufacturingsupplychainsatleast95%oftheprocesstimeisaccountedasnon-value CONTROLLINGMATERIALFLOW191adding.’Thenmaterialmovementcanbemademoreefficientbyremovingnon-valueaddingstepsand,inparticular,reducingthetimespentinstorage.KarabusandCroza9saythat:‘productshouldneverbewarehousedorstored,butshouldcontinuallybeinmovement,withtheleastpossiblenumberofhandlingsteps’.Cross-docking–whichco-ordinatesmaterialsmovementsothattheyaretransferredfromthearrivalbaydirectlytothedeparturebaywithoutevergoingintostorage–cangivemuchfasterdeliveryandreducecoststolessthanhalf.Lutonsummarisesthisbysayingthat:‘Efficientconsumerresponserequirescross-docking’14andhesuggeststhatanefficientterminalshouldaimforturningoverstockatleastdaily,or250turnsayear.Theseideasareconsolidatedinflowthroughlogistics,whichaimsatasmooth,continuousanduninterruptedflowofmaterials.IndifferentcircumstancestherecanbemanyotherenablersforECR.Theseincludeinte-grationofthewholesupplychain,transparency(sothatallorganisationscanseewhatishappeningandhowthisaffectsthem),understandingtheoperationsofotherorganisations(particularlytheconditionsandconstraintstheyworkwith),flexibleoperationsthatcandelivermaterialswithshortleadtimes,balancedresourcestogiveasmoothflowofmaterials,andsoon.IntroducingECRECRisadeceptivelysimpleidea.LikeJIT,though,itneedssubstantialchangestooperationsandcanonlybeusedincertaincircumstances.Ifthesupplychainstartswithpotatoes,theyaregrowninaparticularseasonandfarmerscannotsuddenlygrowacropatshortnotice.Anotherproblemcomeswiththelengthofthesupplychain,asasingleorganisationthatdoesnotwanttobeinvolved–orcannotadapt–willdisrupttheflow.Ifthesupplychaincrossesaslowinternationalborder,orincludesanareawhereproductivityislow,orhitsotherprob-lems,thedelaysbecomeunacceptableandECRcannotwork.IntroducingJITcanbeahugeundertaking,fundamentallychangingthewayanorganisa-tionworks.WhenJITisextendedtoECR,implementationbecomesanevenbiggerissue.Thisisprobablywhyorganisationshaveseemedslowtointroduceit.By1997almostnoorganisa-tionshadafullyestablishedERCsystem.15Nonetheless,interestwasclearlygrowing,andSzymankiewiczsaidthat:‘IfthemassiveincreaseinECRactivitypredicted…becomesareality,itwillbecomethemaincatalystfordevelopmentsinsupply-chainthinking.…ECRcouldwellbecomethebasisforsupply-chainmanagement.’16ThefollowinglistincludessomekeystagesforanorganisationimplementingECR:●designalogisticsstrategybasedonresponsivereplenishment●understandtheprinciplesofECRandhowthiswillaffectoperations●definetheaimsofECRfortheorganisationandmeasuresofperformancefrompartner-shipswithorganisationsthatcanmatchtheorganisation’saims●introducecomprehensiveEDIwithsuppliersandcustomers●build‘flowthrough’logistics,wherematerialsaremovedasefficientlyaspossible●benchmarkotheroperationsandcontinuetoimprove.Thisis,ofcourse,onlyapartiallist,anditseemsdeceptivelysimple.Formingpartnerships,forexample,isnoteasy,sointegratinganentiresupplychainisextremelydifficult.Ifitwereeasytogetanefficientflowofmaterialswith‘flowthrough’logistics,moreorganisationswouldalreadybeworkinglikethis.DespitethesecautionsECRcan,whenworkingproperly,givedramaticimprovements.Estimatessuggestatypicalreturnoninvestmentof250%overthefirstthreeyearsofuse.9 192LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT❑Thetraditionalapproachtoplanningisbasedonforecastsofdemand.Whenactualdemandisknown,wecanuseapproachesbasedon‘dependentdemand’.❑Materialrequirementsplanningisadependentdemandsystemwhich‘explodes’amasterscheduletogivetimetablesforthedeliveryofmaterials.Byrelatingdeliveriestoactualrequirements,MRPcanbothreducecostsandimprovecustomerservice.❑ThereareseveralextensionstoMRP,suchasclosed-loopMRPwhichgivesfeedbackforcapacityplanning.MRPIIextendstheideaofMRPtoother■■■■■■■■■functions,sothatallplanswithinanorganisationarerelatedbacktothemasterschedule.❑EnterpriseresourceplanningextendstheMRPapproachtosuppliers.Itco-ordinatesthemovementofmaterialsalongthesupplychain.❑Just-in-timeaimsateliminatingwastefromanorganisation.Itdoesthisbyorganisingoperationstooccurjustastheyareneeded.Thisneedsanewwayofthinking,whichsolvesproblemsratherthanhidesthem.❑JITmatchesthesupplyofmaterialstothedemandby‘pulling’materialsthroughtheprocess.Kanbansgiveasimple,practicalmethodofcontrollingthisflow.❑EfficientconsumerresponseextendstheideasofJIT,bypullingmaterialsthroughanintegratedsupplychain.ThereareseveralenablersforECR,CHAPTERREVIEWincludingEDIand‘flowthrough’logistics.CASESTUDYJITatPentagonPlasticsPentagonPlasticsmakesmallinjection-mouldedpartsforanumberofmanufac-turers.Afewyearsago,theyfacedanewproblemwithoneoftheirbestsellingparts,whichwasusedbyaninstrumentmakerandeventuallyputintoFordcars.WhenFordexpandedtheirqualitymanagementprogrammealltheirsuppliers–includingthosewhowereseveraltiersupthesupplychain–hadtochangetheirhabits.Inparticular,theyhadtointroducetotalqualitymanagementandjust-in-timeoperations. CONTROLLINGMATERIALFLOW193CASESTUDYcontinuedJaydeepJulamiwastheproductionmanageratPentagon,andhewaswonderinghowtomeetthenewdemandsonhisoperations.Therewere30mainproductsand120minorones,andtheplantworkedasingleshiftforfivedaysaweek.Theircurrentproductionplanningwasbasedonaregularsix-weekcycle.Thefirst15daysofthiscyclewerespentmakingthemainproducts,andthenext15daysmakingminorproducts.Thisschedulewasdesignedtoreducethedisruptionofchangingproductionfromoneproducttoanother.Eachchangeusuallytooklessthananhour,butcouldtakeuptofourhoursifthingswentwrong.AdashboardinstrumentpanelwastypicalofPentagon’smainproducts.Thiswasmadeinbatchesof25,000andsenttoastoreoffinishedgoods.Whencustomersorderedthepaneltherewasaminimumorderquantityof4000.Mostordersweremetfromstock,butifPentagondidnothaveenoughstocktomeetanorder,theywouldrescheduleproduction.Thismightgiveaweek’sdelay,aswellasupsettingtheschedulesofotherproducts.Transportwasarrangedwithalocalcompany,whopickedthepartsupfromPentagonanddeliveredthemdirectlytocustomers,usuallywithintwoweeks.JaydeepwasreadinganarticleaboutHewlett-Packard’sintroductionofJIT.ThissaidthattheyintroducedJITinsevenstages.They:1.designedanefficientmassproductionprocess2.implementedtotalqualitymanagement3.stabilisedproductionquantities4.introducedkanbans5.workedwithsuppliers6.continuallyreducedstocks7.improvedproductdesigns.JaydeepthoughtabouthowhecoulduseHewlett-Packard’sexperienceinhisownplant.Heknewroughlywhatwasinvolved,butstillwasnotconfidenttheycouldmakeJITwork.CASESTUDYQuestions●DescribeindetailthestepsthatHewlett-PackardusedtointroduceJIT.●Fromthelimitedinformationavailable,doyouthinkthatPentagonPlasticsshouldconsiderJIT?Whatbenefitscouldtheyget?●HowmightPentagonsetaboutintroducingJIT? 194LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROJECTPlanninginPracticeOneofthemaindifferencesbetweenMRPandJITistheirrelianceoncomputersystems.MRPneedsspe-cialisedsoftware,oftenusinghugesystems.DoasurveytoseewhatprogramsyoucanfindforMRPandcomparetheirfeatures.Ontheotherhand,JITlooksforsimplesystems.Restaurantsuseasimpleformofkanbanwhenwaiterspassmessagesbacktocooks,tellingthemwhattoprepare.Whatotherexam-plesofJITcanyoufind?Howdotheysendmessagesbackthroughthesupplychain?DISCUSSIONQUESTIONS1.MRPwasdevelopedtoplanthesupplyofpartsatmanufacturers,soitcannotreallybeusedinothertypesoforganisation.Doyouthinkthisistrue?2.MRPIIseemsagoodideaintheory,butitwouldbedifficulttoplanlogistics,letalonefinanceandmarketing,fromamasterschedule.Thesystemswouldalsobesounwieldythattheycouldneverworkproperly.Eveniftheydidwork,operationswouldbetooinflexibletocopewithagilecompetitors.Whatdoyouthinkoftheseviews?3.WhatarethemaindifficultiesofusingERP?4.Ifyouwereinhospitalandneedingabloodtransfusion,wouldyouratherthetransfusionserviceusedatraditionalsystemofholdingstocksofblood,orajust-in-timesystem?WhatdoesyouranswertellyouaboutJITinotherorganisations?5.WhatarethemostsignificantchangesthatJITbringstotheplanningoflogisticsinanorganisation?WhathappensifanorganisationwantstointroduceJIT,butfindsthatitssupplierscannotcopewiththesmallbatchesandfrequentdeliveries?6.WhataretheproblemsofusingECR?Howcantheseproblemsbeovercome?REFERENCES1.OrlickyJ.(1974)MaterialsRequirementPlanning,McGraw-Hill,NewYork.2.WatersC.D.J.(1992)InventoryControlandManagement,JohnWiley,Chichester.3.BraceG.andRzevskiG.(1998)Elephantsrarelypirouette,LogisticsFocus,6(9),14–18.4.SharpA.E.(1998)quotedin‘Betterroutesfordecisionmakers’,FinancialTimes,1/7/98.5.BurrisP.(1999)StudydispelscommonmythsaboutERP/ERM,PressreleasebyMETAGroup,01/01/99.6.MondenY.(1994)ToyotaProductionSystem(2ndedn),Chapman&Hall,London.7.ShingoS.(1981)StudyofToyotaProductionSystemfromanIndustrialEngineeringViewpoint,JapaneseManagementAssociation,Tokyo.8.HayE.J.(1988)TheJust-in-timeBreakthrough,JohnWiley,NewYork.9.KarabusA.andCrozaM.(1995)Thekeystothekingdom,MaterialsManagementandDistribution,May,21–2.10.BodenJ.(1995)Amovablefeast,MaterialsManagementandDistribution,November,23–6. CONTROLLINGMATERIALFLOW19511.MargulisR.A.(1995)GrocersentertheeraofECR,MaterialsManagementandDistribution,February,pp.32–3.12.BeesleyA.(1995)Timecompression–newsourceofcompetitivenessinthesupplychain,LogisticsFocus,3(5),24–5.13.BeesleyA.(2000)Timecompressioninthesupplychain,Chapter11inWatersD.(ed.)GlobalLogisticsandDistributionPlanning,KoganPage,London.14.LutonD.(1995)Efficientconsumerresponserequirescross-docking,MaterialsManagementandDistribution,April,p.15.15P-EConsulting(1997)EfficientCustomerResponse,P-EConsulting/InstituteofLogistics,Surrey.16.SzymankiewiczJ.(1997)Efficientcustomerresponse,LogisticsFocus,5(9)16–22.FurtherreadingChengT.C.E.andPodolskyS.(1996)JustinTimeManufacturing(2ndedn)Chapman&Hall,London.HutchinsD.(1999)JustinTime(2ndedn),Gower,London.LouisR.S.(1997)IntegratingKanbanwithMRPII,ProductivityPress,Cambridge,MA.LuscombeM.(1993)MRPII:IntegratingtheBusiness,ButterworthHeinemann,London.SandrasW.A.(1995)JustinTime,OliverWightPublications,Williston,VT.SchniederjansM.J.andOlsonJ.R.(1999)AdvancedTopicsinJustinTimeManagement,QuorumBooks,NewYork.TurbideD.A.(1993)MRP+,IndustrialPress,NewYork. CHAPTER8MeasuringandImprovingPerformanceCONTENTS■Aimsofthechapter■Casestudy–Ed’s■MeasuringperformanceDrive-throughBottleShop■Comparingperformance■Project–Qualityoflogistics■Analysingasupplychain■Problems■Improvingperformance■Discussionquestions■Chapterreview■References■FurtherreadingAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■RECOGNISEtheimportanceofmeasuringperformance■DESCRIBEdifferentmeasuresofsupplychainperformance■DISCUSSthebestmeasuresandtheiruse■USEbenchmarking■ANALYSEasupplychainusingdifferentcharts■DESCRIBEdifferentapproachestoimprovinglogistics MEASURINGANDIMPROVINGPERFORMANCE197MEASURINGPERFORMANCEThelastfewchaptershavedescribedthedesignandplanningofasupplychain.Atthispoint,wehavesetthestructureofthesupplychain,andshownhowtoorganisethemovementofmaterials.However,thesupplychainisnotfixed,butcontinuestoevolve.Soweneedsomewayofsayinghowwellitworksatthemoment,andhowitcanbeimproved.Forthiswehavetoanswerfourquestions:1.Whatarewedoingnow?Analysingthecurrentmethods,aimsandoperationsoflogistics.2.Whatdowewanttodointhefuture?Givingnewaimsandclearobjectivesforimprovement.3.Whatisthebestwaytogetthere?Lookingatoptionsandimplementingthebest.4.Howdoweknowthatwearegettingthere?Measuringperformance,comparingactualresultswithexpectations.Wehavealreadyansweredquestion2,asthestrategyandfollowingplanssaywhatlogisticsshoulddointhefuture.Inthischapterwecanlookattheotherquestions,startingwithmeas-uresoflogisticsperformance(forquestion4).Thenwedescribesomemethodsofanalysingcurrentoperations(forquestion1),andsuggestsomeapproachestoimprovement(forques-tion3).MeasuresforlogisticsManagersineveryorganisationhavetomeasuretheperformanceoflogistics.Iftheydonottakemeasures,theyhavenoideahowwelltheyaredoing,whetherthingsareimprovingorgettingworse,whethertheymeettargets,orhowtheycomparewithcompetitors.Anoldmaximsays,‘whatyoucan’tmeasure,youcan’tmanage’.Theproblem,ofcourse,isfindingwhattomeasureandhowtomeasureit.Thereisahugenumberofpossiblemeasuresoflogistics.Someoftheseareindirectmeas-uresandoftenrelatetofinance,suchasthereturnonassets,paybackperiod,orcontributiontoprofits.Financialmeasuresarepopular,astheyareeasytofind,soundconvincing,giveabroadviewandallowcomparisons.However,theyalsohaveweaknessesastheyconcentrateonpastratherthancurrentperformance,areslowtorespondtochanges,relyonaccountingconventions,anddonotrecordimportantaspectsoflogistics.Financialperformancecanshowthatsomethingiswrong,butitdoesnotshowwhatiswrongorhowtocorrectit.Thisislikeadoctorfindingthatyouhaveafever–itshowsthatsomethingiswrong,butdoesnotshowhowtogetbetter.Inpractice,itismuchbettertousedirectmeasuresoflogistics,suchasthenumberoftonnesdelivered,stockturnoverordistancetravelled.Again,therearemanypossiblemeas-ures.Wewillstartbylookingatgeneralonesforcapacity,utilisationandproductivity. 198LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEKeystone-GunterbachKeystone-GunterbachoffersarangeofPerformanceindicatorValueChangetransportandwarehousingservicesinyeararoundBerlin.ForseveralyearsthemajorReturnoncapital12.4%+2.4%shareholdersfeltthatthecompanywasReturnonassets6.1%+2.0%under-performing,andin2000theyPre-taxmargin3.3%+0.1%appointedanewchiefexecutive,withanReturnonshareholders’funds21.2%+6.5%explicitgoalofimprovingresults.TheEquitygearing28.9%–4.2%chiefexecutivestartedarestructuringandDebtgearing43.7%–6.3%cost-cuttingexercise,andby2001couldInterestcover2.5times–0.2reportsomeprogress.TheannualreportCurrentratio1.27times–0.3showedthatthecompany’sperformancewasnowgenerallycomparablewiththemarketsofcentralEurope.Theytriedtoindustry.Thetableshowsanextractofcompeteonthequalityoftheirservice,butsomekeyindicators.deliverytimesweregettinglonger,thereAttheannualmeetingthreesharehold-wereincreasingproblemswithreliability,erswhohadworkedfortheoriginalGun-lackofinvestmentwasmakingtheirsys-terbachtransportcompanyaskedforsometemsoutdated,andcustomersatisfactionclarification.Theyfeltthatthecompany’swasdeclining.Inthefirstquarterof2002long-termsurvivaldependedonitsbeingtheirbusinessfellby15%andtheycompetitive.Theycouldseethefinancialappointedanewchiefexecutive.performance,butdidnotknowhowwellthecompanywasrunningitslogistics.Source:companyannualreportsActually,thecompanywashavingtrou-blewithcompetitioninthedevelopingCapacityandutilisationInChapter6wedefinedthecapacityofasupplychainasthemaximumamountthatcanbemovedthroughitinaspecifiedtime.Thisisabasicmeasureofsupplychainperformance.Eachpartofasupplychainhasadifferentcapacity,andtheoverallcapacityissetbythebottlenecks.Itmightseemstrangetodescribecapacityasameasureofperformance,ratherthanafixedvalueorconstraintonthethroughput.Therearetwoanswerstothis.First,wecansaythatthecapacitydependsonthewaythatresourcesareused.Twoorganisationscanuseidenticalresourcesindifferentways,andgetdifferentthroughputs.Thenthecapacitygivesadirectmeasureofperformanceandmanagementskills.Second,wecanpointoutthatcapacityisnotfixed,butvariesovertime.Atthestartofthedayateamofpeoplemightbe MEASURINGANDIMPROVINGPERFORMANCE199abletomove500casesanhour;attheendofthedaythesameteamaretiredandcanonlymove400casesanhour.Theoperationsseemtobeexactlythesame,butthecapacityhasdeclined.Toallowfortheseeffects,wedefinedifferencetypesofcapacity.Designedcapacityisthemaximumpossiblethroughputinidealconditions;effectivecapacityiswhatwecanactuallyachieveoverthelongterm;actualthroughputshowswhatweactuallyachieved.ThedesignedcapacityofEllison’scallcentreis1000telephonecallsanhour.Theycanachievethisforashortperiod,butaftertakingintoaccountdifferenttypesofcalls,staffschedules,holi-days,faultswithequipmentandotherfactorstheeffectivecapacityis850callsanhour.InonetypicalhourEllisonactuallyhandled710calls.Thisshowsthattheywereworkingbelowcapacityandhavenotfullyusedtheirresources.Utilisationshowstheproportionofdesignedcapacitythatisactuallyused.Supposeyouhaveavehiclefleetthatisdesignedtodeliver100tonnesofmaterialsaweek.Thisisitsdesignedcapacity.Ifthefleetonlydelivers60tonnesinoneweek:amountofcapacityused60utilisation===0.6or60%designedcapacity100Thedesignedcapacityofasupplychainisnotthesamethroughoutitslength,butdifferentpartshavedifferentutilisation.Youmight,forexample,findthatatransportfleetisunder-utilised,whilethewarehouseitisdeliveringtoisworkingflatout.Figure8.1showsanillustrationofsometypicalcalculations.PartABCDEFGH140unitsflowthroughDesigned200650440180680460220700capacityEffective180600420160650410200680capacityThroughput140140140140140140140140Utilisation70%22%32%78%21%30%64%20%Figure8.1Capacityandutilisationinasupplychain 200LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEYing-ChuaAssociatesInJuly2000,Ying-ChuaAssociateshadtenBeforeAfterpeopleorganising1000specialisedinsur-reorganisationreorganisationancepoliciesfordangerousgoodsmove-Numberof1000/10=1001200/11=109policiesprocessedments.Intheorytheycouldprocess1250perpersonpoliciesamonthbutbreaks,interruptions,Directcosts115,000/1000=£115156,000/1200=£130holidays,schedulesandotherfactorslim-perpolicyitedthistoabout1150.ThedirectcostsofDesignedcapacity12501600thisoperationwere£115,000.Effectivecapacity11501300Demandfortheservicewasgrowing,Utilisation1000/1250=80%1200/1600=75%andinSeptemberthecompanydidasmallreorganisation.Afterthistheyemployedelevenpeople,whocoulddealwithamax-Ying-Chua’sreorganisationincreasedtheimumof1600policiesamonth,butwithanumberofpoliciesprocessedperperson,morerealisticlimitof1300.Theywerealit-buttheyalsoincreasedthedirectcostspertledisappointedtofindthatinthefollow-policy.Thecapacityhasrisen,buttheutili-ingmonththeyonlyprocessed1200sationhasdeclined.Whetherperformancepolicies,withdirectcostsof£156,000.hasimproved,ornot,dependsontheSomemeasuresofthisperformanceareobjectivesofthecompany.giveninthetable.Asyoucansee,eventhesesimplemeas-Source:companyreportsureshavetobeinterpretedwithsomecare.ProductivityProductivityisoneofthemostwidelyusedmeasuresofperformance.Unfortunately,peopleoftenconfuseitsmeaning,assumingthatitistheamountofworkdonebyeachperson.Therearereallyseveralkindsofproductivity.Thebroadestpicturecomesfromtotalproductivity,whichrelatesthroughputofasupplychaintotheamountofresourcesused.totalthroughputTOTALPRODUCTIVITY=totalresourcesusedUnfortunately,thisdefinitionhasanumberofdrawbacks.Throughputandresourcesmustuseconsistentunits,sotheyarenormallytranslatedintounitsofcurrency.Thisdependsontheaccountingconventionsused–sowenolongerhaveanobjectivemeasure.Anotherproblemisfindingvaluesforalltheinputsandoutputs.Thisisparticularlydifficultforintangibleinputs(suchassunlight,theenvironmentandreliability)andoutputs(suchaspollution,wasteprod- MEASURINGANDIMPROVINGPERFORMANCE201uctsandreputation).Wecouldsaythatweareonlyinterestedintheimportantfactors–butthensomeonehastodecidewhichtheseare,andwehaveagainlostourobjectivity.Becauseofthesepracticaldifficulties,hardlyanyorganisationsmeasuretotalproductivity,preferringtousepartialproductivity,orsinglefactorproductivity.Thisrelatesthethroughputofasupplychaintoasingletypeofresource.totalthroughputPARTIALPRODUCTIVITY=unitsofasingleresourceusedTherearefourtypesofpartialproductivityrelatingthethroughputtodifferenttypesofresource:●equipmentproductivity–suchasthenumberofcustomervisitspervan,weightmovedperforklift,ormilesflownperaeroplane●labourproductivity–suchasthenumberofdeliveriesperperson,tonnesmovedpershift,orordersshippedperhourworked●capitalproductivity–suchastheamountstoredforeachpoundofinvestment,deliveriesperunitofcapital,orthroughputperdollarinvestedinequipment●energyproductivity–suchasthenumberofdeliveriesperlitreoffuel,amountstoredperkilowatt–hourofelectricity,orthevalueaddedforeachpoundspentonenergy.Productivitycanbeaveryusefulmeasureofperformance.Butwhenanorganisationsimplyreportsits‘productivity’youhavetolookverycarefullyatwhattheymean.Ifanauto-matedwarehouseincreasesitslabourproductivity,thismightbemuchlessimportantthanchangestoitsequipmentorcapitalproductivities.WORKEDEXAMPLEThevanderPerlitzCorporationrunsanumberofwarehousesinsouthernAfrica.Overthepasttwoyearstheycollecteddataaboutlogistics,usingstandardunitsforthroughputandconvertingvaluesintoSouthAfricanrand.20012002weightofmaterialsmoved10001200sellingpriceR100R100rawmaterialsused5100kg5800kgcostofrawmaterialsR20,500R25,500hoursworked43004500directlabourcostsR52,000R58,000energyused10,000kWh14,000kWhenergycostR1000R1500othercostsR10,000R10,000Howcanyoudescribetheproductivity? 202LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedSolutionFromtheinformationgivenwecanuseseveralmeasuresofproductivity.■Thetotalproductivityin2001was:totalthroughput100×1000==1.2totalresourcesused20,500+52,000+1,000+10,000By2002thishadrisento120,000/95,000=1.26,whichisariseof5%■Unitsofthroughputperkiloofrawmaterialin2001was1000/5100=0.196.In2002itwas1200/5800=0.207whichisariseof5%■Someothermeasuresare:20012002%increasetotalproductivity1.201.265.0units/kgofrawmaterial0.1960.2075.6units/Rofrawmaterial0.0490.047–4.1units/hour0.2330.26714.6units/Roflabour0.0190.02110.5units/kWh0.1000.086–14.0units/Rofenergy1.0000.800–20.0Ingeneral,labourproductivityhasrisen,rawmaterialsproductivityhasstayedaboutthesame,andenergyproductivityhasfallen.OthermeasuresCapacity,productivityandutilisationgivegeneralmeasuresoflogisticsperformance,butwecanusemanymorespecificones.Forexample,somecommonmeasuresoftransportperform-anceinclude:●Reliabilityofdelivery●Totaltraveltimeanddistance●Deliverycost●Customersatisfaction●Frequencyofservice●Lossanddamage●Availabilityofspecialequipment MEASURINGANDIMPROVINGPERFORMANCE203●Helpfulnessofdrivers●Timetoloadandunload●Totalweightmoved●Numberoferrorsindeliveries●Errorsinprocessingandadministration●Sizeandcapacityofvehicles●Skillsofdrivers●Utilisationofvehicles.Althoughwedescribetheseas‘measures’,someareclearlymoredifficulttoquantifythanothers.Nonetheless,theymayallbeimportant,sowehavetofindwaysofassigningnumer-icalvalues.Sometimeswecanusesurrogatemeasures,perhapsmeasuringcustomersatisfac-tionbythenumberofcomplaintsreceived.Moreoftenweusenotionalscales,sowemightaskcustomerstoratesomefactoronascaleofonetofive.Butrememberthatwhenweusethesemethodstojudge‘customersatisfaction’,‘staffmorale’,‘managementleadership’,orsomeintangibleconcept,wearetryingtogivenumericalvaluestoessentiallynon-quantifiablefactors,andshouldtreattheresultswithcaution.Warehouseshavearangeofdifferentperformancemeasures,oftenrelatedtotherateofstockturnoverorutilisationofspace.Somemeasuresarebasedonthevalueofstockheld.Thisvariesovertime–oftenquitewidely–soweuseaverageortypicalvalues.Theaveragevalueofstockofasingleproductistheaveragenumberofunitsheldmultipliedbytheunitvalue.Whenthisissummedforallproducts,wegetanaveragetotalinventoryvalue.Averagetotalinventoryvalue=∑(averagenumberofunitsheld×unitvalue)Managerscantrackthisvalueovertimeandlookfortrends.Ifthevalueofstockisrising,itmightbeacauseforconcern.Moreusefulmeasuresrelatetheamountofstocktothedemand.Thenanorganisationcanreportthenumberofweeks’supplyheldinstock.averagetotalinventoryvalueWeeks’supply=averageweeklythroughputIdeallythisshouldbeaslowaspossible,suggestingthatstocksarebeingkepttoaminimum.Somemanufacturershold10weeks’supplyormore,particularlyifsupplyisuncer-tainordemandisvariable;companiesusingjust-in-timeoperationsonlyholdafewhours’supply.Aslightlydifferentviewmeasuresthestockturnover,orturn.Thisshowshowquicklymaterialsmovethroughthesupplychain.annualthroughputStockturnover=averagetotalinventoryvalueIftheannualthroughputofawarehouseis$1millionandtheaveragetotalinventoryvalueis$200,000,theturnoveris5.Thismeansthatmaterialsarereplacedanaverageoffivetimesayear,andtheaveragestocklevelis1/5yearsor10weeks’supply.Othercommonmeasuresofwarehouseperformanceinclude:●Averagestockvalue●Changesinstockvalue●Utilisationofstorageareaandvolume 204LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●Proportionofordersmetfromstock●Proportionofdemandmetfromstock●Weeksofstockheld●Stockturnover●Ordercycletime●Numberofordersprocessed●Costofeachstocktransaction●Customerservices●Errorsinorderpicking●Damageandloss●Specialstoragefacilities.Theselistsareobviouslynotcomplete,andindifferentcircumstancesmanyothermeas-uresmightbeimportant.Wecouldalsomakesimilarlistsforotherfunctionsoflogistics.Withprocurement,forexample,wecouldmeasuretheperformancebythecostpertransaction,costasapercentageofpurchasevalue,timetosubmitorders,valueofmaterialsbought,discountsachieved,numberoftransactionsperperson,numberoferrors,proportionofautomaticorders,andsoon.Thereisclearlynoshortageofmeasures,butweshouldaskwhichonesareactuallyused.AsurveybyHarrisonandNew1foundthatmostorganisationsusesomeformalmeansofassessingsupplychainperformance–but20%oftheirrespondentsdidnoassessmentatall(asyoucanseefromthefollowingtable).MeansofassessingsupplychainperformancePercentageofcompaniesNoformalmeans20Limitedformalmeans29Someformalmeans39Extensiveformalmeans12Onthepositivesideitseemsthat80%oforganisationsusesomemeasuresoflogisticsperformance.Ferreira2saidthatthetenmostcommonmeasuresarequality,leadtime,orderfulfilment(whichmeasurestheproportionofordersthataredeliveredasexpected),on-timedelivery,responsivenesstodemand,technicalsupport,warrantyandservice,consolidationofdeliveries,paymenttermsandorderingsystems.Againsomeoftheseseemdifficulttomeasure,butamoreinterestingpointisthatnoneofthesemeasurescontainsanexplicitrefer-encetocost.Measureslike‘service’haveanimplicitreference,butitseemsthatcostisnotalwaysamajorconcern.ThisviewissupportedbyHarrisonandNew1whofoundthemostcommonmeasuresoflogisticsperformancearecustomerdeliveryperformance(86%),inven-toryturn(76%),supplierperformance(66%),daysofinventory(57%),orderfulfilment(54%),leadtime(52%),customerreturns(52%),andsuppliercosts(48%).Lessthanhalfofcompa-niesreportedusingcostasameasureofperformance.Othersurveysreportsimilarfindings,suchasLennox,3whosuggeststhatimportantfactorsareorderfulfilment(68%),deliveryerrors(57%),damage(50%)andleadtime(40%).BalancingdifferentmeasuresOneproblemisthatthedifferentmeasuresgivedifferent–andoftenconflicting–views.Ifatruckisdrivenfasterthanusual,themilesperhourgoesup,butthemilesperlitreoffuelgo MEASURINGANDIMPROVINGPERFORMANCE205down;whenashopisrenovateditssalespersquaremetregoup,butitssalesperpoundinvestedgodown;increasingtheamountofautomationinawarehousegiveshigherlabourproductivitybutlowercapitalproductivity.Togetareasonablepictureoflogisticswehavetotakeabalancedviewofmeasures.Butwhichmeasuresaremostimportant?Wecanstartansweringthiswiththeobviouscommentthatmeasuringtheperformanceofasupplychainisnotanendinitself.Themeasuresgivebasicinformationformanagerstouseintheirdecisions,andtheyshowhowwellthesupplychainisachievingitsgoals.Ifthegoalistohaveafastflowofmaterialsthroughthechain,managersshouldmeasurethisspeedofflowandnotbothersomuchabout,say,productivity;iftheaimistominimisecosts,managersshouldmeasuredifferentaspectsofcost,butnotworrysomuchaboututilisation.Unfortunately,managersoftenignorethisadviceanduseinappropriatemeasuresthatareeasiesttofind,supporttheirviews,havealwaysbeenusedinthepast,orshowtheminthebestlight.Someconsequencesofthisarewarehousesfullofgoodsbecausemanagers’statusisjudgedbytheamountofinvestmenttheycontrol,rushedservicebecauseserversarejudgedbythenumberofclientstheyspeaktoandnotthequalityoftheirservice,doublebookedseatsbecauseairlinesarejudgedbyseatoccupancy,speedingtrucksbecausedriversarejudgedbythenumberofdeliveriestheymakeinaday.Togiveareasonableviewoflogistics,ameasuremust:●relatetotheobjectivesofthesupplychain●focusonsignificantfactors●bemeasurable●bereasonablyobjective●lookatcurrentperformance,nothistorical●allowcomparisonsovertimeandwithotherorganisations●beeasytounderstandbyeveryoneconcerned●bedifficulttomanipulatetogivefalsevalues●beusefulinotheranalyses.LOGISTICSINPRACTICEDeliveringfrozenfoodFigure8.2outlinesthestructureoftheUK■allowingthemtofocusoncoreopera-frozenfoodindustry.Animportantfeaturetionsofmanufacturingofthisisthedominantroleoftheretail■standarddistributionthroughasinglemultiples.Thethreelargestsupermarketcontractorchainssellathirdofallfood,andbuyfrom■automatedorderprocessingseveralhundredmanufacturersand■integratedstockmanagementsystemimporters.■singlestockholdingpointneartoAproblem,whichiscommonformanyproductionindustries,isthatmanufacturersand■lowproductionanddistributioncostsretailersusedifferentcriteriatojudgeper-■longleadtimesandproductionruns.formance.Themainrequirementsofmanu-Theretailers’requirementsfromlogisticsfacturers’logisticscanbesummarisedas:include: 206LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinued■nostock-outsinshopdisplaysshouldmovequicklyandgiveareliable■small,frequent,reliabledeliveriesservice.Asurvey4of11,900trips,delivering■deliveriesmadeatanyrequestedtime206,000palletsoffoodandcovering1.16■shortleadtimesmillionkmfoundthat25%ofjourneys■linkedsystemsbasedonefficientweredelayed.Themaincausesofthecustomerresponsedelayswereproblemsatthedeliverypoint■directmovementofgoodsarrivingonto(31%)andtrafficcongestion(23%).Thisdisplaysurveyalsofoundthattrucksspent21%of■lowerstockinstorestheirtimeidle.■noerrorsordamageindeliveries■influenceinthesupplychainaimingatActivityoftrucksPercentageoftimelowerdistributioncostsRunningontheroad35■opportunitiestobackhaulreturnables.Idle(emptyandstationary)21Loading/unloading16Thereisclearlyalotofagreementhere,butWaitingforloadingordeparture12therearesomeareaswherethetwogroupsMaintenanceandrepair6judgesuccessindifferentways.Forexam-Delayedontheroad6ple,manufacturerswantthirdpartycon-Delayedwhileloaded4tractorstotakeresponsibilityforlogistics,whilesupermarketswantamorepositiveSources:LindfieldG.(1998)LogisticsFocus,6(1),say,withgreaterinfluenceovercostsand2–8;McKinnonA.(2000)Measuringtheeffi-operations.ciencyofroadfreighttransportoperations,Logis-OneareawheremanufacturersandticsandTransportFocus,2(8),26–7retailersagreeisthatdeliveryvehiclesExportsUKmanufacturersImportsSuppliersWholesalersCashandcarryWholesalersIndependentRetailmultiplesCateringtradeRetailersretailersFigure8.2StructureoftheUKfrozenfoodindustry MEASURINGANDIMPROVINGPERFORMANCE207COMPARINGPERFORMANCEStandardsforcomparisonWehavealreadysaidthatmeasuresofperformancearenotanendinthemselves,buttheyhelpmanagersmakedecisionsaboutthesupplychain.Inparticular,measurescanbeusedto:●seehowwellobjectivesarebeingachieved●comparethecurrentperformanceoflogisticswithperformanceinthepast●makecomparisonsoflogisticswithotherorganisations●comparetheperformanceofdifferentpartsofthesupplychain●makedecisionsaboutinvestmentsandproposedchanges●measuretheeffectsofchangestothesupplychain●helpwithotherinternalfunctions,suchaswagenegotiations●highlightareasthatneedimproving.Asyoucansee,manyoftheseinvolvecomparisons.Thisisbecauseabsolutemeasuresoftenhavelittlerealmeaning.Ifyouknowthatashophasannualsalesof$1200persquaremetre,youcannotsaywhetherthisisgoodorbaduntilyouknowthesalesincomparableshops.Therearebasicallyfourwaysofjudgingperformance,usingcomparisonswith:1.Absolutestandards–whichgivethebestperformancethatcaneverbeachieved.Thisisanidealperformancethatoperationsmightaspireto–suchasthetargetofzerodefectsintotalqualitymanagement.2.Targetperformance–whichisamorerealistictargetthatisagreedbymanagers,whowanttosettough,butattainable,goals.Theabsolutestandardforthenumberofcustomercomplaintsreceivedeachweekiszero,butamorerealistictargetmightbefour.3.Historicalstandards–whichlookatperformancethatwasactuallyachievedinthepast.Asorganisationsarealwayslookingforimprovement,wecanregardthisastheworstperformancethatmightbeaccepted.4.Competitors’standards–whichlooksattheperformanceactuallybeingachievedbycompetitors.Thisisthelowestlevelofperformancethatanorganisationmustachievetoremaincompetitive.FederalExpressdeliverpackages‘absolutely,positivelyovernight’sootherdeliveryservicesmustachievethisstandardtocompete.Therearemanywaysofmakingthesecomparisons.Someareveryinformal,andwhenware-housemanagersvisitanotherwarehousetheyautomaticallylookforideastheycanuse.Oftenamoreformalmethodisbetter,andthemostcommonusesbenchmarking.BenchmarkingWithbenchmarking,anorganisationcomparesitsperformancewithacompetitor.Thereisnopointincomparingperformancewithsomerandomcompetitor,sobenchmarkingcomparesanorganisation’sperformancewiththebestresultsachievedintheindustry.Tobeblunt,organisationsusebenchmarkingtofindideasforlogisticsthattheycancopyoradapt. 208LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTIdentifytheprocesstobenchmarkandthemeasuresofperformanceFindthecompetitorwiththebestperformanceandcollectdataonitsoperationsCompareoperations,findandanalysedifferencesinperformanceFindreasonsforthedifferenceinperformanceandlookforwaysofovercomingtheseRedesignprocessesinthelightoftheseanalysesandestablishperformancegoalsImplementplans,monitorprogressandcontinuebenchmarkingFigure8.3StepsinbenchmarkingThereareseveralstepsinbenchmarking.Thesestartwithanorganisationrecognisingtheneedtoimproveitslogistics.Thenithastodefinethemostappropriatemeasuresofperform-ance,identifytheleadingcompetitorintheindustry,andexaminetheirlogisticstoseehowtheyachievethissuperiorperformance(asshowninFigure8.3).Theeasiestbenchmarkingtoorganiseisinternal,withonedivisionofacompanycomparingitsoperationswithanotherdivision.However,managersshouldtakeabroadview,andlookforpossibleimprovementsanywheretheygetthechance.Youmightthinkthatorganisationsarereluctanttogivedetailsoftheiroperationstocompetitors.Inpracticeitcanbefairlyeasytogetthisinformation,andfearsthatitwillbeexploitedarelargelygroundless.Everyoneknowshowtodeliverparcels,servefood,runashop,provideataxiservice–butthousandsoforganisationsworkverysuccessfullyintheseindustries,despitethefactthateveryoneknowsallabouttheiroperations.Organisationsinthesameindustrywillshareinfor-mationwhentheycanbenefitfromtheresults–aseventhebestperformerscanlearnthingsthatmakethemevenbetter.WhenSainsbury’sbenchmarkedtheoperationsattheirdepotinBuntingford,theycontacted45companieswhohadagreedtotakepartintheexercise.Morethanhalfreturnedusefulinformation,andSainsbury’smadefollow-upvisitstotenparticu-larlyusefuloperations.5 MEASURINGANDIMPROVINGPERFORMANCE209Sometimes,however,itisdifficulttofindadirectcompetitorforbenchmarking,andthenitisusefultolookatorganisationsthatarenotinthesameindustry.BPisnotadirectcompetitorofTate&Lyle,buttheybothrunfleetsoftankersandmaylearnfromeachother’stransportoperations.Sometimesitispossibletolearnfromcompletelydifferenttypesoforganisation.Trainoperators,forexample,mightfindimprovementsfrombusoperators,airlines,orothercompaniesthatarenotinvolvedintransportbutgivehighcustomerservice,suchassupermarkets.LOGISTICSINPRACTICECharlesFrideriksonCarRentalsWhenCharlesFrideriksonCarRentalsthataftertheirfirstvisitacustomercanpass(CFCR)startedabusinessinCopenhagen,aplasticcardthroughareaderandpickuptherewerealreadymanycompetitorsintheacarimmediately.market.Ingeneral,themajorinternationalAtthesametime,CFCRrecognisedthatcompaniestendedtocompetebyservice,privatecustomersweremoreinterestedinincludingHertz(‘Calltheworld’sNo.1’),price,sotheylookedattheoperationsofAvis(‘Wetryharder’),Eurodollar(‘Rentthesmallercompaniestoseehowtheyfromthebest’),Europcar(‘Allaround–areduceoperatingcosts.Forexample,theybetterservice’),Ford(‘Abignameindonotuseexpensivelocationslikeairportrental’),Thrifty(‘Worldclassserviceatyourarrivallounges,keeptheircarsforratherdoorstep’).Thesmaller,localcompanieslonger,andhavemoreflexiblepricing.tendedtocompeteonprice,suchasEcon-CFCReffectivelybenchmarkedtheiromy(‘Thelowestpricesaround’),Capitaloperationsagainstinternationalcompanies(‘Competitiverates,bestvalue’),andHar-whenlookingatthequalityofservice,andald(‘Lowestratesintown’).localcompanieswhenlookingforlowCFCRdecidedthattheywouldcompetecosts.Theimportantpointabouttheirbygivingagood,personalserviceatarea-benchmarkingisthatitidentifiedbettersonableprice.Theyobviouslycouldnotperformanceanditshowedhowthiswasgivethescaleofserviceofferedbytheachieved.internationalcompanies,buttheylearntaSource:FrideriksonC.(2000)BenchmarkingCarlotfromtheiroperations.Forexample,Rentals,WesternOperationsGroup,LondonCFCRautomatedtheiradministration,soANALYSINGASUPPLYCHAINProcesschartsSupposethatwebenchmarkacompetitor’spurchasingsystem,andfindthatitistenpercentcheaperthanours.Nowwehavetolookatthesystemandseeexactlyhowitworks,and 210LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTwhereitmakesthesavings.Inotherwords,weneedsomewayofdescribingthedetailedoper-ationsinthesupplychain;wewantsomemeansoflistingtheindividualactivitiesandshowingtherelationshipsbetweenthem.Theeasiestwayofdoingthisiswithaprocesschart.Thereareseveraltypesofprocesschart,buttheyallstartbybreakingdownaprocessintoseparateactivities.Supposewelookatourprocessforsubmittinganorder.Wecoulddescribethemainactivitiesas:●receiverequesttopurchasematerials●checkdepartmentalbudgetsandgetclearancetopurchaseReceiverequest●makeashortlistofpossiblesuppliersandsendaforpurchaserequestforquotations●examinequotationsreceivedandpickthebest●discuss,negotiateandfinalisetermsandCheckbudgetsandgetconditionsclearance●issueapurchaseorderforthematerials●doanynecessaryfollow-upandexpediting●arrangepaymentofthesupplier’sinvoice.SendRFQtoshortlistofsuppliersWecandrawaninformalprocesschartforthisintheformofaflowchart(showninFigure8.4).YesThisinformalchartgivesageneralviewoftheFollow-upDonecessaryneeded?follow-upprocess,butitdoesnotgivemanydetails.Abetterapproachstartsbydescribingalltheactivitiesas:No●operation:wheresomethingisactuallydonePickbestquote●movement:whereproductsaremoved●storage:whereproductsareputawayuntiltheyareneededDiscuss,●delay:whereproductswaitforsomethingtonegotiateandhappenfinalise●inspection:totestthequality.NoThenwecantrackaseriesofactivitiesanddescribeSatisfactoryresult?exactlywhathappens.Forthis,weusethefollowingsixsteps.YesStep1:ListalltheactivitiesintheirpropersequenceIssuepurchaseorderfromthestartthroughtothefinish.Step2:Classifyeachactivityasanoperation,move-ment,inspection,delayorstorage.FindtheYestimetakenanddistancemoved.SortoutProblemsStep3:Summarisetheactivitiesbyaddingtheproblemsnumberofactivities,totaltimes,rateofNodoingeachactivity,andanyotherrelevantinformation.ArrangepaymentStep4:Criticallyanalyseeachactivity,askingques-tionslike,‘Whyisitdonethisway?’,‘Canweeliminatethisactivity?’,‘Howcanweimprovethisactivity?’,‘CanwecombineFigure8.4Aninformalprocesschartactivities?’