– use WORD format onlyWeek 2 Discussion QuestionsAction ItemsComplete the following discussion questions in your textbook:Chapter 1: Q. 1 & Q 2Use additional resources such as your textbook, journal articles, or online resources to support your position by rephrasing and paraphrasing that information. Be sure to cite your references in APA style. To directly COPY and PASTE information from any resources is considered plagiarism and is prohibited.Write a 2-3 page paper to elaborate your answers for both questions.—————————————————————————————————————————-3-1: Week 3 Discussion QuestionsAction ItemsComplete the following discussion questions in your textbook:Chapter 2:Q 1 & Q 4Use additional resources such as your textbook, journal articles, or online resources to support your position by rephrasing and paraphrasing that information. Be sure to cite your references in APA style. To directly COPY and PASTE information from any resources is considered plagiarism and prohibited.Write a 3-4 page paper to elaborate your answers for both questions.——————————————————————————————————————–6-1: Week 6 Discussion Questions.Action ItemsComplete the following discussion questions in your textbook:Chapter 5: 1Use additional resources such as your textbook, journal articles, or online resources to support your position by rephrasing and paraphrasing that information. Be sure to cite your references in APA style. To directly COPY and PASTE information from any resources is considered plagiarism and prohibited.Write a 1-2 page paper to elaborate your answers.Logistics
Management
& Strategy
Competing Through
the Supply Chain
Fourth Edition
Alan Harrison &
Remko van Hoek
Logistics Management
and Strategy
We work with leading authors to develop the
strongest educational materials in logistics,
bringing cutting-edge thinking and best
learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high quality print and
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and apply their content, whether studying or at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
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Logistics Management
and Strategy
Competing through the supply chain
Fourth Edition
Alan Harrison
Remko van Hoek
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 2002
Second edition published 2005
Third edition published 2008
Fourth edition published 2011
© Pearson Education Limited 2002, 2005
© Alan Harrison and Remko van Hoek 2008, 2011
The rights of Alan Harrison and Remko van Hoek to be identified as authors of this work
have been asserted by them in accordance with the Copyright, Designs and Patents Act
1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without either the prior written permission of the
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Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership
rights in such trademarks, nor does the use of such trademarks imply any affiliation with or
endorsement of this book by such owners.
Pearson Education is not responsible for the content of third party internet sites.
ISBN: 978-0-273-73022-4
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Harrison, Alan, 1944–
Logistics management and strategy : competing through the supply chain
/ Alan Harrison, Remko van Hoek. — 4th ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-273-73022-4 (pearson : alk. paper) 1. Business logistics.
2. Industrial management. I. Hoek, Remko I. van. II. Title.
HD38.5.H367 2010
658.5–dc22
2010041143
10 9 8 7 6 5 4 3 2 1
14 13 12 11
Typeset in 9.5pt Stone Serif by 73
Printed by Ashford Colour Press Ltd., Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.
To Cathi, Nick, Katie, Maryl and Ticho, with love.
Contents
Foreword
Preface
Authors’ acknowledgements
Publisher’s acknowledgements
How to use this book
Plan of the book
xiii
xv
xvii
xix
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xxiii
Part One COMPETING THROUGH LOGISTICS
1 Logistics and the supply chain
Introduction
1.1 Logistics and the supply chain
1.1.1 Definitions and concepts
1.1.2 Supply chain: structure and tiering
1.2 Material flow and information flow
1.2.1 Material flow
1.2.2 Information flow
1.3 Competing through logistics
1.3.1 Hard objectives
1.3.2 Supportive capabilities
1.3.3 Soft objectives
1.3.4 Order winners and qualifiers
1.4 Logistics strategy
1.4.1 Defining ‘strategy’
1.4.2 Aligning strategies
1.4.3 Differentiating strategies
1.4.4 Trade-offs in logistics
Summary
Discussion questions
References
Suggested further reading
2 Putting the end-customer first
Introduction
2.1 The marketing perspective
2.1.1 Rising customer expectations
2.1.2 The information revolution
2.2 Segmentation
2.3 Demand profiling
2.4 Quality of service
2.4.1 Customer loyalty
2.4.2 Value disciplines
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viii Contents
2.4.3
Relationship marketing and customer relationship
management (CRM)