. MEASURINGANDIMPROVINGPERFORMANCE211Step5:Nowrevisetheprocesstogivefeweractivities,shortertimes,lessdistancetravelled,andsoon.Step6:Checkthenewprocedures,preparetheorganisationforchanges,trainstaff,andsoonandimplementthechanges.Thefirstthreestepsgiveadetaileddescriptionofcurrentactivities,andanexampleoftheformatforachartisshowninFigure8.5.6,7Steps1and2areusuallydonebyobservation,whileStep3isacalculation.Thelastthreestepslookforimprovements.ProcesschartNumberDescriptionOperationMoveStoreDelayInspectTimeDistanceComment1Activity1X102Activity2X45120Intostoresetc.Totals55120Figure8.5FormatforaprocesschartWORKEDEXAMPLEDrawachartoftheprocessinvolvedwhenalorrymakesadeliverytoasupermarketSolutionDetailsoftheprocess,andparticularlythetime,varyconsiderably.Figure8.6showsthestartofachartfromonesupermarket.Whenthischartiscompletedinasmuchdetailasweneed,wecanstartlookingforimprovements.Why,forexample,dowehavetomove100metrestomovegoodstostorage–canwereducethissomehow?Whydoesittake30minutestoputgoodsontotheshelves–canwedothisfaster?ProcesschartNumberDescriptionOperationMoveStoreDelayInspectTimeDistance1GetdetailsofdeliveryX102UnloadlorryX453CheckgoodsX254MovetostorageX151005StoreX4506TakefromstoreX157MovetoconsolidationX10758WaitforcheckX209CheckgoodsX1510MovetoshelvesX1211011PutontoshelvesX30Totals647285Figure8.6Partofaprocesschartfordeliveriesatasupermarket 212LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPrecedencediagramsAnotherformatfordescribingasupplychainusesaprecedencediagram.Thisconsistsofanetworkofcircles(representingactivities)andarrows(representingtherelationshipsbetweenthem).SupposeaverysimpleoperationhastwoactivitiesAandB,andAmustfinishbeforeBcanstart.Wecanrepresenttheactivitiesbytwocirclesandtherelationshipbyanarrow,asshowninFigure8.7.Thenwecanextendthismethodtomorecomplexsupplychains,asillus-tratedinthefollowingexample.ABFigure8.7Precedencediagram,withactivityBfollowingactivityAWORKEDEXAMPLEAsupplychainhas11activitieswiththeprecedenceshowninthefollowingtable.Drawaprecedencediagramofthechain.ActivityMustbedoneafter1–213142,35464748596,7108,91110SolutionActivity1canbedonerightatthestart.Whenthisisfinishedbothactivities2and3canstart.Activity4canbedoneafterbothactivities2and3,andsoon.ContinuingwiththislogicgivesthediagramshowninFigure8.8.Whenwehavedrawnthisnetwork,wecanstartlookingforimprovements. MEASURINGANDIMPROVINGPERFORMANCE2132581011146937Figure8.8PrecedencediagramforworkedexampleMultipleactivitychartsItisoftenusefultoseewhateachpersonorpieceofequipment,isdoingatanytime.Wecandothismosteasilywithamultipleactivitychart.Thishasatimescaledownthesideofthediagram,withalltheparticipantslistedacrossthetop.Thetimeeachparticipantworksontheprocessisblockedoff(asshowninFigure8.9).Thischartisfortwopeopleworkinginasmallwarehouse.Whentheygetanordertheygoaroundandputthegoodsinatrolley,thentheytakethemtoapackingmachine.Thepartici-pantsintheprocessaretwopeople,twotrolleysandthepackingmachine.Thechartshowswhatorders(AtoE)eachparticipantisworkingonduring5-minutetimeslots.Asyoucansee,eachordertakes15minutestocollectand5minutestopack.Wecanseeexactlywhateachparticipantisdoingatanytime,andwecanlookatthepatternofworktoidentifybottlenecksandidleperiods.MultipleactivitychartTimePerson1Trolley1Person2Trolley2Packingmachine5AABB10AABB15AABB20AA25CCBB30CCDD35CCDD40CDDC45EEDD50EE55EE60EETotals5460303525Figure8.9Exampleofamultipleactivitychart 214LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEOneoperatoriscurrentlyassignedtoeachofthreepackingmachines.Themachinesworkacyclewith6minutesforloading,6minutesforoperatingand4minutesforunload-ing.Anoperatorisneededfortheloadingandunloading,butthemachinescanworkwithoutanysupervision.Thewarehousemanagerplanstomakesavingsbyusingtwopeo-pletooperatethethreemachines.Drawamultipleactivitycharttoseeifthisisfeasible.SolutionFigure8.10showsamultipleactivitychartforthreemachinesandtwooperators,assumingallpeopleandmachinesareidleatthestart,andwefollowtheprocessforthefirsthour.MultipleactivitychartTimeOperator1Operator2MachineAMachineBMachineC2LoadALoadBLoadLoad4LoadALoadBLoadLoad6LoadALoadBLoadLoad8LoadCOperateOperateLoad10LoadCOperateOperateLoad12LoadCOperateOperateLoad14UnloadAUnloadBUnloadUnloadOperate16UnloadAUnloadBUnloadUnloadOperate18LoadALoadBLoadLoadOperate20LoadALoadBLoadLoad22LoadALoadBLoadLoad24UnloadCOperateOperateUnload26UnloadCOperateOperateUnload28LoadCOperateOperateLoad30UnloadALoadCUnloadLoad32UnloadALoadCUnloadLoad34LoadAUnloadBLoadUnloadOperate36LoadAUnloadBLoadUnloadOperate38LoadALoadBLoadLoadOperate40UnloadCLoadBOperateLoadUnload42UnloadCLoadBOperateLoadUnload44LoadCOperateOperateLoad46LoadCUnloadAUnloadOperateLoad48LoadCUnloadAUnloadOperateLoad50UnloadBLoadALoadUnloadOperate52UnloadBLoadALoadUnloadOperate54LoadBLoadALoadLoadOperate56LoadBUnloadCOperateLoadUnload58LoadBUnloadCOperateLoadUnload60LoadCOperateOperateLoadTotals5252605650Figure8.10Multipleactivitychartforworkedexample MEASURINGANDIMPROVINGPERFORMANCE215WORKEDEXAMPLEcontinuedTheprocessstartswithoperators1and2loadingmachinesAandBrespectively.Thesemachinesstartworking,whileoperator1loadsmachineC.TheoperatorsunloadmachinesAandBassoonastheyarefinished,andthentheyreloadthemachines.MachineChastowaittobeunloadeduntilanoperatorisfree.Thechartfollowstheseactivitiesforthefirsthour,atwhichpointbothoperatorshavebeenidlefor8minutes,andthethreemachineshavebeenidlefor0,4and10minutes.Someofthisidletimewasneededtogetthingsgoingatthestartoftheday,soitdoeslookasifthenewarrange-mentwillwork.Wecouldconfirmthisbyfollowingtheactivitiesforalongerperiod.IMPROVINGPERFORMANCEBenefitsofbetterperformanceOrganisationsworkwithcontinualchange.Products,competitors,costs,markets,locations,infrastructure,employees,customers,theeconomy,thebusinessenvironment,companyobjectives,technology,shareholders,andjustabouteverythingelsechangesovertime.Iforganisationsdonotrespondtothesechanges,theygetleftbehindbymoreflexiblecompeti-tors.Theargumentisthatcompetitorsarealwaystryingtogetanadvantagebyimprovingtheirownsupplychains,soeveryorganisationhastokeepimprovingjusttostayinthesameplace.Sothemainbenefitsofbetterlogisticsinclude:●long-termsurvival●lowercosts●increasedprofits,wages,realincome,andsoon●improvedcompetitivenessandgrowth●betterjobsecurityandstaffinvolvement●betteruseofavailableskills●lesswasteofresources●realistictargetsforimprovingperformance●monitoringimprovingperformance●allowingcomparisonsbetweenoperations●measuringmanagementcompetence.Buthowdowemakesurethatourlogisticscontinuetochangeandimprove?Thebestansweristodevelopanorganisationalcommitmenttoimprovement–acceptingthatcontinualchangeisinevitable,necessaryandbeneficial.Wedevelopaculturethatwelcomesandencour-agesimprovement.Ofcourse,asupportiveculturedoesnotnecessarilygeneratenewideas,sowestillneedsomewayoflookingatthesupplychainandfindingwaystoimproveit. 216LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTItmightseemfairlyeasytospotwaysofimprovingasupplychain.Asyoulookaround,youcontinuallyseethingsthatcouldbedonebetter–poorroadlayouts,enquirydeskswithlongqueues,transportthatisnotpunctual,productsthataretooexpensive,staffwhoarepoorlytrained,longwaitsforappointments,unhelpfulservice,andsoon.Organisationscouldeasilyimprovethese.Inprinciple,managersshouldseizeeverychanceforimprovement,buttheyseemhappytocontinuewiththeirold,inefficientmethods.Whyisthis?Inpracticetherearemanyexplanations.Managersmayhavetriedtoimprovethingsinthepast,failed,becomedisillusionedandnotwanttorepeatsimilarexperiences.Moreoftenthereisnoincentiveforthemtochange,ortheylackauthoritytopushthroughreforms.Theymaynothavethetimeforthenecessaryinvestigation,ornotseetheneed,ornotlikechange,ornotknowhowtoimprovethings,orthinkthatchangeswouldbetooexpensiveanddifficulttoimplement,orclaimthattheycannotmeasureperformance.ThisprobablyaccountsforRobertTownsend’sobservationthat8‘Allorganisationsareatleast50%waste–wastepeople,wasteeffort,wastespaceandwastetime.’Beesley9–11goesfurtherandsaysthat:‘IntypicalUKmanufacturingsupplychainsatleast95%oftheprocesstimeisaccountedasnon-valueadding.’Thiscertainlysuggeststhatthereareopportunitiestomakethingsbetter.FindingimprovementsTherearenumeroussuggestionsforimprovinglogistics.Aswesawwhendesigningalogisticsstrategy,manyoftheseadoptgeneralthemes,suchastotalqualitymanagement,increasingtechnology,leanoperations,emphasisinghumanresources,timelyoperations,controllingmaterialsflow,alliances,improvedcommunications,andsoon.Oneclearpointfromthesethemesisthattheoldfashionedideaof‘gettingpeopletoworkharder’hasverylittletodowithperformance.Ahard-workingpersonwithaspadeisfarlessproductivethanalazypersonwithabulldozer.About85%ofperformanceissetbythesystemthatisdesignedbymanagement;only15%isunderthecontrolofindividualemployees.Ifthingsaregoingwell,itislargelybecausethemanagersaredoingagoodjob:ifthingsaregoingbadly,itisprobablythemanagerswhoaretoblame.Wehavealreadysuggestedusingbenchmarkingandprocesschartstohighlightareasforimprovement.Anotherobviousapproachistoaskpeoplemostcloselyinvolvedinlogisticsfortheirsuggestions.Theymayalreadyhaveastringofsuggestions,orcouldquicklyfindsome.Unfortunately,thesepeoplemaybereluctanttosuggestimprovements.Theymaybesocloselyinvolvedwiththedetailsoftheirjobthattheysimplydonotnoticebetteroptions.Andiftheydofindimprovements,thereistheunpleasantsuggestionthattheyhavebeendoingthingsbadlyinthepast.Amorepressingproblemisthatpeoplewhoknowhowtomakeimprovementsdonothavetheauthoritytomakethechangesthemselves,andareneveraskedfortheiropinionbythosewhocouldchangethings.Inprinciple‘empowerment’andrelatedideasshouldovercomethisproblem.Oftensimplerulesofthumbcanimprovelogistics.Thesemakegeneralsuggestions,like,‘reducethefrequencyofdelivery’,‘chargeapremiumforsmalldeliveries’,‘dovalueaddingactivitiesforcustomers’,‘usetheWeb’,‘usethirdpartiesfornon-corebusiness’,‘reducestocklevels’,‘makesurethewarehouseistidy’,andsoon.Thesecanfocusonareasthatcommonlycauseproblemsinlogistics.Wehavemetthisapproachbefore,withtheexperienceofToyotawhofoundthatthefollowingsixareascausedmostconcern.12●Quality–thatistoopoortosatisfycustomers●Productionlevel–makingproducts,orhavingcapacity,thatisnotcurrentlyneeded MEASURINGANDIMPROVINGPERFORMANCE217●Processing–havingunnecessary,toocomplicatedortime-consumingoperations●Waiting–foroperationstostartorfinish,formaterials,repairs,andsoon●Movement–withproductsmakingunnecessary,long,orinconvenientmovementsduringoperations●Stock–toomuchstockthatneedsstoringandraisescosts.AdifferentviewcomesfromDevonshire13whosuggeststhatinformationprocessingisthekey,sayingthat,‘thereisadirectlinkbetweentheperformanceofsupplychainsandthequalityofavailableinformation–indeed,insomeapproachestomakingsupplychainsmoreefficient,stockissaidtobereplacedbyinformation.’Thesesuggestspecificareastofindimprovements(likeEmmett14),butitmightbebettertouseamoregeneralapproachandtalkaboutprinciples.Forexample,Sordy15suggeststhatlogisticscanbeimprovedbyaimingforfiveprinciples:1.Balance,givingasmoothflowofmaterialsthroughthechain2.Location,withalloperationsinthebestpositions3.Minimise,usingtheleastamountofhandling,distancetravelledandcost4.Simplify,tomakeeverythingassimpleaspossible5.Communicate,asagoodinformationflowgivesgoodmaterialflow.Wheatley16usesaslightlydifferentapproach,givingthegeneraladvicetoreducethenumberofparticipantsinlogistics(numberofsuppliers,andsoon),eliminateactivitiesandresourcesthatdonotaddvalue,useEDI,focusoncustomerneeds,usetheInternet,benefitfromcollab-orationanddevelopthesupplychainintoavirtualfactory.Whereverwelookforimprovements,weneedsomegeneralprocedurefortacklingtheproblems.Inotherwords,weneedtodesignastructureforourlogisticimprovementprojects.WehavealreadymentionedonepossiblestructureinChapter4whenwedescribedaplan–do–check–actcycle.Thishasateamofpeoplewhosejobistogoaroundandpositivelysearchforthingsthatcouldbedonebetter,usingthecycle:●plan–lookingattheexistinglogistics,collectinginformation,discussingalternatives,andsuggestingaplanforimprovement●do–wheretheplanisimplemented,anddataiscollectedonperformance●check–whichanalysestheperformancedatatoseeiftheexpectedimprovementsactuallyappeared●act–iftherearerealimprovementsthenewproceduresaremadepermanent,butiftherearenoimprovements,lessonsarelearntandthenewproceduresarenotadopted.Theteamiscontinuouslylookingforimprovements,andatthispointtheyreturntothebeginningofthecycle,andstartlookingformoreimprovements.Otherpeopleusedifferentapproaches.Areasonableoneformostproblemshasthefollowingsteps:1.Makeeveryoneawarethatchangesareneededtothesupplychain,describingthereasons,alternativesandlikelyeffects.2.Examinecurrentpractices,identifytheiraims,seehowwelltheyachievetheseandiden-tifyproblemareasandweaknesses.3.Usebenchmarkingandothercomparisonstoidentifypotentialimprovementsandimprovedmethods.4.Designbetterproceduresusingtheknowledge,skillsandexperienceofeveryoneconcerned. 218LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT5.Discusstheproposalswidelyandgetpeoplecommittedtothenewmethods.6.Designadetailedplanforimplementingtheimprovements,anticipatinglikelyproblemsratherthanwaitingforthemtohappen.7.Makeanynecessarychangestotheorganisation’sstructure,systems,facilities,andsoon.8.Giveappropriatetrainingtoeveryoneinvolved.9.Setchallenging,butrealistic,goalsforeveryone,andmakeitclearhowthesecanbeachieved.10.Haveaspecificeventtostartthenewmethods.11.Establishmilestonesandmonitorprogresstomakesuretheyareachieved.12.Givesupportandencouragementtoeveryoneconcerned.13.Havecontinuingdiscussionsaboutprogress,problems,adjustments,andsoon.14.Monitorandcontrolprogresstomakesurethateverythingcontinuestogoasplanned,remaincommittedtothenewmethodswhiletheyaregivingimprovements,andupdatethemasnecessary.15.Acceptthatthenewmethodsareonlytemporary,andcontinuallylookforfurtherimprovements.Thisseemsaratherformallist,butitisbasedonsimpleprinciples–analysingwherewewanttogoandhowwecangetthere.Animportantpointisthattheprocedureusescontinuousimprovement.Whennewmethodsareintroduced,wehavetorecognisethattheyareonlytemporary,andwillbereplacedagaininthefuture.Thisgenerally–butnotinevitably–involvesastreamofrelativelyminorchangesthatcaneasilybeabsorbedbytheorganisation,givefewdisruptions,andcausenomajorproblems.Thereislittlerisk,asanysmallchangethatdoesnotworkcaneasilybereversed.Thisincrementalapproachtochangebuildsamomentumforimprovement,andmakessurethatlogisticsisalwaysgettingbetter.Remember,though,thattheincrementalapproachhascriticswhosaythatcontinuallytinkeringwiththesupplychainiscounter-productive.Theyaremorelikelytorecommendaradicalapproachsuchasbusinessprocessre-engineering.LOGISTICSINPRACTICEHebblethwaiteLtdGeorgeHebblethwaiterunsasmallware-Fixedcosts%Variablecosts%houseandtransportcompanydistributingWages35Fuel54arangeofcampingequipmentinnorthernDepreciation27Maintenance19Britain.HewaskeentoimprovecompanyManagement22Tyres24performanceandcollecteddata(seetable)Insurance12Oil5oncostsfortransportandwarehousing.Licences4(a)Transportfleetoperationslargelyfixed–sohisfirststudylookedforGeorgeeasilyidentifiedtheareaswhereheimprovementsintheactivitiesforwhichhecouldlookforimprovements.Hegotpaidgotnopay.Specifically,helookedforformovingvehicles,buthiscostswereimprovementsintheloading,unloading MEASURINGANDIMPROVINGPERFORMANCE219LOGISTICSINPRACTICEcontinuedandidletimes(astrucksspendanaverageofTotaltime%Ofpickingtime%58%oftheirtimeidle).17TheotherareaheReceiving18Travel58focusedonwasvehicleroutes.Ingeneral,materialsthevariablecostsrisewithdistance,buttheyPuttingon11Picking31shelvesalsovarywithconditionssuchascongested,Picking39Checking8urbanandhillyareasthatreducespeedsandDespatching23Other3increasefuelconsumption.Other9(b)Warehouseoperations:Pickingwasclearlymosttimeconsuming,Wages58%andthenmorethanhalfofthepickingtimeBuildings23%wasspentmovingaround.GeorgefeltthatEquipment19%thiswasanotherplacewithlargepotentialThecostofwagesinthewarehousewassavings.particularlyhigh,soGeorgeanalysedpeo-ple’sactivitiesandfoundtheproportionofSources:companyreports;HebblethwaiteG.(2001)WesternOperationsGroup,Leedstheirtimethattheyspentdoingcertainactivities.❑Organisationsmustcontinuallyimprovetheirlogisticstoremaincompetitive.Thismeansthatmanagersineveryorganisationhavetomeasuretheperformanceoftheirsupplychains.❑Withoutthesemeasuresmanagershavenoideahowwelltheirlogisticsis■■■■■working,howtheycomparewithcompetitors,howperformancehaschangedovertimeorwhatcanbeimproved.❑Thereisahugenumberofpossiblemeasuresforthesupplychain.Manyoftheseareindirectandbasedonfinance.Itis,however,importanttohavesomedirectmeasuresoflogistics.❑Generalmeasuresincludecapacity,utilisation,andproductivity.Therearemanyotherspecialisedmeasuresfortransport,warehousingandotherpartsoflogistics.Anorganisationhastotakeabalancedviewofthesetogetanoverallview.❑Performancemeasuresareoftenusedforcomparisons.Thisisthebasisofbenchmarking,whichcomparesanorganisation’slogisticswiththebestperformanceintheindustry.CHAPTERREVIEW 220LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT❑Wecandescribetheactivitiesinasupplychainusingavarietyofdifferent■■■charts.Thesehighlightareasthatneedimproving.❑Thereareseveralwaysthatanorganisationcanapproachimprovement.Itmightfocusonspecificareasthatcommonlycauseproblems,oritmightuseaparticularprocedure.Wedescribedageneralapproachtoimprovement.continuedCASESTUDYEd’sDrive-throughBottleShopEd’sDrive-throughBottleShopsellsalcoholicdrinksinBrisbane,Australia.Thepricesarelowandthe‘drive-through’shopisbusy.Customersacceptsomedelaystogetcheapdrinks,butatbusyperiodsthemanagersawthathewaslosingcustomers.Thebasicplanoftheshophasasinglelineofcarsdrivingpastaservicewindow(customerscanparkandvisittheshopasnormal,butrelativelyfewdothis).Theobviouswayofreducingthedelaysistohavemoreservicewindowsworkinginparallel,butthesiteisratherlongandnarrow,sothisisdifficult.Themanagerdecidedtotryanumberofimprovements,suchasdividingtheserviceintoseveralparts.Hefoundthedistributionsoftimesforvariousoperations,andthenusedaspreadsheettosimulateanumberofoptions.Figure8.11givesanideaofhisapproach.Forthisheputthreeserversinseries.Thefirstserver,A,tookthecustomer’sorder,thesecond,B,lookedafterthebillandpayment,andthethird,C,deliveredthegoods.Thespreadsheetfollowstencustomersthroughtheprocess.Itgeneratestimesforeachactivity(randomlygener-atedtofollowactualdistributions),andshowshowtheprocessperformsduringatypicalshortperiod.Behindtheshopisanareaofbulkstorage.Mostordersaredeliveredbyeightwholesalers,whogenerallymakeonedeliveryaweek.Sometimesstocksrunlow,andthemanagerarrangesaspecialdelivery.Anothertwentysmallersuppliersdeliverspecialgoodsormakespecialdeliverieswhenthereareproblems.Tomakeadministrationeasy,themanageralwaysusesastandardorderforeachsupplier.Everyweekhetakesthestandardorders,adjuststhemiftherehasbeenanyunusualdemand,andpreparesforspecialeventssuchaslocalfootballmatches.Thenhefaxestheorderstosuppliers,andtheinvoicesaredeliveredwiththegoods. MEASURINGANDIMPROVINGPERFORMANCE221ABCDEFGHIJ1CustomerABCJoinStartJoinStartJoinStart2queueserviceLeavequeueserviceLeavequeueserviceLeave3418.458.478.518.528.559.009.019.029.04528.458.518.538.539.009.019.029.049.07638.588.589.019.029.079.099.109.109.13749.009.019.049.059.099.109.119.139.16859.059.059.069.069.109.139.139.169.18969.209.209.219.219.219.239.239.239.251079.209.219.249.259.259.289.299.299.331189.229.249.269.279.289.309.309.339.351299.259.269.299.309.309.349.359.359.3813109.259.299.329.339.359.389.399.399.441415Analysis16Numberofcustomers1017TimeinqueueA2.10ServicetimeA2.5018TimeinqueueB6.30ServicetimeB-1.9019TimeinqueueC1.20ServicetimeC2.402021Timeinqueues6.00Timebeingserved7.4022Timeinsystem15.20Figure8.11PartofasimulationforEd’sDrive-throughBottleShopCASESTUDYQuestions●Howdoyouthinkthemanagercanmeasuretheperformanceoftheshop?●Whereshouldhestartlookingforimprovements?●Howcanhedescribethedetailsoftheoperations?PROJECTQualityofLogisticsTakeacriticallookaroundyouandseeifyoucanseeexamplesofpoorlogistics.Youmightfind,forexample,thatatrainiscancelled,abusarrivesatthewrongtime,adeliveryofgoodsarrivesafterthepromisedtime,ashoprunsoutofaproductthatyouwant,atowncentreispoorlylaidout,andsoon.Whatcouldyoudotoimprovetheseoperations?Whydoyouthinkthatnoonehasmadetheseobvi-ousimprovements? 222LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROBLEMS1.Intwoconsecutiveyearsawarehousehadthefollowingcharacteristics:Year1Year2Weightofmaterialsmoved5000tonnes6500tonnesNumberoforderssatisfied16501820Numberofstock-outs8753Averagevaluestocked£254,000£287,000Costofadministration£60,000£76,000Hoursworked12,00015,000Directcosts£115,000£173,000Energyused20,000kWh24,000kWhEnergycost£2000£3000Whatcanyousayabouttheperformanceofthewarehouse2.Theactivitiesofaninsurancebrokercanbedescribedbythefollowingtable.Drawaprecedencediagramoftheprocess.ActivityMustbedoneafter1–21314152,364728596107,8119,103.Qualityinspectorsinacompanytakerandomsamplesofmaterialsarrivingfromsuppliers.Aninspec-tioninvolvesthreeseparatetests,eachofwhichusesadifferenttypeofmachine.Therearetwomachinesofeachtype.Eachtesttakessixminutesforassessment,followedbyfourminutesforfineadjustment.Therearethreeinspectorsworkinginthearea.Drawaprocesschartfortheinspectionarea.Howmanyunitscanbeinspectedeachhour?DISCUSSIONQUESTIONS1.‘Whatyoucan’tmeasureyoucan’tmanage.’Towhatextentdoyouthinkthisistrue?2.Managerscanbetemptedtousetheeasiestmeasuresofperformance,orthosethatshowthemselvesinthebestlight.Whataretheconsequencesofthis?Canyougiveexamplesofproblemsthiscreates? MEASURINGANDIMPROVINGPERFORMANCE2233.Whatarethemostappropriatemeasuresofperformanceforasupplychain?4.Performancemeasurescangiveconflictingviews–changesthatimprovesomemeasures,makeothersworse.Howcanyoudecidewhethertheoveralleffectisbeneficialornot?5.Itiseasytofindimprovementsinanysupplychain.Sowhyhavethemanagersnotalreadymadethem?6.Continuousimprovementisnotreallyusefulasitjusttinkerswithexistingoperationsanddoesnotlookforsignificantgains.Towhatextentdoyouthinkthisistrue?REFERENCES1.HarrisonA.andNewC.(2002)Theroleofcoherentsupplychainstrategyandperformancemanagementinachievingcompetitiveadvantage,JournaloftheOperationalResearchSociety,53(3),263–71.2.FerreiraJ.A.(1993)Re-engineeringthematerialsandprocurementfunction,APICS–ThePerformanceAdvantage,October,48–53.3.LennoxR.B.(1995)Customerservicereignssupreme,MaterialsManagementandDistribution,January,17–19.4.ColdStorageandDistributionFederation(2000)KeyPerformanceIndicators,CSDF,Bracknell.5.ChaplenA.andWignallJ.(1997)Sainsbury’schecksoutbenchmarking,LogisticsFocus,5(9),13–14.6.WatersD.(2001)OperationsManagement,FinancialTimes/PrenticeHall,Harlow.7.BruntD.(1999)Valuestreammappingtools,LogisticsFocus,7(2),24–31.8.TownsendR.(1970)UptheOrganisation,CoronetBooks,London.9.BeesleyA.(1995)Timecompression–newsourceofcompetitivenessinthesupplychain,LogisticsFocus,3(5),24–5.10.BeesleyA.(1995)Timecompressiontools,LogisticsFocus,3(7),17–20.11.BeesleyA.(2000)Timecompressioninthesupplychain,Ch.11inWatersD.(ed.)GlobalLogisticsandDistributionPlanning,KoganPage,London.12.MondenY.(1983)ToyotaProductionSystem,IndustrialEngineeringandManagementPress,Norcross,GA.13.DevonshireR.M.(1996)Supplychaininformation,LogisticsFocus,4(5),29–31.14.EmmettS.(2000)Improvingfreighttransportandwarehouseoperations,LogisticsandTransportFocus,2(2),30–4.15.SordyS.(1997)Doyouhaveanyprinciples?,LogisticsFocus,5(8),19.16.WheatleyM.(1998)Sevensecretsofeffectivesupplychains,ManagementToday,June,pp.78–87.17.McKinnonA.(1999)Theeffectoftrafficcongestionontheefficiencyoflogisticaloperations,InternationalJournalofLogisticsResearchandApplications,2(2).FurtherreadingArmisteadC.andRolandP.(1996)ManagingBusinessProcesses:BPRandBeyond,JohnWiley,Chichester.BerryL.G.(1995)GreatService,FreePress,NewYork.HammerM.(1996)BeyondReengineering,HarperCollins,NewYork.LeibfriedK.H.J.andMcNairC.J.(1992)Benchmarking:AToolforContinuousImprovement,HarperCollins,NewYork. PARTIIIActivitiesintheSupplyChainThisbookisdividedintothreeparts.PartIgaveageneralintro-ductiontothesubjectofsupplychainmanagement;PartIIdiscussedtheplanningneededforasupplychain;andPartIIIfocusesonsomespecificfunctionsoflogistics.TherearefivechaptersinPartIII,eachofwhichdescribesamajoractivityinthesupplychain.Chapter9looksattheprocurementofmaterials.Materialsarekeptinstock,soChapter10describesinventorymanagement,whileChapter11discussessomequestionsofwarehousing.Chapter12describesthetransportofmaterialsandChapter13looksatissuesofinternationallogistics.Thisisthelastpartofthebook,whichrelatestoourearlierdiscussionsonspecificactivitiesinthesupplychain. CHAPTER9ProcurementCONTENTS■Aimsofthechapter■Casestudy–ArnoldHaralson■Definitions■Project–Howtobuy■Choosingsuppliers■Discussionquestions■Procurementcycle■References■Typesofpurchase■Furtherreading■ChapterreviewAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■DEFINEtheroleofprocurement■APPRECIATEtheimportanceofprocurementinthesupplychain■CHOOSEanappropriatesupplier■DISCUSSthestepsinaprocurementcycle■DESCRIBEe-procurementanditsadvantages■TALKaboutdifferentarrangementsforpurchasing 228LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTDEFINITIONSPurchasingandprocurementInpreviouschapterswehavedescribedtheplanningofasupplychain.Thisstartswithstrategicaims,andmovesdowntoorganisetheflowofmaterials,makessurethatresourcesareavailable,andcontinuallylooksforbettermethods.Butwehavenotreallydiscussedthemech-anismforinitiatingtheflowofmaterials.Thisisprovidedbypurchasingorprocurement.Inasupplychain,eachorganisationbuysmaterialsfromupstreamsuppliers,addsvalue,andsellsthemtodownstreamcustomers.Aseachorganisation,inturn,buysandsells,thematerialsmovethroughthewholesupplychain.Thetriggerthatinitiateseachmoveisapurchase.Thisisbasicallyamessagethatanorganisationsendstoasupplier,saying,‘wehaveagreedonterms,sosendusmaterialsandwewillpayyou’.PURCHASINGgivesamechanismforinitiatingandcontrollingtheflowofmaterialsthroughasupplychain.Purchasingisthefunctionresponsibleforacquiringallthematerialsneededbyanorgani-sation.Manyofthesetransactionsarenotstandardpurchases,butincluderental,leasing,contracting,exchange,gifts,borrowing,andsoon.Thisiswhysomepeopleprefertotalkaboutthe‘acquisitionofmaterials’orthemorecommontermofprocurement.‘Procurement’and‘purchasing’areoftentakentomeanthesamething.Usually,though,purchasingreferstotheactualbuying,whileprocurementhasabroadermeaning.Itcanincludedifferenttypesofacquisition(purchasing,rental,contracting,andsoon)aswellastheassociatedworkofselectingsuppliers,negotiating,agreeingterms,expediting,monitoringsupplierperformance,materialshandling,transport,warehousingandreceivinggoodsfromsuppliers.■PROCUREMENTisresponsibleforacquiringallthematerialsneededbyanorganisation.■Itconsistsofalltherelatedactivitiesneededtogetgoods,servicesandanyothermaterialsfromsuppliersintoanorganisation.Procurementdoesnotusuallymovematerialsitself,butitorganisesthetransfer.Itgivesthemessagethatmaterialsareneeded,andarrangesthechangeofownershipandlocation.Butitisanotherfunction,suchastransport,thatactuallydeliversthem.Soprocurementislargelyconcernedwithinformationprocessing.Itcollectsdatafromvarioussources,analysesit,andpassesinformationtothesupplychain.ImportanceofprocurementYoucaneasilyseewhyprocurementisimportant.Ifwetakeabroadview,procurementformsanessentiallinkbetweenorganisationsinthesupplychain,anditgivesamechanismforco-ordinatingtheflowofmaterialsbetweencustomersandsuppliers.Ateverypointinthesupplychain,procurementpassesmessagesbackwardstodescribewhatcustomerswant,anditpasses PROCUREMENT229messagesforwardstosaywhatsuppliershaveavailable.Thenitnegotiatestermsandcondi-tionsfordelivery.Ifwetakeamorelimitedview,procurementisclearlyanessentialfunctionwithineveryorganisation.Weknowthateveryorganisationneedsasupplyofmaterials,andprocurementisresponsiblefororganisingthis.Ifprocurementiscarriedoutbadly,materialsdonotarrive,orthewrongmaterialsaredelivered,inthewrongquantities,atthewrongtime,withpoorquality,attoohighprice,lowcustomerservice,andsoon.Youcangetafeelfortheimportanceofprocurementfromthefollowingexample.InthefirsthalfofthetwentiethcenturyfarmersintheUSprairiescouldbefairlyisolated.SearsRoebuckintroducedanewwayofbuyingthatgavefarmersthesameaccesstoproductsastherestofthepopulation.LOGISTICSINPRACTICESearsRoebuckSearsRoebuckisamajorretailerintheTheyhavemaintainedthistradition,andUnitedStates.Foundedin1886itnowhasstilladvertise,‘Satisfactionguaranteedorannualrevenuesofover$40billion.Muchyourmoneyback’.ofitsearlygrowthwasbasedondeliveringAccordingtoAckermanandBrewer1thisgoodstofarmersintheremoteprairies.Inkindofmailorderbusinesshassome1913itscataloguecontained1500pages,importantfeaturesforlogistics:withthousandsofitemsrangingfrom■logisticsprovidershavedirectcontactboxesofmatchestocompletehouses.Peo-withcustomerspleinanylocationcouldposttheirorders■thisdirectcontactallowsmorepreciseorsendthemtoagents,andhavegoodsorderingdeliveredbypostortrain.Theircustomers■anefficientsystemforexchanginginfor-werealwayssatisfied,asthecompanygavemationisessentialacomprehensiveguaranteeontheircata-■ordersaresmallerthannormalloguecover:■customersaremoredemandingandIfforanyreasonwhatsoeveryouweredis-wantbetterservicesatisfiedwithanyarticlepurchasedfrom■transportismorecomplicated.us,weexpectyoutoreturnittousatourexpense.WewillthenexchangeitforSources:promotionalmaterial,companyreportsandwebsiteatwww.sears.comexactlywhatyouwantorwillreturnyourmoney,includinganytransportationchar-gesyouhavepaid.Notonlyisprocurementessential,butitisalsoresponsibleforalotofexpenditure.Foratypicalmanufacturer,60%ofitsspendinggoesonmaterials,withcompanieslikeGeneralMotorsspendingover$50billionayear.Soprocurementisdirectlyresponsibleformostofa 230LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTcompany’sspending,andarelativelysmallimprovementcangivesubstantialbenefits.Supposethatacompanybuysrawmaterialsfora60,spendsa40onoperationsandthensellstheproductfora110.Itclearlymakesaprofitof110–(60+40)=a10aunit.Nowsupposethatprocurementnegotiatesa5%discountonmaterials.Materialsnowcost60×0.95=a57,andwiththesamesellingpricethea3savinggoesstraighttoprofit.Theprofitoneachunitnowjumpstoa13,soa5%decreaseinmaterialscostsraisesprofitby30%.WORKEDEXAMPLELastyearWiesiekLimitedhadtotalsalesof£108million.Theirdirectcostswere£58mil-lionformaterials,£27millionforemployeesand£12millionforoverheads.Whatistheeffectofreducingthecostofmaterialsby1%?Ifmaterialscostsarenotreduced,howmuchwouldsaleshavetoincrease,oroverheadsfall,togetthesameeffect?Solution■Theactualprofitlastyearwas108–(58+27+12)=£11million.■Ifthecostofmaterialsdropsby1%,itfallsto58×0.99=£57.42million.Thentheprofitrisesto108–(57.42+27+12)=£11.58million.A1%decreaseinmaterialscostsincreasesprofitsby5.3%.Profitasapercentageofsalesrisesfrom10.2%to10.7%.■Ifmaterialscostsdonotchange,andassumingthatothercostsremainthesameproportionofsalesvalue,thensaleswouldhavetoriseby5.3%to£114milliontogetthesameincreaseinprofit.■Togetthesameextraprofitthefixedcostswouldhavetofallby£0.58millionor4.8%.Inrecentyearstherehasbeenwiderrecognitionofprocurement’spositionasanessentialfunctionthatcancontrolmostofanorganisation’sexpenditure.Asaresult,thefunctionhasreceivedalotmoreattention.Itusedtobeconsideredlittlemorethanaclericaljob,buyingmaterialsastheywererequested.Nowitisrecognisedasanimportantmanagementfunctioninitsownright.Thistrendhasbeenencouragedbychangingpatternsofprocurement.SupplychainsaregettingshorterasmorecustomersusetheWeboravoiddifferenttiersofsuppliers;alliancesarereducingthenumberofsuppliersusedbyeachorganisation;amountspurchasedareincreasingascompaniesfocusontheircoreactivitiesandoutsourcingmore;customersaremoredemandingofproductsandconditionsofpurchase.These,andotherfactors,turnaspotlightonprocurement.Withthiscontext,itisnotsurprisingthatprocurementistreatedasaseniormanagementrole. PROCUREMENT231AimsofprocurementTheoverallaimofprocurementistoguaranteethatanorganisationhasareliablesupplyofmaterials.Withthisoverridingaim,wecandevelopthefollowinglistofmoreimmediategoals:●organisingareliableanduninterruptedflowofmaterialsintoanorganisation●workingcloselywithuserdepartments,developingrelationshipsandunderstandingtheirneeds●findinggoodsuppliers,workingcloselywiththemanddevelopingbeneficialrelationships●buyingtherightmaterialsandmakingsurethattheyhaveacceptablequality,arriveatthetimeandplaceneeded,andmeetanyotherrequirements●negotiatinggoodpricesandconditions●keepingstockslow,consideringinventorypolicies,investment,standardandreadilyavailablematerials,andsoon●movingmaterialsquicklythroughthesupplychain,expeditingdeliverieswhennecessary●keepingabreastofconditions,includingpendingpriceincreases,scarcities,newproducts,andsoon.OrganisationofprocurementThewaythatprocurementisorganisedclearlydependsonthetypeandsizeoftheorganisation.Inasmallorganisation,asinglebuyermightberesponsibleforallpurchases,policyandadmin-istration.Amedium-sizedorganisationmighthaveadepartmentwithbuyers,expeditors,store-keepers,andclerks.Alargeorganisationmighthavehundredsofpeopleco-ordinatinghugeamountsofpurchases.Usuallyprocurementisorganisedasasingledepartmenttogetthebenefitsofcentralisedpurchasing.Thesebenefitsinclude:●consolidationofallordersforthesame,andsimilar,materialstogetquantitydiscounts●co-ordinatingassociatedactivitiestoreducecostsoftransport,stockholdingandadministration●eliminatingduplicatedeffortandhaphazardpractices●havingasinglepointofcontactforsuppliersandgivingthemconsistentinformationandservice●developingspecialisedskillsandimprovingprocurementoperations●allowingotherpeopletoconcentrateontheirownworkwithoutdivertingintopurchasing●concentratingresponsibilityforprocurement,makingmanagementcontroleasier.Thesebenefitscanbeconsiderable,butcentralisedpurchasinghasitscritics.IfyouworkinanofficeinLeeds,itseemsnonsensicaltocontactyourpurchasingdepartmentinMiltonKeynes(450kmaway)tobuymaterialsfromasupplierinBradford(20kmaway).Nonetheless,thissystemshouldgiveoverallbenefits.However,organisationsthatworkoverawidegeograph-icalareaareawareoftheproblemsofcentralisedpurchasing,andmayuselocalpurchasing.Thiscan,ofcourse,bringitsownbenefits.Localofficesarelikelytohavebetterknowledgeoflocalconditionsandculture,betterrelationswithsuppliers,moreflexibleoperations,lowertransportcosts,andsoon. 232LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICECNRailwayCanadianNationalRailways(CN)usedtowhocouldsupplyalltheirmainpurchases,haveatraditionalpurchasingandmaterialsandthencomparingthecompanies’abilitymanagementdepartment.Atthebeginningtoformproductivepartnerships.BobGal-ofthe1990sthisemployed1400peopleinlantexplainedthattheywere‘lookingfora60locations.Thedepartmenthadbeensuc-supplierthatcouldprovideuswithatotalcessfulinloweringprices(byupto35%)package.Wealsowantedtoworkwithathroughalliancesandvolumepurchasing.companythathadacommonviewandDespitethis,thecompanyfeltthatitcouldmanagementcommitment’.improveprocurementperformance.BobThetransitiontonewprocurementandGallant,headofsupplymanagementatCN,changingculturewasdifficultforadepart-saidthattherewasastrongpushforbettermentthatserved23,000employees.Theyperformanceattherailwayandthat:‘Pur-changedthedepartment’sname,ranachasingisoneofthemostpowerfulwaystoseriesofseminarsandworkshopstoexplainenhanceeconomicperformance.’thenewphilosophy,hiredoutsidepeople,CN’straditionalapproachwastobuyformedalliancesandactivelysearchedforeachmaterialfromthebestsupplier,nego-newideas.Themostdifficultpartwascon-tiatingforthelowestprice.Buttheyfoundvincingpeoplethattheywereaimingforthattheycouldgetloweroverallcostsbythelowestoverallcost,ratherthanthepurchasingfromafewmaindistributors,cheapestimmediateprice.ratherthanfromseparatecompanies.InBy1995CNhadreducedtheirsupplySeptember1994,forexample,theymanagementdepartmentto280peopleinstoppeddealingindividuallywith500geo-25locations,thetotalcostofmaterialspur-graphicallydispersedsuppliersinwesternchasedbyC$14millionandstocksbyC$4Canada.Instead,theyformedanalliancemillion.ThefollowingyeartheylookedforwithAcklands,amajordistributorwhoreductionsofC$40millionincostsandbecameresponsibleforco-ordinatingtheseC$34millioninstock,withsimilarimprove-supplies.CNreplaced6000annualinvoicesmentsin1997.byasinglemonthlybillandreducedcostsSource:Anon.(1996)Buyingpower,MaterialsbyC$1.2millionayear.ManagementandDistribution,February,43–5TheychoseAcklands,andotherdistribu-tors,byformingashortlistofcompaniesCHOOSINGSUPPLIERSQualifiedsuppliersArguably,themostimportantpartofprocurementisfindingtherightsupplier.Thereisnopointinhavingawell-designedproduct,ifthesuppliercannotactuallydeliverit.Imaginethat PROCUREMENT233youareworkingonaprojectandwanttobuysomeimportantmaterials–perhapsaprefabri-catedbridgeforaconstructionproject.Youwilllookfortwofactors.First,aproductdesignthatsatisfiesyourneeds.Second,asupplierwhocanguaranteetodelivertheproductasdesigned.Inotherwords,thesuppliermustbecapableofdoingthework,givinghighquality,workingtoaschedule,withacceptablecosts,andsoon.Anadvertisedtimeoffourhoursforatrainjourneymightseemagoodservice,butithaslessvalueifthetrainoperatorcannotactu-allydeliverthis.Procurementstarts,then,byfindingaqualifiedsupplier.Thisisonewhocanactuallydeliverthematerialsneeded.Ingeneral,organisationslookforsupplierswho:●arefinanciallysecurewithgoodlong-termprospects●havetheabilityandcapacitytosupplythenecessarymaterials●accuratelydelivertherequestedmaterials●sendmaterialsofguaranteedhighquality●deliverreliably,ontimewithshortleadtimes●quoteacceptablepricesandfinancingarrangements●areflexibletocustomers’needsandchanges●areexperiencedandhaveexpertiseintheirproducts●haveearnedagoodreputation●useconvenientandeasyprocurementsystems●havebeenusedsuccessfullyinthepastandcandeveloplong-termrelationships.Indifferentcircumstances,manyotherfactorsmightbeimportant,suchasconvenientloca-tion,abilitytodealwithvariabledemand,andsoon.Mostorganisationshavealistofapprovedsupplierswhohavegivengoodserviceinthepast,orwhoareotherwiseknowntobereliable.Ifthereisnoacceptablesupplieronfile,theorganisationhastosearchforone.Suppliersforlowvalueitemscanprobablybefoundintradejournals,cataloguesorthroughbusinesscontacts.Moreexpensiveitemsneedathoroughsearch,andthiscanbeverytimeconsuming.Ausefulapproachforchoosingthebestsupplierforaproducthasthefollowingsteps:●Lookforalternativesuppliers●Buildalonglistofqualifiedsupplierswhocandelivertheproducts●Compareorganisationsonthislonglistandeliminatethosewhoare,foranyreason,lessdesirable●Continueeliminatingorganisationsuntilyouhaveashortlist(usuallyfourorfive)ofthemostpromisingsuppliers●Prepareanenquiry,orrequestforquotation,andsendittotheshortlist●Receivebidsfromtheshortlist●Doapreliminaryevaluationofbidsandeliminatethosewithmajorproblems●Doatechnicalevaluationtoseeiftheproductsmeetallspecifications●Doacommercialevaluationtocomparethecostsandotherconditions●Arrangeapre-awardmeetingtodiscussbidswiththeremainingsuppliers●Discussconditionbids,whicharespecificconditionsthathavetobeagreed●Choosethesupplierthatismostlikelytowintheorder●Arrangeapre-commitmentmeetingtosortoutanylastminutedetails●Awardorderstothepreferredsupplier. 234LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThisisclearlyatime-consumingprocedure,butrememberthatapoorsuppliercancausemoreproblemsthanpoormaterials.Thewholeprocedureisonlyusedformajorpurchases,andifyouarebuyingpencilstheshopnextdoorisprobablyasgoodasanyothersupplier.Normally,anorganisationwillspendlittletimelookingatalternativesuppliersif:●itisbuyinglowvaluematerials●thereisonlyonepossiblesupplier●thereisalreadyasuccessfularrangementwithasupplier●thereisnotenoughtimeforextendednegotiations●theorganisationhasapolicyofselectingspecifictypesofsupplier.Sometimes,particularlywithgovernmentwork,procurementhastobevisiblyfair,andallpotentialsuppliersmustbegivenanopportunitytosubmitquotations.Ratherthanformingashortlistofqualifiedsuppliers,anorganisationwillwidelyadvertisethatitisseekingquota-tionsforparticularworkormaterials.Theorganisationcomparesallthebidssubmittedandchoosestheonethatbestmeetstheprescribedcriteria.Thisiscalledopentender.Avariationreducestheadministrativeeffortbyputtingsomequalificationsonsuppliers,perhapsbasedonexperience,sizeorfinancialstatus.Thisgiveslimitedtender.Asyoucansee,wearetalkingaboutcustomersselectingsuppliers–andassumethatsuppliersarehappytoserveallthecustomerstheycanfind.Thisisusuallythecase,butsome-timessuppliershavemorepowerandeffectivelychoosetheircustomers.Thismighthappenwhenasupplierhasamonopoly,ornearmonopoly,ofsomematerial.Itmightalsohappenwhenthereisatemporaryshortageofsomecommodity,suchasoil,andsupplierschoosethecustomerstheywillsupply,perhapsgivingpreferencetolargercustomers,thosewhopaymore,orthosewhohavelong-termagreements.Inthesecasesthesupplierhasmorepower,asshowninFigure9.1.2100%SupplierhasMutuallymorepowerdependent–allianceLittleCustomerhasdependence–morepowercompetitionAmountofcustomer’smaterialsboughtfromsupplier050%100%Amountofsupplier’smaterialssoldtocustomerFigure9.1Relativepowerofacustomerandasupplier PROCUREMENT235NumberofsuppliersWehavealreadydiscussedthetrendtowardslong-termalliancesandpartnerships.Thisinevitablymovesorganisationstowardssinglesuppliers,eitherforeachmaterial,orforarangeofdifferentmaterials.Someorganisationssaythatthissinglesourcingleavesthemvulnerabletotheperformanceofanindividualcompany,andtheyhavesevereproblemsifsomethinggoeswrong.Ifthesinglesupplierofavitalcomponenthitsfinancialproblems,anorganisationmay,throughnofaultofitsown,havetostopproduction.Toavoidthis,someorganisationshaveapolicyofbuyingthesamematerialsfromanumberofcompetingsuppliers.Theymightuserulesofthumbsuchas‘neverletamanufactureraccountformorethan20%oftotalrevenue;neverletacustomerabsorbmorethan50%oftotalresources’.3Thechoicemustdependonindividualcircumstances,butwecanlistsomeadvantagesofpolicy:●Advantagesofsinglesourcing:●astrongerrelationshipbetweencustomersandsuppliers,oftenformalisedinalliancesorpartnerships●commitmentofallpartiestothesuccessoftherelationship●economiesofscaleandpricediscountswithlargerorders●easiercommunication,reducedadministrationandsimplerproceduresforregularorders●lessvariationinmaterialsandtheirsupply●easiertokeeprequirements,conditionsandsoon,confidential.●Advantagesofmulti-sourcing:●competitionbetweensuppliersreducesprices●thereislesschanceofdisruptedsupplies,asproblemscanbeavoidedbyswitchingsuppliers●candealmoreeasilywithvaryingdemands●involvingmoreorganisationscangiveaccesstowiderknowledgeandinformation●ismorelikelytoencourageinnovationandimprovement●doesnotrelyontrustingoneexternalorganisation.Organisationsusemoresupplierswhentheywanttoavoidpotentialproblems.Anotherwayofdoingthisusesforwardbuying.Initssimplestform,thishappenswhenanorganisa-tionordersmorematerialsthanitcurrentlyneedsandkeepstheexcessinstock.Anotherformusescontractstodelivermaterialsatspecificpointsinthefuture.Bothofthesebringtwobenefits.First,theyguaranteesuppliesforsomeperiodinthefutureandminimisetheeffectofpossibledisruptions.Second,thepriceofmaterialsisfixed,avoidingtheeffectsoffuturepricerisesoruncertainty.Ofcourse,thingscanstillgowrong.Acompanythatsignsalong-termcontractcanstillgooutofbusiness,orawarehousecanburndown,butthechancesofaproblemaremuchsmaller.Itisprobablysafestforanorganisationtoholdsparestockitself,butthishashighercosts;agreeingacontractforfuturedeliveriesgiveslowercosts,butdoesnoteliminatesomuchrisk(anditisalsoapoorarrangementwhenmaterialpricesmightfall).MonitoringsupplierperformanceMostorganisationsmonitortheirsupplierstomakesurethattheycontinuetogivesatisfactoryservice.Thisiscalledsupplierratingorvendorrating.Oftenthisisdoneinformallybyasubjectivereview;sometimestherearecomplexmeasuresforeveryaspectofperformance.Mostorganisationsuseacompromisethatgivesareasonableviewofperformance,andneedsareasonableamountofeffort.Onecommonapproachusesachecklistofimportantfactorsand 236LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTchecksthatthesuppliermeetsanacceptablestandardinthese.Thechecklistmightaskwhetherthesupplierisfinanciallysound;whetheritdeliversontime;ifmaterialqualityishighenough;ifthereistechnicalsupport;whetherthepriceiscompetitive;aboutrelevanttrends,andsoon.Ifthesupplierdoesnotmeetanycriterionthecustomerhastodiscussimprovementsorlookfornewsources.Theaimisnotreallytoreplaceexistingsuppliers,buttomonitorperformance,identifyareasthatneedimprovingandagreethebestwayofachievingtheseimprovements.Onlyasalastresortshouldanorganisationstartlookingfornewsuppliers.Amoreusefulapproachtoratinggivesthesupplierascorefordifferentaspectsofperform-ance.Theymight,forexample,giveeachsupplierascoreoutoftenforon-timedelivery,andifasupplier’sscoredriftsdownbeloweightthecustomercandiscusswaysofimprovingperformance.Althoughthisapproachsoundsconvincing,therecanbeconsiderabledifficul-ties.How,forexample,canyouidentifythemostimportantfactorsofsupplierperformance,therelativeimportanceofeach,theactualperformance,andthelowestacceptableperform-ance?Eachoftheseislikelytocomefromacombinationofdiscussionandagreement,ratherthanfrommoreprecisemeasurement.Theresultisasubjectiveviewthatmaybeuseful,butcontainslittleobjectivemeasurement.LOGISTICSINPRACTICEPhilipsSemiconductors,StadskanaalPhilipsSemiconductors’plantinStad-CriteriaPerformancerequiredskanaal,theNetherlands,makesmillionsofDelivery99.5%deliveredontime,withdiodesayear.Thesearemadeonanauto-performanceaveragedeliveriestwiceaweekmatedassemblyline,usingjust-in-timeQualitylessthan3–5partspermillionoperations.Materials(suchasglass,wiresdefectiveandconnectors)havetobedeliveredatPriceexpectedtofallby7%ayearexactlytherighttime,withanydelaysResponsivenesssupplierfeedbackwithintwointerruptingtheprocess.hoursforcriticalproblemsOver65%oftheplant’scostismaterials,AuditscorecompiledscoreaccordingtoandPhilipsputsexactingdemandsonitsPhilipsauditsystemsuppliers.Itonlytoleratesafewdefectspermillionparts,andtypicallydemandsThissystemplaysakeyroleinPhilipskeep-decreasesinpriceof7%ayear.Tomonitoringitsleadingpositioninanincreasinglysupplierperformance,Philipsintroducedacompetitivemarket.SupplierRatingSystemwhichmeasuresfiveSources:PhilipsSemiconductors,Stadskanaal,criteriafor12mainsupplierseachmonth.PurchasingAnnualReport(1998)andSupplierThecriteriameasuredareasfollows.RatingSystem,manual(1998)PROCUREMENTCYCLEStepsinthecycleOnceithaschosenasupplier,anorganisationhastofollowsomeprocedureforarrangingpurchases.Imaginethatyouwanttobuysomethingexpensive,likeanewcomputer.You PROCUREMENT237probablyapproachthisinseveralstages,listingthefacilitiesyouwant,searchingforsystemsthatcanprovidethese,identifyingsuppliers,developingashortlistofoptions,comparingthese,andchoosingthebest.Youraimistofindthecombinationofproductsandsuppliersthatbestsatisfiesyourneeds.Theprocurementfunctioninanorganisationdoesexactlythesame,andfollowsaspecifiedprocedureforeachpurchase.Thisprocedureisdifferentineveryorganisation,andvarieswiththetypeofthingbeingpurchased.YouwouldnotexpectanorganisationsuchastheUSarmy,whichbuysmillionsofitemsaday,toworkinthesamewayasthedirectorsofRealMadridfootballclubwhentheyacquireanewstriker.AndtheUSarmywouldnotapproachitsdecisiontobuypencilsinthesamewayasitsdecisiontobuyhelicopters.Despitetheseinevitabledifferencesindetail,wecansuggestageneralapproachtoprocure-ment.Thishasaseriesofcommonsteps,whichstartwithauseridentifyinganeedformate-rialsandendwhenthematerialsaredelivered.Figure9.2showsanoutlineofthesesteps,whileamoredetailedviewofatypicalprocurementcyclehasthefollowingsteps(withkeydocumentsinbold).1.Auserdepartment:●identifiesaneedforpurchasedmaterials●examinesmaterialsavailableandpreparesspecifications●checksdepartmentalbudgetsandgetsclearancetopurchase●preparesandsendsapurchaserequesttoprocurement.2.Thenprocurement:●receive,verifyandcheckthepurchaserequest●examinethematerialrequested,lookingatcurrentstocks,alternativeproducts,productionoptions,andsoon–andafterdiscussionswiththeuserdepartmentconfirmthedecisiontopurchaseUserdepartmentProcurementSuppliers1.IdentifyneedRequestspurchase2.receiverequestprocessrequestquotations3.receiverequestprocess4.receivequotationsendquotationdiscussdiscussandprocesssendpurchaseorder5.receiveorderprocessshipgoodsand6.receiveandcheckinvoice7.receiveandchecktransferauthorisepayment8.arrangepaymentreceivepaymentFigure9.2Outlineofstepsinaprocurementcycle 238LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●makeashortlistofpossiblesuppliers,fromregularsuppliers,listsofpreferredsuppliers,orthoseknowntomeetrequirements●sendarequestforquotationstothisshortlist.3.Theneachsupplier:●examinestherequestforquotations●checksthecustomer’sstatus,credit,andsoon●seeshowitcouldbestsatisfytheorder●sendsaquotationbacktotheorganisation,givingdetailsofproducts,pricesandconditions.4.Thenprocurement:●examinethequotationsanddocommercialevaluations●discusstechnicalaspectswiththeuserdepartment●checkbudgetdetailsandclearancetopurchase●choosethebestsupplier,basedonthedetailssupplied●discuss,negotiateandfinalisetermsandconditionswiththesupplier●issueapurchaseorderforthematerials(withtermsandconditionsattached).5.Thenthechosensupplier:●receives,acknowledgesandprocessesthepurchaseorder●organisesalloperationsneededtosupplythematerials●shipsmaterialstogetherwithashippingadvice●sendsaninvoice.6.Thenprocurement:●acknowledgereceipt●doanynecessaryfollow-upandexpediting●receive,inspectandacceptthematerials●notifytheuserdepartmentofmaterialsreceived.7.Thentheuserdepartment:●receivesandchecksthematerials●authorisestransferfrombudgets●updatesinventoryrecords●usesthematerialsasneeded.8.Thenprocurement:●arrangepaymentofthesupplier’sinvoice.Thefirstthreestepssortoutthematerialsandsupplier,andthencomesthecrucialpointwiththeissueofapurchaseorderinstep4.Atthispointtheorganisationagreestobuyspeci-fiedmaterialsfromasupplier,andthepurchaseordertriggersthesupply(alongwithnecessaryproductionplanning,transportarrangements,finance,andsoon).Thepurchaseorderispartofalegalcontractbetweentheorganisationanditssupplier.Theremainingstepsfinalisethedetailsofdelivery.Thisprocedureseemscomplicated,andinvolvesmanystepsanddocuments.Ifyouarebuyingsomethingexpensive,thiseffortiscertainlyworthwhile–andyoumayactuallyfollowamuchmorecomplicatedproceduretofixproductspecifications,selectthesupplierandnego-tiateterms.Butifyouaremakingsmallpurchases,ifthereareexistingrelationshipswithsuppliers,orthereisonlyonequalifiedsupplier,itisclearlynotworthgoingthroughthiswhole PROCUREMENT239expensive,procedure.Thenyouwilllookformoreroutinemethods.Forthese,aruleofthumbsuggests£80asthecostofprocessingabasic,simpleorder,whileAllenquotesfiguresof$115to$150.4Eventhisistooexpensiveforverylowvalueitems,wheretheprocurementwouldcostmorethanthematerials.Thenyouwilllookforevensimpler,automaticoradhocprocedures.Apartfromitscost,anotherproblemwiththeformalprocurementprocedureisthetimethatittakes.Itistooslowtomakequickpurchases.PaulSigarrobuysmaterialtomakedesignerdressesforl’HauteVisioninStockholm,andfoundthatadeliveryofmaterialstypi-callytookonedaytoarrivefromthesupplierinNice,butorganisingthisdeliveryoftentookfiveweeks.5ThissupportsanearliersurveyintheUSA6whichfoundthefollowingaveragetimesforprocessingordersatmanufacturers.PartofprocurementAveragedaysFromcustomerplacingorder,tosupplierreceivingit1.9Fromsupplierreceivingorder,tofinishingadministration2.1Fromfinishingadministration,toshippingorder2.2Fromsuppliershippingorder,tocustomerreceivingit4.1Total10.3Usingatraditional,paper-basedsystemtookanaverageof10.3daysforacustomertogetmaterialsdeliveredfromamanufacturer’sstock.Iftherewereproblemssuchasshortages,specialproductsthatneededsomework,specialtransportordeliveryarrangements,difficultnegotiationsofconditions,oranysimilarproblems,thistimewasconsiderablylonger.Inrecentyearsalotofworkhasbeendonetoreduceboththecostandtimeforprocure-ment.Someofthesemethodsarefairlysimple.Blanketorders,forexample,useasingleordertocoverregulardeliveriesofmaterialsoversomespecifiedtimeinthefuture.Valueanalysisusesateamofpeoplefromdifferentfunctionalareastofindsubstitutematerialsthatarelowerinpricebutequallyasgoodastheoriginal.Noneoftheseadjustmentstackleoneofthebasicproblemswithpaper-basedprocurement,whichisitsunreliability.Purchasingstafftypicallyspendathirdoftheirtimedealingwithproblemsthatoccurwhentheprocurementprocessfailsinsomeway.7,8Someoftheseprob-lemswithpaper-basedprocurementinclude:●takingalongtimetogothroughthewholeprocedure●relyingonalotofformsandpaperworkwhichmovearounddifferentlocations●needingalotofpeopletocomplete,analyse,process,storeandgenerallydealwithallthepaper●havingotherpeopletosupervise,manageandcontroltheadministrativeprocedures●inevitableerrorswithsomanydocumentsandpeopleinvolved●notgivingattentiontorelatedsystems,suchasstockcontrol.Amajorstepinimprovingprocurementcamewithelectronicpurchasing.Electronicdatainterchange(EDI)hasbeenusedsincethe1980s,andthisallowsautomatedprocurement.Anorganisationlinksitsinformationsystemtoasupplier’s,andwhenitistimetoplaceanorderthesystemautomaticallysendsamessage.Thisworkswellforsmall,regular,repeatordersandmostorganisationsreadilyadoptedtheprinciples.Thereareseveralvariationsonautomatedprocurement,allofwhichareconsideredunderthegeneralheadingofe-procurement. 240LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTe-procurementMostorganisationsalreadyusesomeformofe-procurement.Surveys7,8suggestthatover60%ofUKcompaniesusede-procurementby2002,and80%ofEuropeanmanagerssoonexpecttouseitextensively.Someoftheadvantagesthisbringsare:●allowinginstantaccesstosuppliersanywhereintheworld●creatingatransparentmarketwhereproductsandtermsarereadilyavailable●automatingprocurementwithstandardprocedures●greatlyreducingthetimeneededfortransactions●reducingcosts,typicallyby12–15%7,8●outsourcingsomeprocurementactivitiestosuppliersorthirdparties●integratingseamlesslywithsuppliers’informationsystems.Therearebasicallytwotypesofe-procurementwhicharedescribedasB2B(whereonebusi-nessbuysmaterialsfromanotherbusiness)andB2C(whenafinalcustomerbuysfromabusi-ness).MostofusaremorefamiliarwithB2Ctransactions,wherewebuybooks,music,softwareortravelfromwebsites.Between1999and2002thenumberofInternetshoppersintheUKrosefrom2millionto6million.9Nonetheless,manyofthesesiteshavehitfinancialtroubleswiththeburstingofthe‘dot-combubble’,andtherehavebeenanumberofwidelypublicisedbankruptcies.In1996AndersonConsultingpredictedthaton-lineshoppingwouldsoonaccountfor20%ofUKgroceries,butby2002thefigurewasstilllessthan1%.9Verdict,aretailresearchagency,thenpredictedthaton-linesaleswouldriseto6%ofallgrocerysalesby2006.Itisclearlydifficulttogetreliablefiguresinthisarea,butthereisageneralfeelingthatB2Cwillcontinuetogrowstrongly.Oneproblem,ofcourse,isthatpeopledonotnecessarilylikee-procurement.Ifyouwanttobuyabook,youcanusevariouswebsites,fillintheformsforyourpurchase,andgetthebookdeliveredwithinaday.Butifyougotoyournearestbookshop,youmightuselesssophisticatedtechnology,butpickupthebookimmediatelyandwithoutthedeliverycharge.B2Ccanhitdifficultiesbecausepeopleactuallylikegoingtolookatthingsbeforetheybuy.SomeevidenceforthiscomesfromtheUSA,whereonly1%ofcarpurchasesaremadethroughtheWeb,butbeforebuying75%ofpeopledoon-linesearchestocomparepricesandspecifications.9Amoreimportantfactoristhatmoste-procurementisactuallyB2B.TheGartnerGrouphaveproducedthefollowingestimatesofB2Btrade.10,11YearValueofB2Bprocurement($billion)19984319992192000433200191920021900200336002004600020058500Theattractionsofe-procurementaresogreatthatmostorganisationswillcontinuetomoveinthisdirection.Onemajorsoftwarecompanyestimatedthefollowingsavingsfrome-procurement(valuesareinapertransaction).Thesystemgaveareturnoninvestmentof400%ayear. PROCUREMENT241ProcessstepOriginalcostCostwithe-procurement1.Createdetailedrequirement17.29.32.Approvalprocess5.52.73.Checkrequirements20.204.Orderprocessing54.46.85.Receiving10.32.96.Internaldelivery35.013.07.Paymentprocess23.60.6Total166.235.3Manypeopleareenthusiasticaboutthegrowthofe-procurement,buttheyoftenforgetanimportantpoint.Ifweorganisee-procurementveryefficiently,itgivesmuchbettercommuni-cations–butitdoesnotnecessarilyimprovethephysicalflowofmaterials.Thisonlyhappenswhenorganisationsinthesupplychainusethecommunicationstofindbetterwaysofmovingmaterials.AsDoerflingeretal.say,‘Therealbarrierto(B2B)entryistheback-end–fulfilment–notthewebsiteitself’.12Perhapsthemaineffectsofe-procurementarenotthespeedofpurchasingbuttheeffectsithasonthesupplychain.Customerscannowbuyfromarangeofsupplierswhomightbegeographicallyremote.Theyalsohavetheoptionofbuyingdirectlyfrommanufacturersorprimarysuppliers,andcanusetheincreasingnumberofspecialisedWebretailers.MerrillLynch13suggestthatthemainchangesthatthiswillbringare:●growinguseoftheInternetforprocurementwillchangepatternsoflogistics●e-commercewillchangebuyingpatterns,butwillprobablynotgeneratemuchnewbusiness●organisationswillhavetoimprovecustomerserviceby,forexample,homedeliveryservices.LOGISTICSINPRACTICEAmazon.comThetraditionalwayofbuyingbooksistoayear,comparedwiththreeorfourtimesavisitabookshop,orperhapsjoinabookyearforanormalbookshop.Todevelopclub.In1995JeffBezoswentastepfurthertheirlogistics,Amazonlookedatthebestandstartedanon-linebookretailingbusi-practicesandrecruitedtheVicePresidentofnessfromhisgarage.Hismissionwas‘tologistics(and15otherstaff)fromWal-Mart.usetheInternettotransformbookbuyingAttheheartofAmazon’soperationsisaintothefastest,easiest,andmostenjoyablesophisticatedsystemtoguidecustomersshoppingexperiencepossible’.Hisaimofthroughthestepsofmakingtheirpurchases.stockingeverybookinprintsoonmadeThissystembasicallyrecordscustomerAmazon.comtheworld’slargestbookorders,getsthepayment,andarrangesretailer.Initsfirstfullyearofoperationitsdelivery.However,itdoesfarmorethanthissaleswere$15.7million,androseby34%andcansearchformaterialindifferentways,amonth.Stockwasturningover150timeslistsimilarbooksandotherpeople’spur- 242LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedchases,recommendbooks,givereviewsment,auctionsandsoon.Theyhavealsofromotherreaders,authorsandpublishers,formedpartnershipswithon-linepharma-supplyinformationaboutauthors,tellyoucies,sportinggoodssuppliers,grocers,andaboutnewbooksthatarebeingreleased,soon.Asaresult,theyoffer18milliondis-sendnewsletters,letyoutrackanorder,andtinctproducts.TheirUKbranch,forexample,awholerangeofotherfunctions.lists1.2millionBritishbooks,250,000USAmazonusetheirefficientoperationstobooks,220,000CDsand23,000videosandgivelowoverheads,sotheygetsubstantialDVDs.InJuly2000whenHarryPotterandtheeconomiesofscale,andusetheirsizetoGobletofFirewaspublished,Amazonputinnegotiatediscountsfrompublishers.Asathebiggesteveradvanceorderof410,000result,theycangivediscountsofupto50%copies,250,000ofwhichweredeliveredbyonthepublishers’priceofbestsellers.ThisFederalExpressonthefirstdayofsales.combinationofcustomerservice,wideDespiteitsimpressiveperformance,choice,efficientdeliveryandlowcostshasAmazonisnotimmunefromthepressuresattracted25millioncustomersin160coun-andsharepricefluctuationsofe-business.tries.Netsalesforthefirstquarterof2000In2000itwasmakinganetlossofaroundwereUS$578million,anincreaseof84%on$200millionaquarter.Thefirstquarterofthepreviousyear.Theyhaveexpanded2002sawitsfirstoperatingprofit.beyondtheiroriginaloperationsinSeattle,Sources:companyannualreportsandwebsiteatwithmajoroperationsintheUK,Germanywww.amazon.com;KothaS.(1998)CompetingandFrance.TheyhaveexpandedbeyondontheInternet,EuropeanManagementJournal,books–firstintoassociatedareasofCDsandAprilvideos,andthenintotoys,games,gardenfurniture,gifts,hardware,kitchenequip-TYPESOFPURCHASEDifferentapproachesfordifferentproductsWhenwedescribedaformalprocedureforprocurement,wesaidthatitcanbeverycompli-catedandtimeconsuming.Itwouldbeexpensiveandunnecessarilycomplicatedtousethisprocedureforeverypurchase,andnobodywantstospendsixmonthsbuyingapacketofenvelopes.Ontheotherhand,majorpurchasesneedmuchmoreinformationandanalysis.Thisiswhyorganisationsvarythedetailsoftheirprocurementprocedures,matchingthemethodstothetypesofmaterials.Generallyspeaking,thehigherthecostofmaterialsandthemorecomplicatedtherequirements,themoretimeandeffortprocurementneeds.Organisationsoftensetrulesfortheeffortputintoprocurement,perhapsusingadhocproceduresforlow-valueroutinesupplies,asimple,automaticprocedureforpurchasesupto PROCUREMENT243£20,000,amorerigorousprocedureforpurchasesupto£150,000,andspecial,detailedanalysesforbiggerpurchases.VandeVliet14describesavariationonthisat3M,wheretheprocurementeffortdependsontheimportanceofmaterials:●non-criticalmaterialshavelowprofitswithlittleriskinsupply,andneedbasic,simpleproceduresforpurchasing●bottleneckmaterialshavelowprofitsbuthavemoreriskinsupply,andneedlong-termcontractswithalternativesourcestoavoidpotentialproblems●strategicmaterialswithhigherprofitsneedmoreformalrelationshipswithsuppliersoverthelongterm,possiblydevelopingintoalliancesandpartnerships.Oncesuchrulesareestablished,amanagementcontrolsystemcanmonitorpurchasesandmakesuretheyaredoneinthebestway.Itcanseehowpurchaseshavebeenmade,iftheoutcomeissatisfactory,iftheeffortisreasonableinrelationtothecostsandimportance,andiftheprocedurecanbeimprovedforthefuture.Animportantpointhereisthedifferencebetweenroutine,repeatordersandnewones.Ifasupplierhasgivengoodserviceoversomeextendedtime,anorganisationmightavoidalmostalltheprocurementcycleandputminimaleffortintoadministeringfutureorders.Orderingbecomesroutineandtheorganisationeffectivelysendsamessagetosay,‘sendanotherorderlikethelastone’.Withnon-routinepurchases,anorganisationhastobemorecarefulandputmoreeffortintothechoiceofsupplier,andconditionsofpurchase.Ifanorderisrepeatedoftenenough,anorganisationmightconsiderthe‘make-or-buy’decision.Inotherwords,ithastochoosethosematerialsthatitcanmakeitself,andthosethatarebestmetbyoutsidesuppliers.Initssimplestform,thisaskswhetheranorganisationcangetmaterialsmorecheaplyfromasupplierthanitcanmakethem.Efficientoperationsandeconomiesofscaleoftenmeanthatspecialisedsupplierscandelivermaterialsatlowerpricesthanotherorganisationscanproducethem.Thereare,however,manyotherfactorstoconsider.Makingpartsinternallycanbemorereliable,givegreatercontroloversupply,tailorproducts,haveshorterleadtimes,usespareresources,protectdesigns,keepvalue-addingoper-ations,increasethesizeofthecompany,andsoon.Ontheotherhand,buyingthemfromsupplierscangetthebenefitsofspecialisation,giveaccesstogreaterexpertise,geteconomiesofscale,reducestocklevels,transfersomerisk,maintainflexibility,andsoon.TheDepartmentofTradeandIndustry15suggeststhatthethreemaincriteriaforsuchdeci-sionsare:●financialfactors–relatingtothecosts●operationalfactors–relatingtoresponsiveness,flexibility,reliability,andsoon●strategicfactors–relatingtothelong-termimplicationsofthedecisionfortheorganisation.Inpractice,theperceivedbenefitsofoutsourcingareincreasingandmoreorganisationsarehappytoconcentrateontheircorefunctionsandusespecialisedsuppliersformaterials.TermsandconditionsAlthoughwehavetalkedingeneraltermsabout‘placinganorder’,thereareseveraldifferenttypesoforder.Organisationstypicallytalkabout‘placinganorder’forgoods,but‘signingacontract’forservicesand‘leasing’equipment.Toalargeextent,thesearedifferentwaysofsayingthesamethings,buttheremaybelegaldifferences.Forexample,withhirepurchasethematerialsremainthepropertyofthesupplieruntiltheyarefullypaidfor,whilecreditfinancing 244LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTgivesownershiptotheorganisationwhichbecomesresponsibleforservicingadebt.Wehavealreadymentionedsomespecifictypesoforder,withthefollowingbeingmostcommon:●Purchaseordersareusedinthestandardapproachtoprocurementthatwedescribedabove.Itisessentiallyaletterfromoneorganisationtoanother,givingdetailsofthematerialsitwantstopurchaseanditsconditionsofpurchase.Thisisusuallyaresponsetoaquotationfromaqualifiedsupplier,givingthematerialsitcansupplyanditsconditionsoftrade.●Blanketordersgiveasimplesystemforcheap,standarditems,suchasstationery.Anorgan-isationplacesasingleorderforallthematerialsthatitwillneedoversomeperiod,suchasayear.Thenthesupplierdeliversbatchesofmaterialswhenrequestedduringtheyear.●e-ProcurementusesEDIortheInternettosimplifypurchasesbyreplacingpaper-basedprocedureswithelectronicones.Thisgivesafastandefficientmethodforrepeat,orstraightforward,orders.●Contractsgivedetaileddescriptionsofanagreementbetweenanorganisationandasupplier;theydescribeexactlytheresponsibilities,workandservicesforeach,togetherwithallrelevanttermsandconditions.Manyorganisationsusecontractsinsteadofpurchaseordersforextendedservices,sotheysignacontractforasupplyofelectricity.Inthesameway,organisationssignacontractforaspecificpieceofwork,suchasaconstructioncompanybuildingalengthofroad.●Sub-contracts:whenasuppliersignsacontractwithanorganisation,itmaynotdoalltheworkitself,butpreferstopassonsomeworktoasub-contractor.Then,therearetwoagreements–thecontractbetweentheorganisationandthesupplier,andthesub-contractbetweenthesupplierandsub-contractor.Forbigprojects,therecanbeseveralmorelayersofsub-contracting.●Leasesandrentalagreementsagainpresentthetermsandconditionsofacquiringmaterials.Theyaregenerallyusedforbuildingsorequipmentthatisreturnedtotheowneraftersomeperiodofuse.Youcanrentorleaseacar,forexample,andwhenyouhavefinishedwithit,youreturnittotheowner.Thedifferenttypesofpurchasesuggestanotherproblemwithprocurement.Therecanbesomanydifferenttermsandconditionsthatitissurprisinglydifficulttocomparethem.Supposethatyouarebuyingsomestandardcommodity,suchaselectricity.Manycompetitorsofferthesameproductsothebestistheonethatoffersthelowestprice.Often,however,therearedifferentconditionsofpurchase.Ifyouwantatelephoneservice,allsuppliersgiveessen-tiallythesameproduct,butthepricingstructure,discountsandofferscanmakesignificantdifferences.Thenitistheconditionsofpurchasethatshowthebestsupplier.Inpractice,therecanbemanyfactorsotherthancosttoconsider.Hillsuggests16thatdeci-sionsaboutpurchasesaremadeintwostages.Inthefirst,availableproductsareexaminedandthosewith‘qualifying’factorsgetontoashortlist.Then‘orderwinning’factorsidentifythebestproductfromtheshortlist.Costislikelytobeoneofthequalifyingfactors,butisonlylikelytobeanorderwinningfactorwithcommodities.Qualityisparticularlyimportant,whichisthereasonwhytotalqualitymanagementsaysthatthelowestpricedoesnotneces-sarilygivethebestdeal.17Pricingisaverycomplicatedissue.Itiscertainlynotinanorganisation’slong-terminteresttoforcesupplierstogiveunrealisticallylowprices,ortheywillgooutofbusinessandnotbetherenexttimetheyareneeded.SupermarketsinpartsoftheEuropeanUnionhavefollowed PROCUREMENT245consumerpressuretoreducefoodprices.Whilethisbenefitstheircustomers–andpresumablythebroadpopulation–itmeanspayinglesstofarmerswhogrowthecrops.Iffarmersgooutofbusiness,thereisamajorimpactonruralcommunitiesandthecountryside,morerelianceonimportedfood,aneffectonthebalanceoftrade,andsoon.Ingeneral,therearefourwaysofsettingapriceformaterials:1.Pricelists–wheresuppliersquotefixedprices.Bookpublishers,forexample,quoteasellingpricethattheyexpectretailerstouse.Theycangivediscountsforlargeorspecialpurchases,butoneorganisationessentiallyfixestheprice.2.Specialquotation–wheresuppliersquotepricestoeachcustomer,particularlyfornon-standardmaterials.Customerssubmitarequestforaquotation,andthesupplierreturnsapriceandconditionsthatitiswillingtooffer.3.Negotiation–whenthereissomeflexibilityinpriceandconditions.Asuppliermightgiveaquote,butiswillingtonegotiateifitcangetsomebenefitsuchasrepeatorders.Simi-larly,customerscannegotiateiftheywantspecialconditions,suchasfastdelivery.4.Commoditypricing–forcommoditiessuchasoil,coffee,goldandwheat,marketforcessetthegoingratethatisusedbyallsuppliers.Youcanseemanysuchfiguresin,say,financialfuturesmarkets.Evenwhenthebasicpricehasbeenagreedtherecanbeotherdifficultieswithconditions.Who,forexample,paysfortransportationtothefinallocationandwhoacceptstherisksforthejourney?Severalstandardconditionsareused(showninFigure9.3)andforhistoricalreasonstheyseemtobephrasedintermsofshipping:●Ex-works:Thepurchaseracceptsmaterials‘atthefactorygate’andtakesoverallresponsi-bilityfortransport,documentation,customsclearance,insurance,riskandsoon.Thistypeofcontractisbestwhenthesupplierhaslittleexperienceofmovingmaterialsthroughtherelevantarea,orthepurchaserhasalotofexperience.Ifneitherhasthenecessaryexperi-ence,theycansub-contracttheactualmovementtothirdpartyspecialists.●Freealongside(FAS):Herethesuppliermovesmaterialstoaspecified‘port’anddeliversthem‘alongsideaship’.Thecustomertakesovertheloadingonavesselandmovementonward.●Freeonboard(FOB):ThisisavariationofFAS,wherethesupplieralsotakescareoftheloadingontothevessel,andthenthecustomerisresponsibleforonwardtransport.ThismightseemlikeasmalladjustmenttoFAS,butloadingmightinvolveheavylifts,riskofdamage,oruseoflighters(whicharesmallvesselsusedtomovematerialsouttoalargervesselmooredindeeperwater).●Deliveredex-ship:Wherethegoodsareavailableontheship(orquayside)butthecustomerhastoarrangeforcustomsclearance,duty,andsoon.●Costandfreight(C&F):Herethesupplierarrangestransporttoanagreedpoint,butthecustomeracceptsanyriskandarrangesinsuranceforthejourney.●Cost,insuranceandfreight(CIF):Wherethesupplierdeliverstoanagreedpoint,andalsoarrangesinsuranceforthejourney.●Delivered:Wherethesupplierisresponsibleforallaspectsofthetransportuptodeliverytothecustomer. 246LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTDepartureArrivalIntermediateTransportdockSeadockstoragejourneyShipShipTransportTransportSupplierCustomeroperationsTAATFoperationsPointoftransferfromsuppliertocustomerEx-worksFreeFreeonDeliveredCostandDeliveredalongsideboardex-shipfreightorcost,insuranceandfreightFigure9.3SomearrangementsfordeliveryLOGISTICSINPRACTICETT>T&Gmakearangeofprefabricatedbuild-thesearrangements,buthavefoundsignifi-ingsforuseintheRussianandCanadiancantreductionsinthetimesneededforcer-arctic.Overthepastthreeyearstheyhavetainactivities.Thefollowingtablegivesamovedtowardssinglesourcing,developingcomparisonoftheircurrentpartneringandinformalpartnershipswithpreferredsuppli-previousapproachofcompetitivebidding:ers.TheyhavenotanalysedthecostsofPartnering(weeks)Bidprocess(weeks)Bidreview2–34–6Drawingpreparation4–57–10Drawingapproval12–3Manufacturingtime10–1218–24Testtime12–3Total17–2233–46Source:companyreports PROCUREMENT247❑Purchasinggivesamechanismforinitiatingthemovementofmaterialsfromoneorganisationtoanother.Procurementisabroadertermwhichincludesaseriesofrelatedactivities.❑Procurementisresponsibleforacquiringallthematerialsneededbyanorganisation.Itconsistsofalltheactivitiesneededtoorganiseaninwardflowofmaterialsfromsuppliers.❑Procurementisanessentialfunctionineveryorganisation.Itisoftenresponsibleforthegreatestpartofexpenditure,andasmallimprovementcanbringsignificantbenefit.■■■■■■■■■❑Thefirststepinprocurementisfindingtherightsupplier.Thisdecisioncanbeasimportantasgettingtherightproducts.❑Procurementusuallyworksinacyclewithanumberofdistinctsteps.Therearemanyvariationsonthisbasicmodel.❑Traditionalapproachestoprocurementcanbeexpensiveandtimeconsuming.Manyorganisationshavemovedtowardse-procurement,whichcanbringconsiderablebenefits.❑Differenttypesofpurchaseneeddifferentconditions,withtheamountofeffortgenerallyrelatedtotheproductvalue.❑Totalcostisoftenimportantinpurchasingdecisions,buttherecanbemanyotherfactors.ItisoftensurprisinglydifficulttocomparethetermsandCHAPTERREVIEWconditions.CASESTUDYArnoldHaralsonFormanyyearsArnoldHaralsonworkedintheportofBergen.In1997hehadhis55thbirthdayandtookearlyretirement.Hehadanumberofprojectshewantedtoworkon,includingwritingahistoryofNorseinfluenceonRussianculturaldevelop-ment.HefinishedthebookintwoyearsandpublisheditthroughNorgeldt,aspecialistlocalpublisher.Itsold300copiesinthefirstyear,andArnoldwassoonworkingonasecondbookdiscussingthelinksbetweenNorsemythologyandRussianfolklore.Arnoldhadconsiderableexpertiseinhisfieldandplannedtocontinuehisseriesofbooks.Herecognisedthattheydidnothavebroadappeal,buttherewasasteadydemandinthisspecialisedmarket.Norgeldtseemedhappytoconsiderhisnewproposals. 248LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedAlthoughheenjoyedwritingbooks,Arnoldwastroubledbythemarketing.NorgeldtonlyreallyworkedinNorwayandSweden,wheretheyestimatedacontin-uingdemandforhistypeofbookataround200copiesayear.ArnoldfeltthattherewerelargeScandinavianpopulationsintheUSA,Australiaandothercountries,whowerenotbeingreached,andtherewerealmostnosalesinRussia.Althoughhewasnotexpectingagreatreturnfromhisbookshewasdisappointedbythesizeofhisroyaltycheques.Hisbooksretailedfor1000NKr,buthisroyaltieswerecalcu-latedfrom6%ofthepublisher’ssellingprice,whichdependedonthediscountsofferedbutwasusuallylessthan700NKr.Arnoldwasunlikelytogethisbookspublishedbyanyofthemajor,interna-tionalcompanies,buttherewereotheralternatives.Hecould,forexample,approacha‘vanitypublisher’whowouldchargeafeeforpublishingthebook,butreturnmoreoftheincomegenerated.AmoreattractiveoptionmightbetousetheWeb.Arnoldcouldsimplysetupawebsitetoadvertisehiscurrentbooksmorewidely.Butifhesetupawebsite,hemightaswellbypasstheretailerandsellcopiesdirectlytocustomers.WhenArnoldstartedtothinkalongtheselines,hethoughtthathecouldalsobypassthepublisher.Thenhecouldeitherproducethebookhimselfandsellitthroughhiswebsite,oravoidthepaperversionandallowcustomerstopayafeetoaccessanelectronicversion.CASESTUDYQuestion●Arnoldclearlyhastothinkhardaboutpublishinghisbooks.Whatoptionsdoyouthinkhehas?Whatwouldbethebenefitsandproblemswitheach?Whatroutewouldyourecommendhimtofollow?PROJECTHowtoBuyImaginethatyouwanttobuysomethingrelativelyexpensive,suchasacar.Whatalternativesourcesarethere?Describethestepsyouwouldfollowinmakingthepurchase.Nowcomparethesewiththestepsfollowedbyacompanymakingasimilarpurchase.Isitdifficulttogetinformationabouttheprocedurethatanorganisationusesforprocurement? PROCUREMENT249DISCUSSIONQUESTIONS1.Somepeoplesaythatyoushouldalwayslookforquotations,evenforrepeatorders,asthisencouragescompetitionandkeepspriceslow.Otherpeoplesaythatyoushouldformanalliancewithonesuppliersothatyouunderstandeachother’sneeds.Whichoftheseviewsdoyouthinkismorepersuasive?2.EveryoneistalkingaboutthebenefitsofpurchasingthroughtheInternet.Whatarethese?Howwille-procurementaffectwideroperations?Whatotherchangeswilltherebeinthefuture?3.Whatfeatureswouldmakeanidealsupplier?4.Forwardpurchasinghasmanyadvantages–asdemonstratedbythehugemarketinfinan-cialfutures.Whatarethesebenefits?Ifthesearesoobvious,whyaremanyorganisationsignoringthemandusingjust-in-time?5.Doyouthinkanorganisationshouldalwaysnegotiatehardwithsupplierstogetthecheapestpricesandbestconditionsitcan?6.InOctober2000TheTradingandStandardsInstituteinLondonmadetestpurchasesin102retailwebsites.Therewereproblemswith37%ofthese,38%arrivedlaterthanprom-isedand17%didnotarriveatall.9Whatdoesthistellyouaboute-procurement?REFERENCES1.AckermanK.B.andBrewerA.M.(2001)Warehousing:akeylinkinthesupplychain,Ch.14inBrewerA.M.,ButtonK.J.andHensherD.A.(eds)HandbookofLogisticsandSupplyChainManagement,Pergamon,Oxford.2.ScottC.andWestbrookR.(1991)Newstrategictoolforsupplychainmanagement,InternationalJournalofPhysicalDistributionandLogisticsManagement,21(1),23–33.3.PerryR.(1998)QuotedinLawlessJ.‘Challengesofgoingglobal’,SundayTimes,26/4/98.4.AllenS.(2001)Leveragingprocurement:thequiete-business,LogisticsandTransportFocus,3(4),29–30.5.SigarroP.(2001)Speedingupprocurement,WesternOperationsSeminar,Nice.6.LaLondeB.J.andZinszerP.H.(1976)CustomerService,NationalCouncilofPhysicalDistributionManagement,Chicago.7.CummingsN.(2002)UKleadingtheworldine-procurement,ORNewsletter,March.8.Websiteatwww.BarclaysB2B.com.9.RusheD.(2001)www.basketcase,SundayTimes,2September,p.5.10.Anon.(2001)TheEconomicDownturnisNotanExcusetoRetrenchB2BEfforts,Gartner,Stamford,CT.11.TheGartnerGroup(2001)Websiteatwww.gartner.com.12.DoerflingerT.M.,GerhartyM.andKerschnerE.M.(1999)Theinformationrevolutionwars,Paine-WebberNewsletter,NewYork.13.MerrillLynch(1999)E-commerce:VirtuallyThere,MerrillLynch,NewYork.14.VandeVlietA.(1996)Whenthegagglinghastostop,ManagementToday,June,pp.56–60.15.DepartmentofTradeandIndustry(2001)LogisticsandSupplyChainManagement,Websiteatwww.dti.gov.uk.16.HillT.(1993)ManufacturingStrategy(2ndedn),Macmillan–nowPalgraveMacmillan,Basingstoke.17.DemingW.E.(1986)OutoftheCrisis,MITPress,Cambridge,MA. 250LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTFurtherreadingArnoldJ.R.T(1996)IntroductiontoMaterialsManagement(2ndedn)PrenticeHall,EnglewoodCliffs,NJ.BailyP.,FarmerD.,JessopD.andJonesD.(1998)PurchasingPrinciplesandManagement(7thedn),Pitman,London.GattornaJ.LandWaltersD.W.(1996)ManagingtheSupplyChain,Macmillan–nowPalgraveMacmillan,Basingstoke.LeendersM.R.andFearonH.E.(1996)PurchasingandSupplyManagement,McGraw-Hill,NewYork.SaundersM.(1997)StrategicPurchasingandSupplyChainManagement(2ndedn),FinancialTimes/PrenticeHall,London. CHAPTER10InventoryManagementCONTENTS■Aimsofthechapter■Casestudy–Lennox■ReasonsforholdingstockWholesaleGroup■Economicorderquantity■Project–National■UncertaindemandandsafetyStockholdingsstock■Problems■Periodicreviewsystems■Discussionquestions■Effortofstockcontrol■References■Chapterreview■FurtherreadingAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■UNDERSTANDwhyorganisationsholdstocks■ANALYSEthecostsofholdingstock■CALCULATEeconomicorderquantities■CALCULATEassociatedleadtimes,costsandcyclelengths■DEFINE‘servicelevel’andDOrelatedcalculationsforsafetystock■DESCRIBEperiodicreviewsystemsandCALCULATEtargetstocklevels■DOABCanalysesofinventories 252LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTREASONSFORHOLDINGSTOCKAggregatestockholdingsInthelastchapterwesawhowprocurementorganisestheflowofmaterialsintoanorganisa-tion.Butwedidnotaskwhenanorganisationshouldbuymaterials,orhowmuchitshouldbuy.Inthischapterwediscussthesequestions,andrelatethemtothebroaderpoliciesoninventorymanagement.Ideally,materialsmovesmoothlyandcontinuouslythroughasupplychain.Inpractice,therearealwaysdelays–andwhenmaterialsstopmovingtheyformstocks.Allorganisationsholdstocksofsomekind,whetheritisashopthatstocksgoodsforcustomerstolookat,achefwithstocksofingredientsinthepantry,oramarketresearchcompanywithstocksofinformationinadatabase.STOCKSaresuppliesofgoodsandmaterialsthatareheldbyanorganisation.Theyareformedwhenevertheorganisation’sinputsoroutputsarenotusedatthetimetheybecomeavailable.AnINVENTORYisalistofthingsheldinstock.InChapter7wediscussedmaterialrequirementsplanningandjust-in-time.Intheirdifferentways,bothoftheseassumethatstocksareawasteofresourcesthatshouldbeelimi-nated,oratleastminimised.Fromtheirargumentsyoumightgettheimpressionthateveryorganisationisgettingridofitsstocksandmovingto‘stockless’operations.Thereiscertainlyatrendinthisdirection.Surveysby,forexample,theInstituteofGroceryDistribution1foundthatstocklevelsfellbyasmuchas8.5%inayear,whiletheInstituteofLogistics2foundthatin1999UKcompanies,‘managedtoalmosthalvethestockholdingrequirementssincethe1995survey’.Wecangetabroaderpicturefromgovernmentfigures.3–5Theeasiestmeasuretakestheratioofaggregatestocktogrossdomesticproduct(GDP).Thisdoesnotgiveanabsolutemeasureofperformance,butitallowsreasonablecomparisonsovertime.Figure10.1showsthebookvalueofaggregatestockheldintheUnitedKingdomasapercentageofGDPfrom1949to1998.6Attheendofthe1940sandintotheearly1950stherewasarapiddeclineinstocksastheeconomyreturnedtonormalaftertheSecondWorldWar.Fromtheearly1950srightthroughtothepresentdaytherehasbeenasteadydecline,whichwecanattributetoimprovinginven-torymanagement.Thereare,ofcourse,someunexpectedmovements,suchasthesuddenchangeintheearly1970sthatwascausedbytherapidincreaseofoilpricesandtheeconomicdisruptionthatfollowed.Thesecan,however,beviewedasashort–termfluctuationontheunderlyingdownwardtrend.Thesteadyfallinstocksclearlysuggestsimprovinginventorymanagement,buttheremaywellbeotherfactors,suchasthechangingstructureofindustry,themovetowardsservices,internationalcompetition,economiccycles,inflation,changingGDP,currencyvalueandincreasingmobility.Inventoriesclearlyrespondtosuchexternalinfluences.Ifyoulookatabusinesscycle,forexample,itmightstartwithindustrybeingover-optimisticaboutthefuture–theyexpectsalestoriseandincreaseproductiontomeetthishigherdemand.Inven-toriesbuildupassaleslagbehindproduction,andatsomepointindustrylosesconfidenceandcutsbackonproductiontousetheexcessstocks.Thiscausesadeclineintheeconomy, INVENTORYMANAGEMENT25370.060.050.040.030.0Stock/GDP(%)20.010.00.01951195419571960196319661969197219751978198119841987199019931996YearFigure10.1AggregatestockasapercentageofGDPfortheUKwhichonlypicksupagainwhenstocksarelowerandproductionisnotmeetingcurrentdemand.Becauseitisrelativelyeasytochangeinventorylevels–mucheasierthan,say,adjustingproductionlevels–theytendtofluctuatemorethanthebusinesscycleitself.IntheUKmanufacturingcontributeslessthan20%oftheGNP,butitholds40%ofthestocks.Thereareroughlyequalamountsofmaterials,workinprogressandfinishedgoods(about£20billionofeach).Theamountofstockheldbymanufacturershasfallenmuchfasterthanothersectorsofindustry,suggestingthattheyhavebeenattheforefrontofstockreduc-tion–andalsothattheyareinthebestpositiontoreducestocks.Organisationsfurtherdownthesupplychainhavetopaymoreattentiontotheirfinalcustomersandreactquicklytodemands–aleadtimeofonedayisverygoodforamanufacturer,reasonableforawholesaler,butnotgoodenoughforaretailer.BufferingsupplyanddemandDespitethecleartrendtowardslowerstocks,manyorganisationscannotreducethem.Farmersgrowonecropofhayayear,andthenstoreittofeedanimalsthroughouttheyear.Adistillerstoreswhiskyinbarrelsforatleastthreeyearsbeforesellingit.Avideostorebuyscopiesofvideosandkeepstheminstockuntilpeoplewanttohirethem.Theseorganisationsdonotwanttoeliminatestocks,buttheywanttocontrolthemproperly.Themainreasonforholdingsuchstocksistogiveabufferbetweenvariable–anduncer-tain–supplyanddemand.Imaginethefoodbeingdeliveredtoasupermarket.Thisisdeliv-eredinlargequantities–perhapsatruckloadatatime–butitissoldinmuchsmallerquantitiestoindividualcustomers.Theresultisastockofgoodsthatisreplenishedwitheverydelivery,andisreducedovertimetomeetdemand.Thestocksgiveacushionbetweensupplyanddemand.Theyallowthesupermarkettocontinueworkingefficiently,evenwhendeliveryvehiclesaredelayed,orthereisunexpectedlyhighdemandfromcustomers. 254LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT■ThemainpurposeofSTOCKSistoactasabufferbetweensupplyanddemand.■Theyallowoperationstocontinuesmoothlyandavoiddisruptions.Tobemorespecific,stocks:●actasabufferbetweendifferentpartsofthesupplychain●allowfordemandsthatarelargerthanexpected,oratunexpectedtimes●allowfordeliveriesthataredelayedortoosmall●takeadvantageofpricediscountsonlargeorders●allowthepurchaseofitemswhenthepriceislowandexpectedtorise●allowthepurchaseofitemsthataregoingoutofproductionoraredifficulttofind●allowforseasonaloperations●makefullloadsandreducetransportcosts●givecoverforemergencies●canbeprofitablewheninflationishigh.LOGISTICSINPRACTICEStockholdingsTescoIndustrialSpecialitiesandPaints.InthefirstTescoisthelargestfoodretailerintheUK,halfof2000itreportedatradingprofitofwhereithas16%ofthemarket.Italso£275million,onaturnoverof£3.8billion.operatesincentralEuropeandtheFarEast.Itsassetswerevaluedat£7.3billion,ofItsannualreportfor2000showed:which£920millionwerestocks.Totalsales£20,385millionL.T.FrancisFixedassets£8527millionL.T.Francisisamanufacturerofpre-castNumberofstores845concretefittingsforthebuildingtrade.ItsTotalsalesarea24.0millionsquarefeet2000annualreportshowedsalesof£14Stocks£744millionmillionandtotalstocks£2.4million.IBMAsyoucansee,theseorganisationsholdFormanyyearsIBMhasbeenaleaderinlargestocks.InTescothestockisaroundthecomputerindustry.In2000itsrevenue4%ofsales,inIBMabout7%intotal,inICIwas$87.5billion,anditheld£3.7billionofitis11%forthefullyear,andinL.T.Francisstocksofworkinprogressand$1.2billionitis17%.Manyorganisationshaveveryofstocksoffinishedgoods.highstocks,anditisnotunusualformanu-facturerstohold25%ofannualsales.ICIICIisamajorchemicalcompany,withfourSources:companyannualreportsandwebsiteswww.tesco.com,www.ICI.comandwww.ibm.commajordivisions–NationalStarch,Quest, INVENTORYMANAGEMENT255TypesofstockJustabouteverythingisheldasstocksomewhere,whetheritisrawmaterialsinafactory,finishedgoodsinashoportinsofbakedbeansinapantry.Wecanclassifythesestocksas:●Rawmaterials–thematerials,partsandcomponentsthathavebeendeliveredtoanorganisation,butarenotyetbeingused.●Workinprocess–materialsthathavestarted,butnotyetfinishedtheirjourneythroughtheproductionprocess.