2.4.4 Measuring service quality
2.5 Setting priorities for logistics strategy
2.5.1 Step 1: Diagnose current approach to market segmentation
2.5.2 Step 2a: Understand buying behaviour
2.5.3 Step 2b: Customer value analysis
2.5.4 Step 3: Measure logistics strategy drivers
2.5.5 Step 4: Specify future approach to market segmentation
Summary
Discussion questions
References
Suggested further reading
3 Value and logistics costs
Introduction
3.1 Where does value come from?
3.1.1 Return on investment (ROI)
3.1.2 Financial ratios and ROI drivers
3.2 How can logistics costs be represented?
3.2.1 Fixed/variable
3.2.2 Direct/indirect
3.2.3 Engineered/discretionary
3.3 Activity-based costing (ABC)
3.3.1 ABC example
3.3.2 Cost–time profile (CTP)
3.3.3 Cost-to-serve (CTS)
3.4 A balanced measurement portfolio
3.4.1 Balanced measures
3.4.2 Supply chain management and the balanced scorecard
3.4.3 Supply chain financial model
3.5 Supply chain operations reference model (SCOR)
Summary
Discussion questions
References
Suggested further reading
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Part Two LEVERAGING LOGISTICS OPERATIONS
4 Managing logistics internationally
Introduction
4.1 Drivers and logistics implications of internationalisation
4.1.1 Logistical implications of internationalisation
4.1.2 Time-to-market
4.1.3 Global consolidation
4.1.4 Risk in international logistics
4.2 The tendency towards internationalisation
4.2.1 Focused factories: from geographical
to product segmentation
4.2.2 Centralised inventories
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Contents
4.3
The challenges of international logistics and location
4.3.1 Extended lead time of supply
4.3.2 Extended and unreliable transit times
4.3.3 Multiple consolidation and break points
4.3.4 Multiple freight modes and cost options
4.3.5 Price and currency fluctuations
4.3.6 Location analysis
4.4 Organising for international logistics
4.4.1 Layering and tiering
4.4.2 The evolving role of individual plants
4.4.3 Reconfiguration processes
4.5 Reverse logistics
4.6 Managing for risk readiness
4.6.1 Immediate risk readiness
4.6.2 Structural risk readiness
4.7 Corporate social responsibility in the supply chain
Summary
Discussion questions
References
Suggested further reading
5 Managing the lead-time frontier
Introduction
5.1 The role of time in competitive advantage
5.1.1 Time-based competition: definition and concepts
5.1.2 Variety and complexity
5.1.3 Time-based initiatives
5.1.4 Time-based opportunities to add value
5.1.5 Time-based opportunities to reduce cost
5.1.6 Limitations to time-based approaches
5.2 P:D ratios and differences
5.2.1 Using time as a performance measure
5.2.2 Using time to measure supply pipeline performance
5.2.3 Consequences when P-time is greater than D-time
5.3 Time-based process mapping
5.3.1 Stage 1: Create a task force
5.3.2 Stage 2: Select the process to map
5.3.3 Stage 3: Collect data
5.3.4 Stage 4: Flow chart the process
5.3.5 Stage 5: Distinguish between value-adding
and non-value-adding time
5.3.6 Stage 6: Construct the time-based process map
5.3.7 Stage 7: Solution generation
5.4 Managing timeliness in the logistics pipeline
5.4.1 Strategies to cope when P-time is greater than D-time
5.4.2 Practices to cope when P-time is greater than D-time
5.5 A method for implementing time-based practices
5.5.1 Step 1: Understand your need to change
5.5.2 Step 2: Understand your processes
5.5.3 Step 3: Identify unnecessary process steps and large
amounts of wasted time
ix
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x Contents
5.5.4 Step 4: Understand the causes of waste
5.5.5 Step 5: Change the process
5.5.6 Step 6: Review changes
5.5.7 Results
5.6 When, where and how?
Summary
Discussion questions
References
Suggested further reading
6 Supply chain planning and control
Introduction
6.1 The supply chain ‘game plan’
6.1.1 Planning and control within manufacturing
6.1.2 Managing inventory in the supply chain
6.1.3 Planning and control in retailing
6.1.4 Inter-firm planning and control
6.2 Overcoming poor coordination in retail supply chains
6.2.1 Efficient consumer response (ECR)
6.2.2 Collaborative planning, forecasting
and replenishment (CPFR)
6.2.3 Vendor-managed inventory (VMI)
6.2.4 Quick response (QR)
Summary
Discussion questions
References
Suggested further reading
7 Just-in-time and the agile supply chain
Introduction
7.1 Just-in-time and lean thinking
7.1.1 The just-in-time system