●Finishedgoods–goodsthathavefinishedtheprocessandarewaitingtobeshippedouttocustomers(seeFigure10.2).Thisisafairlyarbitraryclassification,asonecompany’sfinishedgoodsareanothercompany’srawmaterials.Someorganisations,notablyretailersandwholesalers,havestocksoffinishedgoodsonly,whileothers,likemanufacturers,haveallthreetypesindifferentproportions.Nationally,around30%ofstocksarerawmaterials,40%workinprogressand30%finishedgoods.6Somestockitemsdonotfalleasilyintothesecategories,andwecandefinetwoaddi-tionaltypes:●Sparepartsformachinery,equipment,andsoon●Consumablessuchasoil,fuel,paper,andsoon.InChapter7wedescribedmaterialrequirementsplanningasadependentdemandsystem,wherethedemandforanitemisfounddirectlyfromamasterschedule.ThealternativeSuppliersOperationsCustomersStocksofrawStocksofworkStocksofmaterialsinprogressfinishedgoodsConsumablesSparepartsFigure10.2Typesofstock 256LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTapproachlooksatanindependentdemandsystem,wherethetotaldemandforanitemismadeupoflotsofseparatedemandsthatarenotrelatedtoeachother.Theoveralldemandforbreadinasupermarket,forexample,ismadeupoflotsofdemandsfromseparatecustomerswhoactindependently.Independentdemandsystemscontrolstocksbyfindingthebestbalancebetweenvariouscosts.Inparticular,theylookforanswerstothreebasicquestions:1.Whatitemsshouldwestock?Noitem,howevercheap,shouldbestockedwithoutconsid-eringthecostsandbenefits.Thismeansthatanorganisationshouldstopunnecessary,newitemsbeingaddedtostock,anditshouldmakeregularsearchestoremoveobsoleteordeadstock.2.Whenshouldweplaceanorder?Thisdependsontheinventorycontrolsystemused,typeofdemand(highorlow,steadyorerratic,knownexactlyorestimated),valueoftheitem,leadtimebetweenplacinganorderandreceivingitintostock,supplierreliability,andanumberofotherfactors.3.Howmuchshouldweorder?Large,infrequentordersgivehighaveragestocklevels,butlowcostsforplacingandadministeringorders:small,frequentordersgivelowaveragestocks,buthighcostsofplacingandadministeringorders.Thefirstofthesequestionsisamatterofgoodhousekeeping,simplyavoidingstockthatisnotneeded.Thefollowingsectionlooksforanswerstothelasttwoquestions.CostsofcarryingstockThetotalcostofholdingstockistypicallyaround25%ofitsvalueayear.Areasonableobjec-tiveistominimisethiscost.Youmightthink–especiallyafterthelessonsofjust-in-time–thatminimisingcostsisthesameasminimisingstocks.Butthisisnotnecessarilytrue.Ifashopholdsnostockatall,itcertainlyhasnoinventorycosts,butitalsohasnosales;iteffec-tivelyincursanothercostoflosingcustomers.Lambert7describesoneapproachwhichlooksatthecostsofcapital(forborrowing,oppor-tunity,andsoon),inventoryservice(insurance,taxes,andsoon),storagespace(rent,heating,andsoon)andinventoryrisk(obsolescence,damage,andsoon).Wewilluseaslightlydifferentapproachthatdividestheoverallcostsofstockintofourseparatecomponents.1.Unitcost:thepriceforanitemchargedbythesupplier,orthecosttotheorganisationofacquiringoneunitoftheitem.Itmaybefairlyeasytofindthisbylookingatquotationsorrecentinvoicesfromsuppliers,butitismoredifficultwhenthereareseveralsuppliersofferingslightlydifferentproducts,orofferingdifferentpurchaseconditions.Ifacompanymakestheitemitself,itmaybedifficulttogiveareliableproductioncostorsetatransferprice.2.Reordercost:thecostofplacingarepeatorderforanitem.Thismightincludeallowancesforpreparinganorder,correspondence,receiving,unloading,checking,testing,useofequipmentandfollow-up.Sometimes,costssuchasqualitycontrol,trans-port,sortingandmovementofreceivedgoodsareincluded.Inpractice,thebestestimateforareordercostoftencomesfromdividingthetotalannualcostofthepurchasingdepartmentbythenumberofordersitsendsout. INVENTORYMANAGEMENT2573.Holdingcost:thecostofholdingoneunitofaniteminstockforaunitperiodoftime–forexample,thecosttoAirFranceofholdingaspareengineinstockforayear.Theobviouscostistied-upmoney.Thisiseitherborrowed(inwhichcasethereareinterestpayments)oritiscashthatcouldbeputtootheruses(inwhichcasethereareopportu-nitycosts).Otherholdingcostsareforstoragespace,loss,handling,specialtreatment,suchasrefrigeration,administrationandinsurance.Anotherproblemisobsolescence,whichreferstostockthathasbeenkeptinstoragesolongthatithaslittleornovalue,suchassparepartsthatarenolongerneededorfoodthatispastitssell-bydate.Thereisatrendforproductstohaveshorterlifecycles,sotheamountofobsolescencemightincrease.Ontheotherhand,wearemovingmaterialsmuchmorequicklythroughsupplychains,soinmanycircumstancestheamountofobsolescenceisdeclining.Itisdifficulttogivetypicalvaluesforthese,butaguidelineforannualcostsasapercentageofunitcost,has:%ofunitcostcostofmoney10–15storagespace2–5lossandobsolescence4–6handling1–2administration1–2insurance1–5Total19–354.Shortagecost:occurswhenanitemisneededbutitcannotbesuppliedfromstock.Inthesimplestcasearetailerlosesdirectprofitfromasale.Buttheeffectsofshortagesareusuallymorewidespreadandincludelostgoodwill,lossofreputation,andlossofpoten-tialfuturesales.Shortagesofrawmaterialsforproductioncancausedisruption,resched-ulingofproduction,re-timingofmaintenanceperiods,andlayingoffemployees.Shortagecostsmightalsoincludepaymentsforpositiveactiontoremedytheshortage,suchasexpeditingorders,sendingoutemergencyorders,payingforspecialdeliveries,storingpartlyfinishedgoodsorusingmoreexpensivesuppliers.Itcanbedifficulttogetfiguresforanyinventorycosts,butshortagecostsareaparticularproblem.Thesecanincludesomanyintangiblefactors,suchaslostgoodwill,thatitisdifficulttoagreeareasonablevalue.Mostorganisationstaketheviewthatshortagesareexpensive,soitisgenerallybettertoavoidthem.Inotherwords,theyarewillingtopaytherelativelylowercostsofcarryingcoststoavoidtherelativelyhighercostsofshortages.Asyoucanimagine,thistendstoincreasetheamountofstockheld,particularlywhenthereisuncertainty.WORKEDEXAMPLEJanetLongisapurchasingclerkatOvertonTravelGroup.Sheearns£16,000ayear,withotheremploymentcostsof£3000,andhasabudgetof£6200fortelephone,communi-cations,stationeryandpostage.InatypicalmonthJanetplaces100orders.Whengoodsarrivethereisaninspectionthatcostsabout£15anorder.Thecostofborrowingmoney 258LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEcontinuedis9%,theobsolescencerateis5%andinsuranceandothercostsaverage4%.HowcanOvertonestimatetheirreorderandholdingcosts?SolutionThetotalnumberofordersayearis12×100=1200orders.■Thereordercostincludesallcoststhatoccurforanorder.Theseare:■salary=£16,000/1200=£13.33anorder■employmentcosts=£3000/1200=£2.50anorder■expenses=£6200/1200=£5.17anorder■inspection=£15anorderSothereordercostis13.33+2.50+5.17+15=£36anorder.■Holdingcostsincludeallcoststhatoccurforholdingstock.Theseare:■borrowing=9%■obsolescence=5%■insuranceandtaxes=4%Sotheholdingcostis9+5+4=18%ofinventoryvalueayear.Itisevendifficulttoagreeavalueforbasicfigureslikethevalueofstockheld.Isitworththeamountyouactuallypaidforit,theamountyouwouldpaytoreplaceit,theamountyoucansellitfor,orsomeothervalue?Inpractice,themostcommoncostingisbasedontheamountpaidandcanuse:●FIFO–firstin,firstout,whichassumesthatstockissoldintheorderitwasbought,sotheremainingstockisvaluedatthecurrentreplacementcost●LIFO–lastin,firstout,whichassumesthatthelateststockisusedfirst,sotheremainderisvaluedatearlieracquisitioncosts●Averagecost–whichusesamovingaveragecostoversomeperiod.WORKEDEXAMPLEAcompanyboughtthefollowingnumbersofanitem.InJulyithad8unitsinstock.Whatwasthevalueofthisstock?MonthJanFebMarAprMayJunNumberbought645832Unitprice211918222426 INVENTORYMANAGEMENT259WORKEDEXAMPLEcontinuedSolutionThereisnorightanswertothis,asitdependsontheconventionsthatwechoosetouse.■FIFOassumesthattheremainingunitsarethelastthatwerebought,andthevalueofthelasteightunitsis(2×26)+(3×24)+(3×22)=190■LIFOassumesthatthefirstunitsboughtarestillinstock,andthevalueofthesefirsteightunitsis(6×21)+(2×19)=164■Currentreplacementcostgivesavalueof(8×26)=206■Athree-monthmovingaveragegivesasmoothedunitpriceof(22+24+26)/3=24,andavalueof(8×24)=192.ECONOMICORDERQUANTITYFindingtheordersizeTheeconomicorderquantity(EOQ)wasdevelopedearlylastcentury8–10andhasremainedadominantthemeforthecontrolofindependentdemandsystems.Itremainsthebestwayoftacklingawiderangeofinventoryproblems.Itisflexibleandeasytouse,andgivesgoodguidelinesforawiderangeofcircumstances.Imagineasingleitem,heldinstocktomeetaconstantdemandofDperunittime.Assumethatunitcost(U),reordercost(R)andholdingcost(H)areallknownexactly,whiletheshortagecostissohighthatalldemandsmustbemetandnoshortagesareallowed.Theitemisboughtinbatchesfromasupplierwhodeliversafteraconstantleadtime.Wewanttofindthebestorderquantity,Q,andalwaysplaceordersofthissize.Thereisnopointincarryingsparestock,sowetimeorderstoarrivejustasexistingstockrunsout.Thenwegetaseriesofstockcycles,withthesaw-toothpatternshowninFigure10.3.StocklevelOrderquantityStockTimecycleFigure10.3Repeatedpatternofstockcycles 260LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAtsomepointanorderofsizeQarrives.Thisisusedataconstantrate,D,untilnostockisleft.Wecanfindthetotalcostforthecyclebyaddingthefourcomponentsofcost–unit,reorder,holdingandshortage.Noshortagesareallowed,sowecanignorethiscost,andthecostofbuyingtheitemisconstantregardlessoftheorderingpolicy,sowecanalsoleavetheunitcostoutofthecalculations.Thenwecanshowthatthecostperunittimeis:C=totalreordercosts+totalholdingcosts=RD/Q+HQ/2IfweplotthesetwopartsseparatelyagainstQ,wegettheresultsshowninFigure10.4.Fromthisgraphyoucanseethat:●thetotalholdingcostriseslinearlywithordersize●thetotalreordercostfallsastheorderquantityincreases●largeinfrequentordersgivehightotalholdingcostsandlowtotalreordercosts●smallfrequentordersgivelowtotalholdingcostsandhightotalreordercosts●addingthetwocostsgivesatotalcostcurvethatisanasymmetric‘U’shapewithadistinctminimum●thisminimumcostshowstheoptimalordersize–whichistheeconomicorderquantity,EOQ.Astandardanalysisshowsthattheeconomicorderquantityisfoundfromthefollowingequation:2RDEconomicorderquantity,Q=HwhereD=demandR=reordercostH=holdingcostCostVariablecostperunittimeTotalholdingcostMinimumTotalreordercostOptimalOrderordersizequantityFigure10.4Variationofcostwithordersize INVENTORYMANAGEMENT261WORKEDEXAMPLEJohnPritchardbuysstationeryforPenwynnMotors.Thedemandforprintedformsiscon-stantat20boxesamonth.Eachboxofformscosts£50,thecostofprocessinganorderandarrangingdeliveryis£60,andholdingcostis£18aboxayear.Whataretheeco-nomicorderquantity,cyclelengthandcosts?SolutionListingthevaluesweknowinconsistentunits:D=20×12=240unitsayearU=£50aunitR=£60anorderH=£18aunitayear.■Substitutingthesevaluesintotheeconomicorderquantitygives:2RD260240××Q===40unitsH18■Thenthevariablecostis:C=totalreordercosts+totalholdingcosts=RD/Q+HQ/2=60×240/40+18×40/2=360+360=£720ayearYoucanseethatthetotalreordercostsequalthetotalholdingcosts.Thisisalwaystrueifweordertheeconomicorderquantity,sowecansimplifythecalculationtotwicethetotalholdingcostor:C=HQ=18×40=£720■Wealsohavetoconsiderthefixedcostofbuyingboxes,whichisthenumberofboxesboughtayear,D,timesthecostofeachbox,U.Addingthistothevariablecostabove,givesthetotalcostofstockholding:totalcost=UD+C=50×240+720=£12,720ayear■Webuy40boxesatatime,anduse20boxesamonth,sothestockcyclelengthis2months.Ingeneral,wecanfindthestockcyclelengthfromT=Q/D:T=Q/D=40/240=1/6yearsor2monthsThebestpolicy–withtotalcostsof£12,720ayear–istoorder40boxesofpaperevery2months. 262LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTFindingthetimetoplaceordersWhenanorganisationbuysmaterials,thereisaleadtimebetweenplacingtheorderandhavingthematerialsarriveinstock.Thisisthetimetakentoprepareanorder,sendittothesupplier,allowthesuppliertomakeorassemblethematerialsandpreparethemforshipment,shipthegoodsbacktothecustomer,allowthecustomertoreceiveandcheckthematerialsandputthemintostock.Dependingoncircumstances,thisleadtimecanvarybetweenafewminutesandmonthsorevenyears.Supposetheleadtime,L,isconstant.Tomakesurethatadeliveryarrivesjustasstockisrunningout,wehavetoplaceanorderatimeLearlier.Theeasiestwayoffindingthispointistomonitorcurrentstockandplaceanorderwhenthereisjustenoughlefttolasttheleadtime.Withconstantdemand,D,thismeansthatweplaceanorderwhenthestocklevelfallstoLD,andthispointiscalledthereorderlevel.Reorderlevel=leadtimedemand=leadtime×demandROL=LDInpractice,theinventorycontrolsystemkeepsacontinuousrecordofthestockonhand,updatingthiswitheverytransactionandsendingamessagewhenitistimetoplaceanorder.Ordinarily,thismessageissenttoapurchasingdepartment;withe-procurementorsomeformofalliancethemessageissentdirectlytothesupplier;withECRsystemsthemessageissenttothesupplierandotherorganisationsdownthesupplychain.Thiscalculationworkswellprovidedtheleadtimeislessthanthelengthofastockcycle.Inthenextexampletheleadtimeistwoweeksandthestockcycleis50/20=2.5weeks.Supposetheleadtimeisraisedtothreeweeks.Thecalculationforreorderlevelthenbecomes:Reorderlevel=leadtime×demand=LD=3×20=60unitsWORKEDEXAMPLEDemandforanitemisconstantat20unitsaweek,thereordercostis£125anorderandholdingcostis£2anunitaweek.Ifsuppliersguaranteedeliverywithin2weekswhatisthebestorderingpolicyfortheitem?SolutionListingthevariablesinconsistentunits:D=20unitsaweekR=£125anorderH=£2aunitaweekL=2weeksSubstitutingthesegives:2RD212520××Q===50unitsH2Reorderlevel=leadtime×demand=LD=2×20=40unitsThebestpolicyistoplaceanorderfor50unitswheneverstockfallsto40units. INVENTORYMANAGEMENT263StocklevelEOQEconomicorderquantityReorderlevelLeadTimetimePlaceOrderorderarrivesFigure10.5UsingareorderleveltotimeordersTheproblemisthatthestocklevelneveractuallyrisesto60units,butvariesbetween0and50units.Thewayaroundthisproblemistorecognisethatthecalculatedreorderlevelreferstobothstockonhandandstockonorder.Thenthereorderlevelequalsleadtimedemandminusanystockthatisalreadyonorder.Intheexampleabove,theorderquantityis50units,soaleadtimeofthreeweekswouldhaveoneorderof50unitsoutstandingwhenitistimetoplaceanotherorder.Then:Reorderlevel=leadtimedemand–stockonorder=LD–Q=3×20–50=10unitsAnorderfor50unitsshouldbeplacedwheneveractualstockdeclinesto10units.Becausetheleadtimeislongerthanthestockcycle,therewillalwaysbeatleastoneorderoutstanding,asshowninFigure10.6.StocklevelEconomicorderquantityReorderlevelPlaceOrderPlaceOrderPlaceOrderorderAorderBorderCBarrivesCarrivesDarrivesFigure10.6Orderpatternswhenleadtimeislongerthanstockcycle 264LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTOneproblem,ofcourse,isthattheleadtimemaynotbeconstant.Weknowhowlongtheleadtimehasbeeninthepast,andweknowthecurrenttarget,buttheremaybesomevari-abilityandthesuppliermightnotalwaysachievethistarget.Aswellasforecastingdemand,wealsohavetoforecasttheleadtime,sothereorderlevelisactuallybasedontwoforecasts.SensitivityanalysisOneproblemwiththeeconomicorderquantityisthatitcangiveawkwardorderquantities.Itmight,forexample,suggestbuyingimpossiblefigures,suchas88.39tyres.Wecouldroundthisto88tyres,butmightprefertoorder90oreven100.Butdoesthisroundinghavemucheffectonoverallcosts?Inpractice,thetotalcostcurveisalwaysshallowaroundtheeconomicorderquantity.Theamountweordercanincreaseto156%oftheeconomicorderquantityorfallto64%andonlyraisevariablecostsby10%.Similarly,theorderquantitycanincreaseto186%oftheeconomicorderquantityorfallto54%andonlyraisevariablecostsby20%.ThisisonereasonwhytheEOQanalysisissowidelyused–althoughthecalculationisbasedonaseriesofassumptionsandapproximations,thetotalcostrisesslowlyaroundtheoptimal.EOQgivesagoodguidelineforordersizeinawiderangeofcircumstances(seeFigure10.7).WORKEDEXAMPLEChengTauHangnoticesthatdemandforanitemhiscompanysuppliesisconstantat500unitsamonth.Unitcostis$100andshortagecostsareknowntobeveryhigh.Thepur-chasingdepartmentsendsoutanaverageof3000ordersayear,andtheirtotaloperatingcostsare$180,000.Anystockshavefinancingchargesof15%,warehousechargesof7%andotheroverheadsof8%ayear.Theleadtimeisconstantatoneweek.Findagoodorderingpolicyfortheitem.Whatisthereorderleveliftheleadtimeincreasesto3weeks?Whatrangeofordersizekeepsvariablecostswithin10%ofoptimal?Whatisthevariablecostifordersareplacedfor200unitsatatime?SolutionListingthevaluesweknowandmakingsuretheunitsareconsistent:D=500×12=6000unitsayearU=$100aunitR=annualcostofpurchasingdepartment=180,000=$60anordernumberofordersayear3000H=(15%+7%+8%)ofunitcostayear=(0.3)×U=$30aunitayearL=1week■Wecanfindthebestorderingpolicybysubstitutingthesevaluesintotheequations:■orderquantity,2RD2606000××Q===154.9unitsH30 INVENTORYMANAGEMENT265WORKEDEXAMPLEcontinued■cyclelength,T=Q/D=154.9/6000=0.026yearsor1.3weeks■variablecostayear=HQ=30×154.9=$4647ayear■totalcostayear=UD+variablecost=100×6000+4647=$604,647ayear.■Theleadtimeislessthanthestockcycle,so:Reorderlevel=LD=1×6000/52=115.4unitsTheoptimalpolicyistoorder154.9unitswheneverstockfallsto115.4units.■Iftheleadtimeincreasesto3weeks,therewillbe2ordersoutstandingwhenitistimetoplaceanother.Then:Reorderlevel=leadtime×demand–stockonorder=LD–2Q=3×6000/52–2×154.9=36.4units.■Tokeepvariablecostswithin10%ofoptimal,thequantityorderedcanvarybetween64%and156%oftheeconomicorderquantity,whichis99.1unitsto241.6units.■Iffixedordersizesof200unitsareusedthevariablecostsare:C=totalreordercosts+totalholdingcosts=RD/Q+HQ/2=60×6000/200+30×200/2=$4800ayearWearenotusingtheeconomicorderquantity,sothevariablecostishigherandthetotalreordercostsnolongerequalthetotalholdingcosts.Cost20%increase10%increaseLowestcost0.54Q0.64QEconomic1.56Q1.86QOrderordersizequantity,QFigure10.7Thecostcurveisshallowaroundtheeconomicorderquantity 266LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWeaknessesofthisapproachTheeconomicorderquantityhasbeenusedforalmostacentury,andisstillthebasisformostindependentdemandinventorysystems.Ithasanumberofadvantages,suchas:●easytounderstandanduse●givinggoodguidelinesforordersize●findingothervaluessuchascostsandcyclelengths●easytoimplementandautomate●encouragingstability●easytoextend,allowingfordifferentcircumstances.Ontheotherhand,thereareanumberofweaknesses,asit:●takesasimplifiedviewofinventorysystems●assumesdemandisknownandconstant●assumesallcostsareknownandfixed●assumesaconstantleadtimeandnouncertaintyinsupplies●givesawkwardordersizesatvaryingtimes●assumeseachitemisindependentofothers●doesnotencourageimprovement,inthewaythatJITdoes.Wecanovercomesomeoftheseproblemsby,forexample,developingmorecomplicatedmodels.Inthenextsectionwewillshowonestepinthisdirection.LOGISTICSINPRACTICEMontagueElectricalEngineeringMontagueElectricalEngineering(MEE)isarealisedthathehadbeenorderingpartssmallelectricmotormanufacturerwithwithouttakinganynoticeoftheinventoryannualsalesof£8million.RobertHellieriscosts.Theaccountantcalculatedthecostoftheoperationsmanager.Hereadtheinventoryas30%ayearandtheorderingmonthlyinventoryreportandwassurprisedcostswereabout£15anorder.Basedontofindtotalstockshadjumpedfrom£2.2thesefiguresRobertadjustedhispurchasemillionto£2.6millioninthepastmonth.patternandreducedordersforXCT45toRobertnoticedtherewereveryhigh500.Oneyearlater,stockshadfallentolessstocksofpartnumberXCT45,whichisa3than£1million,customerservicehadcmdiameterbearing.MEEusedtheseimproved,emergencyorderswerealmoststeadily,ataratearound200aweek.TheeliminatedandMEEwassavingover£0.5bearingscost£5eachandRoberthadbeenmillionayear.buying2500unitsatatime.TherewereSource:RobertHellier(2000)Presentationtomanysuchitemsinthereport,andRobertWesternOperationsGroup,September INVENTORYMANAGEMENT267UNCERTAINDEMANDANDSAFETYSTOCKThebasiceconomicorderquantityassumesthatdemandisconstantandknownexactly.Inpracticedemandcanvarywidelyandhavealotofuncertainty.AcompanysellinganewCD,forexample,doesnotknowhowmanycopieswillsellinadvance,orhowsaleswillvaryovertime.Whenthevariationissmall,theEOQmodelstillgivesusefulresults,buttheyarenotsogoodwhendemandvariesmorewidely.Thereareseveralwayswecandealwithvariableanduncer-taindemand,andwewillillustrateoneapproachwherethedemandisnormallydistributed.Youcanseeeasilywhyourpreviouscalculationsdonotworkwithavariabledemand.Weusedareorderlevelfoundfromthemeandemandintheleadtime.Butifdemandintheleadtimeisaboveaverage,stockwillrunoutbeforethenextdeliveryarrivesandtherewillbeshortages.Unfortunately,whendemandis,say,normallydistributed,itisabovethemeanin50%ofcycles.Mostorganisationswouldnotbehappywithshortagesin50%ofstockcycles.Analternativeistoholdadditionalstocks–abovetheexpectedneeds–toaddamarginofsafety.Thenorganisationsincreasetheirholdingcostsbyasmallamount,toavoidthehighershortagecosts.Thesesafetystocksareusedifthenormalworkingstockrunsout.Theyhavenoeffectonthereorderquantity–whichisstilldefinedbytheEOQ–butdoaffectthetimewhenanorderisplaced(showninFigure10.8).Inparticular,thereorderlevelisraisedbytheamountofthesafetystocktogive:REORDERLEVEL=leadtimedemand+safetystock=LD+safetystockHighersafetystocksobviouslygiveagreatercushionagainstunexpectedlyhighdemand,andbettercustomerservice.Ofcourse,thecostsofholdinglargerstocksarealsohigher,sowehavetobalancethesetwoeffects.Theproblemisthatshortagecostsaresodifficulttofindthattheyarelittlemorethanguesses.Analternativeapproachreliesonmanagers’judgementStocklevelEconomicorderquantityReorderlevelSafetystockTimeFigure10.8Safetystockraisestheaveragestocklevel 268LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTtosetanappropriateservicelevel.Thisistheprobabilitythatademandismetdirectlyfromstock.Anorganisationtypicallygivesaservicelevelof95%.Thismeansthatitmeets95%ofordersfromstock–andacceptsthat5%oforderscannotbemetfromstock.Theservicelevelneedsapositivedecisionbymanagers,basedontheirexperience,objectives,competition,andknowledgeofcustomerexpectations.Thereareseveralwaysofdefiningservicelevel,butwewilltakeitastheprobabilityofnotrunningoutofstockinastockcycle.Thisisthecycle-servicelevel.SupposethatdemandforanitemisnormallydistributedwithameanofDperunittimeandstandarddeviationofσ.IftheleadtimeisconstantatL,thelead-timedemandisnormallydistributedwithmeanofLD.Thelead-timedemandhasavarianceofσ2Landstan-darddeviationofσ√L.Wegetthisresultfromthefactthatvariancescanbeadded,andif:●demandinasingleperiodhasmeanDandvarianceσ2,then●demandintwoperiodshasmean2Dandvariance2σ2,●demandinthreeperiodshasmean3Dandvariance3σ2,and●demandinLperiodshasmeanLDandvarianceLσ2.Thesizeofthesafetystockdependsontheservicelevel.Tobespecific,whenlead-timedemandisnormallydistributedthesafetystockis:SAFETYSTOCK=Z×standarddeviationoflead-timedemand=Zσ√LAsusual,Zisthenumberofstandarddeviationsawayfromthemean,andprobabilitiescanbefoundfromastatisticspackageortables.Togivesomeexamples:●Z=1givesastock-outin15.9%ofstockcycles●Z=2givesstock-outsin2.3%ofstockcycles●Z=3givesstockoutsin0.1%ofstockcycles.Ifdemandvarieswidely,thestandarddeviationoflead-timedemandishigh–andveryhighsafetystocksareneededtogiveaservicelevelanywherecloseto100%.Usually,organi-sationschooselowerservicelevelsthatreflecttheimportanceofeachitem.Thenveryimpor-tantitemshaveservicelevelscloseto100%,whilelessimportantonesarearound85%.WORKEDEXAMPLEAssociatedKitchenFurnishingsrunsaretailshoptosellarangeofkitchencabinets.Thedemandforcabinetsisnormallydistributedwithameanof200unitsaweekandastan-darddeviationof40units.Thereordercost,includingdelivery,is£200,holdingcostis£6perunitayearandleadtimeisfixedat3weeks.Describeanorderingpolicythatgivesthe INVENTORYMANAGEMENT269WORKEDEXAMPLEcontinuedshopa95%cycle-servicelevel.Whatisthecostofholdingthesafetystockinthiscase?Howmuchdoesthecostriseiftheservicelevelissetat97%?SolutionListingthevaluesweknow:D=200unitsaweek=10,400unitsayearσ=40unitsR=£200anorderH=£6aunitayearL=3weeks■Substitutingthesevaluesgives:■Q=√(2RD/H)=√(2×200×200×52/6)=833(tothenearestinteger)■Reorderlevel=LD+safetystock=600+safetystock■Fora95%servicelevelZ=1.64standarddeviationsfromthemean.Then:■safetystock=Zσ√L=1.64×40×√3=114(tothenearestinteger)Thebestpolicyistoorder833unitswheneverstockfallsto600+114=714units.Onaverageorderswillarrivewhenthereare114unitsleft.Thesafetystockisnotusuallyused,sotheholdingcostissimply:=safetystock×holdingcost=114×6=£684ayear■Iftheservicelevelissetat97%,Zbecomes1.88and:■safetystock=Zσ√L=1.88×40×√3=130Thecostofholdingthisis:=safetystock×holdingcost=130×6=£780ayearLOGISTICSINPRACTICEWiesiekTeknikaWiesiekTeknika(WT)marketarangeof■Marketingequipmentdiagnosticequipmentforclinicallaborato-■Customisingequipmenttocustomerriesandbloodbanks.TheyarethePolishneedsbranchofaDutchparentcompany,and■Installingitincustomers’premiseshavebeenopenfor25years.Asummaryof■Trainingcustomerstousetheequipmenttheiractivitiesincludes: 270LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinued■Maintaininga24-hourhelpandadvicestandardprograms,butdecidedtogettail-deskoredsoftwarefromthecompanythathad■Preventivemaintenanceinstalledtheirinformationsystem.Thisset■Emergencyrepairs.stocklevelsaccordingtocompanypolicy,butrelatedpurchasestoactualuse,forecastWTcurrentlysupport33typesofequip-demand,andanalysesofleadtimes.Usingment,guaranteeingarepairwithin48thecurrentsupplierhadtheadvantagesof:hours.Forthistheyneedstocksofpartsandconsumables,andcurrentlyhold22,000■usingexistingsystemstodosomeoftheitemsvaluedat300,000Zl(basedoninter-necessaryanalysesnaltransferprices).Theseareorderedfrom■integratingthenewsystemeasilywiththeparentcompanywithanormalleadexistingsystemstimeof14days,butrushorderscanarrive■givingacustomisedsystemforthestockinfivedays.Upuntil2001,theamountofanalysesstockheldwasdeterminedbytheparent■buildingonWT’sexperiencewithcompany.WTrecordedtransactionsandcurrentsystemseverymonthplacedanordertoreplacethe■havingasoftwaresupplierthathaspartsthathadbeenusedinthepreviousprovedreliableandhelpfulmonth.Thissystemhadanumberofdisad-■havinglowerdevelopmentandoper-vantages,with:atingcosts.■noattempttominimiseorreducecostsThekeypartsofthenewsystemare■time-consumingprocedurestocheckimproveddataentry(basedoninternationaltransactionrecordsandprepareordersbarcodes),analysisofdemand(withfore-■nocheckthatallitemsheldwereactu-casts,monitoringcustomerservice,andsoallyneededon),ordergeneration(automaticallygener-■noguaranteethatstocklevelswereatingandtransmittingorderstotheparentappropriatecompany)andordertracking(checking■occasionalshortagesneedingrushordersprogressofeachorder,timing,costs,andso■norecordsofstockperformanceon).Thebenefitsofthenewsysteminclude■stocklevelsrisingby60%inthepreviouslowerstocklevels,costs,timespentonfouryears.administrationandshortages.In2001theparentcompanyencour-Source:companyreportsageditsbranchestoreviewandimprovetheirinventorycontrol.WTlookedatsomePERIODICREVIEWSYSTEMSTheEOQanalysisusesafixedorderquantityforpurchases,soanorderoffixedsizeisplacedwheneverstockfallstoacertainlevel.Aheatingplantmayorder25,000litresofoilwhenevertheamountinthetankfallsto2500litres.Suchsystemsneedcontinuousmonitoringofstock INVENTORYMANAGEMENT271StocklevelEconomicorderquantityReorderlevelTime(a)FixedorderquantityStocklevelTargetstocklevelPeriodTime(b)PeriodicreviewFigure10.9Alternativeapproachestoorderinglevelsandarebestsuitedtolow,irregulardemandforrelativelyexpensiveitems.Butthereisanalternativeperiodicreviewapproach,whichordersvaryingamountsatregularintervals.Asupermarketmayrefillitsshelveseveryeveningtoreplacewhateveritsoldduringtheday.Theoperatingcostofthissystemisgenerallyloweranditisbettersuitedtohigh,regulardemandoflowvalueitems.(SeeFigure10.9).Ifthedemandisconstantthesetwosystemsarethesame,butdifferencesappearwhendemandvaries.Wecanshowthisbyextendingthelastanalysis,andlookingataperiodicreviewsystemwheredemandisnormallydistributed.Thenwearelookingforanswerstotwoquestions.First,howlongshouldtheintervalbetweenordersbe?Thiscanbeanyconvenienttime,andorganisationstypicallyplaceordersattheendofeveryweek,oreverymorning,orattheendofamonth.Ifthereisnoobviouscyclewemightaimforacertainnumberofordersayearorsomeaverageordersize.Oneapproachistocalculateaneconomicorderquantity,andthenfindtheperiodthatgivesordersofaboutthissize.Thisdecisionislargelyamatterformanagementjudgement. 272LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTSecond,whatisthetargetstocklevel?Thesystemworksbylookingatthestockonhandwhenanorderisdue,andorderinganamountthatbringsthisuptoatargetstocklevel.orderquantity=targetstocklevel–stockonhandAttheendofamonthacompanymighthavetenunitsremainingofanitemwithatargetstocklevelof40,soitorders30moreunits.Wecanfindthetargetstocklevelbyextendingourpreviousanalyses.SupposetheleadtimeisconstantatL.Whenanorderisplaced,thestockonhandplusthisordermustlastuntilthenextorderarrives.AsyoucanseefromFigure10.10:nextorderarrivesafteratime=orderinterval+leadtime=T+LAgain,wewillassumethatthedemandforeachperiodisnormallydistributedwithameanDandstandarddeviationσ,andthatboththeorderperiodandleadtimearefixedatTandLrespectively.Then:●demandinoneperiodhasmeanDandvarianceσ2●demandovertwoperiodshasmean2Dandvariance2σ2●demandover(T+L)periodshasmeanD(T+L),varianceof(T+L)σ2Thestandarddeviationindemandover(T+L)isσ√(T+L),sowecandefineasafetystockas:safetystock=Z×standarddeviationofdemandover(T+L)=Zσ√(T+L)StocklevelTargetstocklevelPlaceOrderPlaceOrderTimeorderarrivesorderarrivesLTABFigure10.10OrderplacedatAhastocoverdemanduntilB INVENTORYMANAGEMENT273Then:targetstocklevel=meandemandover(T+L)+safetystock=D(T+L)+Zσ√(T+L)Supermarketstraditionallyuseperiodicreview,andwithEDIyoucanimagineastorewherethetillspassmessageseverynighttoreplenishproductsthatwereusedduringtheday.Butthesystembecomesmoreresponsiveandreducesstocklevels,ifitsendsmessages,say,twoorthreetimesaday.Suppliersconsolidatetheseordersandsenddeliveriesasoftenasnecessary.WORKEDEXAMPLEDemandforanitemhasameanof200unitsaweekandstandarddeviationof40units.Stockischeckedeveryfourweeksandleadtimeisconstantattwoweeks.Describeapol-icythatwillgivea95%servicelevel.Iftheholdingcostis£2aunitaweek,whatisthecostofthesafetystockwiththispolicy?Whatistheeffectofa98%servicelevel?SolutionListingthevaluesgiven:D=200unitsσ=40unitsH=£2aunitaweekT=4weeksL=2weeks■Fora95%servicelevel,Zis1.64(whichyoucanfindfromastandardpackageortables).Then:■safetystock=Zσ√(T+L)=1.64×40×√6=161(tothenearestinteger)■targetstocklevel=D(T+L)+safetystock=200×6+161=1361.Whenitistimetoplaceanorder,thepolicyistofindthestockonhand,andplaceanorderfor:■ordersize=targetstocklevel–stockonhand=1361–stockonhand.If,forexample,thereare200unitsinstock,weplaceanorderfor1361–200=1161units.■Thesafetystockisnotnormallyused,sotheholdingcost:=safetystock×holdingcost=161×2=£322aweek.■Iftheservicelevelisincreasedto98%,Z=2.05.Then:■safetystock=Zσ√(T+L)=2.05×40×√6=201units■targetstocklevel=D(T+L)+safetystock=200×6+201=1401units■costofthesafetystockissafetystock×holdingcost=201×2=£402aweek. 274LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTButwhystopattwoorthreemessagesaday,whenthetillscansendmessageseverytimetheymakeasale?Thisistheapproachofcontinuousreplenishment,whichhasreducedstocksinTescoby10%,whileincreasingavailabilityby1.5%andsignificantlyincreasingproductivity.11EFFORTOFSTOCKCONTROLABCanalysisEventhesimplestandmosthighlyautomatedinventorycontrolsystemneedssomeefforttomakeitrunsmoothly.Forsomeitems,especiallycheapones,thiseffortisnotworthwhile.Veryfeworganisationsinclude,forexample,routinestationeryornutsandboltsintheirstockcontrolsystem.Attheotherendofthescaleareveryexpensiveitemsthatneedspecialcareabovetheroutinecalculations.Aircraftengines,forexample,areveryexpensive,andairlineshavetocontroltheirstocksofspareenginesverycarefully.AnABCanalysisputsitemsintocategoriesthatshowtheamountofeffortworthspendingoninventorycontrol.ThisisastandardParetoanalysisor‘ruleof80/20’,whichsuggeststhat20%ofinventoryitemsneed80%oftheattention,whiletheremaining80%ofitemsneedonly20%oftheattention.ABCanalysesdefine:●Aitemsasexpensiveandneedingspecialcare●Bitemsasordinaryonesneedingstandardcare●Citemsascheapandneedinglittlecare.TypicallyanorganisationmightuseanautomatedsystemtodealwithallBitems.ThesystemmightmakesomesuggestionsforAitems,butdecisionsaremadebymanagersafterreviewingallthecircumstances.Citemsmightbeexcludedfromtheautomaticsystemandcontrolledbyadhocmethods.AnABCanalysisstartsbycalculatingthetotalannualuseofeachitembyvalue.Wefindthisbymultiplyingthenumberofunitsusedinayearbytheunitcost.Usually,afewexpen-siveitemsaccountforalotofuse,whilemanycheaponesaccountforlittleuse.IfwelisttheCumulative100percentageofusebyvalue5001050100CumulativeApercentageBCofitemsFigure10.11TypicalresultsforanABCanalysis INVENTORYMANAGEMENT275itemsinorderofdecreasingannualusebyvalue,Aitemsareatthetopofthelist,BitemsareinthemiddleandCitemsareatthebottom.Wemighttypicallyfind:Category%ofitemsCumulative%ofuseCumulative%of%ofitemsbyvalueusebyvalueA10107070B30402090C6010010100Figure10.11showstypicalresultsofplottingthecumulativepercentageofannualuseagainstthecumulativepercentageofitems.YouhavetobecarefulwithABCanalysesastheycangivemisleadingadvice.Theannualvalueofamaterial’suseisoftenapoormeasureofitsimportance.Essentialsafetyequipment,forexample,hastobepresentevenifitisneverused.Anassemblylineonlykeepsgoingifallmaterialshavethesame,highservicelevel,regardlessoftheircost.WORKEDEXAMPLEAsmallstorehastencategoriesofproductwiththefollowingcostsandannualdemands:ProductP1P2P3P4P5P6P7P8P9P0UnitCost(D)2010205010505201001Annualdemand(‘00s)2.5502066156105150DoanABCanalysisoftheseitems.Ifresourcesforinventorycontrolarelimited,whichitemsshouldbegivenleastattention?SolutionTheannualuseofP1intermsofvalueis20×250=D5000.Repeatingthiscalculationfortheotheritemsgivesthefollowingresults:ItemP1P2P3P4P5P6P7P8P9P0%ofitems10101010101010101010Annualuse(D’000s)550403301530510105Sortingtheseintoorderofdecreasingannualusegivesthefollowingresults:ProductP4P2P3P6P5P8P9P1P7P0Cumulative%ofitems102030405060708090100Annualuse(D’000s)330504030151010555Cumulativeannualuse330380420450465475485490495500Cumulative%annualuse667684909395979899100Category<–A–><————B————><———————C———————>Theboundariesbetweencategoriesofitemsareoftenunclear,butinthiscaseP4isclearlyanAitem,P2,P3andP6areBitemsandtherestareCitems.TheCitemsaccountforonly10%ofannualusebyvalue.Ifresourcesarelimited,theseshouldbegivenleastattention. 276LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTVendormanagedinventoryIfanorganisationistryingtoreducetheamountofeffortitputsintoinventorycontrol,oneoptionistoleavethewholeproblemtosomeoneelseandusethirdparties.Wehavealreadyseenthatoutsourcingpartsoflogisticscanbringadvantages,andoneoptionistouseathirdpartytokeepallstock.Anotheroptionistohaveanotherorganisationlookafterthestockcontrol,withoutthemactuallyholdingthestock.Perhapsthemostcommonarrangementofthiskindisvendormanagedinventory.Youcanimaginethisisadepartmentstore,whichholdsstocksof,say,shoes.Ordinarilythestorecontrolsitsownstocks,andordersmorefromawholesalerwhenitwantsthem.Withvendormanagedinventory,thewholesalercontrolsthestocks,andsendsmorealongwhentheyareneeded.Thebenefitsofsucharrangementsarethatthesuppliercanco-ordinatestocksoverawiderarea,useoptimalinventorypolicies,organisetransportmoreefficiently,increaseintegrationinthesupplychain,collectmoreinformationaboutdemandpatterns,andgiveaconsistentcustomerservice.12Thedrawbacksincludemorerelianceonasupplierwhomayhavedifferentobjectives,lessclearresponsibilityforstock,needformoresophisticatedinformationsystems,andlessflexibility.LOGISTICSINPRACTICEBHPandNalco/ExxonEnergyChemicalsEverydayBHPoffshoreproduces70,000management.Localoperationsgaveupbarrelsofoiland300millioncubicfeetoftheirstocksandreliedonthesupplyfromgas.Since1995theyhavehadanallianceNalco/Exxon,removingstages2,3,4and6withNalco/ExxonEnergyChemicalstosup-fromthesupplychaininFigure10.12.plyspecialtychemicals.In1998theylookedAlthoughthecompaniesalreadyhadaforimprovementstothesupplychain,akeyworkingalliance,thiswasasignificantstep.sectionofwhichisshowninFigure10.12.ThenewsystemwaslaunchedafteralotofThishadseveralproblemsincluding:preparationin1999,andreducedcostsby■verylargesafetystocks28%–or$300,000ayear–withnoreduc-■poororderpoliciestionincustomerservice.Therehavealso■nosinglepointofresponsibilityforstocksbeennumerousintangiblebenefits,suchas■poormanagementpracticestheredeploymentofscarceresourcesto■barriersanddelaystoorders.moreprofitablearea.ThecompaniesdecidedtointroduceaSource:JonesA.(2001)Vendormanagedinven-tory,LogisticsandTransportFocus,3(5),31–5singleinventorysystem,basedonvendor3.6.1.2.Thirdparty4.5.Nalco/ExxonNalco/Exxon➜BHPoffshore➜shorebase➜BHPpurchasing➜Nalco/Exxon➜manufacturingoffshoredepartmentCustomerservicesstocksstocksstocksFigure10.12OriginalsupplychainforNalco/Exxon INVENTORYMANAGEMENT277❑Stocksarethematerialsthatorganisationskeepinstoreuntiltheyareneeded.Everyorganisationholdsstocksofsomekind,togiveabufferbetweensupplyanddemand.Theirmainpurposeistoallowforuncertaintyandvariation.■■■■❑Therearemanytypesofstocksandarrangementsfortheirstorage.Thisisalwaysexpensiveandorganisationslookformethodsofcontrolthatachievesomespecificpurpose.Theyusuallylookforabalancebetweenthedifferentcosts.❑Mostindependentdemandinventorysystemsarebasedonaneconomicorderquantity.Thisistheordersizethatminimisesthetotalcostofasimpleinventorysystem.Thereorderlevelshowsthetimestoplaceorders.❑Ifdemandvarieswidelywecanaddasafetystocktoachieveaspecifiedservicelevel.Therearemanyotherextensionstothebasicmodels.❑Analternativeapproachusesaperiodicreviewsystemthatplacesregularorderstobringstocksuptoatargetlevel.❑Thereareseveralwaysofallocatingreasonableefforttostockcontrol.OneCHAPTERREVIEWusesanABCanalysis;anotheroutsourcespartofthefunction,perhapsusingvendormanagedinventory.CASESTUDYLennoxWholesaleGroupBrisbaneisthemaincityofQueensland,Australia.Tothenorthareaseriesofcoastaltownsthataregrowingveryquickly.In1988GeorgeLennoxopenedadistri-butioncentreinCairnstosupplypharmaceuticalsandrelatedproductstoretailpharmacies,hospitals,dispensingdoctorsandafewotheroutlets.Inthepast,deliv-eriesofpharmaceuticalsinthisremoteareahadbeenmadedirectlybymanufac-turers,butthegrowingpopulationhadencouragedwholesalerstoopen.Nowthereisamatureindustrygivinganefficientdeliveryservicefromcentralisedwarehouses.Asmorepharmaceuticalwholesalersarrivedthemarkethasbecomeincreasinglycompetitive.GeorgeLennox’scompanyhasgrownintotheLennoxWholesaleGroup(LWG)andisoneofthemaincompaniesinthearea.Itisnowclassifiedasamedium-sizedprivatecompanywhichisrunefficientlyandgivesagoodservicetocustomers.ThethreemainactivitiesofLWGare:■ordertakingandprocessing■stockholdingandcontrol■deliverytocustomers. 278LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedToensurehiscompany’scontinuingsuccess,GeorgeLennoxisalwayslookingforimprovedperformance.Ashortwhileagohewasconcernedthatthecostofdeliveriestocustomerswasrising.Thedistributionsystemhadbeenreviewedoccasionallyasthecompanygrew,butitwasessentiallydesignedforamuchsmalleroperation.Georgehiredamanagementconsultanttogiveadviceonimprovingthetransportoper-ations.Theconsultantdidsomeworkwhichsuggestedareasforimprovement,andhisfinalreportsuggestedthatthecompanylookatitsstockholdingpolicies.Georgelookedatthestockcontrolsystem,whichwasbasedonstandardsoftwareprovidedbyCyborgExcelersevenyearsearlier.Thishadbeenupdatedandexpandedtwice,andstillseemedtoworkquitewell.Unfortunately,acloseexaminationshowedthatstocklevelshadactuallybeendriftingupwardsforsometime.Thepurchasingdepartmentexplainedthatthecompanywassuccessfulbecauseithadareputationforreliabilityandservice.Acustomercoulde-mail,faxortelephoneanorderanddeliverywouldbeguaranteedduringthenextworkingday.UnfortunatelyLWGhadoccasion-allyrunoutofstockandhadletdowncustomers(theirownleadtimefrommanufac-turersaveragedaboutaweek).Tomakesurethishappenedrarely,thepurchasingdepartmenthadadoptedapolicyofkeepingtwoweeks’demandinreservestock,butforsomereasonthisseemedtobedriftinguptothreeweeks’demand.Thesameorderingprocedurewasusedforallitems.Thiswasbasedonthepurchasingdepartment’sviewthatthemostimportantfactorwasaveragedemandoverthepastfiveweeks.Thisvaluewasusedasaforecastoffuturedemand.Thenareorderlevelwassetas:Reorderlevel=Forecast×(leadtime+safetystock)×FactorwhereFactorisavariablebetween1and2togiveasubjectiveviewoftheitem’simportanceandthesupplier’sreliability.Orderquantitiesarereallysetbythenumberofstaffinthepurchasingdepart-ment.Threepeopleworkinthedepartment,eachprocessinguptosixtyordersaday.In200workingdaysayeartheycanprocess36,000orders.Astherewere4000itemsinstock,eachitemcanhaveanaverageof9ordersayear.Toaddanotherelementofsafety,eachorderwasmadebigenoughtolastabouteightweeks.Thesystemwaslargelyautomated,andnobodyreallycheckeditsperformance.Itemswereusuallyinstockwhentheywereneeded,somanagersdidnotlookatthedetailsoftheoperations.Unitcostsvariedbetweenonedollarandseveralhundreddollars,andnoonehadcalculatedcostofstockholdingorpurchasing.Asanexper-iment,Georgecollectedsomeinformationforasmallsampleofnineitems. INVENTORYMANAGEMENT279CASESTUDYcontinuedItemWeek1234567891532842522714512355671219872643012603220810986648777738225118923177987548223743441333221221951154602304680573276232272111559530766346182591953017912096503776557402422173120599361215659885331022523187131360819860395231118628156140559694621102133626523182100963735556411672582452517198555518755912502772122816912375892095191322263224312101119601304485Reorderlevel302122010501601120610025209004400Orderquantity4502000150024514507900450019506400Unitcost(A$)45.2510.208.7532.6012.256.5028.5036.004.20CASESTUDYQuestions●Howwelldoyouthinktheexistinginventorycontrolsystemworks?Whatareitsweaknesses?●Howcouldyouimprovethesystem?●GeorgeLennoxiskeentomakeprogressinthisarea.Whatwouldyouadvisehimtodonext?PROJECTNationalStockHoldingsOnanationalscale,theamountofstockseemstobefalling.Collectsomefigurestocheckthisobser-vation.Howdothesefiguresvaryfordifferentcountries?Whatarethemainfactorsthataffectnationalstockholdings?Whateffectdoesthishaveontheeconomy?Whatothertrendsarethereininventorycontrol? 280LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROBLEMS1.Thedemandforanitemisconstantat200unitsayear.Unitcostis£50,costofprocessinganorderis£20andholdingcostis£10perunitperannum.Whataretheeconomicorderquantity,corre-spondingcyclelengthandcosts?2.JeanJeaniespa.work48weeksayeartomeetdemandforjeanswhichismoreorlessconstantat200unitsaweek.Theypay£20foreachpairofjeansandaimforareturnof20%oncapitalinvested.Annualstoragecostsare5%ofthevalueofgoodsstored.Thepurchasingdepartmentcosts£65,000ayearandsendsoutanaverageof2000orders.Findtheoptimalorderquantityforjeans,thebesttimebetweenordersandtheminimumcostofstockingtheitem.3.Demandforanitemissteadyat40unitsaweekandtheeconomicorderquantityhasbeencalcu-latedat150units.Whatisthereorderlevelwhentheleadtimeis:(a)1week(b)3weeks(c)5weeks(d)7weeks?4.FeniccieFantoccaforecastdemandforcomponentstoaverage18adayovera200dayworkingyear.Anyshortagesdisruptproductionandgiveveryhighcosts.Theholdingcostforthecomponentis120,000lireaunitayear,andthecostofplacinganorderis240,000lireanorder.Findtheeconomicorderquantity,theoptimalnumberofordersayearandthetotalannualcostofoperatingthesystemiftheinterestrateis20%ayear.5.Acompanyadvertisesa95%cycle-servicelevelforallstockitems.Stockisreplenishedfromasinglesupplierwhoguaranteesaleadtimeof4weeks.Whatreorderlevelshouldthecompanyadoptforanitemthathasanormallydistributeddemandwithmean1000unitsaweekandstandarddeviationof100units?Whatisthereorderlevelfora98%cycle-servicelevel?6.WolfgangHeinzstocksanitemwithaunitcostof$80,reordercostof$100andholdingcostof$2aunitaweek.Demandfortheitemhasameanof100aweekwithstandarddeviation10.Leadtimeisconstantat3weeks.Designaninventorypolicyfortheitemtogiveaservicelevelof95%.Howwouldyouchangethistogivea90%servicelevel?Whatarethecostsofthesetwopolicies?7.DescribeaperiodicreviewsystemwithanintervaloftwoweeksforthecompanydescribedinProblem10.5.8.Asmallstorehastencategoriesofproductandthefollowingcostsandannualdemands:ProductH1P2A3X1W2P3Z1C2C3Z2UnitCost(Dm)6075903121830456066Annualdemand(‘00s)3221087302064DoanABCanalysisoftheseitems.DISCUSSIONQUESTIONS1.Whatcostsareincurredbyholdingstock?Someorganisationstrytoreducestocksbymakingtoorder,orguaranteeingdeliverywithinaspecifiedperiod.Dosuchmethodsreallyreduceinventorycosts? INVENTORYMANAGEMENT2812.Whatfactorsinrealinventorycontrolarenotincludedintheeconomicorderquantitymodel?Ifthecostsofholdingstockaresodifficulttofind,howreliablearetheresultsfromthiskindofanalysis?3.Whatshouldyouconsiderwhensettingaservicelevel?Howcanahospitalsetareason-ableservicelevelforitssuppliesofbloodfortransfusions?4.WehavenowseenhowstockscanbecontrolledbyMRP,JITandindependentdemandsystems.Whenwouldyouuseeachofthese?Arethereanyothermethods?5.Whatfeatureswouldyouexpecttoseeinanautomatedinventorycontrolsystem?Lookatsomecommercialpackagesandcomparethefeaturestheyoffer.6.Stocksareaninevitable.MethodslikeJITonlytransferstocksfromonepartofthesupplychaintoanother.Towhatextentdoyouthinkthisistrue?REFERENCES1.InstituteofGroceryDistribution(1998)RetailDistribution1998,IGD,Herts.2.InstituteofLogistics(1998)EuropeanLogistics:ComparativeSurvey,InstituteofLogistics,Corby.3.OfficeforNationalStatistics(2001)AnnualAbstractofStatistics,HMSO,London.4.OfficeforNationalStatistics(2001)UKEconomicAccounts,HMSO,London.5.OfficeforNationalStatistics(2001)EconomicTrends,HMSO,London.6.WatersC.D.J.(2001)Inventorymanagement,Ch.12inBrewerA.M.,ButtonK.J.andHensherD.A.(eds)HandbookofLogisticsandSupplyChainManagement,Pergamon,London.7.LambertD.W.(1976)TheDevelopmentofanInventoryCostingMethodology,NationalCouncilforPhysicalDistributionManagement,Chicago.8.HarrisF.(1915)OperationsandCost,A.Shaw&Co.,Chicago.9.RaymondF.E.(1931)QuantityandEconomyinManufacture,McGraw-Hill,Chicago.10.WilsonR.H.(1934)Ascientificroutineforstockcontrol,HarvardBusinessReview,No.XIII.11.Tescoplc(2001)AnnualReviewandSummaryFinancialStatement.2001.12.HerringS.(2000)Inventorymanagementintothe21stcentury,LogisticsandTransportFocus,2(7),43–5.FurtherreadingGreeneJ.H.(1997)ProductionandInventoryControlHandbook(3rdedn),McGraw-Hill,NewYork.LewisC.D.(1997)DemandForecastingandInventoryControl,WoodheadPublishing,Cambridge.SilverE.A.,PykeD.F.andPetersonR.(1998)InventoryManagementandProductionPlanningandScheduling(3rdedn),JohnWiley,NewYork.TersineR.J.(1994)PrinciplesofInventoryandMaterialsManagement,PrenticeHall,EnglewoodCliffs,NJ.WatersC.D.J.(1992)InventoryControlandManagement,JohnWiley,Chichester.WatersC.D.J.(1998)APracticalIntroductiontoManagementScience(2ndedn),Addison-WesleyLongman,Harlow. CHAPTER11WarehousingandMaterialHandlingCONTENTS■Aimsofthechapter■Chapterreview■Purposeofwarehouses■Casestudy–ViaCendor■Activitieswithinawarehouse■Project–Warehouseoptions■Ownership■Discussionquestions■Layout■References■Materialshandling■Furtherreading■PackagingAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■APPRECIATEthepurposeandaimsofwarehouses■DESCRIBEthemainactivitiesinawarehouse■COMPAREthebenefitsofprivateandpublicwarehousing■SEEhowtodesigngoodwarehouselayouts■CHOOSEthemostappropriatetypeofequipment■APPRECIATEthepurposeofpackaging WAREHOUSINGANDMATERIALHANDLING283PURPOSEOFWAREHOUSESDefinitionsAllorganisationsholdstocks.Thelastchapterlookedatquestionsofcontrollinginventoriestofindthebestpatternsfororders,amounttostock,andsoon.Inthischapterwearegoingtolookatthewaystockisactuallystored.Stocksoccuratanypointinthesupplychainwheretheflowofmaterialsisinterrupted.Mostorganisationsarrangeforstockstobekeptinwarehouses.Inpractice,thesewarehousesmightbeopenfieldswhererawmaterialslikecoal,oresorvegetablesareheaped;orsophisti-catedfacilitiesthatgivetherightconditionsforfrozenordelicatematerials;ordatabasesthatholdstocksofinformation;orpeoplewhohaveastockofskills;oralmostanyotherformthatyoucanthinkof.Tosimplifythings,wewillsimplyrefertowarehousesasanyplaceforstoringmaterials.Peopleuseanumberofdifferenttermsforwarehouses,withthemostcommonbeingdistributioncentresandlogisticscentres.Sometimestheydescribedistributioncentresasstoringfinishedgoodsontheirwaytofinalcustomers,whilelogisticscentresstoreawidermixofproductsatdifferentpointsinthesupplychain.Othernamesareused,suchas‘transitcentre’,toshowthatthefacilitynotonlystoresmaterials,butdoesarangeofotherjobs.Tomakethingseasy,wewillusethegeneralterm‘warehouse’tocoverallsuchfacilities.■AWAREHOUSEisanylocationwherestocksofmaterialareheldontheirjourneythroughsupplychains.■Aswellasstorage,warehousescanbeusedforanumberofotheractivities.Warehousesareanessentialpartofmostsupplychains.Olsen1commentsthat:Wehaveseenthedemiseofwarehousingpredictedagainandagain,especiallywiththeevolutionofthephilosophiesofjust-in-time,quickresponse,efficientconsumerresponse,directstoredelivery,andcontinuousflowdistribution.Aswehavealreadyseen,therealityisthateveryorganisationholdsstockstogiveabufferbetweensupplyanddemand.Aslongastheyneedtoholdstocksofmaterials,theyneedware-housestoholdthem.Mostwarehousesaredesignedforrawmaterialscollectedbeforeoperations,andfinishedgoodsduringdistributiontocustomers.Toalesserextent,theystoreworkinprogress,consumablesandspareparts.Inthischapterwearegoingtolookatsomeofthemaindeci-sionsrelatingtothesestores.Whenwetalkaboutwarehousesstoringmaterials,thisisreallyonlypartofthestory.Manyorganisationsareusingwarehousesasconvenientlocationsfordoingarangeofrelatedjobs.Obviously,theycanbeusedtoinspect,sortmaterialsandbreakbulk(takinglargedeliveriesandbreakingthemintosmallerquantities).Theymightalsobeusedforfinishingproducts,labelling,packaging,makingproducts‘storeready’forretailers,doingotheraspectsofpostponement,servicingvendormanagedinventories,andsoon.Theoveralltrendisforwarehousestodomoretasks,positivelyaddingvalueratherthanbeingapurecostcentre. 284LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTFittingintothelogisticsstrategyWarehousesareexpensivetorunandneedcarefulplanning.Wehavealreadylookedatsomeofthekeydecisionsforthis.Thelogisticsstrategysetstheoverallstructureofthesupplychain,includingtheroleofwarehouses;locationdecisionsshowwheretoopenwarehouses;capacityplansshowthenumberofwarehousestobuildandbestsizeforeach;inventorymanagementshowsthematerialstostoreandamountsofeachtostock.Nowwearegoingtolookatsomerelateddecisions.Whatjobsshouldwedointhewarehouses?Whoshouldownthem?Whatisthebestlayout?Whatequipmentshouldweusetomovematerials?Howdowemeasureperformance?Asalways,thereisahierarchyofdecisions,withthestrategyleadingtoaseriesoftacticalandoperationaldecisions.If,forexample,thebusinessstrategyisbasedonhighcustomerservice,thelogisticsstrategywillprobablybebasedonmore,smallerwarehouses.Atleastinprinciple,warehouseslocatedneartocustomerscangivefasterresponseandbetterlevelsofservice.Apartfromtheobviousfactoroftotalthroughput,therearesomeotherimportantfactorsinchoosingthebestsizeforawarehouse.Theseinclude:●thenumberofproductsusingthewarehouse●thetypeofdemandforeachproduct,howmuchitvaries,averageordersize,andsoon●physicalfeaturesoftheproducts,particularlysizeandweight●specialstorageconditions,suchasclimatecontrol,packaging,andsoon●targetcustomerservicelevel●leadtimesfromsuppliersandpromisedtocustomers●economiesofscale●typeofmaterialhandlingequipment●layoutofstorageandrelatedfacilities.Mostofthesearefairlyobvious,suchashighercustomerservicelevelneedingbiggerware-housestoholdhigherstocks,andlongerleadtimesneedingmoresafetystocktocoverfortheunexpected.Warehouseoperationshavetocontributetothelogisticsstrategy.Somanagershavetoanalysethisstrategy,designwarehousesthatwillsupportit,andthenrunthesewarehousesaseffectivelyaspossible.Wecandescribeoneapproachtothiswiththefollowingsteps:21.analysethelogisticsstrategy–settingthecontextandfindingwhatthewarehousehastoachieve2.examinecurrentoperations–toseethefailingsandhowthesecanbeovercome.3.designanoutlinestructure–findingthebestmainlocation,numberofsub-depots,andsoon4.makedetailedplans–findingthesizeoffacilities,stockholdings,materialhandlingequipment,systemstodevelop,peopletoemploy,transportneeds,andsoon5.getfinalapproval–submittingtheplanstoseniormanagerstoagreethefunding6.finalisebuildingdesign–purchasingland,choosingcontractorsandbuilding7.finaliseequipmentdesign–choosingequipment,suppliersandpurchasing8.finalisesystemsdesign–designingtheordering,inventorycontrol,billing,goodsloca-tion,monitoring,andallothersystemsneeded9.fitout–installingallequipment,systems,staffandtesting10.openandreceivestock–totestallsystems,finishtrainingandbeginoperations11.sortoutteethingproblems–togetthingsrunningsmoothly12.monitorandcontrol–ensuringthateverythingworksasplanned,measuringperform-ance,revisingincentiveschemes,andsoon. WAREHOUSINGANDMATERIALHANDLING285Thesestepsneednotbedoneinstrictsequence,buttheyhighlightsomeoftheimportantdecisionareas.Togothroughthiscompleteprocesstakessometime,perhapstwoorthreeyearsforatypicalfacility.LOGISTICSINPRACTICEDanielWestWholesaleLtdDanielWestWholesale(DWW)isaprivatelyThentheycontactcustomerswhohavenotownedwholesaleroffrozenfishandasentorders,askingiftheywantanything.rangeoffreshfoods.Itemploys85people,Theseordersareconsolidatedinto‘cus-receivesgoodsfrom52suppliers,anddeliv-tomerrequirementlists’,whicharesenttoersto570maincustomersinthenorthofthewarehouse.ThegoodsforeachorderEnglandusingafleetof26vans.Allitsarepickedfromtheshelves,assembled,putoperationsarebasedinasinglewarehouseintoadeliverybox,checked,andtakentoainGateshead.departurebay.AtthedeparturebaytheDWWissuccessfulinahighlycompeti-materialshavefinalpackingandpromo-tivemarket,anditattributesitssuccesstotionalmaterialadded.itsoutstandingcustomerservice.ThisisThecustomerrequirementlistsareusedjudgedbythefivecriteriaofclosepersonaltodesignroutesforthevans.Thedriverscol-relationships,flexibilitytorespondtoindi-lectthescheduleofcustomerstobevisited,vidualneeds,lowpricesenhancedbydis-pickuptheboxestobedelivered,andloadcounts,highstocksmeeting98%ofordersthemintothevaninthespecifiedorder.offtheshelf,andfrequentdeliveries,nor-Thentheysetoffontheirdeliveries,visitingmallytwiceaday.anaverageof20customers,travelling110DWW’sturnoveris£35millionayear,milesamorning,anddelivering£3000ofwithagrossmarginofabout4.5%.Allthegoods.Thiswholeprocedureisrepeatedoncostsareclassifiedasacquisition(76%),aslightsmallerscaleintheafternoon.storage(7%),distribution(4%)andothersAftereachofthemaindeliveryruns,(13%).DWW’spurchasingsystemanalysesthepur-Everymorningtheorder-processingchases,consolidatestheseintoorders,androominDWWchecksordersthathaveautomaticallytransmitsthemtosuppliers.beenautomaticallysentbycustomertills,Source:WestD.(2002)ReporttoShareholders,e-mailed,faxed,ortelephonedovernight.Newcastle-upon-TyneACTIVITIESWITHINAWAREHOUSEBasicactivitiesThebasicfunctionofawarehouseistostoregoods.Thismeansthattheyreceivedeliveriesfromupstreamsuppliers,doanynecessarycheckingandsorting,storethematerialsuntilthey 286LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTareneededandthenarrangedeliverytodownstreamcustomers.Wecanaddsomedetailsandgetthefollowinglistofactivitiesthataregenerallyincludedin‘warehousing’.●receivinggoodsfromupstreamsuppliers●identifyingthegoods,matchingthemtoordersandfindingtheirintendeduse●unloadingmaterialsfromdeliveryvehicles●doinganynecessarychecksonquantity,qualityandcondition●labellingmaterials(usuallywithbarcodes)sotheycanbeidentified●sortinggoodsasneeded●movinggoodstobulkstoragearea●holdingtheminstockuntilneeded●whennecessary,movingmaterialsfrombulkstoragetoasmallerpickingstore●pickingmaterialsfromthisstoretomeetorders●movingthematerialstoamarshallingarea●assemblingmaterialsintoorders●packingandpackagingasnecessary●loadingdeliveryvehiclesanddispatchingtheorder●controllingallcommunicationsandrelatedsystems,suchasinventorycontrolandfinance.Thisisobviouslyageneralpictureandsomewarehousesdonotdoalloftheactivities,whileothersdomanymore.Youcangetsomeideaofthecostsinvolvedfromthefollowingexample.LOGISTICSINPRACTICEWaldenmierTWLWaldenmierTWLarespecialistsintransportStorage(rent,depreciation,interest,localtaxes,andsoon)22%betweencountriesincentralEuropeandMaterialhandling(forklifttrucks,thoseintheformerSovietUnion.Toensurepallets,packaging,andsoon)12%asmoothflowofgoodstheyrunaseriesofUtilities(electricity,heat,andsoon)8%logisticscentres.EveryyeartheyreviewCommunicationandcontrol(Internet,theiroperationstoseehowthecostsoftelephonesystems,andsoon)10%thesecentresvaryindifferentcountries.InAdministration(management,insurance,2001theyfoundthatwarehousingaddedsecurity,andsoon)12%anaverageof3.8%tosellingprice.Thebreakdownofthiscostwas:Source:companyannualreportsEmployment(wages,benefits,compensation,trainingandsoon)36%OtheractivitiesinwarehousesTraditionallywarehouseswereseenasplacesforthelong-termstorageofgoods.Noworgani-sationstrytomovematerialsquicklythroughthesupplychain,sotheirrolehaschanged. WAREHOUSINGANDMATERIALHANDLING287Theyarenowviewedmoreasstagingpointsthroughwhichmaterialsmoveasquicklyaspossible.Astheirroleinlong-termstoragehasdecreased,theyhavebecomeconvenientloca-tionstodoarangeofotherjobs.Theyare,forexample,thebestplaceforsortingmaterials,packingandconsolidatingdeliveries.Imagineacustomerwhoneedspartloadsofdifferentmaterialsfromdifferentsuppliers.Partloadsareamountsthatdonotfillthetransportused,soapartloadmightbehalfacontainerorpartofafullvan.Transportoperationsareoftendividedintofullloadandpartload–soyoucanhearofTL(truckload)andLTL(lessthantruckload)operators.Asyouwouldexpect,theunitcostsarehigherforpartloads.Ourcustomerneedsseveralpartloadsdeliv-ering,soitcanreducecostsbyconsolidatingtheseintofullloads.Thenitgetsallthepartloadsdeliveredtoawarehousenearthesuppliers,consolidatesthemintofullloads,andpaysthelowercostsoffull-loadtransporttoitsoperations(asillustratedinFigure11.1).Theextracostofconsolidationinawarehouseismorethanrecoveredfromthereducedcostoftrans-port.Thisisthewaythatfreightforwardersmaketheirmoney.Adifferentformofconsolidationoccurswhenamanufacturermakes,orbuys,partsofafinalproductindifferentlocations.Thenitcanarrangeforallcomponentstobesenttoawarehousewhichcombinesthepartsintothefinalproduct,andarrangesdeliverytocustomers.Acomputermanufacturer,forexample,mightcollectinacentralwarehouseakeyboardfromBrazil,softwarefromtheUSA,amonitorfromtheUK,speakersfromTaiwanandthemainboxfromJapan,andsoon.Thewarehouseassemblesthecomponentsintofinalsystemsanddeliversthemtocustomers.SuppliersWarehouseTransportCustomer(a)ConsolidationSupplierTransportWarehouseCustomers(b)Break-bulkFigure11.1Usingwarehousestoreducetransportcosts 288LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThiskindofconsolidationcangofurtherthansimplybringingtogethermaterialsfromdifferentsources.Itmightaddthefinalpackingandpackagingtopresentasingleproduct,orevendoalimitedamountoffinalmanufacturing.Thisisthebasisofpostponement,wherethefinalstepsofproductionarelefttothelastpossiblemoment.AswesawinChapter2,thishastheadvantageofreducingstocksandincreasingflexibilitytomeetlatechangesincustomerdemands.Warehousesalsodotheoppositeofconsolidationwhentheybreak-bulk.Hereasuppliersendsallthedemandforaparticularareainasingledeliverytoalocalwarehouse.Theware-housebreaksthisdeliveryintotheseparateordersandpassesthemontoeachcustomer.Warehousesareincreasinglyplacesforsortinganddoingworkonmaterialsratherthanstoringthem.Intheextremetheydotheseassociatedjobs,butthematerialsareneverputintostorage.Thisisthebasisofcross-docking.Thearrivalofmaterialsatawarehouseisco-ordi-natedwithitsdeparturestocustomers,sothattheyaretransferreddirectlyfromthearrivalareatotheloadingarea,andimmediatelysentfordeliverytodownstreamcustomers.Inprac-tice,theremightbesomedelay,butthisisusuallylessthan24hours.Somedepotsforcross-dockingdonotevenhavestorage,butonlyorganisethetransferofmaterialsfrom,say,onetrucktoanother.Aswellasreducingstocklevels,thisremovesallthenon-valueaddingactiv-itiesofputtingmaterialsintostorage,andlaterremovingthem.DaleRoss,DirectorofLogisticsatOshawaFoodsinToronto,estimatesthat:‘cross-dockingfullpalletsofproductcansave60%ofacompany’sdirectlabourcostsinawarehouse’.3LOGISTICSINPRACTICE25CanadianForcesSupplyDepot25CanadianForcesSupplyDepotopenedweighedandmeasured.WheneverythinginMontrealin1995.This60,000squarehasbeenchecked,anddetailsconfirmed,metrewarehousereplacedthreeearlierthematerialsareofficially‘received’.ThenfacilitiesinMontreal,TorontoandMonc-WMISprintsa‘licenceplate’barcodetoton.Itsaimisto,‘receive,warehouseandidentifyeachunit,andassignsastorageloca-issueeverythingneededtosupportbases,tion.Thislocationissetbythefeaturesofthestations,shipsandservicebattalionsacrossunit,andischosentogivethebestuseofeasternCanadaandUnitedNationspeace-storagespace.WMISthendeliverstheunittokeepingunitsaroundtheworld’.itsstoragelocation,usingfixed,hand-heldThewarehousereceivesnewmaterialsandvehicle-mountedscannersaroundthefromcommercialsuppliersandreturnsfromwarehousetotrackandcontrolmovements.CanadianForcesunits.Whenatruckarrives,WMISisalsolinkedtootherCanadianForcesthedocumentsarecheckedandthevehiclesystemstokeeptrackofordering,stocks,isdirectedtooneof11receivingdocks.invoicingandrelatedinformation.Thereitisunloaded,barcodesonmaterialsWMIShasfourdifferenttypesofstoragearescanned,anddataisfedintotheware-location:housemanagementinformationsystem■Larger,palletisedshipmentsaremoved(WMIS).Materialsarethenputontoconvey-byforkliftfromtheconveyortooneofors,whereeachunitisautomatically WAREHOUSINGANDMATERIALHANDLING289LOGISTICSINPRACTICEcontinuedsixstackercraneswhichworkintheThewarehousewasbuiltusingahighbayarea.Thereare18aisles,20developer-leasearrangement.Withthis,themetreshigh,providing140,000loca-developerpaidforallmajorconstruction,tionsforstorage.retainsownership,andleasestheware-housetotheCanadianForcesforC$6.6■Smallerunitsaretakenfromthemillionayear.OthercostscametoC$31.8conveyorbyamonorailsystemwhichmillion,including$4.4forminorconstruc-deliversthemtothemid-risestacks.Fourtion,C$13millionforwarehouseequip-monorailtrains,eachwith8trolleys,ment,C$4.8millionforthewarehousemoveona400metretrackandtakemanagementinformationsystem,C$3.5unitstodeliverychutes.Theyarepickedmilliontorelocatestock,C$3.4millionforupby10wire-guidedstockpickerswhichprojectsupport,andC$2.7millioncontin-workinthe37aisles,10metreshigh,gencyallowance.Thesavingsofclosingtheproviding600,000storagelocations.olderfacilitiescametoC$33millionayear,■Largerunitsaretakenfromaspecialso25CanadianForcesSupplyDepotpaidarrivalsdocktothebulkstoragearea,foritselfinaboutthreeyears.whichhasspace6metreshighforfree-standinggoods.Source:BrookerD.(1995)Forwardmarch,Mate-rialsManagementandDistribution,August,■Hazardousmaterialsaretakenfroma19–21specialarrivalsdocktoaseparateareaforspecialtreatment.AimsofwarehousingIngeneral,theaimsofawarehousearetosupportthebroaderlogisticsfunctionbygivingacombinationofhighcustomerserviceandlowcosts.Morespecificaimsinclude:●providingnecessarystorageatkeypointsinasupplychain●givingsecurestorageofthetypeneededbymaterials●keepingallmaterialsingoodconditionandwithminimaldamage●givinghighcustomerservice●doingallnecessaryactivitiesefficientlyandwithlowcosts●gettinghighproductivityandutilisationofresources●controllingallmovementsofmaterialseffectivelyandwithouterrors●sortingmaterialsarrivingandquicklytransferringthemintostorage●pickingmaterialsdeparting,quicklytransferringthemoutofstorageandconsolidatingdeliveries●beingabletostorethewholerangeofmaterialsneeded●beingflexibleenoughtodealefficientlywithvariationsinstocklevels●allowingforspecialconditions,rotationofstock,andsoon●givingsafeworkingconditions,andcompliancewithregulations. 290LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTOWNERSHIPManyorganisationsownandruntheirownwarehouses.Butforsmallorganisationsthiswouldbebothdifficultandexpensive,sotheyusefacilitiesprovidedbyspecialisedware-housingcompanies.Evenlargecompaniescanbenefitfromthisarrangement,sotheyhaveabasicchoicebetweenprivateandpublicwarehouses.Privatewarehousesareownedorleasedbyanorganisationaspartofitsownsupplychains.Theorganisationrunsitsownwarehousestosupportitsmainoperations.Thisgivesgreatercontroloveracentralpartoflogistics,andallowsintegrationofwarehousingwiththebroaderactivitiesoflogistics.Thewarehousecanbetailoredtotheorganisation’sneeds,beingintherightlocation,rightsize,fittinginwithcustomerservice,andsoon.Commu-nicationsareeasierwithsystemsintegratedthroughouttheorganisation.Itmightalsogivelowercosts(withouttheprofitthatwouldbeneededbyanotherorganisation),withpossibletaxadvantagesanddevelopmentgrants.Anotherlesstangiblebenefitcomesfromthecorporateimage,asprivatewarehousescangiveanimpressionofreliabilityandlong-termdependability.InChapter3wementionedthatorganisationsoftenchoosetoconcentrateontheircoreactivitiesandcontractoutsomeoftheirlogistics.Inthelastchapterwementionedoneaspectofthis,wherevendor-managedinventoriestransferresponsibilityforinventorymanagementtoanoutsideorganisation.Generally,stocksarestillkeptwithintheorgan-isation,buttheyaremanagedbyasupplier.Amorecommonformofcontractinghasanorganisationoutsourcingpartsofitswarehousing.Thenstocksareactuallyheldbyathirdpartyinapublicwarehouse.Apublicwarehouseisrunasanindependentbusiness,whichmakesmoneybychargingusersafee.Therearemanytypesofpublicwarehouse,includingbondedwarehouses,coldstores,bulkstorage,tankersandvariousspecialitystores.Thefacilitiesavailablearegener-allysoflexiblethatanorganisationcanget,withinreason,anyfacilitiesthatitneeds.Therearealsomanyarrangementsfortheiruse.Atoneextreme,anorganisationmightsimplyrentanareaofemptyspaceinawarehousethatitshareswithmanyotherorganisations.Theorganisationstilllooksafterallaspectsofitswarehousingandrunsthenecessaryoper-ationsitself.Attheotherextreme,anorganisationmightcontractoutallitswarehousingoperationstoaspecialistthirdparty.Thentheorganisationdoesnoneofitsownware-housing,butspecifiesstandardsthatmustbemet.Theprovidermightmeetthesestandardsbyusingsparecapacityinitsexistingfacilities,orforlargeoperationsitmightbuildandrunspecial,dedicatedfacilities.Themainbenefitofpublicwarehousesistheirflexibility.Theycanbeusedtocovershort-termchangesindemandwithoutbuyingordisposingoffacilities.Someotherbenefitsinclude:●flexibilitytodealwithchangingdemand,perhapsduetoseasonality●abilitytosupplyskillsandexperiencethattheorganisationdoesnothaveinternally●accesstothelatestequipmentandpractices●avoidinglargecapitalinvestment,givinghigherreturnoninvestment●easyaccesstoawidergeographicalarea●allowingshort-termtestsofworkinginnewareas●useofeconomiesofscaletoreducewarehousingcosts●consolidatingloadswithotherorganisationstoreducetransportcosts●guaranteedhighqualityandefficientservice WAREHOUSINGANDMATERIALHANDLING291●flexibilitytodealwithchangingconditions,removingrisksfromdatedpracticesandtechnology.Thesebenefitshavetobebalancedagainstthelossofcontrol.Thereisalsosomequestionofcost.Publicwarehousesmightbeefficientandlargeenoughtogeteconomiesofscale,buttheyalsohavetomakeaprofitand,bydefinition,generatemoreincomethantheircosts.Carefulanalysesareneededtofindthebalanceofthesecosts.Thetrendinrecentyearshasclearlybeentousepublicwarehouses.4,5Thisleavesorganisa-tionsfreetoconcentrateontheircoreoperationsandusetheexpertiseofspecialistware-housingcompanies.Itmightalsoformthebasisofapolicyofoutsourcingotherlogisticsservices,suchastransport.Themovetowardscontractingoutwarehousingmeansthatthemostcommonarrange-mentforwarehousingisprobablyamixtureofprivateandpublic.Anorganisationusesprivatewarehousesforbasic,coreneedsandthentopsthisupwithpublicwarehousingasneeded.Asaroughguideline,awarehousewithenoughcapacitytomeetpeakdemandwillonlyworkatfullcapacityfor75–85%ofthetime.Soasensibleoptionistohaveaprivatewarehousewithenoughcapacityforthis75–85%ofthetime,andusepublicwarehousesfortherestofthetime.Withsucharrangements(illustratedinFigure11.2)organisationscanachieveoccupancyratesofover90%.6Thechoicebetweenprivateandpublicwarehousingisoftenseenasanotheraspectofthe‘makeorbuy’decision,andisoftenpresentedasabreak-evenanalysis.Privatewarehouseshavehigherfixedcostsbutlowerunitoperatingcosts,whilepublicwarehouseshavelowfixedcostsbutpotentiallyhighervariablecosts,asshowninFigure11.3.Thisgivesaverysimpleview,andmanyotherfactorsshouldbeincludedinsuchdecisions.Thebasicquestion,ofcourse,iswhetherapublicwarehousecangivethesame(orbetter)serviceforthesame(orlower)cost.Ifitcangiveabetterserviceorlowercostthenthereareclearargumentsformovinginthisdirection.DemandmetbyDemandforpublicwarehouseswarehousingCapacityofprivatewarehousesTimeFigure11.2Meetingdemandwithamixtureofprivateandpublicwarehouses 292LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPublicwarehousesTotalcostPrivatewarehousesBreak-evenThroughputpointFigure11.3Break-evenanalysisforpublic/privatewarehousesLAYOUTGenerallayoutOneofthemostimportantdecisionswhenrunningawarehouseisitslayout.Thisdescribesthephysicalarrangementofstorageracks,loadingandunloadingareas,equipment,offices,rooms,andallotherfacilities.Asyoucanimagine,thishasasignificanteffectontheeffi-ciencyofoperations.Ifafrequentlyuseditemisstoredalongwayfromthedeliveryanddeparturebays,timeiswastedeverytimeaunitisputinto,ortakenfrom,stores.Stevenson7summarisesthisbysayingthat:Layoutdecisionsareimportantforthreebasicreasons:(1)theyrequiresubstantialinvestmentsofbothmoneyandeffort,(2)theyinvolvelong-termcommitments…(3)theyhavesignificantimpactonthecostandefficiencyofshort-termoperations.Everytimeyougointoasupermarketyouseeasortofwarehouse.Materialsaredeliveredatthebackofthesupermarket,theyaresortedandputontoshelvesinthemiddle,thencustomerspicktheitemstheywantandtakethemawayfromthefront.Thissuggeststhattheessentialelementsinawarehouse(illustratedinFigure11.4)are:●anarrivalbay,ordock,wheregoodscomingfromsuppliersaredelivered,checkedandsorted●astoragearea,wherethegoodsarekeptasstock●adeparturebay,ordock,wherecustomers’ordersareassembledandsentout●amaterialhandlingsystem,formovinggoodsaround●aninformationsystem,whichrecordsthelocationofallgoods,arrivalsfromsuppliers,departurestocustomers,andotherrelevantinformation.Therearemanyvariationsonthisbasicoutline.Themostcommonone–whichisalsousedinmostsupermarkets–actuallyhastwostorageareas.Goodsarriveandareputintoabulkstore(thebackroominasupermarket)whichisthemainstoragearea.Thepackagesinthebulkstorearebrokenintoindividualunitsandmovedtoasmallerpickingstorethatisusedto WAREHOUSINGANDMATERIALHANDLING293StorageareaArrivalDeparturebaysbaysSystemsandcontrolsFigure11.4Basiclayoutofawarehouseassembleorders(theshelvesinasupermarket).Whenanorderisreceived,theitemsneededare‘picked’fromthesmaller,pickingstoreandbroughttogetherinaconsolidationarea,beforemovingtothedeparturebays.Whenstocksinthepickingstorerunlow,theyarereplenishedfromthebulkstore.Thisgivestheflowofmaterialsfromarrivalbays,bulkstore,pickingstore,consolidationareatodeparturebays,asillustratedinFigure11.5.Youcanseefromthisthatsupermarketsarenotreallytypicalwarehouses,astheyhavefundamentallydifferentaims.Warehouseswantthepickingtobeasfastaspossible,withgoodsmovingquicklytotheexit;supermarketswanttheircustomerstopickgoodsslowly,asthelongertheyareintheshopthemoretheyspend.PickingBulkstorestoreArrivalConsolidationDeparturebaysareabaysSystemsandcontrolsFigure11.5Schematicofacommonwarehouselayout 294LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLayoutofrackingInmostwarehouses,materialsarestoredinsomeformofshelvingorracking.Thiscantakemanyforms,leadingtothreebasicquestions:●Whattypeofrackingshouldbeused?●Whatisthebestlayoutfortheracking?●Whereshoulddifferentitemsbestoredontheracks?Thebasictypeofstorageisanareaoffloorspace,markedoutinagridtoidentifydifferentlocations.Bulkyorheavyitemsareputintoalocation,probablybyaforklifttruck.Thenextlevelofstorageusesshelvingbuiltinaisles,withmaterialstypicallyonpallets.Aproblemwiththisarrangementisthattheshelveshavetobeshallow,sothatallmaterialsarewithinreach,andtheaislestendtobelong.Smallerunitsarestoredinbins,whicharecontainersarrangedinpigeonholes,sothatmaterialsareeasytofindandremove.Flowrackscanincreasethedensityofstoragebymakingtheshelvesmuchdeeper.Theseareslopingshelvesthatarefilledfromtheback,andasyouremoveaunitfromthefront,alltheremainingunitsmoveforward.Otheroptionsforstorageincludehorizontalcarousels(binsonanovaltrackthatrotatetobringmaterialstoapicker),verticalcarousels(shelvesthatrotateupanddowntobringmate-rialswithinreach),hangingracksforgarments,silosandtanksforfluids,andahugeassort-mentofotherarrangements.Storageinawarehouseisalmostinevitablyarrangedinaisles.Toreducethegroundareaneeded,theseaislescanbequitehigh.Inpractice,thedetailsofthelayoutaredeterminedbytheexistingbuilding,architect’sviews,siteavailable,height,orsomephysicalconstraint.Withintheseconstraints,warehousemanagerstrytodesignthebestlayoutforracking.Thisdepends,toalargeextent,onthetypeofgoodsbeingstoredandthehandlingequipmentused.Ifthegoodsaresmallandlight,suchasboxesofpills,theycanbemovedbyhand,andthewarehousemusthavelowshelvingandbesmallenoughtowalkround.Ifthegoodsarelargeandheavy,suchasengines,theyneedheavierhandlingequipmentsuchascranesandforklifttrucks.Thentheaislesmustbebigenoughforthesetomanoeuvre.Wewillreturntothisthemeinthenextsection.Onewayofapproachingthedesignisto:●estimatedemandformaterialsoverthenextfiveyearsorso●translatethisintoforecastmovementsofmaterialsinto,throughandoutofthewarehouse●compareavailableequipmentforhandlingthesemovementsandchoosethemostappropriate●findthespaceneededforstoringandmovingeachitem●designagenerallayoutfortheracking●seewhichmaterialsshouldbeclosetoeachother(suchasfastmovingmaterialsnearertotransportbays,chilledgoodsinthesamearea,highvaluegoodsinsafeareas,andsoon)andthosethatshouldbefarapart(suchasfoodsfarawayfromchemicals)●developoutlineplansforthelayoutsandhandlingareasandchoosethebest(usingappropriateanalysessuchassimulations)●adddetailstogivefinalplans.Inanyparticularcircumstancesthereisnotreallyasingle‘best’layout,soorganisationsusuallylookforonethatsatisfiestheirrequirements.Then,becauseofthewidevarietyofmate-rials,locations,operations,objectives,andsoon,itisdifficulttogofarbeyondthesegeneralguidelines.Experiencedoes,however,makesomesuggestionsforgoodlayouts.Theseinclude: WAREHOUSINGANDMATERIALHANDLING295●planthelayouttogiveasmoothflowofmaterialsinto,throughandoutofthewarehouse●simplifymovements,eliminatingorcombiningseparatemovementswherepossible●usehighlevelstoragewherepossible,asthisreducestheoverallarea●haveofficesoutsidethemainwarehousearea,asspaceabovethemiswasted●considerusingspareroofspaceforoverheadmovementofmaterials●giveappropriatespaceforaisles–asnarrowaspossibletoreducenon-workingspace,butwideenoughforequipment●considermezzaninefloorsforpickingandadministration●havemovementsinstraightlinesononefloor.Noticethatseveralofthesesuggestusingalloftheavailablevolume.Thecostsofwarehousingoftenrisewiththearea,sothereareadvantagestohavingtallbuildings,providedthattheextraheightisproperlyused.Ratherthanlookingatturnoverpersquaremetre,warehouseefficiencyisoftenjudgedonturnoverpercubicmetre.LocatingmaterialsonshelvesManycostsofrunningawarehousearefixed–suchasrent,localtaxes,utilities,anddeprecia-tion.Someofthesefixedcostsaresetbymanagementpolicy,suchasthetotalinvestmentinstock.Themainvariablecostcomesfromthedetailsofthelayout,anddependsonthetimeneededtolocateitemsandeitheraddthemtostockorremovethem.Whentherearethou-sandsofitemsinstore,smalldifferencesinthewaytheyarearrangedcangivemarkedlydifferentserviceandcosts.WORKEDEXAMPLEAsmallstorehasarackwithninecoloursofpaintinfivelitretins.Atoneendoftherackisanissueareawherethestorekeeperworks.Weeklydemandforthepaintisasfollows:ColourRedBlueWhiteBlackBrownGreenYellowGreyPinkTins15021012909604801803606090Ifallpaintisstoredinbinsthatare5mwide,designalayoutfortherack.Designalayoutifthesizeofbinsvarieswiththeweeklydemand.SolutionAreasonableaimistominimisethedistancewalkedbythestorekeeper,assumingthateachtinofpaintneedsaseparatejourney.Thepaintshouldbelaidoutsothatcolourswithhighestdemandarenearesttheissuearea,sothelayouthaspaintinorderwhite,black,brown,yellow,blue,green,red,pinkandgrey(asillustratedinFigure11.6).Assumingthattinscomefromthemiddleofbins,thetotaldistancemovedbythestorekeeperis:=2×(2.5×1290+7.5×960+12.5×480+17.5×360+22.5×210+27.5×180+32.5×150+37.5×90+42.5×60)=86,400mIfthesizeofbinisproportionaltotheweeklydemand,andassumingthatpaintistakenfromthemiddleofthebins,thepaintcanbestoredequallywellinanyorder. 296LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTIssueareaStoragerackWhiteBlackBrownYellowBlueGreenRedPinkGreyFigure11.6LayoutofpaintinworkedexampleTurnaroundtimeApartfromthelayoutofthestorageareas,theefficiencyofawarehousealsodependsonhowquicklyitdealswithdeliveryvehicles.Thereareseveralmeasuresofturnaroundtime,butthemostcommonisthetimetakenbetweenavehiclearriving(eitherdeliveringmaterialsorcollectingthem)anddeparting.Transportoperatorsgetpaidforhavingtheirvehiclesanddriversmoving,sotheydonotwantthemsittingidlyinawarehouseduringloadingorunloading.Thisiswhyairlineslikepassengerstodisembarkquickly,sothatnewpassengerscanbeloadedandtheplanecanmoveontoitsnextjourney.Atthesametime,thereislimiteddockingspace,soitmustbefreedupquicklytogetareasonablethroughput.Itis,then,ineverybody’sinteresttominimisetheturnaroundtime.Threearrangementscanhelpwiththis.First,orderscanbeassembledandwaitingtomoveontoavehicle–whenthevehiclearrivesitisloadedquicklyandmovedon.Second,specialloadingandunloadingequipmentcanbeusedtospeedoperations.With,forexample,rollersonvehiclefloorsastan-dardvehiclecanbeloadedandunloadedinfiveminutesorless.Third,thebayscanbelaidoutcarefullytominimisecongestion.LOGISTICSINPRACTICECornwall,OntarioWal-Martoperates170storesinCanada,astheseneedspecialinspectionsandfinish-whereitslogisticsismanagedbyTibbett&ingwhicharebestcentralised.Britten.In2000,theyopenedanewdistri-TheCornwalldistributioncentrecoversbutioncentreinCornwall,Ontario.Thiscen-100,000squaremetres,stocks10,000dif-treservesthe61storesineasternCanada,ferentitems,withstoragefor55,000palletsjoiningtwoothercentresthatservetherestand10,000cases.ofthecountry.Italsospecialisesinthesup-AnordermanagementsystemanalysesplyoflinenandshoesthroughoutCanada,alldemandmetbythecentre,forecasts WAREHOUSINGANDMATERIALHANDLING297LOGISTICSINPRACTICEcontinuedfuturesales,andplacesorderswithsuppli-Ordersareautomaticallyreceivedfromtheers.Thesedeliveriesarereceivedin80stores’point-of-salessystems,thecasesaredocks,withbarcodesaddedtoeachpalletpicked,putontoaconveyorandsenttotheandcasetoallowautomaticmovement.departuredocks(automaticallyguidedbyMostgoodsarriveonpalletsandareputbarcodes).Thereare79departuredocks,ontoconveyorsformovementintostoragesoonedockwithitsconveyorisusedforandthereare19docksforarticlesthatcan-eachstore.Thismakessortingveryeasy.notuseconveyors.ThereissomecrossSomegoodsthatcannotgoontheconvey-docking,withitemsgoingfromthereceiv-orsarehandpickedandmovedbyforklift.ingareatothedeparturedocksin15min-Independentcarriers,oroneofthecen-utes.Sixtyhigh-volumeproductsarekepttre’ssmallfleetofvehicles,delivertostores,neartoconveyors,andstayinstockforlessusuallywithin24hoursofordering.thanaday.TheaveragestayforremainingSources:DaudelinA.(2001)Supplychainitemsistwoweeks.managementtheWal-Martway,SupplyChainThecentrebreakspalletloadsintocases,andLogisticsJournal,Spring,andwebsitesatwithathroughputof115,000casesaday.www.walmart.comandwww.infochain.orgMATERIALSHANDLINGAlotoftheworkinawarehousemovesmaterialsfromonelocationtoanother.Everythinghastobetakenfromdeliveryvehicles,movedaroundthewarehouse–oftenseveraltimes–andeventuallyputontodepartingvehicles.Theactivitiesinvolvedformpartofmaterialshandling.MATERIALSHANDLINGisconcernedwiththemovementofmaterialsforshortdistancesgenerallywithinawarehouse,orbetweenstorageareasandtransport.Everytimeanitemismoveditcostsmoney,takestime,andgivesanopportunityfordamageormistake.Efficientwarehousesreducetheamountofmovementtoaminimum,andmakethenecessarymovementsasefficientaspossible.Someobjectivesofmaterialshandlinginclude:●movingmaterialsaroundawarehouseasrequired●movingmaterialsquickly,reducingthenumberandlengthofmovements●increasingstoragedensity,byreducingtheamountofwastedspace●reducingcosts,byusingefficientoperations●makingfewmistakes,withefficientmaterialmanagementsystems.Theseaimsrely,toalargeextent,onthechoiceofhandlingequipment.Thiscanaffectthespeedofmovement,typeofmaterialsthatcanbemoved,costs,layout,numberofpeopleemployed,andsoon. 298LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTInsomewarehousesmostofthematerialshandlingisdonebyhand,withlittleequipmentexcept,perhaps,fortrolleysandbaskets.Otherwarehouseshaveforklifttrucksandcranesformovingheavyitems.Thesesuggesttwolevelsofautomation–manualandmechanised.Athirdlevelgivesautomatedwarehouses,whereallmaterialshandlingismanagedbyacentralcomputer.Thesethreelevelsoftechnologygivewarehouseswithcompletelydifferentcharacteristics.ManualwarehousesThisisprobablytheeasiestarrangementtoimagine,andisstilloneofthemostcommon.Itemsarestoredonshelvesorinbins.Peoplegoaroundandpickitemsfromtheshelves,andputthemintosomesortofcontainerformovement–likeasupermarkettrolley.Theremaybesomeaids,likehandtrucksformovingpallets,orcarouselstobringmaterialstopickers,butessentiallypeoplecontrolallaspectsofmovements.Youcangetanideaoftheseoperationsbylookingaroundasupermarket,whichisverysimilartoamanualwarehouse.Manualwarehousesonlyworkiftheitemsaresmallandlightenoughtolift.Shelvesmustbelowenoughforthemtoreachandclosetogethertoreducethedistancewalked.Materialsarestoredonshelves,orinbins,thatarenohigherthanabouttwometres.Thewarehousemustbeheated,litandallowpeopletoworkcomfortably.MechanisedwarehousesMechanisedwarehousesreplacesomeofthemusclepowerofmanualwarehousesbymachines.Typicalexamplesofmechanisedequipmentare:●reachtrucks,whichareusuallyelectricallypoweredandmovepalletsandsimilarloadsuptostoragelocations.Adrivercontrolsthetruck,whichcanraiseloadsverticallytoaconsiderableheight.Thesetrucksarequitesmall,slow,andwithlimitedfacilities,buttheyworkwellinconfinedspaces.●order-pickingmachinesareavariationonreachtrucks,wherethedriverisliftedwiththematerialstopick,ordeliver,athighlocations.●forklifttrucks,comeinmanydifferentversionsandarethestandardmeansofmovingpalletsandequivalentloadsforshortdistances.Theyareverymanoeuvrable,flexible,andcanbeadaptedformanyjobs.Ontheotherhand,theyneedspacetowork,andarefairlyexpensivetouse.●cranes,whichdescribeafamilyofvehiclesusedtoliftmaterials.●towlines,whicharecontinuouscablesthatcanmovetrailersaroundafixedpath,ratherlikeskilifts.●conveyors,whichareusedtomovelargequantitiesofgoodsalongfixedpaths.Youcanseemanyexamplesofconveyorbeltsmovingmaterialsthatrangefromironoretoletters.Analternativeusesrollerconveyors. WAREHOUSINGANDMATERIALHANDLING299●tractorsortrains,whicharepowerunitsthatpullloadsthathavebeenputontotrailerunits.Thetractordeliverstrailerstotheplaceneeded,ratherlikesmallarticulatedtrucksortugsandbarges.●carousels,whicharebasicallyaseriesofbinsgoingroundafixedtrack.Atsomepointonthejourneyitemsareputintoabin,andthebinsareemptiedwhentheypassanotherchuteorcollectionpoint.Thesewarehousescanstoreheaviergoodsandmaybemuchbigger.Someequipmentneedswideaislestomanoeuvre,butrackingcanbehigher–typicallyupto12metreswithaforklifttruckandhigherwithcranesorhigh-reachequipment.Materialsintheselargerwarehouseswillprobablynotbeputstraightontoshelves,butarelikelytobein‘unitised’loads.Thesearesimplystandardsizedpackagesorcontainersthatareusedforallmovements.Theideaisthatstandardpackagescanbemovedmuchmoreeasilythanasetofdifferentsizesandshapes.Themostcommonformat,whichwehavealreadymentionedinpassing,usespallets.Thesearethewoodencarriersthatevolvedintoastandard1.2mby1mformatinthe1960s.Wewillreturntothisthemeinthenextsection.Asurvey8foundthatforkliftswerebyfarthemostwidelyusedequipmentformovingmaterialsfromwarehouses,beingusedby94%ofcompanies.Otherwidelyusedequipmentincludedvariousmanualtrucks(55%),conveyors(40%),various‘manaboard’trucks(33%),horizontalcarousels(26%),stackercranes(23%)andverticalcarousels(9%).Thekeypointaboutmechanisedsystemsisthattheyarestillunderthecontrolofanoper-ator.Someoneactuallydrivesaforkliftorcontrolsthemovementalongatowline.Thenextalternativeistopassthecontrolofmovementstoacomputer.AutomatedwarehousesTraditionalwarehouses,evenmechanisedones,tendtohavehighoperatingcosts.Theseoper-atingcostscanbereduced,aswellasimprovingaspectsofservice,byusingautomation.Unfortunately,thisneedsaveryhighinvestmentinequipment,andisonlyreallyworthwhileforverybigstoresthatmovelargeamountsofmaterials.Automatedwarehousesworkintheusualway,buttheyincludethefollowingcomponents:●storageareasthatcanbeaccessedbyautomaticequipment;theseoftenusenarrowaislesupto,say,40mtalltogetahighdensityofmaterialsandminimisethedistancesmoved.