7.1.2 The seven wastes
7.1.3 JIT and material requirements planning
7.1.4 Lean thinking
7.1.5 Application of lean thinking to business processes
7.1.6 Role of lean practices
7.2 The concept of agility
7.2.1 Classifying operating environments
7.2.2 Preconditions for successful agile practice
7.2.3 Developing measures that put the end-customer first
to improve market sensitivity
7.2.4 Shared goals to improve virtual integration
7.2.5 Boundary spanning S&OP process to improve
process integration
Summary
Discussion questions
References
Suggested further reading
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Contents
xi
Part Three WORKING TOGETHER
8 Integrating the supply chain
Introduction
8.1 Integration in the supply chain
8.1.1 Internal integration: function to function
8.1.2 Inter-company integration: a manual approach
8.1.3 Electronic integration
8.2 Choosing the right supply relationships
8.3 Partnerships in the supply chain
8.3.1 Economic justification for partnerships
8.3.2 Advantages of partnerships
8.3.3 Disadvantages of partnerships
8.4 Supply base rationalisation
8.4.1 Supplier management
8.4.2 Lead suppliers
8.5 Supplier networks
8.5.1 Supplier associations
8.5.2 Japanese keiretsu
8.5.3 Italian districts
8.5.4 Chinese industrial areas
8.6 Supplier development
8.6.1 Integrated processes
8.6.2 Synchronous production
8.7 Implementing strategic partnerships
8.8 Managing supply chain relationships
8.8.1 Creating closer relationships
8.8.2 Factors in forming supply chain relationships
Summary
Discussion questions
References
Suggested further reading
9 Sourcing and supply management
Introduction
9.1 What does procurement do?
9.1.1 Drivers of procurement value
9.2 Rationalising the supply base
9.3 Segmenting the supply base
9.3.1 Preferred suppliers
9.3.2 Strategic relationships
9.3.3 Establishing policies per supplier segment
9.3.4 Vendor rating
9.3.5 Executive ownership of supply relationships
9.3.6 Migrating towards customer of choice status
9.4 Procurement technology
9.5 Markers of boardroom value
9.6 What does top procurement talent look like?
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xii Contents
Summary
Discussion questions
References
Suggested further reading
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Part Four CHANGING THE FUTURE
10 Logistics future challenges and opportunities
Introduction
10.1 Changing economics?
10.2 Internal alignment
10.3 Selecting collaborative opportunities upstream and downstream
10.4 Managing with cost-to-serve to support growth and profitability
10.5 The supply chain manager of the future
10.6 Changing chains
Summary
Discussion questions
References
Suggested further reading
Index
333
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336
340
343
345
347
349
350
350
350
351
Supporting resources
Visit www.pearsoned.co.uk/harrison to find valuable online resources
For instructors
● Complete, downloadable Instructor’s Manual, containing teaching notes, notes on case
studies and teaching tips, objectives and discussion points for each chapter
● Downloadable PowerPoint slides of all figures from the book
For more information please contact your local Pearson Education sales representative or visit
www.pearsoned.co.uk/harrison
Foreword
I am delighted to introduce Logistics Management and Strategy, now in its fourth
edition – a further aid in our ability to drive our understanding of such a critical
part of the business environment. In Bausch and Lomb logistics remains a key
area of management attention, given its central role in customer service and the
opportunities it provides for cost control, two fundamental essentials for any
global business today.
Bausch and Lomb is built on a tradition of developing state of the art Optical
products – from contact lenses to cataract surgery and the fast-growing optical
pharmaceutical markets. These complex supply chains cover five continents and
serve varying types of customers including hospitals, opticians and multiple
retailers. They involve stock-keeping units (skus) requiring temperature control,
serial traceability and sterility, and make for a diverse and challenging set of
logistics demands.
When you then add these challenges to a range of over 100,000 skus – with
some products being offered in over 7,000 different refractive powers/pack sizes –
then you can understand why utilising the very latest approaches to logistics
management and strategy is absolutely crucial.