●equipmenttomovematerialsaroundthewarehouse;theseareusuallyautomatedguidedvehicles(AGVs)whichuseguidewiresinthefloor,butmightincludeconveyors,tractors,orarangeofothermovingequipment.●equipmenttoautomaticallypickmaterialsandputthemintostorage,includinghighspeedstackercranesthatcanreachanypointinthenarrowaislesveryquickly.●equipmenttotransfermaterialsbetweenthedifferenttypesofequipment;theseauto-maticloadersandunloadersmightincludeindustrialrobots.●awarehousemanagementsystemtorecordmateriallocations,andcontrolallmovements. 300LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTTherecanbeconsiderablebenefitstoautomation.Greenwood9suggestssomeoftheseasreducederrors,improvedrecordsofinventory,increasedproductivity,reducedpaperwork,improvedspaceutilisation,lowerstocks,bettercontrolofmovements,supportofEDI,andbettercustomerservice.Anobviouspointisthatnopeopleworkinthestorageareas,sothereisnoneedforheatandlight.ChoiceofequipmentIngeneral,highervolumesofthroughputusehigherlevelsofautomation.Warehousesforlowvolumesofthroughput(likeashop)areusuallymanual,mediumvolumesofthroughput(likeafoodwarehouse)aremechanised,andhighvolumeofthroughput(likeane-mailbookseller)areautomated,asshowninFigure11.7.Althoughitisimportant,volumeisonlyonefactorinthechoiceofequipment.Thefinaldecisionneedsalotofanalysis,withthekeyfactorslikelytoinclude:●physicalcharacteristicsofloads–size,weight,andsoon●numberofloadstobemoved–fromthethroughputofthewarehouse,plusanyinternalmovementsforsorting,checking,andsoon●distancetobemoved–fromthesizeofthewarehouse●speedofmovementrequired–howquicklythewarehousehastorespondtodemands,andsoon.Mostorganisationsmovetohighertechnologysystemstoimproveproductivity8butotheraimsareimprovedcustomerservice,reducedcosts,safety,betterstockcontrolandmoreflexi-bility.Manyanalysescanhelpwiththisdecision,includingbreak-evenpoints,returnoninvestment,netpresentvalue,andmeasuresofproductivity.ManualMechanisedUnitcostAutomatedThroughputManualMechanisedAutomatedFigure11.7Choiceofautomationandwarehousesize WAREHOUSINGANDMATERIALHANDLING301LOGISTICSINPRACTICEHandemannGroupHandemannGrouprunafairlystandard■Shelving,600squaremetreswiththreewarehousefordistributingmaterialsforaisles35metreslongand1.5metrestheirgasandelectricitysupplybusinessinwide.Shelvesare8metreshigh,provid-areasofAustriaandGermany.Theware-ing8000locationsforpackagesofhouseisdividedintoanumberofareasasvarioussizesandweightsupto200kg.showninFigure11.8.■Bins,200squaremetres,withoneaislegiving6000locationsforsmall,fast-■Goodsin,1200squaremetrescontain-movingitems.ingsevendocks,andareasforchecking,■Despatcharea,800squaremetresbulkbreaking,re-packaging,qualitycontainingtendocksandareasforassuranceandreturns.sorting,assemblingdeliveries.■Highbays,2400squaremetreswitheightaisles45metreslongand2metresThematerialshandlingequipmentcanwide.Palletrackingis14metreshigh,changeaccordingtocurrentneeds,butuseswithspacefor3580palletsweighingupavarietyoftruckstomovepeopleand/ortoatonne.Thisisthemainstorageformaterialsalongaislesandupstorageracks.appliancesandbulkmaterials.Typicalconfigurationshave12electrictrucks■Lowbays,1200squaremetreswithsix(basedonforkliftsbutofvariousdesigns),aisles35metreslongand1.67metres10hand-operatedtrucks,1sweeperand4wide.Palletrackingis8metreshigh,lorriesforlocaldeliveries.providingspacefor910palletsweighingSource:companyreportsuptoatonne.GoodsinHighbaysLowbaysShelvingBinsGoodsindocksDespatchdocksFigure11.8OutlineofHandemannGroup’swarehouse 302LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPACKAGINGStandardpackagesWehavealreadymentionedpallets(thestandardwoodentraysaboutfourfeetsquarethatmaterialsareputontoeasemovement)andcontainers(the20-or40-footmetalboxesthatareusedtomoveahugevarietyofgoodsaroundtheworld).Collectingtogethermaterialsintothesestandardpackagesiscalledunitisationtoformunitloads.Itismucheasiertomovestandardloadsthanitistomoveavarietyofdifferentsizesandshapes.Ifacompanyalwaysusesstandardloads,itcansetupallitshandlingequipmenttomovetheseefficiently.Thisiswhydeliveriestoasupermarkethaveallthegoodsofdifferentsizesputontostandardtrolleysthataresimplywheeledonandofftrucks.Puttingeverythingintocontainersmeansthatacompanyonlyhastomovethecontainers,ratherthanmovingeachitemseparately.Anotherbenefitofstandardpackagesisthattheycanincreasethedensityofstorage.Imagineacompanymovingbicycles;thedensityofaloadoffinishedbicyclesisquitelow,asthebicycleshavebitsthatstickoutandpreventthembeingpackedcloselytogether.Thecompanycouldincreasethedensityoftheloadandreducefreightchargesbyusingstandardcratesforallthepedals,handlebars,saddlesandotherbits,whileframesgointootherstan-dardcrates.Youcanseethebenefitsofstandardpackageswheneverloadsarebeingmoved.Ifyougetaremovalcompanytohelpyoumovehouse,theyputallyoursmalleritemsintostandardsizedcardboardboxes.Theseareoftencombinedintopalletloadsthataremovedbyforklifttrucks.Theseinturnmightbeassembledintocontainerloadsformovinganywhereintheworldbyroad,railorship.Wewilltalkaboutcontainersinthenextchapter.Sooneoftheobviousbenefitsofpackagingisthatitmakesmaterialshandlingeasier.Thisiswhyyoutakeyourclothesonholidayinasuitcase,ratherthancarryeverythingseparately.Butthereareotherreasonsforusingproperpackaging.PurposeofpackagingManyitemsneedspecialprotectivepackagingduringmoves,particularlydelicatethingslikechinaandelectronics.Sometimesthepackagingcanprotectgoodsfromharshenvironments,suchasrainorsun;sometimesitisneededtoseparatematerialsthatwouldcontaminateeachother,suchassugarandpetrol;sometimesitkeepsthecontentsclean,suchasfoodstuffsandmedicines.Ingeneral,packagingservesfourbasicfunctionsasit:●identifiestheproductandgivesbasicinformation●protectsitemswhiletheyarebeingmovedthroughthesupplychain●makeshandlingeasier●assistsinmarketing,promotingtheproduct,advertisingandgivinginformationtocustomers.Thebalancebetweenthesedependsverymuchontheproduct.Barsofchocolate,forexample,mightputmoreemphasisonmarketing,whileboxesoficecreammightbemoreconcernedwithprotection.Therearealsotwotypesofpackagingtoconsider.First,theinterior,orconsumerpackaging,isdesignedforthecustomerandincludesthemarketingandpromo-tionalmaterials.Thisistheonethatisbrightlycolouredandhascellophaneandadvertise-ments.Second,theexteriororindustrialpackagingthatisdesignedtoprotectandmake WAREHOUSINGANDMATERIALHANDLING303handlingeasier.Thisistheplainboxorpalletthatgivesinformationtoorganisationsinthesupplychain.Thispackagingcanbemadeofmanydifferentmaterials,buttheconsumerpackagingtendstowardsbrightplastic,whiletheindustrialpackagingtendstowardsdullcardboard.Someperfumesandalcoholicdrinkscomeinveryelaboratebottlesthatcostalotmoretoproducethanthecontents.Withexpensiveconsumergoodsthismightbeacceptable,butitwouldcertainlynotworkwithbasicproductssuchasmilkorsugar.Sowehavetoconsiderthedesignandmaterialsofthepackagingcarefully.Therearefivemainmaterialsforpackaging:●Glassiseasytoclean,reuseandrecycle,butisfragile,relativelyexpensiveanddifficulttomake●Plasticislight,strongandeasytoclean,butcanbeexpensiveanddifficulttomakeorreuse●Cardboardislight,cheapandcanberecycled,buthaslittlestrengthandpoordurability●Woodisstrong,durable,easytouseandcanbereused,butitisheavy,bulkyanddifficulttoclean●Metalisstronganddurable,butitisheavyandcanbeexpensive.Thechoiceofthese–orothermaterials–dependslargelyonthetypeofproducts,movementandprotectionneeded.Thiscanbeadifficultdecision,balancingmanyfactors.Youwould,forexample,ordinarilyexpectliquidstodeliveredinsomeformofplasticbottles.Butthiswouldgivethewrongimageforwinewhichisgenerallydeliveredinglassbottles.Shrink-wrappedpalletloadsgivealotofprotection,buttheywouldnotbeappreciatedbyJIToperationsthatwantfastaccesstosmallquantitiesofparts.PackagingwasteWhenyoubuysomething,youmightbesurprisedbytheamountofpackaging.Cakesandchocolatesroutinelyhavethreelayersofwrapping;sometimesyoumightfinduptofivelayers.Butrememberthatyouonlyseetheconsumerwrapping,andtherehaveprobablybeentwomorelayersofindustrialwrappingwhichhasalreadybeenremoved.Therearegrowingconcernsabouttheamountofpackaging,itscostanddisposal.TheUKproducesabouteightmilliontonnesofpackagingwasteayear,andhalfofthiscomesfromindustrialpackaging.10Conventionally,industrialpackagingismorelikelytobereusedandrecycledthanconsumerpackaging,becauseitismorerobust,andcanbecollectedfromafewlocations.Consumerpackagingismorelikelytobediscarded,butsomecompanies,suchasBodyShop,havepoliciesofreducingthisbyreusablecontainers.Thisisanimportantissue,astheEuro-peanUnion,andotherareasareintroducinglimitsontheamountofpackagingwastethatcompaniescandiscard.Severalcountriesonlyallowglasscontainersifthesearecollectedandreused,oratleastrecycled.Therearesimilarregulationsformetalcontainers,particularlyaluminiumcans.Perhapsmorenoticeablearetheregulationsonotherpackaging,whichareincreasinglyforcingorganisationstorecordtheamountofpackagingtheyuse,andtheamounttheyrecycle.Iftheyfailtoachievesometargetforrecycling,theyfaceheavyfines.TheEuropeanUnionhasmovedtowardsthisscheme,withoverallrecyclingtargetsof50%.Suchtrendshaveencouragedmanyorganisationstoswitchawayfrompackagingthatisdiscardedafterdeliverytothefinalcustomer,andtowardsreuseablepackagingandreverselogis-tics.Replacingcardboardcontainersbywoodmightseemexpensive,butitcanbeusedrepeat-edlyandactuallyreduceoverallcosts–aswellascontributingtoacleanerenvironment.10 304LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT❑Awarehouseisthegeneraltermforanyplacewherematerialsarestoredontheirjourneythroughasupplychain.❑Thetraditionalfunctionofawarehouseistostorematerials.Thisinvolvesarangeofactivitiesfromreceivingmaterialsforstorage,throughtopreparingdeliveriesforcustomers.❑Thetrendtomovematerialsmorequicklythroughasupplychainischangingtheroleofwarehouses.Theirroleaslong-termstoresisdeclining,andtheyareincreasinglyseenasaconvenientlocationforotherjobs,suchasconsolidatingpartloadsandpostponement.Theyaredevelopingvalue-■■■■■■■■■addingactivities,ratherthanbeingpurecostcentres.❑Oneimportantconsiderationistheownershipofwarehouses,withachoicebetweenprivateandpublicoperations.Thetrendistowardspublicwarehousing,usingspecialistthird-partyproviders.❑Thelayoutofawarehousehasasignificanteffectonitsoperations.Eachwarehouseisessentiallyunique,buttherearegeneralguidelinesforgoodlayout.❑Manytypesofequipmentareusedinwarehouses.Wecanclassifytheseasmanual,mechanisedorautomated.Thechoicedeterminesthetypeofoperationsandfeaturesofthewarehouse.❑Packagingisanimportantaspectofmaterialshandling.Itservesseveralpurposesincludingprotection,easingmovementandpassingonproductCHAPTERREVIEWinformation.CASESTUDYViaCendorHungaryhadacentrallyplannedeconomyforover50years,withmosteconomicactivitycontrolledbythegovernment.Bythe1990scommercialandindustrialorganisationswereinefficient,outdatedandfallingfurtherbehindcompetitorsfromothercountries.Politicalandeconomicreformsstartedinthe1990swiththeaimoftransferringmostorganisationsbacktotheprivatesector.Transporthadbeentightlycontrolled,butwassubstantiallyprivatisedandderegulated.JanosCendorwaskeentotakeadvantageofnewdevelopments,andstartedatruckingcompany.Hetookoveranexistingdepotwithallitsfacilities,withplans WAREHOUSINGANDMATERIALHANDLING305CASESTUDYcontinuedfortransformingthisintoamodernandcompetitivecompany.Initially,hehadconsiderableproblems.Hisfacilitiesweredecaying,hisvehicleswerefallingapart,hewasoverstaffed,andworkingpracticeswereoutdated.InthepastthedepothadfocusedontradewithcountriesintheformerSovietbloc,andnowhadtolookforothertradingpartnersintheWest.By1997Januswasmakingprogress,andwasprofitingfromthehugeincreaseintradebetweenHungaryandcountrieswithintheEuropeanUnion.Hehadmodernisedhisdepot,replacedvehiclesandwasmakingprogresswithstaff.Inearly2001hewasplanninganewwarehouseneartotheAustrianbordertoimportconsumergoods,andexportagriculturalproduce.However,competitionfromothertransportcompanieswasincreasing,andEuropeanoperatorswereintroducingnewideas.SoJanusplannedhisnewwarehousetoplayaleadingroleinmovinghiscompanyforward;itwouldbeaflagshipoperationthatwouldhaveaclearadvan-tageovercompetitors.TheproblemfacingJanusisthat,likeeveryoneelse,hedoesnotknowexactlywhatthefuturewillhold.Hereadreports5whichsuggestedthatwarehousesofthefuturewouldconcentrateon:■betterservicetogivecompletecustomersatisfaction■concentrationofoperationsinfewerlogisticscentres■reducingstocksbyimprovedmaterialsflow■paperlesselectronictransactions■flexibilitygivingcustomisedoperations■cross-docking■third-partywarehousing■automationofmaterialmovements■moreskilledemployeestomanagenewoperations.CASESTUDYQuestions●HowdoyouthinkthechangingeconomicconditionsinHungarychangedlogisticsintheregion?●IfJanusaskedforyouradviceonthefacilitiesneededbyhisnewwarehouse,whatkindofoperationswouldyousuggest?Whatarethebenefitsofthenewoperations?Wouldthesegiveasustainablecompetitiveadvantage? 306LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTPROJECTWarehouseOptionsImaginethatyouhavestartedacompanytomakesomeproduct,suchasanewtypeoficecreamforsaleinsupermarkets.Yourlogisticssystemwillincludewarehousing.Howwouldyousetaboutdesign-ingthenumber,size,locationandfacilitiesofthewarehouses?Havealookaroundandseehowcom-paniesactuallyhandlethisproblem.Aretheresignificantdifferencesbetweentherealcompaniesandyourmodel?DISCUSSIONQUESTIONS1.Iftheflowofmaterialsisproperlyco-ordinatedthereisnoneedforstockand,therefore,noneedforwarehouses.Whendoyouthinkthatwarehouseswilldisappearfromthesupplychain?2.Warehousesusedtobeplaceswheregoodswerestored,oftenforlongperiods,untiltheywereneeded.Amorerecentviewhaswarehousesasplaceswhereloadsarereorganisedontheirjourneythroughthesupplychain.Doyouthinkthisisarealdifference?Ifitis,whateffectdoesthishaveonwarehouseoperations?3.Manyorganisationsareusingspecialistthirdpartysuppliersforwarehousing.Whatarethebenefitsofthis?Whatarethedifferenttypesofarrangementforthirdpartyware-housing?4.Whyisthelayoutofwarehousesimportant?Supermarketsarereallyonetypeofware-house,sothesamefactorswillbeimportantineach.Isthistrue?5.Automationisboundtogivethemostefficientwarehouses,soeveryoneshouldmoveinthisdirection.Willallwarehouseseventuallybeautomated?6.Weareoftentoldthatpackagingisamajorproblemforwastedisposal.Whyistheresomuchpackaging,andhowcantheamountbereduced?REFERENCES1.OlsenD.R.(1996)Warehousingtrendsforthenextgeneration,LogisticsFocus,4(2),6–8.2.WatersC.D.J.(2001)ACaseStudyinWarehouseDesign,WesternOperationsGroup,London.3.RobertsonR.(1996)Onthemove,MaterialsManagementandDistribution,May,p.56.4.Anon.(1999)Theriseoftheinfomediary,TheEconomist,351,8215.5.HurdockB.(2000)Ten21stcenturywarehousetrends,DSNRetailingToday,39(15),14.6.DoerflingerT.M.,GerhartyM.andKerschnerE.M.(1999)TheInformationRevolutionWars,Paine-WebberNewsletter,NewYork.7.StevensonW.J.(1993)Production/OperationsManagement(4thedn),Irwin,Homewood,IL.8.McGillivrayR.andSaipeA.(1996)Loggingon,MaterialsManagementandDistribution,January,pp.19–23. WAREHOUSINGANDMATERIALHANDLING3079.GreenwoodP.N.(1997)Howwillawarehousemanagementsystembenefitme?LogisticsFocus,5(4),10–13.10.PihlA.(1997)Packagingre-use:howtomeetlegalobligationsandcutcosts,LogisticsFocus,5(3),8–13.FurtherreadingFernieJ.andSparksL.(eds)(1998)LogisticsandRetailManagement,KoganPage,London.FrazelleE.(2001)WorldClassWarehousingandMaterialsManagement,McGraw-Hill,NewYork.MulcahyD.E.(1993)WarehouseDistributionandOperationsHandbook,McGraw-Hill,NewYork.Simchi-LeviD.,KaminskiP.andSimchi-LeviE.(1999)DesigningandManagingtheSupplyChain,McGraw-Hill,NewYork. CHAPTER12TransportCONTENTS■Aimsofthechapter■Casestudy–MountIsaMines■Introduction■Project–ToorvikTransport■ModeoftransportConsultants■Intermodaltransport■Discussionquestions■Ownershipoftransport■References■Routingvehicles■Furtherreading■ChapterreviewAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■APPRECIATEtheimportanceoftransport■COMPAREdifferentmodesoftransport■DISCUSStheuseofintermodaloperations■COMPAREalternativeformsoftransportownership■LISTdifferentorganisationswhoofferservicesfortransport■APPRECIATEotheroperationalproblems,suchasroutingoftransport TRANSPORT309INTRODUCTIONDefinitionWhenyoutalkaboutlogistics,mostpeopleimaginelorriesdrivingdownamotorway.Asweknow,logisticshasafarwidermeaning,buttransportiscertainlyoneofitsmaincomponents.Inthelastchapterwesawthatmaterialshandlingisconcernedwithmovementswithinafacility.Herewewilllookattransport,whichisconcernedwiththemovementofgoodsbetweenfacilities.TRANSPORTisresponsibleforthephysicalmovementofmaterialsbetweenpointsinthesupplychain.Aswehavealreadyseen,e-commercecanhaveamajoreffectonanorganisation’slogistics.Butrememberthatitisessentiallypartoftheinformationsystem.Whenyoulookatacompany’swebsiteyoucanseedescriptionsofitsproducts,sendanorderandarrangepayment–butyoustillneedtransporttodeliverit.Sometimes,ofcourse,youbuyintangiblessuchasinformation,softwareormusic,andthewebsitecandeliverit.Butmostproductsaremoretangible,andtheyneedtransport.Attheheartoflogisticsaretransportvehiclesmovinggoodsbetweensuppliersandcustomers.ThisiswhytransportintheUKemploys1.3millionpeopleoutofaworkforceof27million1and,alongwithstorage,generates6%oftheGDP.TransportrateIfanorganisationusesthird-partytransport,thepriceofmovingaunitofmaterialbetweenlocationsistherateortariff.Thisissetbythecostoftheserviceprovided,valuetothecustomer,thedistancemoved,weight,sizeandvalueofgoods,complexityofjourney,andsoon.Thisrateisanimportantconsiderationforlogistics,andcanaffectwholepatternsofmovement.Ifanitemcosts$20tomakeintownAand$25tomakeintownB,thenthemaximumrateworthpayingtomovefromAtoBis$5.Iftherateisactually$3,producersintownAwillexporttoB,customersintownBpaylessfortheitem,pricesensitivedemandwillrise,logisticscompaniesgrowtomovetheitem,competitionencouragesproducersintownBtolookforcostsavings,someproducersinBmaydiverttootherproductsthattheycantradebacktotownA.Traderisesandeveryoneseemshappy.If,however,therateisactually$6,noneofthishappens,andeveryoneseemstoloseout.Youcanfindmanyexamplesofthiseffect.TheCzechRepubliccanbrewbeermorecheaplythancountriesinwesternEurope(whichmayexplainwhytheyhavethehighestbeerconsumptionintheworld).However,transportofheavy,relativelylow-valueloadsacrossEuropeisexpensive,andtheseadditionalcostsmakethetradeunattractive.Thereisacommonviewthatmoreexpensivefuel,vehiclesanddriversaremakingtrans-portmoreexpensive.Thecostsforparticularjourneysvaryconsiderablywithconditions,butitisfairertosaythattherelativecostoftransportisactuallyfalling.Thisislargelyduetomoreefficientoperationsandvehicles,butalsoduetochangesinfuelpricesandtaxes.Partlyasaresultofthis,theoverallamountoftradeisrising.ManufacturersinthePacificRimhaveeffi-cientoperationsthatgivelowunitproductioncosts,andcheaptransporttoEuropemeansthattheyoftencompeteoncostwithlocalproducers. 310LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTRelativelycheaptransportalsochangestheshapeofsupplychains,asorganisationscancoverawiderareafromafacility.AsinglelogisticscentrecandelivermaterialsquicklyandrelativelycheaplytoanydestinationinEurope.Thishasencouragedmanycompaniestoreplacetheirnationalwarehousesbyregionalonesthatcoverawidearea.In1995,forexample,Nikewasselling$1billionofgoodsinEurope,withdeliveriesthrough25ware-houses.Itreplacedthesewithasinglepan-EuropeandistributioncentreinBelgium,andworkedwithfourspecialisedtransportcompanies.Thesecompaniesgaveefficientserviceswhichallowedtransportcoststoremainconstant–withinboundtransportcostsfallingslightly,andoutboundtransportcostsrisingslightly.ThenNikecouldbenefitfromthehugereductioninwarehousingandinventorycosts.2Therateisclearlyimportant,butserviceusersseemtohavelittleinfluenceinsettingit.Alargeorganisationnegotiatingfreelywithatransportcompanymayhavesomeflexibility.Thetransportindustryisverycompetitive,andlargecustomerscangetgooddeals.Theyalsohavetheoptionofrunningtheirownfleetsifexternaloperatorschargetoomuch.Often,however,theratesarefixedbyagreementbetweentransportcompanies,governmentpolicies,ormonopolysuppliers.Shippingconferences,forexample,quoteagreedratesbetweendestina-tions,cartelsofmajortransportoperatorsuseindustryagreedrates,andgovernmentownedrailandroadindustriesfixpricesthroughtheirmonopoly.Transportisoneofthemostexpen-sivepartsoflogistics,butusersoftenhavelittlecontroloverit.Inpractice,organisationsdohavemoreinfluence,astheycanmakeaseriesofdecisionsabouttheformoftransport.Whatmodeoftransportisbest?Shouldwerunourowntrans-portoruseathird-partycarrier?Whatkindofvehiclesshouldweuse?Howdowedealwithinternationaltransport?Whatroutesshouldweuse?Canweback-haul?Everyorganisationfacesthesequestions,buttheycometodifferentanswersthatdependonparticularcircum-stances.Wecangivesomegeneraladvice,andwillstartbylookingatthequestionofthetransportmode.MODEOFTRANSPORTThemodeoftransportdescribesthetypeoftransportused.Therearebasicallyfivedifferentoptions–rail,road,water,airandpipeline.Eachmodehasdifferentcharacteristics,andthebestinanyparticularcircumstancesdependsonthetypeofgoodstobemoved,locations,distance,valueandawholerangeofotherthings.Sometimesthereisachoiceofmode,suchasrailorferryacrosstheEnglishChannel;road,railorairbetweenRomeandGeneva.Often,though,thereislittlechoice.IfyouwanttodelivercoffeefromBraziltoAmsterdam,youwilluseshipping;ifyouwanttomovegasfromtheGulfofMexicotoDallas,youuseapipeline;ifyouwantanexpressparcelserviceacrosstheAtlantic,youuseairfreight.Overall,mostgoodstravelbyroad.IntheUK,65%ofallfreightismovedbyroad,orabout160billiontonnekilometresoutof240billiontonnekilometres.3,4Figure12.1showstheamountofmaterialsusingeachmodeintheUKoverthepasttenyearsorso(theamountofairfreightistoosmalltoappearonthisgraph).Therearesomevariationsbetweencountries,butthisisafamiliarpattern.RailRailtransportismostcommonlyusedforheavyandbulkyloadsoverlonglandjourneys.Trainscanmaintainaconsistent,reasonablyhighspeed,andcanlinkwithothermodestocarrycontainersandbulkfreight. TRANSPORT311180160140120road100railwater80pipelinebilliontonnekilometres6040200198919901991199219931994199519961997199819992000YearFigure12.1FreightmovedbytransportmodeintheUKRailservicesareorganisedindifferentways.Theyarealmostinvariablypubliccarriers(givingaservicetoallotherorganisations)ratherthanprivatecarriers(carryinggoodsforoneorganisation).Thispublicserviceisoftenconsideredsoimportantthatitisrunbythestate.Evenwhentherailserviceisnotnationalised,itisalloweda(near)monopoly.Thenumberofcarriersisinevitablysmallwhencomparedwith,say,roadtransport.Themainreasonforthisisthelargeinvestmentsneededfortracks,rollingstockandterminals.Atruckingcompanycanstartaservicebetween,say,ParisandZagrebbyrentingatruckandusingpublicroads;arailoperatorhastobuilditstracksandterminalsandbuythetrainsbeforeitcanstartwork.Costscanbereducedbysharingfacilities.Somecountrieshaveseveraltrainoperatorsusingcommonlyownedtracks,ortracksownedbyanothercompany.Sucharrangementsarenotcommonandtheypresentobviousproblemsforoperations.Oneadvantageofrailisthatoncetheinfrastructureisinplace,ithasveryhighcapacityandlowunitcosts.Thisisanotherfactorthatdiscouragescompetition,asatrackbuiltbyoneorganisationbetweentwopoints,willgenerallyhaveenoughcapacitytomeetalldemand,anditbecomesunviableforacompetitortoopenparallelfacilities.Thereis,forexample,onlyoneraillineundertheEnglishChannel,butthishasenoughcapacitytomeetdemandonthisveryheavilyusedroutefortheforeseeablefuture.Historicallytherehasbeenmorecompeti-tionin,forexample,theUSAbutthishasvirtuallydisappeared.Anotheradvantageofrailisthattheunittransportcostislow,soitcanbeusedtomovelargevolumesofrelativelylow-pricedmaterials,suchascoalandminerals.Forthisreason,railtransportismorecommonintheearlier,upstream,partsofthesupplychain.Youaremorelikelytoseeorganisationsusingrailforinboundrawmaterialsthanoutboundfinishedgoods.Themaindisadvantageofrailisitsinflexibility.Alltrainserviceshavetobetimetabledinadvance,sothattheycanallfitontothesametracks.Thisleaveslittleflexibilityforlast 312LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTminuteoremergencydeliveries.Despitethis,trainoperatorscanprovideanumberofdifferentservices,perhapsofferingmerry-go-roundservices(whereatraincontinuallymovesbetweentwolocations,suchasaportandafactory),fulltrainservices(wherecustomershireanentiretrain),fullwagonloadattachedtoscheduledservices,containertransport,orsharedwagonsonscheduledservices.Amoreobviousconcernisthattrainscanonlytravelalongspecifiedroutesbetweenfixedterminals,andcannotstopatintermediarypoints.Mostcustomersaresomedistanceawayfromtheseterminals,sotheyhavetotransfergoodsbyroadatbothendsofthejourney.Thesetransfersaddtime,andtheycanleaverailasafairlyslowalternative.Itismoreusefulforlongdistances,suchasbetweenPerthandSydneyinAustralia,butisineffi-cientforsmalljourneys,suchasbetweenRotterdamandArnhemintheNetherlands.IntheUKtheaveragejourneylengthbyrailis180kilometres,comparedwith95kilometresbyroad.3Theproblemoflimitedaccessiscommontoseveralmodesoftransport,buttherearewaysofovercomingitseffects.Themostobviousistolocatefacilitiesneartorailterminals(orports,airports,containerportsorappropriateterminals).Ifdemandisbigenough,itisworthbuildingspecialfacilities.Apowerstation,forexample,mightfindthatitischeapertobuildaspecialraillinetoacoalmine,thantousetrucks.Anotheroptionistouseintermodaltrans-port,whichwediscusslaterinthechapter.LOGISTICSINPRACTICEDIRFTLtdTheChannelTunnelhasgivenefficientrailUpgradingoftheWestCoastMainLinelinksbetweentheUKandEuropeandesti-shouldmakerailmovementsevenmorenations.Thishasencouragedsomecom-efficient.paniestomovetheirfreightfromheavyThesiteispopularandhasattractedgoodsvehiclestothetrain.DaventryInter-majorcustomers,suchasEddieStobartandnationalRailFreightTerminal(DIRFT)Tesco.Demandisstrongforthenextphaserealisedthatsuchmoveswouldcreateaoffourmillionsquarefeet,whichwillneedgrowingdemandforalogisticsparknearnofurtherinfrastructure.TheStrategicRailtoDaventrywithgoodconnectionstorailAuthorityareencouragingsuchdevelop-androad.ments.Oneproblem,ofcourse,isthatnotConstructionstartedontherailportneareveryoneiskeenontherailport.IthastheM1inNorthamptonshirein1994.Thealreadyused365acresofgreenfields,andfirsttwomillionsquarefeetoffacilitiesexpansionplansmaybequestionedmoreopenedin1997,operatedbyTibbett&closely.Britten.ThisincludedfacilitiestounloadSources:JonesJ.(2001)Successisnotenough,three750metretrainssimultaneously.Eng-LogisticsandTransportFocus,3(6),32–5;lish,WelshandScottishRailwayruns35StrategicRailAuthority(2001)AStrategictrainsfromtheChannelTunneleachweek,Agenda,HMSO,LondonlargelyfromGermany,FranceandItaly. TRANSPORT313RoadRoadisthemostwidelyusedmodeoftransportandisused–atleastsomewhere–inalmostallsupplychains.Itsmainbenefitisflexibility,beingabletovisitalmostanylocation.Althoughthemaximumspeedonroadsislimited,thisabilitytogiveadoor-to-doorserviceavoidstransferstoothermodesandcangiveashorteroveralljourneytime.Youcanseethiseffectifyouwanttotravelbetween,say,ParisandBrussels.Theplanetravelsfaster,butwhenyouaddonthetraveltimestoandfromtheairports,check-inandboarding,itisfastertocatchabusbetweenthecitycentres.Nonetheless,travelspeedcanbeanimportantconsider-ation,especiallyasroadsarebecomingmorecongestedandvehiclesarelikelytomoveevenmoreslowly.Roadtransporthastheadvantageofbeingabletouseextensiveroadnetworks.Unlikerail,thesealreadyexist,sousersdonothavetobuildandmaintaintheirowntracks.Also,vehiclesdonothavetokeeptosuchrigidtimetables,sotheycangoonjourneysatshortnoticeandwithlittleplanning.Incontrasttorail,whereeachoperatorislikelytohavea(near)monopolyoversomeroute,roadtransportischaracterisedbyalargenumberofcarriersworkinginthesameareas.IntheUSA,forexample,thereare40,000publiccarriersand600,000privatefleets.Withsomanyoperatorscompetitionislikelytobemoreintenseandpricingmoreflexible.Thereisahugenumberofdifferenttypesofroadvehicle.Manyofthesearespecialised,anddesignedforspecificpurposes,andtherearedifferentregulationsindifferentcountries.Thefollowinglistmentionssomeofthemoreimportanttypes.●Deliveryvansarethesmalldeliveryvehicleswhichcancarryatonneortwoinasealedbody.Smallervansarebasedoncardesigns,whilelargerones–suchasLutonBoxvans–arelikesmallremovalvans.●Flat-bedlorriesarebasic,rigidvehicleswithtwoorthreeaxles,andaflatplatformthatisusedtostackmaterials.Materialsaretiedon,orsmallsidesareadded.●Box-bodiedlorriesareliketheflatbeds,excepttheyhavebodiesadded,traditionallywithaccessfromtherear.Thesegivemoreprotectionthanflatbeds.Inthe1970sBoalloyaddedcurtainsidingtogiveeasieraccesstotheload.●Articulatedlorries,aremoremanoeuvrablethanrigidlorries,sotheycanbebigger,uptothelegalweightlimit.Therearemanyvariationsonthethemeoftrucksthatbendinthemiddle.Acommonformathasatwo-orthree-axledtractorandatwo-orthree-axledtrailer.●Lorryandtrailer,whichcombinearigidlorrypullingatwo-axletrailer.Thisgivesgreatercapacitythananarticulatedlorry,butmaintainssomeofitsmanoeuvrability.Manydifferentformatshavebeentried.InSweden,forexample,theyusearticulatedlorrieswithtrailers,givingtwo,oreventhree,pointsofarticulation.InAlberta,Canada,theyusetwotrailerstomoveloadsovertheRockies.InAustralia‘landtrains’havefourorfivetrailerstomovethroughtheoutback.Perhapstheoverallpictureisthat,withinprevailingregulations,thetypeofvehicleisonlylimitedbythedesigners’imagination.Dependingonconditions,roadtransportcannormallycarryloadsupto,say,20–30tonnes.TheEuropeanUnionhasagrosslimitof42tonnesanddifferentlimitsapplyinotherareas.Inexceptionalcircumstances,verylargeloadscanbecarried,suchastheloadsofathou- 314LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTsandtonnesthataremovedforoilcompaniesintheArctic.However,weightandsizelimitsmeanthatroadtransportismoreoftenusedforsmallerloads.Thesebecomerelativelyexpen-sive,soroadtransportisgenerallyusedforshorterdistances.Althoughitisaverysimplisticview,youaremorelikelytoseeroadtransportusedfordeliveringfinishedgoodsthanbulkyrawmaterials.Anotherproblemisthatlorriesareparticularlyvulnerabletocongestionandtrafficdelays.WaterBothrailandroadtransporthavetheobviouslimitationofonlybeingusedonland.Mostsupplychainsuseshippingtocrosstheoceansatsomepoint,andover90%ofworldtradeismovedbysea.YoucanseetheimportanceofshippingtoacountryliketheUK,where95%offreightarrivesorleavesbyship,shippingisthefifthlargestservicesectorexporter,theCityofLondoninsures25%oftheworld’smarinerisk,themarineandrepairbusinessisoneofthelargestinEurope,thereare300portsaroundthecoast,andthesurroundingwatersareamongthebusiestintheworld.5Therearebasicallythreetypesofwatertransport–riversandcanals(usuallycalledinlandwaterways),coastalshipping(movingmaterialsfromoneporttoanotheralongthecoast)andoceantransport(acrossthemajorseas).Manycountrieshavewell-developedriverandcanaltransport,suchasCanadianandUSuseoftheStLawrenceSeaway,andEuropeanuseoftheRhine.Wenormallyassociaterivertransportwithsmallerloads,perhapsnarrowboatsandbarges.Butriversystemscancarryocean-goingshipsforsurprisinglylongdistances.TheMississippi,forexample,isnavigabletoMinneapolis,morethan2500kmfromtheGulfofMexico,andChicagoisamajorportintheAmericanprairies.Realistically,though,mostshippingisdonebylargevesselstravellingthroughtheworld’sshippinglanes.Somecountriesarefortunateenoughtohaveacoastlinethatcanbeusedforinternationaltransport,andcitiessuchasRotterdam,HongKongandNewYorkhavedevel-opedhugeports.Theworld’s20biggestportshandleoverhalfofallworldtrade.6Someformofshippingislargelyunavoidableforlongjourneys.Therearemanydifferenttypesofvesselforvariouscargoes.Shipsgetconsiderableeconomiesofscale,somanyaimatmovingbigloadsatlowunitcosts.●Generalcargoshipsarethestandarddesign,withlargeholdsthatcarryanytypeofcargo.Mostoftheseareloadedbycrane,althoughsomehavesidedoorsthatallowvehiclestodriveonandoff.Manyportsaroundtheworlddonothavefacilitiestohandlethemorespecialisedshipsmentionedbelow,sothesegeneral-purposevesselsareverywidelyused.●Bulkcarrierscarrylargequantitiesofcheapbulkmaterialsinlargeholds,suchasgrainorores.●Tankerscarryanyliquid,butbyfarthebiggestmovementsareoil.Becauseoftheeconomiesofscale,theseshipsarebuiltasbigaspossible.●ContainershipsarespeciallydesignedtocarrystandardcontainersandtheircapacityiscommonlyratedinTEUs(20-footequivalentunits)orFEUs(40-footequivalentunits).Atypicalcontainershipcarriesaround5000ofthese,withlargeronescarrying10,000.●FerriesareusuallyRO-RO(roll-onroll-off)vesselsthatcarryroadvehiclesoverrelativelyshortdistances.Thereare,however,longerRO-ROroutesbetween,say,EuropeandAmerica. TRANSPORT315●Barges,whicharetowedbehindocean-goingtugs.Theseareusedforshorterrouteswhereseaconditionsarefairlyreliable,suchasbetweentheUSAandPuertoRico.Theyhavetheadvantageofbeingcheapertorunthannormalships.●Combinationships.Inadditiontothespecialisedships,manyotherdesignsareused,oftentoallowfordominantpatternsoftrade.ExamplesofsuchcombinationshipsaretheRO-RO/containershipsthatcarryvehiclesimportedintotheUSAandreturnwithbulkgraintoJapan,andtheoil-bulkvesselsthatcarryoilfromtheMiddleEastandreturncarryingores.Oneusefulcombinationispassenger/container,asthepassengersareensuredprioritytreatmentinports.Themaindrawbackwithwatertransportis,ofcourse,itsinflexibilityinbeinglimitedtoappropriateports.Journeysfromsuppliersandtocustomersinevitablyneedachangeofmode,eveniftheyareclosetoports.InStAustell,UK,forexample,chinaclayworksareveryclosetospecialisedportsinFowey,buttheclaystillhastobetransportedtothequayside.Theotherproblemwithshippingisthatitisrelativelyslow,andneedstimetoconsolidateloadsandtransferthematports.However,suchtransferscanbemadeefficient,andthencoastalshippingcancompetewithroadtransport,evenforrelativelyshortdistances.7–9TheaveragewaterjourneyintheUKis400kilometres,soshippingcancompeteon,say,aForth–Tees–Thamesroute.Oneinterestingaspectofshippingisthecontinuedexistenceofconferenceservices.Thismeansthatallcarriersinagivenareaagreetochargeacommonpriceandregulatethefrequencyoftheirservice.Thejustificationofthiscartelisthatitguaranteesamoreregularservicethanwouldotherwisebeavailable.However,manypeoplequestionthisideaofpricefixing,andnon-conferencelinesnowofferdeepdiscounts.AirBecauseofitslowunitcosts,watertransportisthemostcommonmodeforinternationaltransport.Sometimes,though,itsslowspeedisunacceptable.If,forexample,yourunafactoryinArgentinaandacriticalmachinebreaksdown,youdonotwantthespareparttobeputonthenextscheduledshipfromJapan,whichwillarriveinfourweekstime.Insuchcircum-stancesthealternativeisairtransport.Passengersaccountformostairlinebusiness,witheightbillionpassengerkilometresflownayearintheUK.3Thiscontinuestogrowdespitesomehiccoughs(in,say,2001),withlow-farecarriers(Ryanair,VirginExpress,Go,easyJet,buzz,andsoon)accountingforaround25%ofthemarket.10Airlinesalsocarryasignificantamountoffreight,forproductswherespeedofdeliveryismoreimportantthanthecost.Inpractice,thislimitsairfreighttofairlysmallamountsofexpensivematerials.Perhapsthemostcommonmovementsaredocumentsandparceldelivery,withcarrierssuchasFederalExpressandUPS.Therearethreemaintypesofoperation.Thefirsttypeisregularservice,wheremajorairlinesusethecargospaceinpassengeraircraftthatisnotneededforbaggage.Thesecondtypeiscargoservice,whereoperatorsruncargoplanesonregularschedules.Thesearepubliccarriers,movinggoodsforanycustomers.Thethirdtypeischarteroperations,whereawholeaircraftishiredforaparticulardelivery.Incommonwithshipping,airlineshaveproblemsgettingmaterialstoandfromtheirjour-neys.Thereareallsortsoffacilitieslocatedaroundmajorairportsformovingmaterialsfromsourcesontotherightplanes,andthenawayfromplanesandouttocustomers.Unfortu-nately,thesetransfersagaintaketime,andcanreducethebenefitsofairtravel. 316LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAnotherproblemforairlinesistheircosts,overwhichtheyhaveverylittlecontrol.Theyhaveacombinationofhighfixedcosts(aeroplanesareexpensivetobuy)andhighvariablecosts(duetofuel,landingfees,staff,andsoon).Itisexpensivetokeepplanesflying,andthereisnorealwayofreducingthesecosts.Competitioncanalsobefierce,puttingalimitontheamounttheycancharge,andthisfrequentlysendsnewairlinesintobankruptcy.PipelineThemainusesofpipelinesareoilandgastogetherwiththeutilitiesofwaterandsewage.Theycanalsobeusedforafewothertypesofproductsuchaspulverisedcoalinoil.Pipelineshavetheadvantageofmovinglargequantitiesoverlongdistances.Unfortu-nately,theyhavethedisadvantagesofbeingslow(typicallymovingatlessthan10kmperhour),inflexible(onlytransportingbetweenfixedpoints),andonlycarryinglargevolumesofcertaintypesoffluid.Inaddition,thereisthehugeinitialinvestmentofbuildingdedicatedpipelines.Despitethisinitialinvestment,pipelinesarethecheapestwayofmovingliquids–particularlyoilandgas–overlongdistances.Localnetworkscanaddflexibilitybydeliveringtoawiderangeoflocations(suchassuppliesofwaterandgastohomes).ChoiceofmodeSometimesthechoiceoftransportmodeseemsobvious:ifyouwanttomoveheavyitemsbetweenSingaporeandBrisbaneyouwilluseshipping.Forlandjourneys,manyorganisationsseemhappytoputmaterialsonlorrieswithoutmuchthoughtforthealternatives.Inpractice,thechoiceofmodedependsonavarietyoffactors.Perhapsthemainonesarethenatureofmaterialstomove,thevolumeanddistance.Otherfactorsinclude:●valueofmaterials,asexpensiveitemsraiseinventorycostsandencouragefastermodes●importance,asevenlow-valueitemsthatwouldholdupoperationsneedfast,reliabletransport.●transittimes,asoperationsthathavetorespondquicklytochangescannotwaitforcrit-icalsuppliesusingslowtransport●reliability,withconsistentdeliveryoftenbeingmoreimportantthantransittime●costandflexibilitytonegotiaterates●reputationandstabilityofcarrier●security,lossanddamage●schedulesandfrequencyofdelivery●specialfacilitiesavailable.Manyotherfactorsmaybeimportantforafinaldecision.Organisationsthatroutinelyusethecheapestmodemaybeperformingbadlybysomeoftheothermeasures.Rememberthattrans-portcostsareoftenarelativelysmallpartofoverallcosts,anditcanbeworthpayingmoretogetarapidandreliabledelivery.OneoftheearlystudiesoflogisticsbyLewisetal.11showedthatairfreightcanactuallysavemoney.Itmovesmaterialsthroughthesupplychainsoquicklythatorganisationsneedfewerwarehousesfordistributiontocustomers–bypayingmorefortransporttheycanreduceoverallcosts.Asaruleofthumb,thecheapestmodesoftransportaretheleastflexible.Thefollowingtableshowsarankingforthecost,speed,flexibilityandloadlimitsofdifferentmodesoftrans-port.Themodesarerankedinorder,with1beingthebestperformanceand5beingtheworst. TRANSPORT317RailRoadWaterAirPipelineCost34152Speed32415Flexibility21435Volume/weightlimits34152Accessibility21435Ofcourse,organisationsdonothavetousethesamemodeoftransportforanentirejourney.Theycanbreakthejourneyintodistinctstagesandusethebestmodeforeachstage.Wewilllookatsuchintermodaljourneysinthenextsection.LOGISTICSINPRACTICEAlbertacoalminesCanada’slargestcoalminesareinthewest-minetoaterminalontheGreatLakesernprovinceofAlberta.Unfortunatelymost(usuallyThunderBay)andthenbyshipofthedemandforcoalcomesfrompowertoalakesidepowerstation.stationsinthepopulationcentresofsouth-■Directrailshipment:movingcoalbyrailernOntarioover3000kmaway.directlyfromtheminetoastockpileataThemaincompetitorsforcoalinpowerpowerstation.Thisavoidsthetransfertostationsareoil,gas,nuclearpowerandaship,butreplacesaseajourneywithahydroelectricity.Coaliscurrentlyapopularconsiderablylongerrailjourney.choiceasoilandgasareexpensive,nuclearpowerhasquestionsoflong-termsafety,■Highefficiencyrail:usesnewlydesignedandthereislimitedcapacityforhydroelec-railcarsthatincreasemaximumloadstricity.Albertacoalalsohaslowsulphurandreduceunitcosts.Withappropriatecontent,whichreducestheneedforexpen-investment,highefficiencytrainscanbesiveflue-gasemissioncontrolequipment.usedtoreplaceconventionaltrainsinThereare,however,obviousproblemswitheitherofthefirsttwooptions.transport.■WestcoastportsandPanamaCanal:thisAboutthreemilliontonnesofcoaliscarriescoalbytraintoawestcoastportshippedeachyearfromAlbertatoOntario,suchasVancouver,transfersittoshipforwithtransportcostsaround$45atonne.thejourneythroughthePanamaCanalThecoalindustrylooksforwaysofreducingandbackthroughtheStLawrencethis,andthealternativesconsideredareSeawaytopowerstationsinOntario.summarisedbelow(seeFigure12.2).■Coal/oilagglomeration–eastbound:■Railandship:thisisthecurrentpractice,Albertaisamajoroilproducerandwithcoaltransportedbyrailfromthethetransportofoilandcoalcanbe 318LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTAlbertaRail,MinesitespipelineorenergybusOntarioVancouverRailorpipelineandlakerThunderBayStLawrenceSeawayPowerstationsRailorpipelineandshipviaPanamaCanalFigure12.2TransportingcoalacrossCanadaLOGISTICSINPRACTICEcontinuedcombined.Thiscrushesthecoalatthe■Energybus,whichavoidsthemovementmineandmixesitwithcrudeoiltobeofcoalbygeneratingelectricityneartopumpedthroughapipelineeithertheminesandusinganinter-provincialdirectlytothepowerstations,ortoaportelectricitygridtosenditfordistributionontheGreatLakes.AtthedestinationtheinOntario.slurryisseparated,withcoalbeingsentAnalysingallthecostsshowedthatatothepowerstationsandoiltomarketshighefficiencyrailservicefromtheminetoineasternCanadaandtheUSA.ThunderBay,followedbyshiptothepower■Coal/oilagglomeration–westbound:Thisstationgivesthelowestcost.Thisismar-issimilartothepreviousoption,exceptginallycheaperthanthecurrentarrange-thattheslurryispipedtoVancouverforment,butneedsmorecapitalinvestment.separation.ThecoalisputontoshipsSource:AshL.andWatersC.D.J.(1991)Simu-boundforthePanamaCanalandStlatingthetransportofcoalacrossCanada,LawrenceSeaway,whiletheoilissenttoJournaloftheOperationalResearchSociety,42(3),marketsinwesternCanadaandtheUSA.195–204 TRANSPORT319INTERMODALTRANSPORTWehaveseensomefactorsthataffectthechoiceoftransportmode,butorganisationsdonothavetousethesamemodeforanentirejourney.Theirbestoptionisoftentodividethejourneyintostagesandusethebestmodeforeachstage.Thisdoes,ofcourse,dependonfactorslikethelengthofthejourney,therelativecostsandthepenaltyofmovingbetweenmodes.Butifyoumovematerialsfrom,say,LanchowincentralChinatoWarsawinPoland,youmightstartbyputtingthegoodsonatruck,transferringthemtorailforthejourneyacrossChinatoShanghai,thenontoashiptoRotterdam,thenbackontorailtocrossEurope,andthentruckforlocaldelivery.Journeysthatuseseveralmodesoftransportarecalledintermodal.INTERMODALTRANSPORTreferstojourneysthatinvolvetwoormoredifferentmodesoftransport.Theaimofintermodaltransportistocombinethebenefitsofseveralseparatemodes,butavoidthedisadvantagesofeach;perhapscombiningthelowcostofshippingwiththeflexi-bilityofroad,orgettingthespeedofairwiththecostofroad.Themainproblemisthateachtransferbetweenmodescausesdelaysandaddscostsforextrahandling.Youcanexperiencethiseffectwhenyoutransferbetweenabusandtrain,orbetweenacarandferry.Intermodaltransportonlyworksifthistransfercanbedoneefficiently.Attheheartofintermodaltransportarethesystemsfortransferringmaterialsbetweenmodes.Theaimistogiveavirtuallyseamlessjourney,andthebestwayofachievingthisistousemodularorunitisedloads.Ineffect,allmaterialsareputintostandardcontainers,andtheequipmentisarrangedtomovethesecontainers.Thebasiccontainerisametalbox20-feetlong.Thissizehasbecomesomewhatrestricting,anditisoftenreplacedbya40-footbox.Eventhiscanbelimiting,andtheHudson’sBayCompanyuses53-footcontainersonthetripfromVancouvertoMontreal,reducingcostsby10–15%.12Puttingmaterialsintotheseboxeseliminatestheneedtohandleitemsindividually,andthewholecontainergoesfromsourcetodestination.Sincethesecontainerswereintroducedin1956onthetripbetweenNewYorkandHouston,theyhavetransformedideasabouttrans-port.Inparticular,transferringmaterialsbetweenmodeshaschangedfromalabour-intensiveoperationtoacapital-intensiveone.Hugecontainerportsandterminalshavebeenbuiltaroundtheworldtomovecontainersefficientlyandwithminimumdelayfromonetypeoftransporttoanother,orfromonecarriertoanother.Inthelate1960sshipsspentabout60%oftheirtimelaidupinportforloadingandunloading.13Largelyduetocontainerisation,thishasreduceddramatically,andshipscanturnaroundinafewhours.Aruleofthumbisthatittakesonedaytoturnaroundacontainershipwhenitusedtotakethreeweekstoturnaroundaconventionalship.Over70%offreightmovementsnowusecontainers.14Someofthebenefitsofcontainerisationinclude:15●Simplifiedtransportandflowofgoods●Easierandfasterhandling●Genuinedoor-to-doorservice●Fasterdeliveries●Reducedlossduetodamage,misplacementandpilferage 320LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●Reducedpackingcosts●Lowerinsurancecosts●Separationofincompatiblegoods●Useoflesscongestedroutes●Improvedtransportencouragestrade.OthertypesofintermodaltransportAverywiderangeofmaterialscanbeputintocontainers,butthereareinevitablysomethatcannot,orarecheapertotransportbyothermeans.Oil,forexample,mightbeputintocontainer-sizedtanks(inthesamewayasbulkwine),buttankersorpipelinesgivecheaperalternatives.Non-standardcontainersmightalsobepreferredforsomejourneys.Standardcontainershavetobestrongenoughtostackabouteighttall,butifacompanysimplywantstotransferaboxfromrailtoroad,itcanuse‘swapbodies’.Theseareskeletontruckbodiesthatcanbetransferredtoarailcar,butcannotstandtheroughtreatmentofcontainers.Anotheralternativetocontainersispiggy-backtransport,wherealorry–orusuallyjustthetrailer–isdrivenontoatrainforfastmovementoveralongerdistance.YoucanseeanexampleofthisintheChannelTunnel,wherecarsandlorriesaredrivenontoatrainforthispartoftheirjourney.Anotherextensiontothisideauseslandbridges.Theseareusedwhenmaterialscrosslandonwhatisessentiallyaseajourney.ThemostwidelyusedexamplesareintheUSA,wherematerialsfromtheFarEastcrossthePacifictothewestcoastofAmerica,andthentravelbyrailonlandbridgesacrosstoportsontheeastcoast,beforecontinuingtheirseajourneytoEurope.Twomainlinksarethe‘longbridge’inthenorthbetweenSeattleandBaltimore,andthe‘shortbridge’inthesouthbetweenLongBeachandNewOrleans.LOGISTICSINPRACTICESouthamptonContainerTerminalsLtdSouthamptonisoneoftheUK’sbusiestAnimportantfactorforunloadingcontain-deepwaterports.Itcovers176acres,ofersisthereachofthecranes.Thecraneswhich135acresiscontainerstackingspace.havetoreachovercontainersstackedonOntheshipside,theportis4kmfromthedecktoliftthenextonetounload,andthemaininternationalshippinglanetheSouthamptoncraneshavereachesuptoaroundthesouthcoastofEngland.The20containerswide.Theycanliftupto60mainaccesschannelisdredgedto12.6tonnes,andthereisafloatingcraneformetres,withotherberthsdredgedto15heavyliftswithacapacityof200tonnes.metres.Thisgives1350metresofcontinu-Onthelandsidestraddlecarriersmoveousquay,whichcanhandle4oftheworld’scontainersbetweenthequayandthestack.largestcontainershipsatthesametime.Thereare79ofthese,eachwithacapacityAlongthequaysare13ship-to-shoreof40tonnes.Thestackingyardsortscon-gantrycranesforunloadingcontainerships.tainersandkeepsthem,usuallyinstacks3 TRANSPORT321LOGISTICSINPRACTICEcontinuedor4high,untiltheyaresentinlandordeliv-BirminghamandCardiffarearound200kmeredtoashipatthequay.Throughputisaway.Multi-linesidingsallowfastrailcon-fast,asitisineveryone’sinterestforthenections,andFreightlinerrunamainserv-containerstospendaminimumtimeiniceof13trainsaday.Theseconnecttothesestacks.mostmajordestinationsintheUK.Theportis2kmfromthemotorwaySources:companyreportsandwebsitewww.sct.network,andtruckscanmakethisjourneyuk.comwithin5minutes.ThemajorcentresofOWNERSHIPOFTRANSPORTInChapter10wesawhowanimportantdecisionforwarehousingistheownershipoffacilities.Thechoiceisessentiallybetweenprivatelyowned,publicoracombinationofthetwo.Withtransportweagainmeetthisdecision.Isitbetterforanorganisationtorunitsowntransportfleet,tousepublictransport,oracombinationofthetwo?Withtransportthemorecommontermsarein-houseorownaccounttransportcomparedwiththird-partytransport.OwnaccounttransportThishasanorganisationusingitsowntransportfleettomoveitsmaterials.Themostcommonformofprivatetransporthaslargecompaniesrunningtheirownfleetsoftrucks.Thishastheadvantageofflexibility,greatercontrol,closerintegrationoflogisticsandeasiercommunica-tions.Transportcanalsobetailoredtotheorganisation’sneeds,withthebesttypeofvehicles,fleetsize,deliveryschedule,customerservice,andsoon.Ownaccounttransportcanbeexpensiveandanorganisationshouldonlyrunitsownfleetwhenitischeaperthanusingaspecialistthird-partycarrier.Essentially,thismeansthatownaccounttransportmustberunasefficientlyasaspecialisedtransportcompany.Thereare,however,potentialcostsavingsasthereislesspressurefortransporttomakeaprofit,possibletaxadvantages,anddevelopmentgrants.Therearealsointangiblebenefits,suchasthemarketingbenefitsofvehiclespaintedinidentifiableliveryandanimpressionofreliabilityandlong-termdependability.Onlylargerorganisationscanaffordthecapitalinvestmentandcostsofrunningtheirownfleet.Thereare,however,waysofavoidingthesecosts.Mostownaccountfleetsarefinancedbysomeformofhiringorleasing,whichgivesameansofacquiringvehicleswithouthavingtofindallthecapital.Hirepurchase,forexample,spreadsthepaymentsoversomeperiod,whilelong-termhiringallowsmoreflexibleuse.WhenyouseeatruckpaintedinJ.Smith’slivery,itdoesnotnecessarilymeanthatJ.Smithactuallyownsthevehicle.Heorsheismorelikelytobeleasingitfromacompanythatlooksaftermaintenance,overheads,repairs,replacementsandotherrunningcosts,inreturnforafixedfee. 322LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThird-partycarriersSpecialisedtransportcompaniesofferarangeofservicestootherorganisations.Theadvantageofthisarrangementisthatspecialisedcompaniesrunthetransport,leavingtheorganisationtoconcentrateonitscoreoperations.Byusingtheirskillsandexpertisethetransportoperatorscangivebetterservices,orlowercoststhanownaccounttransport.Theymightalsobelargeenoughtoreducecoststhrougheconomiesofscale,andtheycangetanumberofoperationalbenefits.Theycan,forexample,consolidatesmallerloadsintolargeronesandreducethenumberoftripsbetweendestinations,ortheycanco-ordinatejourneystogivebackhauls,wheredeliveryvehiclesareloadedwithothermaterialsforthereturnjourney.Mostthird-partytransportisprovidedbycommoncarriers.ThesearecompanieslikeTNTandExcelLogisticswhichmovematerialsonaone-offbasiswheneveraskedbyanotherorgan-isation.IfyouwanttosendaparceltoAustralia,youmightuseaparceldeliveryservicesuchasUPS,whichactsasacommoncarrier.Alternatively,anorganisationcanformalong-termrelationshipwithacontractcarrier.Thiscontractcarrierthentakesoverapart–oftenmostof–theorganisation’stransportforsomeextendedperiod.Schenker,forexample,actasacontractcarrierwhentheyarerespon-sibleforallthemovementofgoodsforRocheDiagnosticsintheUSA.Contracttransportcompaniesofferawiderangeofservices,rangingfromanoccasionalparcelcollectiontorunningalarge,dedicatedfleetforanindividualcustomer.ChoiceofownershipThereareseveralfactorstoconsiderwhenchoosingthebesttypeofownership.●Operatingcost:Indifferentcircumstanceseitherownaccountorthird-partytransportmightbecheaper,andthereshouldbesignificantotherbenefitsbeforeanorganisationmovesawayfromtheircheaperoption.●Capitalcosts:Capitalisalwaysscarce,andevenifownaccounttransportseemsattractive,anorganisationmightfinditdifficulttojustifytheinvestmentinvehicles.Wehavementionedalternativearrangementsforspreadingthecosts,sotheseanalysesshouldbedonecarefullybeforereachinganyconclusion.●Customerservice:Organisationsmustusetransportthatprovidesacceptablecustomerserviceinthebestpossibleway.Sometimes,itisimpossibletogetathird-partycarrierthatcanmeetsallrequirements,andthenownaccounttransportistheonlyoption–and,ofcourse,viceversa.●Control:Anorganisationclearlyhasgreatercontrolovertransport–andthereforewideroperations–ifitrunsitsowntransport.However,thiscontrolmightbeboughtatahighprice,andcontractcompaniesmightofferequivalentservicesbutwithouttheoverheadsandinflexibilityofaprivatefleet.●Flexibility:Thestructureandoperationsofaprivatefleetarefairlyrigid,asyoucannotmakequickadjustmentstoallowforchangingcircumstances.Ifthereisasuddenpeakindemand,youcannotincreasethesizeofthefleetforafewdays,andthenreduceitagainwhenthepeakpasses.Inthesameway,thefleetisstructuredtocarryacertainmixofsizesandmodes.Commoncarrierscanmaketheseadjustmentsmuchfaster,astheyrely TRANSPORT323ondemandfromsomecompaniesgoingthroughatroughwhiledemandfromothercompaniesispeaking.●Managementskills:Managingtransportneedsspecialisedskills,whicharenotreadilyavail-ableineventhebiggestorganisation.Thisgivesastrongargumentforthird-partycarriers.Largetransportcompaniescansupportthemanagementteamswithspecialistskills,knowledgeandexperienceofdifferentconditions.Asupportingargumentsaysthatanorganisationwithweaktransportmanagementsuffersasitgivesworseperformancethancompetitorsandbecomesuncompetitive;onewithstrongtransportmanagementmaybedivertingvaluabletalentfromtherestofthebusiness.●Recruitmentandtraining:Aswellasbeingthemostwidelyused,roadtransportisgenerallythemostlabourintensive.Thisgiveshighemploymentcosts.Thereisalsoashortageofskilleddrivers,withmanyorganisationsfindingitdifficulttorecruitandtrainsuitablepeople.Bothofthesegiveanincentivetousethird-partytransport.Therearemanyfactorstoconsiderinthefinaldecision,butoverall–incommonwithwarehousing–thereisacleartrendtowardsthird-partycarriers.Manyorganisations–includingthebiggest–arereducingtheirownfleets,usingmorecontractoperators,andformingalliances.Againincommonwithwarehousing,acommonoptionistouseamixtureofownaccountandthird-partycarriers.Thenanorganisationcanuseitsowntransportforcoreactivities,withfullutilisationgivinglowcosts.Anyothertransportneedsarelefttooutsideoperatorswhodealwithpeaksandunusualdemands.OtherservicesAnorganisationcanpassallitstransportproblemstoathird-partycarrier,buttherearemanyotherpeoplewhocanoffertheirownspecialisedservices.Thesecanprovidethespecialskillsthatarenotusuallyavailablewithinasingleorganisation.Someorganisationsgivefairlygeneraladvice,suchasmanagementconsultantswhoworkinlogistics,andsoftwarecompa-niesthattailorpackagesfortransport.Otherexpertsgivemorespecificservices,suchasfreightforwardersandshippingagents.Manypeoplemighthelpwithtransport,andyoucangetthefeeloftheirservicesfromthefollowingexamples.●Commoncarriers:Aswehaveseen,thesemovematerialsbetweentwopointsforanycustomer,usuallyinaone-offdeliveryusingcommonfacilities.●Contractcarriers:Theseoffertransportservices,butusuallyforalongertime.Theytakeoversome,orall,aspectsofanorganisation’stransportforanagreedperiod.Therearemanypossiblearrangements,buttheytypicallyinvolvededicatedfacilitiessetasideexclu-sivelyforoneorganisation.●Intermodalcarriers:Traditionallycarriershaveconcentratedononetypeoftransport,suchasshippinglinesorroadhaulers.Withthegrowthofintermodaltransport,manycompa-niesofferawiderrangeofservicesandoperatedifferenttypesoftransport.Theytypicallylookafterallaspectsofajourneybetweentwospecifiedpoints.●Terminalservices:Materialshavetoswitchfromonemodeoftransporttoanother,ormovebetweendifferentoperators.Thesetransfersmaybedoneatports,airports,termi- 324LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTnalsorcontainerbases,whicharerunbyseparateorganisations.Theterminalsdomorethanjusttransfermaterials,andtheymightunloaddeliveryvehicles,sortgoods,breakbulkforlocaldelivery,concentrategoodsforonwardmovement,loadoutgoingtransport,keeptrackofallmovements,andprovideanyotherrelevantservices.Inthiscontextyoumighthearofdemurrage.Terminalsearnmoneyfromtheirthroughput,whichtheywanttobeasfastaspossible.Anygoodsthatarenotcollectedassoonastheybecomeavailabletakeupspaceandgetinthewayofothermovements.Toencouragecompa-niestocollecttheirmaterialspromptly(perhapswithinadayortwo),terminaloperatorschargedemurrage,whichisapenaltyforlatecollectionandstorage.●Freightforwarders:Oneproblemwiththird-partycarriersistheexpenseofmovingsmallerloads.Unittransportcostsfallwithincreasingquantity,andtransportnowfocusesonstandardloads,suchasafullcontainerload.Ifyouonlyhaveenoughmaterialtofillpartofacontainer,youhavetheobviouschoiceofleavingemptyspace–butthenyouarepayingtomoveawholecontainerandonlyusingpartofit.Analternativeistouseafreightforwarder.Thesearepeoplewhocollectrelativelysmallloads,andconsolidatethemintobiggerloadstravellingbetweenthesamepoints.Afreightforwardermight,forexample,combinesixorsevensmallerloadstogetafullcontainer,givinglowerunitcostsandfasterdelivery.Freightforwardersalsoprovidealltheadministrationneededtomovematerialsthroughtheirjourney,suchasdocumentation,customsclearance,insurance,andsoon.●Brokers:Abrokeractsasanintermediarybetweencustomersandcarriers.Effectively,theylookatthegoodstobemoved,findthebestroutesandcarriersandnegotiateconditions.Therearealsospecialisedbrokerswhoassistwithparticularpartsofthejourney,suchascustomsbrokerswhopreparethedocumentsneededforcustomsclearance,getmaterialsthroughcustomsandmovethemacrossinternationalborders.●Agents:Theseareusuallylocalpeoplewhorepresent,say,shippingcompanies.Theygivealocalpresenceandactasintermediariesbetweendistantcarriersandlocalcustomers,exchanginginformation,arrangements,andsoon.●Parcelservices:ThesearesimilartoaPostOffice,astheydeliversmallpackagestoanyloca-tion.CompaniessuchasFederalExpress,UnitedParcelService(UPS)offerveryfastdeliv-eriestoalmostanylocationintheworld.Theirstrengthiscustomerservice,astheyofferguaranteednextdaydeliveryoverlongdistances.LOGISTICSINPRACTICEChristianSalvesenIn1846ChristianandTheodoreSalvesenalotofgrowth,restructuringandchangefoundedashippingandfishingcompanyinoffocus.In1997,itdemergeditsremain-Norway.Theircompanyhasbeenthroughingnon-coreactivitiesandafterrestructur- TRANSPORT325LOGISTICSINPRACTICEcontinuedingin1999concentratedonitsroleasatheirEuropeanLogisticsCentreatMiltonmajorEuropeanlogisticsbusiness.TheirKeynes,withrapiddeliveryguaranteedbyaimis,‘tomanageclients’supplychainsChristianSalvesen.seamlesslyacrossEuropeunderthesingleAtthecentreoftheoperationsisChrist-brandofChristianSalvesen’.TheynowianSalvesen’sSHARP(ShipmentsHandlingworkinpartnershipwithmanufacturersAndReportingProgramme).Everyeveningandretailers,controllingstock,andmakingDaimlerChryslerentertherequirementsofsurethatgoodsaredeliveredtocustomerseachdealerintothis,andthepartsarepreciselywhentheyareneeded.Tosupportloadedontolargedouble-deckedarticu-this,theyhaveafleetof2500vehicles,latedtrucksatMiltonKeynes.Theseleave5500trailersand14,000staffworkingatbetween1900and2200andtravelto11160sites.feederdepotsaroundthecountry.AttheOneofChristianSalvesen’smajorcon-feederdepotstheyhaveanhourtotransfertractsistodistributepartsforDaimler-partstolocaldeliveryvehicles.Thereare35ChryslerintheUK.Theproblemismakingofthese,eachofwhichdeliverstoupto11surethat300franchisedMercedes-Benzdealers,startingatmidnightandfinishingandChryslerdealershaveadequatesup-by0800.pliesofparts.TheobviousoptionofhavingSources:companyreportsandwebsiteatwww.bigstocksateachdealeristooexpensive,salvesen.comsoDaimlerChryslermeetdemandfromROUTINGVEHICLESAnyorganisationinvolvedintransporthastoconsidermanytypesofproblem.Wehavediscussedsomeofthemostimportant,buttherearealwaysoperationaldetailstoconsider.Thenumberofvehiclesneeded,typeandsize,specialfeaturesrequired,routesused,assignmentofloadsandcustomerstovehicles,schedules,maintenanceschedules,measuresofserviceandquality,andsoon.Wecannotlookatalltheseproblems,butwecanillustratesomeprinciplesbylookingatthequestionofroutingvehicles.Abasicroutingproblemlooksforthebestpathforadeliveryvehiclearoundasetofcustomers.Therearemanyvariationsonthisproblem,allofwhicharenotoriouslydifficulttosolve.Youcanseethisinthebasic‘travellingsalesmanproblem’.Imagineasalesmanwhohasanumberofcustomerstovisitbeforereturninghome,andheorshewantstofindtheshortestjourney(illustratedinFigure12.3).Thisseemslikeasimpleproblem,untilyouthinkaboutthehugenumberofpossibleroutesthathavetobeconsideredandcompared.AswesawinChapter6,thenumberofpossibleroutesisn×(n–1)×(n–2)×(n–3)…3×2×1,wherenisthenumberofcustomerstovisits.Foraproblemofanysize,itisimpossibletoimaginethehugenumberofpossibleroutes,letalonecomparethemandfindthebest. 326LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTHomeFigure12.3ThetravellingsalesmanproblemThetravellingsalesmanproblemisthebasicroutingproblem,andrealproblemsaremuchmorecomplicated.Theytypicallycontainfactorssuchasafleetofdifferenttypesofvehicles,multi-compartmentvehicles,incompatibleproducts,differentlogisticsfacilities,timewindowsfordeliveries,varyingspeedscausedbytrafficconditions,customerswithdifferentimportanceandconditionsfordeliveries,competingaims,variabledeliverytimes,specialequipmentneededforsomedeliveries,uncertaincosts,separateschedulesforvehiclesanddrivers,andsoon.Manymethodshavebeensuggestedfortacklingroutingproblemsbut,likelocation,therearetwogeneralapproaches.Thefirstusesgeographicalargumentstolookforthebestroutes,regardlessoftheactualroads.Thesecondlooksattheroadnetworkandfindsshortestroutesthroughit.Becauseoftheincreasingsophisticationofelectronicmaps,thesecondoftheseisprobablybecomingmorepopular.Thefollowinglistsuggestssomespecificmethodsthathavebeenproposed.1.Negotiations:Findingacceptableroutesissocomplicated,withmanysubjectivefactorsandpeopleaffected,thatthebestapproachisoftentonegotiateasolution.Thismaynotgivethebesttechnicalanswer,butithasthesupportofeveryoneconcerned.2.Adjustpreviousplans:Manyroutingproblemsarefairlystable,likepostmendeliveringletters.Thenausefulapproachhasanexperiencedrouterreviewingpresentcircumstancesandupdatingpreviousroutestoallowforanychanges.Thishasthebenefitofbeingrela-tivelyeasyandcausinglittledisruption.Italsousesawell-understoodprocedureandexpertscangiveresultsthataretrustedbytheorganisation.Unfortunately,theresultscanalsobeofvariableanduncertainquality,theroutesmaytakealongtimetodesignandtheyrelysolelyontheskillsofarouter. TRANSPORT3273.Otherintuitivemethods:Theseincludearangeofmethodsthatusetheskills,knowl-edgeandexperienceofrouters,whotypicallyuseaseriesofheuristicrulesthathavebeensuccessfulinthepast.4.Maps:Schedulersoftenfinditeasiertoworkwithsomeformofdiagrams,andthemostpopulararesimplemapsofkeyfeatures.Thenschedulerscandrawroutesanditerativelyimprovethem.Therearemanyguidelinestohelpwiththis,suchasformingroutesthataremoreorlesscircular,non-intersecting,nodoublingback,andsoon.Graphicalapproacheshavetheadvantagesthattheyareeasytouseandunderstand,buttheyarereallyonlyonestepbetterthananintuitivemethod.5.Spreadsheetcalculations:Usingmapscanshowoverallpatterns,buttheylosesomeofthedetails.Analternativeistoconcentrateonspreadsheetcalculationsandlookatthepatternsinthenumbers.Acommonformatforthisliststhecustomerstobevisiteddowntheleft-handsideandthetimeperiodsacrossthetop.6.Simulation:Simulationisoneofthemostflexibleapproachestosolvingproblems.Itgivesadynamicviewbyimitatingrealoperationsoveratypicalperiod.Supposethatyouwantsomeinformationaboutproposedroutes.Youcouldsitincabsandwatchtheprocessforsometime,andseewhatwashappening.Thismightgiveagoodideaofthenormaloperations,butitwouldtakealongtimetogetresultsandpeoplemaynotworknormallywhilethereissomeonewatching.Analternativeistosimulatetheprocess.Youuseacomputertogeneratesometypicalfeaturesofthejourney,andfollowprogressthroughtheprocess.Ratherthanwatchingandtimingacustomerbeingserved,forexample,acomputergeneratestypicalservicetimes–andanyotherfeaturesthatyouwant.7.Expertsystems:Thesespecialisedprogramstrytomakecomputersduplicatethethinkingofaskilledscheduler.Thebasicskills,expertise,decisionsandrulesusedbyexpertsarecollectedinaknowledgebase.Arouterthenpassesaspecificproblemtoaninferenceengine,whichisthecontrolmechanism.Thislooksattheproblem,relatesthistotheknowledgebaseanddecideswhichrulestouseforasolution.Expertsystemshavebeendevelopingformanyyears,andsomeorganisationsreportusefulresults.8.Mathematicalmodels:Mostofthepreviousapproachesrely,atleasttosomeextent,ontheskillsofarouter.Moreformalmathematicalapproachesgiveoptimal–ornearoptimal–solutionswithoutanyhumanintervention.Inpractice,routinghastoincludesomanysubjectiveandnon-quantifiablefactors,thatoptimalsolutionsinthemathemat-icalsensemaynotgivethebestanswersfortheorganisation.Themostcommonmathe-maticalapproachuseslinearprogramming.Thesemethodsarerathercomplicated,sotheyaregenerallylimitedtosmallproblems.If,however,youhaveaproblemwheresmallchangesinroutesmaygivesignificantdifferenceincosts,itiscertainlyworthlookingatmathematicalapproaches.Thereisalotofstandardsoftwarefortacklingroutingproblems,suchasParagon,CASTandOptrack.Someofthisusesstandardprocedures,butsuppliersareoftenreluctanttopublishdetailsbecauseofconfidentiality.Itcanbeadifficultjobtocompareallthesoftwareavailableandfindtheapproachthatbestsuitsyourneeds. 328LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTWORKEDEXAMPLEAdepotsitedat(120,90)hastomakedeliveriesto12customersatthefollowingloca-tions,andthenreturnbacktothedepot.Whatisthebestroute?CustomerXco-ordinateYco-ordinate1100110212013032201504180210514017061301807170808160170918013010805011100601214080SolutionRealroutingproblemscanhavehundredsorthousandsoflocationstovisit,andhugenumbersofcomplicatingfactors.Thisverysimpleproblemhas479,001,600possiblesolu-tionsfromwhichwehavetoevaluateandpickthebest.Therearemethodsofdoingthis,usuallyincludedinroutingsoftware.OnesimplepackagegavethesolutionshowninFigure12.4.Youmightcheckthatthisistheoptimalresult.250420065815032911007125011100050100150200250Figure12.4Solutiontoroutingproblem TRANSPORT329❑Transportisresponsibleforthemovementofmaterialsbetweenfacilitiesinthesupplychain.Itinvolvesmanyrelateddecisionsaboutthebestmode,ownership,organisation,routes,andsoon.❑Transportisanessentialpartoflogistics.e-Commercecandeliverintangible■■■■■materials,butmostproductsincludegoodswhichneedtransportfordeliverytocustomers.❑Therearefivebasicmodesoftransport–rail,road,air,waterandpipeline.Eachofthesehasdifferentfeaturesandisbestindifferentcircumstances.❑Thebesttransportbetweentwopointsisusuallyintermodal,usingthebestmodeforeachlegofajourney.Transfersbetweenmodescancauseproblems,sotheaimistocreateaseamlessjourneythatcombinestheadvantagesofdifferentmodes.❑Organisationshaveachoicebetweenowningtheirowntransport,usingthird-partycarriers,orsomecombinationofthetwo.Thebestalternativedependsonanumberoffactors,butthereisacleartrendtowardsoutsourcedtransport.❑Transportmanagershavetotacklemanyotherproblems.Oneconcernstheroutestobeusedbyvehicles.Thisisasurprisinglydifficultproblem,andCHAPTERREVIEWmanywaysoftacklingithavebeensuggested.CASESTUDYMountIsaMinesMountIsaMinesisoneoftheworld’sgreatmetalmines.ItsmainoperationsareatMountIsa,inQueensland,Australia,whereitminesadjacentdepositsofcopperandsilver–lead–zincores.Productionlevelschangewithworlddemandandprices,butinatypicalyear7milliontonnesoforeareminedtogive150,000tonnesofcopperandlead(containingsilver)and200,000tonnesofzinc.MountIsahasserioustransportproblems.ItproduceshugequantitiesoforeinaremoteareaofAustralia,whilethemaindemandforfinishedmetalsisintheindustrialisedareasoftheworld,particularlyEurope.Theproblemistoprocesstheoresandmovethemtofinalmarketsascheaplyaspossible.Youcanseethescopeoftheproblemfromanoutlineofthejourneyforcopper.Thisstartswithundergroundexplosionstobreakuptheorebody.Thebrokenoreiscollectedbyfront-endloadersandputontooretrainsthatcarryittoundergroundcrushers.Thecrushedoreisthenhoistedtothesurfaceandstoredincrudeorebins,withacapacityof60,000tonnes.Aconveyormovesorefromthesebinstoanothercrusher,whereitisreducedtoabout10mm,andpassedtofineorebins.Theorethengoestoarod-and-ballcrusherforfinegrinding,andispumpedtoafloatationprocess,whichproducesa 330LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedconcentrateofabout25%copper.Thisconcentrateispassedtosmeltersthatroastittoremovesomeofthesulphur,smelttheroastproducttoremoveironandsilicaandleaveacoppermatte,andthenoxidisethematteinaconvertertoremovemoresulphur.Theresultatthisstageisimpurecopper.Thisissenttoacastingfurnacetoremovemostoftheremainingimpurities,andcastthecopperinto300kgingots.Theseoperationsareallcarriedoutattheminesite,sotherearetwomainlogis-ticsproblems.Thefirstmoveshugequantitiesofmaterialsfromtheminetoworldmarkets,andthesecondmovesmaterialsneededbythemine,smeltersandotheroperationsintotheremotesite.ThecopperingotsaretakenbytraintoTownsville,800kmawayonthecoast,forelectrolyticrefining,whichremovesanyremainingimpuritiesandgivesalmostcompletelypurecopper.Thesefacilitieshaveacapacityofover150,000tonnesayear.Atthispointthecopperiscastintoitsfinalform,ofcake,bars,rodsandwire.Thesearedriventothenearbyportwheretheyareshippedaroundtheworld.CopperisonlyoneofMountIsa’sproducts,andithassimilartransportproblemswithleadandzinc.Italsominescoalandgold,hasorganiseditstransportopera-tionsintoaseparatecompany,generateselectricityandsupplieswaterforthecityofMountIsa,andisinvolvedinawiderangeofminingandassociatedventures.CASESTUDYQuestions●HowimportantdoyouthinktransportisfortheoperationsatMountIsa?●Whatalternativesaretherefortransport?Whatarethecurrentarrangementsandhowmighttheybeimproved?●Dootherminingcompanieshavesimilartransportproblems?PROJECTToorvikTransportConsultantsYouhaverecentlystartedworkforToorvikTransportConsultants,andaretacklingyourfirststudyforamajorcustomer.ThiscustomerbuyselectronicgamesfromJapan,SingaporeandTaiwanandimportsthemtoScandinavia.NowitisconsideringreplacingsomeoftheincreasinglyexpensivegamesfromJapanwithcheapermodelsfromChina.Howwouldyousetaboutfindingthedifferentoptionsfortrans-portingthesegames?Howwouldyoustartcomparingtheseoptions? TRANSPORT331DISCUSSIONQUESTIONS1.‘Transportisbecomingincreasinglylessimportant,ase-commerceandotherdevelop-mentsbecomewidespread.’Doyouthinkthatthisistrue?2.Whattypesoftechnologyareusedintransport?Howdoyouexpectthistochangeinthefuture?3.Formostorganisationsroadtransportistheonlyrealisticmodeoftransport.Ifthisistrue,whydosomanypeopledisapproveofheavylorries?Arethereanynoticeabletrendsinthechoiceoftransportmode?4.Oneofthemajortrendsinlogisticsisthemovetowardscontracttransport.Why?5.Anorganisationwithweaktransportmanagementsuffersasitgivesworseperformancethanmorecompetentcompetitorsandbecomesuncompetitive;onewithstrongtransportmanagementmaybedivertingvaluabletalentfromtherestofthebusiness.Whatdoesthisargumentmeanfortransportmanagementwithinanorganisation?6.Therehasbeenahugeamountofworkdonetodevelopoptimalsolutionstoroutingproblems.Inreality,mostofthisworkremainstheoreticalandhasnotbeenimple-mented.Whyisthis?REFERENCES1.OfficeforNationalStatistics,(2001)AnnualAbstractofStatistics,HMSO,London.2.AshfordM.andPorterK.(1995)ExploitingtheopenfrontiersofEurope,LogisticsFocus,3(8),2–6.3.DepartmentoftheEnvironment,TransportandtheRegions(2001)TransportStatistics,HMSO,London.4.www.transtat.dtlr.gov.uk.5.CochranI.(1999)UKshipping,LogisticsandTransportFocus,1(2),22–5.6.KarundawalaG.(2000)Worldtrade,EighthAnnualCITSriLanka’sconference,Colombo.7.Anon.(2001)UKmarinemotorwaysstudy,LogisticsandTransportFocus,3(4),39.8.PackerJ.J.(1997)Roads-to-waterrevisited,IAMEConference,London.9.www.logistics.som.hw.ac.uk.10.LewisC.(2000)Fortunefavoursthebrash,LogisticsandTransportFocus,2(4),26–8.11.LewisH.T.,CullitonJ.W.andSteelJ.D.(1956)TheRoleofAirFreightinPhysicalDistribution,HarvardBusinessSchool,Boston,MA.12.Anon.(1965)TheBayunveilsnewcontainerstrategy,MaterialsManagementandDistribution,December,p.11.13.UnionInternationaleRailRoute(2001)TransportStatistics,UIRR,Brussels.14.GraingerA.(2000)Globalisation–implicationsforsupplychains,LogisticsandTransportFocus,2(2),46–7.15.WatersC.D.J.andSomanS.B.(1990)Containerisedfreighttransportindevelopingcountries,CanadianJournalofDevelopmentStudies,9(2),297–310.FurtherreadingBamfordC.(2001)TransportEconomics,Heinemann,London.HensherD.(2001)Transport–AnEconomicandManagementPerspective,OxfordUniversityPress,Oxford. CHAPTER13GlobalLogisticsCONTENTS■Aimsofthechapter■Chapterreview■Internationaltrade■Casestudy–O’DaidGroup■Problemswithinternational■Project–Parceltransportlogistics■Discussionquestions■Organisinginternational■Referencesoperations■FurtherreadingAIMSOFTHECHAPTERAfterreadingthischapteryoushouldbeableto:■APPRECIATEtheimportanceofinternationaltradeanditseffectonlogistics■DESCRIBEthefactorsthatencourageinternationaltrade■DISCUSSthemaindifficultiesmetwithinternationallogistics■OUTLINEsomeeffectsofbordercustoms■OUTLINEdifferentwaysofenteringaninternationalmarket■DESCRIBEdifferentstructuresforinternationalorganisation GLOBALLOGISTICS333INTERNATIONALTRADELogisticsandtheeconomyDespiteshort-termfluctuationsintheeconomicclimate,internationaltradecontinuestogrowataremarkablerate.Leontiades1notesthat:Oneofthemostimportantphenomenaofthe20thcenturyhasbeentheinternationalexpansionofindustry.Today,virtuallyallmajorfirmshaveasignificantandgrowingpresenceinbusinessoutsidetheircountryoforigin.Thistradeisbasedontherecognitionthatanorganisationcanbuythingsfromasupplierinonecountry,uselogisticstomovethem,andthensellthemataprofittoacustomerinanothercountry.Improvedcommunications,transport,financialarrangements,tradingagree-ments,andsoon,meanthatorganisationssearchtheworldtofindthebestlocationfortheiroperations.Theninternationallogisticsmovetherelatedmaterialsthroughlongandcomplexsupplychains.INTERNATIONALLOGISTICSoccurwhensupplychainscrossnationalfrontiers.Inprinciple,internationaltradedoesnotnecessarilyleadtointernationalcompanies.Inpractice,however,thetwoareinseparable.Ifanorganisationmovesintoanewcountry,itcankeepaclosecheckonnewoperationsbycontrollingthesefromexistingheadquartersandgivinglocaloperationsverylittleautonomy.Thisis,however,inflexible,anditdoesnotallowlocalorganisationstoadapttotheirownconditionsordevelopskills.Analternativeistodevolvedecisions.Thenacompanymightbecomeinternational(maintainingitsheadquartersinthehomecountryandrunningworldwideactivitiesfromthere),multinational(openingsubsidiaryheadquartersaroundtheworldsothateachareaislargelyindependent)orglobal(treatingthewholeworldasasingle,integratedmarket).Thedistinctionbetweenthesemaynotbesoclear,andanorganisationmaychooseotherformats,perhapsworkinginternation-allyinoneareaandmultinationallyinanother.Perhapshalfofthetradebetweenindustrialisedcountriesisaccountedforbytradebetweensubsidiariesofthesamecompany.2Indevelopedcountriesthisisparticularlynotice-able,withathirdofUSexportsbeingproductssentbyAmericancompaniestotheiroverseassubsidiaries,andanotherthirdbeingproductssentbyforeignmanufacturersbacktotheirhomemarket.Somepeoplepreferthetermgloballogistics,tosuggestintegratedoperationsinaninter-nationalsetting.Thiscanbringawholerangeofnewproblems.Someofthesearepractical,suchasphysicallymovingmaterialsacrossafrontierandorganisingtransportoverlongerdistances;somearecultural,suchasspeakingnewlanguagesandmeetingdifferentcustomerdemands;someareeconomic,suchaspayinglocaltaxesandtariffs.Itispatentlyobviousthattheworldisnotasinglehomogenousarea.Therearedifferencesinterrain,physicalfeatures,climate,infrastructure,populationdensity,economicstrength,politicalsystems,cultures,andjustabouteverythingelse.Fromalogisticspointofview,anyofthesefactorscangiveproblems–itis,forexample,moredifficulttocrosssomenationalbordersthanitistocrossamountainrange,andatruckdrivercrossingEuropemustadapttorepeatedlychangingcustomsandlanguages. 334LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTOnefactorthatisalwaysimportantforlogisticsistheeconomicstrengthofaregion.Ingeneralterms,strongereconomies:●movemorematerials,astheycanaffordtoconsumemoreproducts●havemoreefficientlogistics,duetobetterinfrastructure,systemsandsupport.Greaterprosperityallowsefficientlogistics,butthereisacycleandefficientlogisticscanactivelycontributetoprosperity.Aswellasgivingemploymenttoalargepartofthepopula-tion,logisticscanencourageeconomicgrowth.Theargumentisthatlowercostsforlogisticsreducesthecostofdeliveredproducts–andtherebyencouragessales,increasestrade,opensnewmarkets,breaksdownlocalmonopolies,increasescompetitionandgenerallyencouragesbusiness.ThiseffectwasnoticedbyAdamSmithwhowrotein1776:‘Roads,canalsandnavi-gablerivers…(are)thegreatestofallimprovements.’3Porter4lookedatthereasonswhynationsareprosperousandsaidthat‘anation’sabilitytoupgradeitsexistingadvantagestothenextleveloftechnologyandproductivityisthekeytoitsinternationalsuccess’.Helistedfourimportantfactorsforthis:●factorcondition–whichisanation’sabilitytotransformbasicfactorssuchasresources,educationandinfrastructureintocompetitiveadvantage●demandconditions–suchasmarketsize,buyersophisticationandmarketing●relatedandsupportingindustries–whichincludelogistics,partnersandintermediaries●companystrategy,structureandcompetition–whichgivethemarketstructureandfeaturesofdomesticcompetition.Youcanseethatlogisticsappear–atleastimplicitly–severaltimesonthislist.Toputitsimply,tradeincreasesprosperity,andtradedependsonlogistics.FactorsthatencourageinternationaltradeGovernmentshavegivenalmostuniversalsupportforincreasingtrade.Overtheyearstheyhavesignedmanyinternationalagreementsontrade,andhaveformedarangeoforganisa-tionsliketheGeneralAgreementonTariffsandTrade(GATT),OrganisationforEconomicCo-operationandDevelopment(OECD),andWorldTradeOrganisation(WTO).Therehavealsobeensignificantdevelopmentsinfree-tradeareas,suchastheEuropeanUnion,NorthAmer-icanFreeTradeAgreement,AssociationofSouth-EastAsianNationsFreeTradeAreaandSouthernCommonMarketofSouthAmerica.Largelyasaresultofthesepoliciesworldtradecontinuestogrow.Thegrowthwasabout10%in2000and7%in2001,comparedwithanaverageof6.5%fortheperiod1990–99.5Thevalueofmerchandiseexportsin2001wasabout$6trillionwithcommercialservicesaddinganother$1.5trillion.Thefollowinglistshowssomefactorsthatencouragethisinter-nationaltrade:●Growingdemandinnewmarkets:Manyregionsoftheworldarebecomingmoreprosperousandareconsumingmoregoods.Foreigncompaniesrecognisetheopportunitiesinthesegrowingmarketsandexpandtoselltheirproductsinnewmarkets.●Demandforforeignproducts:Customerstravel,watchtelevisionandusetheWebtoseeproductsavailableindifferentareas.Theydemandnewproductsthatcannotbesuppliedbydomesticcompanies. GLOBALLOGISTICS335●Convergenceofmarketdemands:Centralisedmanufacturingonlyworksifdifferentmarketsacceptthesameproducts–oratleastproductswithminordifferencesinthefinishing.Thereisclearevidenceforaconvergenceintastes–whichOhmaecalls‘Californianisa-tion’6–whichallowsCoca-Cola,McDonald’s,ToyotaandSonytosellthesameproductsinvirtuallyanycountry.●Removaloftradebarriers:OneofthemajorforcestowardsglobalfreetradewastheGeneralAgreementonTariffsandTrade(GATT)whichstipulatedthatallitsmembersshouldbetreatedequally.Countriesinseveralregionshavetakenthisideafurthertocreatefreetradeareas.Thesehaveencouragedtradebyeasingtraderestrictionsandreducingtariffs,andareonereasonwhytheamountscollectedastariffsfellfrom20%oftradeinthe1950s,to7%atthebeginningofthe1990s,and3%by2000.7,8●Manufacturersaimingforeconomiesofscale:Therehavebeensignificantchangesinmanu-facturingoperations,manyofwhichdependon,orworkbestwith,astable,large-scaleproduction.Thebestsizeforthesefacilitiesisoftenlargerthandemandfromasinglemarket.Theresultiscentralisedproduction,witheconomiesofscalegivinglowerunitcoststhatmorethancoveranyincreasedcostsoflogistics.●Specialisedsupport:Aswehavealreadyseenwithwarehousingandtransport,manyorgan-isationsareconcentratingontheircorecompetenciesandareoutsourcingotheractivities.Amajorindustryhasgrownofspecialisedsupportcompaniesthatcanhelpwith,say,exporting,internationaltransport,tradecredit,foreignexchange,customsclearance,andsoon.●Integrationofthesupplychain:Integrationofthesupplychainworkstowardsasmoothmovementofgoodsfrominitialsuppliersthroughtofinalcustomers.Thisonlybecomespossiblewhennationalfrontiersaretransparent,andthismeansthatthesameorganisa-tionhastoworkonbothsidesoftheborder.●Greaterdemandsonsuppliers:Customersareputtingmoredemandsonsuppliers–includingjust-in-timeoperations,totalquality,strategicalliances,customisation,andsoon.Localsuppliersmaynotbeabletomeetthesedemands,andorganisationsmayhavetolookfurtherafieldtofindthebestsources.●Changingpracticesinlogistics:Developmentsinlogisticscanmaketradeeasier.Containeri-sation,forexample,madethemovementofgoodseasier,cheaperandmorereliable.Thisencouragedmanycompaniestomoveprofitablyintonewmarkets.Similarly,‘postpone-ment’,allowsproductstofinishmanufactureatalaterpointinthesupplychainandbemoreflexibletocustomerdemands.●Improvedcommunicationsamongcustomers:Satellitetelevision,theInternetandotherdevelopingcommunicationchannelshavemadecustomersmoreawareofproductsfromoutsidetheirlocalregions.Thishasstimulateddemandinnewmarkets,increasedbrandrecognitionandencouragedconvergenceintastesandproductdemands.●Improvedcommunicationsinbusiness:Developmentsininformationsystems–rangingfromEDItoon-boardsystemsinvehicles–canfundamentallychangethewayorganisa-tionswork.Theyallowmoreflexibleoperations,includingefficientlogisticsinevenremoteareas. 336LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEEuropeanisationoflogisticsAsinglemarketwascreatedwithinthe■TherehasbeenasignificantincreaseinEuropeanUnionin1993.Thishashadathenumberofwarehousesservingmoreconsiderableeffectonlogisticsandwiderthanonecountry–andacleartrendoperations.Theamountoftradewithinthetowardspan-EuropeanlogisticscentresEuropeanUnionhascontinuedtogrow,■Servicelevelsarecontinuingtorisetowithmorecompaniesworkinginternation-meetmoredemandinginternationalally,andseeingthewholeoftheUnionascustomerstheirmarket.■OpportunitiesforcostreductionandSomespecificchangesarecontributingenhancedcustomerservicehaveraisedtothe‘Europeanisation’ofbusiness.theprofileoflogisticsasacorefunction■EDIhasbecomeanessentialpartof■Companiesareintegratingtheiropera-logistics.tionsindifferentcountries,usingcom-monprocessesandlogisticspracticesSources:HefflingerT.(2002)EuropeanLogistics,■Thereisrationalisationofsupplychains,THCo,Brussels;O’SullivanD.