In recent years we have invested heavily in automated warehouses, such as
at our site in Amsterdam, recently recognised as one of the ‘top ten’ logistics
facilities in the Netherlands. We have also developed our utilisation of agile
logistics. This has been addressed by reducing the number of base products
produced in our 17 factories, whilst increasing our customer responsiveness
through postponement of labelling, bundling, promotional artwork and language compliance. In this regard, being a member of the Agile Supply Chain
Research Club at Cranfield and working with Alan has been a rewarding and
beneficial experience. I note that some of our experience has been invested in
Chapter 7.
In the last two years Bausch and Lomb has greatly reduced inventory holdings
through a number of logistics initiatives – improving working capital whilst
maintaining, and even improving, customer service levels.
But the fight goes on, and it is with texts such as Logistics Management and
Strategy in your armoury that you can continue to drive further improvements in
your supply chain. The great aspect of this text is its readability – it does not seek
to lecture the reader, but imparts its wisdom in a straightforward and practical
manner. Fundamentally, I believe that is the essence of the science of logistics.
Every element of our complex logistical environment is captured in this book
with new sections covering sustainability, planning and control, and particularly
the strategic role of procurement – all adding to the rich content.
In introducing this collaboration between Alan and Remko my parentage
springs to mind. This was another Anglo-Dutch partnership – albeit with different outcomes!
xiv Foreword
I have spent the last twenty-five years in logistics, working in both British and
Dutch environments. The last ten of these years have been in a global role. The
output of Alan’s and Remko’s partnership rings true in so many areas – and offer
methods and approaches which will continue to drive our improvements in the
coming years.
Paul Mayhew MSc, MCILT
Vice President, Global Logistics
Bausch and Lomb.
Preface
Logistics has been emerging from Peter Drucker’s shadowy description as ‘the
economy’s dark continent’ for some years. From its largely military origins, logistics has accelerated into becoming one of the key business issues of the day, presenting formidable challenges for managers and occupying some of the best
minds. Its relatively slow route to this exalted position can be attributed to two
causes. First, logistics is a cross-functional subject. In the past, it has rightly
drawn on contributions from marketing, finance, operations and corporate strategy. Within the organisation, a more appropriate description would be a business
process, cutting across functional boundaries yet with a contribution from each.
Second, logistics extends beyond the boundaries of the organisation into the supply chain. Here, it engages with the complexities of synchronising the movement
of materials and information between many business processes. The systems nature of logistics has proved a particularly difficult lesson to learn, and individual
organisations still often think that they can optimise profit conditions for themselves by exploiting their partners in the supply chain. Often they can – in the
short term. But winners in one area are matched by losers in another, and the losers are unable to invest or develop the capabilities needed to keep the chain
healthy in the long term. The emergence of logistics has therefore been dependent on the development of a cross-functional model of the organisation, and on
an understanding of the need to integrate business processes across the supply
network.
While its maturity as a discipline in its own right is still far from complete, we
believe that it is time to take a current and fresh look at logistics management
and strategy. Tools and concepts to enable integration of the supply chain are
starting to work well. Competitive advantage in tomorrow’s world will come
from responding to end-customers better than competition. Logistics plays a vital
role in this response, and it is this role that we seek to describe in this book.
The globalisation of logistics assumes that quality can be duplicated anywhere,
that risks are relatively small, and that sustainability does not really matter. Case
study 4.2 quotes an environmental activist as saying ‘we are producing food in
one corner of the world, packing it in another and then shipping it somewhere
else. It’s mad.’ The reality is that 21st-century supply chains are developing very
different profiles from those developed by the mindsets of ten or 20 years ago.
Risk will become more important. Plans will need to be in place to prevent or
mitigate the impact of financial, operational and political uncertainty. It is both
environmentally and economically right to focus on sustainability. Logistics
stands at the heart of this debate.
This text has a clear European foundation (its currency is the euro) and an international appeal. In line with the globalisation of logistics, we have included
cases from other parts of the world than Europe – diverse though European logistics solutions are – including South Africa, the United States, Japan, China and
Australia.
xvi Preface
Accordingly, we start in Part One with the strategic role of logistics in the supply chain. We continue by developing the marketing perspective by explaining
our view of ‘putting the end-customer first’. Part One finishes by exploring the
concept of value and logistics costs. In Part Two, we review leveraging logistics
operations in terms of their global dimensions, and of the lead-time frontier. Part
Two continues by examining the challenges of coordinating manufacturing and
retail processes, and the impact on logistics of just-in-time and the agile supply
chain. Part Three reviews working together, first in terms of integrating the supply chain and second in terms of sourcing and supply management. Our book
ends with Part Four, in which we outline the logistics future challenge.