(1995)LogisticsinEurope,LogisticsFocus,4(6),9–11withhalfofcompaniesreducingthenumberoffacilitiestheyuse■Rationalisationhasloweredthecostsofstock,warehousingandmaterialsEffectatanorganisationallevelItiseasytotalkaboutworldtradeandsaythat,‘worldexportsofofficeandtelecomequip-mentroseby10%tonearly$770billion…’.9Buttheseaggregateeffectscomefromthousandsofindividualorganisationsdecidingtoexpandtheiroperationsintonewareas.Moreandmorecompaniesaredoingthisandworkinginternationallybutwhatmakesthemmoveinthisdirection?Thesinglemostimportantfactormustbetheorganisation’sproduct,anditssuitabilityforinternationaltrade.Theproductthatillustratesthisbestisthecar.Carmanufacturersareamongthebiggestinternationaloperators.Theybuymaterialsandcomponentsfromsuppliersaroundtheworld,bringeverythingtocentralassemblyplants,andthenshipfinishedcarsouttocustomers,whoagainmightbeanywherearoundtheworld.Thissystemworksbecauseofthehugeeconomiesofscaleforcarassembly,andtheabilityoflogisticstomovematerialsthroughinternationalsupplychains.Youcanseethesameeffectinmanymanufacturerswhoaimforeconomiesofscalebyconcentratingproductioninasinglefacility.Acomputermanufacturer,forexample,mightmakekeyboardsinBrazil,monitorsintheUK,speakersinFrance,motherboardsinSingapore,discdrivesinJapan,casesinChina,andsoon.Thereasonwhythesecompaniescanworkinternationallyisthatlogisticsisefficientenoughtohavearelativelysmallimpactontheoverallcostofthefinalproduct.Thisismeas-uredbythevaluedensity. GLOBALLOGISTICS337TheVALUEDENSITYistheratioofaproduct’svaluetoitsweightorsize.Productswithlow-valuedensity,likesoftdrinks,areexpensivetomoveandlogisticscanformasignificantproportionoftheirfinalcost.Thisencouragessmallersupplierswhoservelocalneeds.Ontheotherhand,logisticsaddsarelativelysmallamounttothecostofhigh-valuedensityproducts,suchascomputers.Thisencouragesafewmainsupplierstoservewide-spread,orglobal,needs.Thereare,ofcourse,manyotherproductfeaturesthataffectthefeasibilityofinternationaloperations.Awell-knownbrandnamecanmakeinternationaloperationsmoreattractive,andNike,forexample,cancompensateforgenerallylow-valuedensityproductsbychargingpremiumprices.Beeralsohasalow-valuedensity,butsomebrandshavewell-establishednames,andsignificanteconomiesofscaleallowthesetomeetinternationaldemandfromafewlargebreweries.Thestageinaproductlifecycleisalsoimportant.Nearthebeginningofthelifecycleprofitsarehighandshortleadtimesaremoreimportantthancost,thusencour-aginglocalsupplies.Laterinthecycle,increasedcompetitionmakescostsmoreimportant,andthesemightbereducedbytheefficient,centralisedstocksandconsolidatedtransportthatcomewithinternationaloperations.Clearlysomeproductsaremoresuitedtointernationaltradethanothers.Somefactorsthatencouragelocal,ratherthaninternational,suppliersareproductsthat:●haverelativelylowvalue,orvaluedensity●deteriorateorhaveshortshelflife●aresensitivetoculturalandotherdifferences●havelittledifferentiationbetweencompetitors,orbrandloyalty●needhighcustomercontactorpersonalservice●havelessemphasisoncost●givelimitedeconomiesofscaleinproduction●generatesocialorpoliticalpressurestoproducelocally●haveunevendevelopmentofmarkets.LOGISTICSINPRACTICETrifastplcTRFasteningswasformedin1973,andwasTrifastusedtomakenutsandbolts,butfloatedontheLondonStockExchangeintheyhadproblemswithfiercecompetition1994asTrifastplc.By1998itemployedatatimewhencustomerswereshortening700people,mainlyinUckfield,Sussex,theirsupplychainsandreducingthenum-whereitsmainproductwasfasteners–likeberofsuppliers.Tobecomemorecompeti-nutsandbolts.Although90%ofitscus-tive,Trifasthadtoexpand,anddecidedtotomersarecompaniesthatoriginatedinmoveintoAsia,EuropeandtheUSA.TheirtheUSorJapan,90%ofitssalesactuallystrategyforexpansionwastomovefromoccurwithintheUK.beingamanufacturerofnutsandboltsto 338LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedbeingaserviceprovider.Typicallytheyvisitdetailsofthedelivery.Themostsophisti-amanufacturer,analysetheirproducts,catedsystemhasTrifasttakingfullresponsi-designexactlythetypeoffastenersneeded,bilityfordeliveringcomponentsdirectlytoandthensupplythem.Morethan60%ofbinsonanassemblyline.thistradecomesfromtheelectronicsindus-Asoneexampleoftheirwork,Trifasttry.Trifastcannotmakeallthefastenersdelivers500differentpartsdirectlytothethemselves,sotheysourceandmanagetheassemblylinesofsevenLearplantsinSwe-supply.Thisgivestheopportunitytodiver-den.Theystore150tonnesofmaterialsinasify.Whiletheyaremanagingthesupplyofcentralwarehouseandreplace64separatefasteners,theycaneasilyarrangethesup-suppliers.plyofassociatedparts,suchassprings,Trifaststarteditsinternationalexpansionplastictiesandpulleys.ThentheycandobybuyingmanufacturingplantsinSinga-someworkonthese,assemblingpartsintoporeandMalaysia.Ithadconsideredopen-components–orkitting.Thisaddsvalueforingdistributioncentres,butthestocksTrifast,andbringsbenefitstomanufactur-neededweretoohigh.Theythenacquireders,whohaveaguaranteedsupplyofmate-companiesinIreland,NorwayandSweden,rials,butonlydealwithonesupplier.andestablishednewcompaniesinFranceTrifast’sphilosophyisnowtoformsup-andHungary.Theynowhavesixmanufac-plypartnershipswithmanufacturersandturingplants,30distributiondivisions,antheirmajorsub-contractors.Throughtheseannualturnoverof£122million,1000partnershipstheymanagethesupplyoffas-employees,andcarry100,000producttenersandjustaboutanyotherhigh-lines.volume,low-costcomponent.TheyhaveSources:companyannualreports;LawlessJ.sixsystemsforthis.Thebasicsystemhasa(1998)Challengesofgoingglobal,Sundaymanufacturerfaxingore-mailingalistofTimes,26/4/98;websiteatwww.trifast.commaterialsitneeds,andTrifastmanagesallPROBLEMSWITHINTERNATIONALLOGISTICSDifferencesinlogisticsInternationallogisticsaredifferentfromnationallogistics,anditisnotjustacaseofmovingthesameactivitiestoanotherlocation.Wecanlistsomeofthecommondifferencesasfollows:●internationaltradeusuallyhasmuchbiggerordersizes,tocompensateforthecostanddifficultiesoftransport●internationalmarketsaremoreerratic,withlargevariationsinthedemandandimpor-tanceofanymarket●mostorganisationshavelessexperiencewithinternationallogistics,sotheyareworkinginareaswheretheyhavelessexpertise GLOBALLOGISTICS339●therearemoreintermediaries,suchasfreightforwardersandcustomsagents●theintermediariesanddistancesinvolvedmakerelationswithcustomersmoredifficultandremote●communicationsbecomemoredifficultatadistanceandacrosscultures●termsoftradevaryandmaybeunfamiliar●financialarrangementscanbelesscertain●documentationismorecomplicated.Internationaltradeisalwaysdifficult.Ifyouimagineasimpletransaction,whereanorgan-isationbuysmaterialsinonecountry,andarrangesforthemtobedeliveredtoanothercountry,youcanbegintoseethecomplications.Itisnotjustaquestionofsendingsomeonetoanothercountrytopickupthematerialsandbringthemback.Alsoincludedareinterna-tionalbankstoarrangethefinancesandexchangecurrencies,onegovernment’sregulationsonexportsandanothergovernment’sregulationsonimports,customsclearancewithdutiesandtaxes,transportoperationsinbothcountries,somemechanismfortransferringmaterialsbetweentransportoperatorsandacrossborders,translatorsfordocumentswrittenindifferentlanguages,lawyerstocheckthecontractsandconditions,andsoon.Asyoucansee,thereisasurprisingnumberofpeopleinvolvedinevenasmalltransaction.Aswithalllogistics,avitalconcernistheflowofinformation.Thisisobviouslymorediffi-cultatadistance,andacrossborders.Unfortunately,itisalsomoreimportanttohaveefficientinformationsystemsforlonginternationalsupplychains,wheretherearemoreopportunitiesforthingstogowrong.Ifadeliveryisdelayedataborder,boththesupplierandcustomerwanttoknowexactlywhatishappening,andhowtosolveanyproblems.Butiftheborderisinaremotearea,itcanbedifficulttogetanyinformation,letaloneanaccurateaccountofthesituation.Intermediarieswhohelptheflowofmaterialsmayactuallycauseproblemswithinformationflows.Ifseveralpeopleareworkingondifferentaspectsofmovement,itmaybedifficulttoco-ordinatetheiractivitiesorassignresponsibilities.DevelopmentsinmobilecommunicationsandEDIcancertainlyimproveinformationflows,andsomeorganisationsareusingthistogetanadvantageovertheircompetitors.Otherimprovementscomewiththeremovaloftradebarriersandharmonisationofbusinesspractices.ProblemswithtradeOfcourse,theadministrativedifficultiesareonlyonetypeofproblemforinternationaltrade.AstheEuropeanUnionmovedtowardsasinglemarket,itidentifiedthreetypesofbarrier:●physicalbarriers,suchasbordercontrolsandcustomerformalities●technicalbarriers,suchasdifferinghealthandsafetystandards●fiscalbarrierssuchasdifferentratesofvalue-addedtaxandexciseduties.Wecanaddsomedetailstothislisttoshowsomeoftheissuesforinternationallogistics.Thesemightappearateveryborder,andcircumstancescanchangewithinaveryshortdistance.●Politicalandlegalsystems:Thetypeofgovernmentandlawsindifferentcountriesgivesignificantlydifferentconditions.Practicesthatareacceptedinonecountrymaybeunac-ceptableinaneighbour.YoucanimagineoneexamplefromthepastwhenGermanywasdivided.SimplysteppingfromWestGermanytoEastGermanymeantachangefromafreemarketeconomywithsystemsalignedtowesternEurope(includingprivatetrans-port)toacentrallyplannedeconomywithsystemsalignedtotheeast(includingnation-alisedtransport). 340LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENT●Economicconditions:Politicalsystemsdirectlyaffecttheeconomy,andtherearesignificantdifferencesinprosperity,disposableincomeandspendinghabits.Sometimesthereareveryrapidchanges,between,say,thebordersoftheUSAandMexicoorAustriaandtheCzechRepublic.●Competition:Thisvariesbetweenveryintense,market-drivencompetitioninsomecoun-tries,tostaterunmonopoliesinothers.Logisticsin,say,theNetherlandsisparticularlywelldevelopedandcompaniescompeteforbusinessoverawidearea.●Technologyavailable:Manylogisticscompaniesusesophisticatedtechnologiesfore-commerce,efficientcustomerresponse,satellitelocation,in-cabnavigation,real-timerouting,totalcommunications,andawholerangeofotherdevelopments.Althoughsuchtechnologyisfeasible,itdoesnotmeanthateverybodyusesit.Mostoftheworlddoesnothaveaccessto,doesnotneed,orcannotaffordthelatesttechnologicaldevelopment.Inmanyareasthemovementofloadsdependsonmanualeffortandbullockcarts,andalorryisthemostadvancedtechnologyavailable.●Socialsystemsandculture:Itisusuallyeasiertotradewithsomeonewhohassimilarculture,habits,expectations,andsoon.Evenlanguagedifferencesgiveproblems,soitwouldbeeasierforacompanyworkinginBelgiumtoopennewfacilitiesinFranceratherthan,say,Sudan.Youmightassumethatthesedifferencesareonlyimportantifdealingwithwidelyseparatelocations,buttherearemanyexamplesofpeoplewholiveveryclosetogether,butseemtohavelittleincommon.●Finance:Therearemanyfinancialfactorstoconsider.Somecountriesdonotallowtheircurrencytobetakenoutofthecountry,thevalueofsomecurrenciesfluctuateswildlyorfallsquickly,somebankingsystemsareinefficient,sometimesexchangingmoneyisdiffi-cult,andsoon.Adifferenttypeofproblemcomeswithcustomsdutiesandtariffsformaterialsenteringthecountry.Wementionsomeoftheseinthenextsection.●Geography:Transportisgenerallyeasierinstraightlinesoverflatterrain.CrossingtheAmericanprairiesiseasy,butveryfewareasarelaidoutlikethis.Physicalbarriersthathindertransportincludeseas,mountainranges,desserts,jungles,rivers,cities,nationalparks,andsoon.Itisoftenthepracticaldetailsthatmakethemovementofmaterialsacrossinternationalfrontierstime-consumingandirritating.Youoftenhearofdeliveriesthatareheldupfordays,simplybecausethedrivercannotspeakthesamelanguageasthecustomspeople.Surveystypi-callysuggestthatthemainproblemsfoundbyexportersareasfollows:MainproblemPercentageofexportersExportdocumentation23Transportationcosts20Highimportduties17Cannotfindforeignrepresentativeswithenoughknowledge16Delayintransferoffunds13Currencyfluctuations12Languagebarrier10Difficulttoserviceproducts10 GLOBALLOGISTICS341LOGISTICSINPRACTICEBordercrossingsCrossinginternationalborderscanbeveryThereaMexicanhaulierpicksupthetrailer,timeconsuming.TrucksdrivingacrosstheandorganisesthejourneyonwardsandtoEuropeanUnionmightcrossmostbordersthecustomer.Thishaulierthenreturnsthewithoutevenslowingdown,butwhentheyemptytrailerneartotheborder,whereahitthePolishbordertheymightbedelayedcartageagentagainmovesitthroughcus-fordaysratherthanhours.YoucanseesometomsandacrossintotheUSA.ThentheUSofthereasonsforthiswhenconsideringthehauliercanpickitupandreturn.borderbetweenMexicoandtheUSA.Thissystemisunusual,butitisnotTheNorthAmericanFreeTradeAgree-unusualtobeheldupatbordercustoms.ment(NAFTA)wassignedin1994betweenThemostcommoncauseofdelayisqueriestheUSA,CanadaandMexico.Thisallowedoverpaperwork.Customsagentscanusu-Mexicotoprotectlocaltruckingcompaniesallysortthisoutfairlyquickly,butEDIgivesbyprohibitingUSAandCanadianfirmstheopportunityforpre-clearance.AnfromoperatingwithinMexicofortenyears.organisationsendsamessageaheadtoaUntilthisconditionranout,companiescustomspointthatitsvehicleissoonarriv-movingmaterialsacrosstheUSA/Mexicoingataborder.Themessagegivesdetailsborderneededsomeproceduresforactu-ofmaterialscarried,owners,destination,allycrossingthefrontier.value,contactpoints,andanyotherrele-ForaUSAtoMexicocrossingaUSvantinformation.Ifallgoessmoothly,cus-haulierdeliversgoodsinatrailerclosetotomsclearanceisagreedbeforethevehicletheborder.Thiscompanyislikelytohavearrives,anditcancontinueitsjourneywithlowerratesthanitsMexicancounterpart,littleinterruption.butitcannotmovematerialsoverthebor-Sources:HelfontG.(2002)CustomsClearanceinder.Acartageagenttakesoverthepaper-NAFTA,LogisticsForum,Houston;Anon.(1994)workandorganisesthetrailer’smoveClearingcustoms,MaterialsManagementandthroughcustomsandacrosstheborder.Distribution,November,24CustomsbarriersConventionally,customsdutyispayablewhenevermaterialsenteracountry.Inpractice,thereismorethanjustcustomsduty,anditcanbequitedifficulttoaddallthetaxesanddutiestocalculatetheamountpayable.MaterialsenteringtheEuropeanUnion,forexample,mighthavetopaycustomsduty,exciseduty,importVAT,countervailingduties,anti-dumpingduty,CommonAgriculturalPolicylevies,andcompensatoryinterest.Thesetariffsarenotneces-sarilyleviedatthesamerates,buttherecanbepreferentialrates.Asanexample,thedutyonatelevisiontubeenteringtheEuropeanUnionfromMalaysiais14%,fromThailandis9.8%,fromSouthAfricais7.3%andfromPolandis0%.10 342LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThesearenottheonlycostsofcrossingaborder,ascompanieshavetopaythecostofcompliancewithexport/importregulations,suchascompulsorydocumentationandinforma-tionrequirements.Ifmaterialscrossaseriesoffrontiers,theymighthavetopaythesecostsateveryone.Thiswouldobviouslyraisepricesandlimittrade.Aspartofapolicytoencouragetrade,mostcoun-triesdonotchargedutiesonmaterialsthataresimplymovingthrough,sothatdutyonlybecomespayableinthefinaldestination.Thisisnotalwaystrue,andsometimeschargesaremadeongoodsintransit.Normally,materialscanalsousecustoms’warehousingwithoutpayingduty.Thisallowsnormalportandwarehousingoperations,withdutypaidwhenthematerialsareremovedfromthecustoms’warehouseandtakentotheirfinalmarket.ThisideaisextendedinFreeTradeZones,whichareduty-andtax-freeareaswithinacountry.Thesezonesgivelargerareasforportandwarehousingoperations,andusuallyworklikeacontainerterminal.Evenlargerdevelopmentsofthiskindformcustomsunions.Theseareareas,liketheEuropeanUnion,thatagreenottochargedutieswithintheirborders.Dutyispaidwhenmate-rialsentertheunion–whichisseenasthefinalmarket–buttheycanthenmovefreelywithoutpayinganymore.Ofcourse,noteverybodyisinfavourofremovingbarriersatinternationalbordersorencouragingtrade.Theyarguethatthereshouldbestrictcontrolsoverexportsand,moreparticularly,imports.Thusconsiderationslikeexcisedutyandcustomschargesservethemainpurposesof:●preventinggoodsthatareconsideredundesirablefromenteringacountry●protectingdomesticproducersfromforeigncompetition●generatingrevenueforthehostcountry●collectingstatisticsontrade.ORGANISINGINTERNATIONALOPERATIONSWaysofreachingforeignmarketsIfacompanywantstosenditsproductsinternationally,itdoesnothavetoworkinternation-allyitself.Itcansellitsproductsex-worksorfree-on-board,whichmeansthatcustomersmakeallthearrangementsforlogistics.Obviously,though,forsuchtransactionstosucceed,someonehastoworkinternationally–evenifitisjustthetransportoperatorthatphysicallymovesmaterialsacrosstheborder.Ifyouimagineamanufacturerwantingtosellitsproductsinaforeigncountry,ithasfivebasicalternatives.Thefollowinglistshowstheseinincreasingorderofinvestmentandrisk.●licensingorfranchising,wherealocalorganisationmakestheproductstodesignssuppliedbyaforeigncompany;dependingoncircumstances,theforeigncompanymightspecifyarangeofproceduresforoperations,quality,tests,suppliers,andsoon●exportingfinishedgoodsandusinglocaldistributorstomarketthem;themainriskherecomesfromincreasingproductiontosatisfyademandthatdependsonthemarketingcompany●settingupalocaldistributionnetwork;productsarestillexportedtomeetdemandbuttheforeigncompanyincreasescontrolofthesupplychainbyreplacingthelocalmarketingcompanybyanownedsubsidiary GLOBALLOGISTICS343●exportingpartsandusinglocalassemblyandfinishing;thisneedsfacilitiesinthehomemarket,butthesecanstartverysmall,asseenin‘postponement’●fulllocalproductionwithnewmanufacturingfacilitieseitherbuiltspeciallyortakenoverfromanexistingcompany.Thisgivesaccesstolocalknowledgeandisoftentheonlywayofgettingapresenceinacontrolledmarket.Asixthalternativeistosetupsomeformofjointventurewithalocalcompany.Moresubstan-tialfacilitiescanbeopenedthroughapartnership,allowingsharedownership,managementskills,knowledgeandrisk.Thelevelofcommitmentherecanvaryconsiderably,butlocalconditionsoftenlimitforeignownershiptonomorethan49%ofanyjointventure.Eachofthesixalternativesinvolvesdifferentlevelsofinvestmentandrisk–andclearlyputdifferentdemandsonthesupplychain.Thefirsttwooptionsuseagentsanddonotinvolvethemanufacturerdirectlyininternationaloperations;thelastfourinvolvesomekindoflocaloperations.Openingfullproductioncanbeveryexpensiveandtimeconsuming.WhenNissan,ToyotaandMazdawantedapresenceintheEuropeanUnion,theyspentbillionsofpoundsandyearsofpreparationopeningnewcarplantsintheUK.Onefasterwayofgettingapresenceinaforeignmarketistobuyacompanythatisalreadyworkingthere.Ifanorganisationisalreadyworkingsuccessfullyinamarket,thenalargercompanycanbuyit,injectcashandbuildonitsassets.ThisishowWal-MartmovedintotheUKbybuyingAsda,whichwasthethirdbiggestsupermarketgroup.Usually,organisationscannotaffordthiskindofinvestmentorrisk,andtheyadoptamorecautiousapproach.Typically,theyexpandtheiroperationsinaseriesofsteps.Ineffect,theymovedownthelistabove,slowlyincreasingtheirinvestmentandonlymovingonwheneachpreviousstagehasprovedsuccessful.LOGISTICSINPRACTICERenfieldPharmaceuticalsRenfieldPharmaceuticalsisaspecialisedattractive,RenfieldmoveontothebranchofamajorSwissmanufacturer,spe-nextstep.cialisinginthetreatmentofhypertension2.Sendateamoffieldrepresentatives.andkidneydamage.ItworksinmanypartsTheseworkwiththelocaldistributors,oftheworld,andusesastandardproce-andalsocollectordersdirectlyfordurefororganisingitsexpansion–orlimit-Renfield.Theycangetexperienceiningitsrisksinlesssuccessfulmarkets.Thislocalconditionsandmakerecommenda-procedurecanbesummarisedinthefol-tionsforthenextstep.lowingsteps:3.Setupalocaldistributionnetwork.1.ExporttolocaltradingcompaniesandOccasionallyRenfieldbuylocalcompa-independentdistributors.Thisgiveslim-niesthathavebeendistributingtheiritedsales,butitisaconvenientwayofproducts.Usually,theystartuptheirowntestingthemarket.Ifthemarketlooks 344LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTLOGISTICSINPRACTICEcontinuedmarketingandlogisticsorganisation,labelling,andpassingtothedistribu-whichworksinparallelwithlocalcompa-tioncompany.nies.Overtime,preferentialtrading5.AfterareasonablylongperiodoftermsallowtheRenfieldsubsidiarytosuccessfulandprofitableoperations,takeadominantpositioninthemarket.withforecastsofcontinuinggrowth,ItalwaysuseslocalemployeesandRenfieldconsiderlargerproductionfacil-resources,butthereisstrongcontrolities.ThesetypicallymakeoneortwooffromRenfieldheadquarters.thecompany’smainproducts,together4.Ifthesubsidiarydistributioncompanywithlimitedproductionofassociateddevelopsasizeableandprofitablematerial.Themixofproductsandsizeofmarket,Renfieldconsidersopeningfacilitiesdependsonthecountry’spopu-productionfacilities.Inthefirstinstancelation,economicconditions,tradeandthisisusuallyapackagingplant.Ingre-monetaryrestrictions,educationlevels,dientsaresentinbulkfromotherrawmaterials,andsoon.Renfieldplants,andthelocalplantSource:companyreportsarrangesfinalproduction,packaging,AlternativetypesoforganisationDecisionsaboutenteringinternationalmarketsdependonfactorsrangingfromtheorganisa-tion’sstrategythroughtoforecastsforeconomicgrowth.Theseareinevitablydifficult,andneedaclearappreciationofthecostsandoperationsinvolved.Theincentiveforinternationaloperationsmustcomefromthebusinessstrategy,whichcontainsanaimofexpansion.Then,perhapsthemostimportantfactoristhatthenew,foreignoperationsmustfitintothegeneralstructureoftheorganisation.Thelogisticsandothersystemsmustbeco-ordinatedandworktogether.Thisincludesadecisionaboutwhethertoworknationally,internationally,multinationallyorglobally.Thesetermsareoverusedtomeanslightlydifferentthings,butessentially:●Nationalorganisationsonlyworkwithintheirhomemarket;iftheywantapresenceininternationalmarkets,theyexporttomarketingorganisationsinforeigncountries.●Internationalcompanieshavefacilitiesindifferentcountries,buttheirworkisreallycentredinonehomecountryfromwhichtheycontroltheactivitiesofallsubsidiaries.●Multinationalcompanieslosethecentralcontrolandhavelooselylinked,largelyinde-pendentcompaniesworkingindifferentgeographicalregions.Theseparatedivisionshavemoreflexibilitytoadjustoperationsandproductstolocalneeds.Twodominantcompanystructureshavedivisionsorganisedbygeographyorproduct.Thisissomewhatmisleading,asnoorganisationcanuseeitheroftheseexclusively.Anorganisationwith GLOBALLOGISTICS345geographicdivisionsstillneedssomebroaderco-ordinationofeachproductsupplychain,andanorganisationwithproductdivisionstillneedssomeregionalstructure.●Globalcompaniesseetheworldasasinglemarket;theyusuallymakestandardproductsforshipmentanywhereintheworld,usingthelocationswheretheycanworkmosteffec-tivelyandefficiently.Perhapsthemainfeatureofglobalorganisationsisthattheytrytoco-ordinatealltheiractivitiesasiftheysupplyasinglemarket.Coca-Cola,forexample,makethesameproductsaroundtheworld,withalloperationsco-ordinatedtomeetdemandasefficientlyaspossible.Somepeoplesuggestthatthesedescriptionscanbemisleadingastheysuggestthatorganisa-tionsadoptasingleapproachtoalltheiroperations–theyusethesingle‘best’wayofworking.Inreality,organisationshavetobeflexibleandrespondtolocalconditions,practicesanddemands.Thisneedsalooserstructurethatcanincludemanydifferenttypesofoperation,butgivesaunifiedculturefortheoverallorganisation.Suchstructuresaresometimescalled‘transnational’.AchievingglobaloperationsLevittsummarisedthefeaturesofaglobalorganisationbysaying:11Themultinationalcorporationoperatesinanumberofcountriesandadjustsitsproductsandpricesineach–athighrelativecosts.Theglobalcorporationoperateswithresolutecertainty–atlowrelativecosts–asiftheentireworld(ormajorregionsofit)wereasingleentity;itsellsthesamethingsinthesamewayeverywhere.Thereareclearlyadvantagesinworkingglobally,frombothalogisticsandoperationspointofview.Globalorganisationslimittherangeofproducts,concentrateresearchanddevelop-ment,ensureeconomiesofscale,removeduplicatedfunctions,simplifymanagementstruc-tures,simplifytheproductdesignfunction,usestandardprocesses,generatewidespreadexpertiseinproducts,giveaunifiedmarketingview,andsoon.Fromalogisticspointofviewglobaloperationscanensurethatfacilitiesareinthebestlocations,andthatthesameprod-uctsmovebetweenanycombinationoffacilitiesandcustomers.Ifthereisashortageofprod-uctsinSriLankathestandardproductscanbeshippedfromstocksinBrazilratherthanwaitfortheusualsuppliers.Ideally,then,organisationsshouldaimforglobaloperations,withtheirefficientoperationsandsingle,seamlessmarketandorganisation.Unfortunately,manyorganisationsfinditdiffi-culttoimplementthestrategiesneededtoachievethese.Therearemanybarriersandprob-lemsincludingthefollowing:12●differentregionsdemanddifferenttypesofproduct●productsdonotlendthemselvestoglobaloperations●globalproductsarenotviewedfavourablyandarerejectedbycustomers●organisationslackthehumanandtechnicalresourcesneededtocompeteglobally●organisationscannotdeveloptherightstructuresandstrategies●managersindifferentregionshavedifferentobjectivesforthemselvesandtheorganisation●thereareotherculturalandeconomicdifferencesthatmakeco-ordinationdifficult●eachregion,andcountrywithintheregion,hasadifferentinfrastructureandfacilities. 346LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTThesefactors,alongwithmanyothers,makeitimpossibleformostorganisationstohaveglobaloperations.Manyorganisationshavestartedinthisdirection,buthitproblems–oftenverysimpleoneslikeproductsthatoffendlocaltastes,lackofinfrastructureortransporttogetmaterialstotheirfinaldestination.Suchproblemscanevenoccurwithinrelativelyhomoge-nousregions,suchaswesternEurope.Becauseofthepracticaldifficulties,globaloperationsareoftenviewedasaconceptualtargetratherthanarealisticproposition.Nonetheless,thereisclearlyatrendformorecompa-niestoconsiderthemselvesasglobal.GlobalsupplychainsManagingthelogisticsofaglobalorganisationisimmenselycomplicated.Itcaninvolvethemovementofhugequantitiesofmaterialsaroundtheworld.Unfortunately,thereisnosingle‘best’modelforaglobalsupplychainthatcanbeusedbyeveryorganisation.Eachorganisa-tionhastofinditsownsolution.Nonetheless,wecanmentionsomecommonresults,andthefollowinglistshowsfivecommonmodelsforgloballogistics:●Sellgloballybutconcentrateproductionandsourcinginonearea.Logisticsthenhasafairlysimplejobofmovingmaterialsfromlocalsuppliersintotheorganisation,buttherearemoreproblemswithdistributionfromoperationstointernationalcustomers.Tosomeextentthismodelgivesfairlyeasylogistics,astheorganisationisapureexporterwithglobalmarketingratherthanglobaloperations.Thiscanalsobethemostvulnerabletoexternalpressures,asitisseenasconcentratingeconomicbenefitsinonecentre.●Concentrateproductioninonecentrebutbuymaterialsandcomponentsfromaroundtheworld.Materialsarenowcollectedfromdistantsuppliers,andproductssoldtodistantcustomers.Thisgives,perhaps,themostdifficultlogisticswithpotentialproblemsforbothinwardandoutwardlogistics.Itgivesmorewidespreadeconomicbenefits,butthemainvalue-addingactivitiesarestillconcentratedinonelocation.●‘Postponement’movesthefinishingofproductiondownthesupplychain.Inaglobalcontext,postponementtypicallyopenslimitedlocalfacilitiestocompleteproduction.Thisgivessomeopportunitiesforlocalvalue,butallcomponentsandpartsareimportedfrommainproductioncentres.Becauseofthelimitedlocalinput,lowaddedvalue,andcompetitionforlocalmanufacturers,thiskindof‘screwdriver’operationcanbeunpopularwithhostcountries.●Operatingasalocalcompany,buyingasignificantproportionofmaterialsfromlocalsuppliers.Theinwardmovementofmaterialsiseasier,asitbecomesalocalmatter.Ofcourse,thismeansthatitmaybevulnerabletochanginglocalconditions.Theproductsmightbedestinedforlocalmarkets,oroperationscouldbebigenoughtoexporttointernationalcustomers.Thisisthemostpopularapproachwithhostcountriesasitdevelopslocalskillsandbringsconsiderableeconomicbenefit.●Someglobaloperationshavelimitedneedoflogistics.Ahamburgerchain,forexample,mightworkglobally,butpracticalitiesdemandthatitdoesnothaveanextendedsupplychain,butbuysalmostallmaterialslocallyandsellstolocalcustomers. GLOBALLOGISTICS347Thefeaturesoftheproductandthecompanystructuresettheoverallshapeofasupplychain.Aglobalcompany,forexample,isunlikelytousethefirstmodelwithcentralisedoper-ations,asthisismorelikean‘international’company.Thereare,ofcourse,manyvariationsonthesebasicthemes.❑Internationaltradeiscontinuingtogrowveryquickly.Allofthistradedependsonefficientlogisticstomovematerialsaroundtheworld.❑Manyfactorsencourageinternationaltrade.Individualorganisationsareincreasinglyseeingthebenefitsofworkingindifferentcountries.Akeyissuefor■■■■■suchexpansionisthattheproductmustbeattractiveininternationalmarkets.❑Therecanbemanyproblemsforinternationallogistics.Manyofthesearecausedbythedifferentconditionsoneithersideofinternationalborders.Someproblemscanbeovercomebysimpleadministrativearrangements;othersareonlysolvedbymajorinitiatives,suchascustomsunions.❑Anorganisationdoesnothavetoworkinternationallyitselftohaveapresenceinoverseasmarkets.Itmight,forexample,exportoruselocaldistributors.Thereareseveralwaysofenteringinternationalmarkets.❑Differentcompaniescanorganisetheirinternationaloperationsindifferentways.Eachhasitsownstrengthsandputsdifferentemphasisonlogistics.Thereisageneraltrendtowardsglobaloperations,whichseetheworldasasingleintegratedmarket.CHAPTERREVIEW❑Therearemanypossiblestructuresforglobalsupplychains.CASESTUDYO’DaidGroupSeanO’DaidrunspartofafamilybusinessinCork,Ireland,producingarangeofnaturalconditionersforgardens.Themainproductispeat.Thisisdugfromlocalbogsownedbythecompany,dried,shreddedtogiveauniformtexture,treatedtoremoveunwantedmaterialandthencompressedforpackinginto25kgand50kgbags.ThesearedeliveredthroughoutIreland,butthehighestsalesareinthesoutharoundCork,andeastaroundDublin.Overthepast20years,tradehasvaried,dependingonthestateoftheeconomyandenthusiasmforgardening(whichisoftenaffectedbytelevisionprogrammes).Amoreseriousproblemistheenvironmentaldamagedonebypeatextraction,and 348LOGISTICS:ANINTRODUCTIONTOSUPPLYCHAINMANAGEMENTCASESTUDYcontinuedwhichisencouraginggardenerstolookforenvironmentallyfriendlyalternatives.O’DaidGardenProductsisasmallcompany,buttheyextractmorethan10,000tonnesofpeatayear.Continuingatthisrateofextraction,theiraccessiblereserveswilllastaboutacentury.Seansummarisesthissituationbysaying,‘wehavelotsofpeatintheground,butdemandiscertainlyfalling,andislikelytogoevenlower.Weareactivelydevelopingnewmaterialsasalternativestopeat,butthesearemoreexpensiveandwillprobablybemoreattractiveinthelongerterm.Inthemediumtermwewanttoexploitourexistingreserves,andgetasmoothtransitiontothenewproducts.Inparticular,wewanttoincreasecurrentpeatproduction,andstartexportingtotheUKandtherestofEurope.’SandraO’Daidrunsanotherpartofthefamilybusiness.Sheimportsmaterialstomakearangeofhigh-valueCelticjewellery,whichsheexportsto42countriesaroundtheworld.HermaterialsarelargelygemstonesandpreciousmetalsfromSouthAfricaandAustralia.HermainexportsaretothecountriesaroundthePacificRim,particularlySingaporeandAustralia.Lastyearsalesfromhertraditionalcustomersfellslightly,andshestartedlookingforsalesintheMiddleEastandSouthAmerica.CASESTUDYQuestions●Howwouldyoucomparethelogisticsrequirementsofthesetwopartsofthefamilybusi-ness?Whatproblemsaretheyeachlikelytoface?Howcanthesebeovercome?●DoyouthinkthatexpandinginternationallyisareasonablestrategyforSean?CanhelearnanythingfromSandra’sexperience?PROJECTParcelTransportImaginethatyouwanttosendaparcelofbooksweighing100kgfromtheUKtoPeru.Findthealter-nativesavailablefortransport,andidentifythebest.Describeindetailthejourneyofyourpackage,andlistthepeopleinvolvedineachstage.Whatspecificproblemswouldyoumeet?Ifyouwereapublisherwantingtosell100kgofbooksaweekinPeru,howwouldthisaffectyourapproachtologistics? GLOBALLOGISTICS349DISCUSSIONQUESTIONS1.Whatarethemaindifferencesbetweenlogisticswithinasinglecountryandlogisticsthatspananumberofdifferentcountries?Whatarethespecificproblemsofworkinginterna-tionally?2.Bytheirnature,allsupplychainsmustbeinternational.Doyouthinkthisistrue?3.Someregionsoftheworldpresentparticularlydifficultproblemsforlogistics.Whatregionsdoyouthinkmightprovedifficulttoworkin,andwhy?4.Thereisagrowingnumberoffreetradeareas.Why?Dotheyreallyallowfreetradebetweenmembers?Iffreetradeissuchagoodidea,whydocountriesnotsimplyremovealltheirdutiesandtariffsontrade?5.Whyarecompaniesmovingtowardsglobaloperations?Whataretheimplicationsforlogistics?REFERENCES1.LeontiadesJ.E.(1985)MultinationalBusinessStrategy,D.C.Heath&Co.,Lexington,MA.2.JuliusD.A.(1990)GlobalCompaniesandPublicPolicy,RoyalInstituteofInternationalAffairs,London.3.SmithA.(1776)TheWealthofNations,London.4.PorterM.(1990)Whynationstriumph,Fortune,12/03/90,pp.54–60.5.www.wto.org.6.OhmaeK.(1985)TriadPower–TheComingShapeofGlobalCompetition,FreePress,NewYork.7.GraingerA.(2000)Globalisation–implicationsforsupplychains,LogisticsandTransportFocus,2(2),46–7.8.Anon.(1998)Worldtradesystemsat50,FinancialTimes,18/5/98.9.WorldTradeOrganization(2001)InternationalTradeStatistics,WTO,Geneva.10.GraingerA.(2000)Customsandinternationalsupplychainissues,LogisticsandTransportFocus,2(9),40–3.11.LevittT.(1983)Theglobalizationofmarkets,HarvardBusinessReview,May/June.12.JainS.(1989)Standardisationofinternationalmarketingstrategies,JournalofMarketing,53,January.FurtherreadingErnstR.etal.(1998)GlobalOperationsManagementandLogistics,JohnWiley,Chichester.WoodD.F.(1994)InternationalLogistics,Chapman&Hall,London. IndexALennoxWholesaleGroup,277–9ABCanalysis,274–6O’Daidgroup,347–8activitiesoflogistics,12–14,34–9passengerinterchange,101–2aggregateplans,150–1PrimalAutoparts,163–4agilelogistics,34,67–9ViaCendor,304–5aimsoflogistics,17–19centralisedpurchasing,231airtransport,315–16centreofgravityforlocations,114–19analysingasupplychain,209–15change,95–100multipleactivitycharts,213–15businessprocessre-engineering,98–100precedencediagrams,212–13continuousimprovement,96–7,100processcharts209–11managing,95–6auditoflogistics,75ofcapacity,146–9rateof,96–7BclosedloopMRP,175B2B,30–1concentrationofownership,32B2C,30–1consolidation,287–8benchmarking,207–9continuousimprovement,96–7,100bottlenecks,92–3,140–2contractlogistics,90–1break-bulk,287–8seealsoownershipbusinessprocessre-engineering,98–100controllingmaterialflow,166–95seealsomaterialflowCco-operation,33,41–2capacity,92–3,139–40,198–9seealsointegrationadjusting,144–6costsbottlenecks,92–3,140–2ofdifferentlocations,119–22capacityrequirementsplanning,175oflogistics,19–22,28changesovertime,146–9ofstocks,256–9definitions,140coveringproblem,128–9planning,142–50cross-docking,33,288casestudiescustomers,4–6AceDairies,24–5focus,68ArnoldHaralson,247–8tiersof,8–10,87–8BrennerRefrigerationSales,131–3customsbarriers,341–2Ed’sDrive-throughBottleShop,220–1FriedlandTimbersasa,51–3DHessingenHerbFarm,79Demingwheel,96–7,217JITatPentagonPlastics,192–3dependentdemand,167 INDEX351distributioncentreseewarehousinginventorymanagement,251–81downstreamactivities,8–9seestockcontrolinwardlogistics,6,13Eeconomicorderquantity(EOQ),259–66Jsensitivityanalysis,264–6JITseejust-in-timeefficientcustomerresponse(ECR),189–91just-in-time178–91electronicdatainterchange(EDI),30benefitsanddisadvantages,187–8electronicfundtransfer(EFT),30effectsonorganisations,181–2electronicpointofsales(EPOS),30extensions,189–91enablingpractices,91–2kanbans,184–7enterpriseresourceplanning(ERP),176–8keyelements,182–83environmentalconcerns,33,70,303principles,178–81e-procurement,30,240–2pullsystems,183–4e-purchasing,30KFkaizen,seecontinuousimprovementfacilitieslocation,seelocationkanbans,184–7‘flowthrough’logistics,191focusoflogisticsstrategy,64–5Llayoutofwarehouses,292–7Gleadtime,31,262–4globallogistics,31–2,332–49leanlogistics,34,66–9customsbarriers,341–2learningcurve,147effectsonorganisation,336–7location,14,90,104–36factorstoencourage,334–5alternativeapproaches,106–8internationaltrade,333–6centreofgravity,114–18organisationof,342–5choosingthegeographicregion,109–13problemswith,338–42costingmodels,119–22supplychains,345–7finitesetapproach,119–25valuedensity,337hierarchyofdecisions,109–10importance,105–6Iinfinitesetapproach,113–19implementingstrategy,82–103networkmodels,126–30capacity,92–4planning,130–1definition,83scoringmodels,122–5designofsupplychain,87–91logisticsdifficulties,84–5activities,12–14,34–5enablingpractices,91–2agile,34typeofdecisions,85–7aims,17–19importanceoflogistics,19–23audit,75improvingperformance,215–19comparingperformance,207–9independentdemand,167,255–6controllingmaterialflows,166–95integrationcosts,19–22,28benefitsforlogistics,42–4definition,4–5,14,17external,39–51enablingpractices,91–2internal,34–9global,332–49oflogisticsactivities,34–9implementingstrategy,82–103ofthesupplychain,27–55importance,19–23partnerships,45–9improvingperformance,215–19intermodaltransport,319–21integrationofactivities,34–9internationallogisticsseegloballogisticsinventorymanagement,251–81internationaltrade,333–6inward,6inventory,252lean,34seestocks 352INDEXlocationoffacilities,14,90,104–36RalstonEnergySystems,93–4materialshandling,297–303RenfieldPharmaceuticals,343–4measuringperformance,196–209RPTurnerCorp.,35–6organising,15–17SAGAG,178outsourcing,32,90–1ScandinavianHealthProducts,184outward,6schedulingatBombayTaxis,161–2planningresourcesfor,137–65SearsRoebuck,229pressurestoimprove,28–9SouthamptonContainerTerminalsLtd,320–1procurement,13,227–50stockholdings,254reverse,13–14Tescoplc,72,84strategy,59–81TheSchenkerGroup,65transport,308–31Trifastplc,337–8trends,30–4TT&G,246warehousing,282–307Wal-Mart,10–11logisticscentreseewarehousingWaldenmierTWL,286logisticsinpracticewarehouselocationsintheUSA,118–1925CanadianForcesSupplyDepot,288–9WiesiekTeknika,269–70accountspayableatFord,99Ying-ChuaAssociates,200Albertacoalmines,317–18Amazon.com,241–2MAugullaLimited,14–15manufacturingresourcesplanning(MRPII),175–6BHPandNalco/ExxonEnergyChemicals,276masscustomisation,31Bjorg’sPharmaceuticals,77–8masterschedule,150–1bordercrossings,341materialflow166–95BritishAirwaysplc,173–4inventorymanagement,251–81capacityatHeathrowAirport,149–50just-in-time,178–91CharlesFrideriksonCarRentals,209materialrequirementsplanning,167–78ChristianSalvesen,324–5seealsosupplychainCNRailway,232materials,6–7Cornwall,Ontario,296–7materialshandling,13,297–303DanielWestWholesaleLtd,285materialsmanagement,6,37deliveringfrozenfood,205–6materialrequirementsplanning(MRP),167–78DIRFTLtd,312approach,168–72EllisandEverard,69batching,174Europeancontractlogistics,91benefits,172Europeanisationoflogistics,336closedloopMRP,175GZRexam,50definition,167HandemannGroup,301disadvantages,172–3HebblethwaiteLtd,218–19extensions,174–8Hotpoint,97–8measuringperformance,196–209IntelinCostaRica,125medianproblem,126–7JITatHarley-Davidson,188–9mission,60–2,73just-in-timeatGuylaRochelleInternational,modesoftransport,310–19182air,315–16Keystone-Gunterbach,198choiceof,316–18KonigshavenSuppliers,19–20intermodaltransport,320–1McDonald’sinMoscow,113pipeline,316MillicraElectronicComponents,110–11rail,310–12MontagueElectricalEngineering,266road,313–14MountIsaMines,329–30water,314–15PermanFrère,43–4MRPseematerialrequirementplanningPetro-Canada,47–8MRPIIseemanufacturingresourcesplanningPhilipsSemiconductors,Stadskanaal,236multipleactivitycharts,213–15PiotrHucekTransport,157–8 INDEX353Ne-procurement,240–2networkmodelsforlocation,126–30importance,228–31organisation,231Otermsandconditions,243–6operationstypesofpurchase,242–3cycle,5–6productivity,200–2definition,4pullingmaterials,183–4orderpicking,13purchasingseeprocurementorganisationoflogistics,15–17Rofprocurement,231railtransport,310–12outsourcing,32,90–1receiving,13seealsoownershiprecycling,13outwardlogistics,6,13re-engineeringseebusinessprocessre-engineeringownershipreorderlevel,262–4,267–9concentrationof,32replacementpolicies,147–8contractlogistics,90–1resourcerequirementplanning,143–4,151–8oftransport,321–5resourcesseeplanningofresourcesofwarehouses,290–2reverselogistics,13–14outsourcing,32,90–1roadtransport,313–14verticalintegration,49–50routingofvehicles,325–8PSpackaging,302–3safetystock,267–9partnership,45–9schedules158–61seealsointegrationschedulingrules,159–61performancescoringmodelsforlocation,122–5comparing,207–9servicelevel,268–9improving,215–19short-termschedules,158–61logisticsandorganisational,20–2singlesourcing,235measuring,196–209stockcontrol,13,251–81ofsuppliers,235–6stocksperiodicreviewsystem,270–4ABCanalysis,274–6physicaldistribution,13,37costs,256–9seelogisticseconomicorderquantity(EOQ),259–66pipelines,316leadtime,262–4plan–do–check–actcycle,96–7,217periodicreviewsystems,270–4planningpurposeof,252capacity,139–50reasonsforholding,252cycles,156–7reductionof,33,252–3forlocation,130–1reorderlevel,262–4generatingalternativeplans,154–6safetystock,267–9ofresources,137–65sensitivityofEOQ,264–6short-term,158–61servicelevel,268–9tactical,150–8targetstocklevel,272–4typesof138–9types,255postponement,32,288stores,13precedencediagrams,212–13strategicalliance,69pressurestoimprovelogistics,28–9seealsointegrationpreventivemaintenance,147–8strategy,59–79,83,138–9processcharts,209–11business,60–2procurement,13,227–50corporate,60–2aims,231designof,73–7cycle,236–9focusof,64–5 354INDEXimplementing,82–103definition,309seealsoimplementingstrategymodes,310–19logistics,62–5ownership,321–5optionsfor,66–72services,323–4time-based,70vehiclerouting,325–8structureofsupplychain,8–12,87–90travellingsalesmanproblem,326–7suppliers,4–6trendsinlogistics,30–4choosing,232–6co-operation,39–50Unumbersof,32,235unitisation,302performance,235–6upstreamactivities,8–9qualified,232–4utilisation,198–200singlesourcing,235utility,18tiersof,8–10,87–8supplychainsVanalysing,209–15valuedensity,337benefitsof,11–12vendormanagedinventory,33definition,7–8,17verticalintegration,49–50global,345–7integration,27–55Wstructure,8–12,87–90warehousing,13,282–307SWOTanalysis,75activitiesin,285–8synchronisedmaterialmovement,31aimsof,289automation,298–300Tdecisions,284–5tacticalplanning,150–8definitions,283targetstocklevel,272–4layout,292–7tender,234materialshandling,297–303termsandconditionsforpurchases,242–6ownership,290–2thirdparty,90–1,290–2,321–5packaging,302–3seeownershipwastedisposal,13,303tiersofcustomersandsuppliers,8–10,87–8watertransport,314–15transport,308–31