This text is intended for MSc students on logistics courses, and as an accompanying text for open learning courses such as global MSc degrees and virtual universities. It will also be attractive as a management textbook and as recommended
reading on MBA options in logistics and supply chain management.
In the second edition, we listened carefully to students and to reviewers alike
and set out to build on the foundation of our initial offering. We updated much
of the material while keeping the clear structure and presentation of the first
edition. There were lots of new cases and we updated others. We attempted to
touch on many of the exciting developments in this rapidly expanding body of
knowledge, such as governance councils, the prospects for a radio frequency
identification device (RFID) and the future of exchanges. The third edition retains the clarity and up-to-date content which have become hallmarks of the previous editions. This edition continues to provide further new and updated cases
to illustrate developments in the subject. This time, Chapters 6, 7 and 10 have
been largely reconstructed, but you will also find many improvements to other
chapters resulting from our research and work with industrial partners.
The fourth edition continues to build on the foundations we have developed
so far, while continuing to update the content and keep it abreast of the rapidly
developing logistics body of knowledge. Many of the cases have been updated
too and new ones introduced. Chapters 6 and 7 have again been largely reconstructed, and we have refocused Chapter 9 around sourcing and supply management. We have continued to develop the theme of sustainable logistics, which
we classify as a competitive priority right from the start. We are grateful to Paul
Mayhew of Bausch and Lomb, who has written the Foreword to this edition following the retirement of Alain Le Goff.
We hope that our book will offer support to further professional development
in logistics and supply chain management, which is needed today more than
ever before. In particular, we hope that it encourages you to challenge existing
thinking, and to break old mindsets by creating a new and more innovative future. Transformation of supply chains is a focus for everyone in the 21st century.
Since we launched this textbook in 2001, it has become a European best seller –
and is popular in Australia, Singapore and South Africa. It is also developing an
important following in the United States. Our book has also been launched in
local language formats in Japan, Brazil, Russia, China, Poland, Mongolia and the
Ukraine.
Authors’ acknowledgements
We should like to acknowledge our many friends and colleagues who have contributed to our thinking and to our book. Cranfield colleagues deserve a special
mention: Dr Janet Godsell, Dr Carlos Mena, Simon Templar, Dr Heather
Skipworth, Dr Paul Chapman (now at Saïd Business School), Dr Paul Baines and
Professor Richard Wilding have all made important contributions. Sri Srikanthan
helped us with the financial concepts used in section 3.2. Members of the Agile
Supply Chain Research Club at Cranfield also deserve special mention, notably
Chris Poole of Procter & Gamble (now of B&Q), Paul Mayhew of Bausch & Lomb
(who provides the foreword for the new edition), Ian Shellard and David Evans of
Rolls-Royce, Mark Brown of Pentland Brands (who updated the apparel cases 4.4
and 8.1) and Joe Thomas of Tesco (who updated Case study 1.1). We have picked
the brains of several who have recently retired from the industry, including
David Aldridge (formerly of Cussons UK), Philip Matthews (formerly of Boots
the Chemist) and Graham Sweet (formerly of Xerox, Europe). A number of professors from other universities have contributed ideas and cases, including
Marie Koulikoff-Souviron (SKEMA Business School, Nice), Jacques Colin (CretLog,
Aix-en-Provence), Konstantinos Zographos (Athens University of Economics and
Business), Huo Yanfang (University of Tianjin), Thomas Choi (Arizona State University), David Bennett (Newcastle Business School) and Corrado Ceruti (University
of Roma Tor Vergata). Many of our MSc graduates, such as Steve Walker and
Alexander Oliveira, also made important contributions. Professor Yemisi Bolumole (University of North Florida) helped us to re-draft earlier versions of the first
edition. Dr Jim Aitken (University of Surrey) contributed to our supply chain segmentation thinking in Chapter 2, and we have used his work on supplier associations in Chapter 8. We also acknowledge the encouragement of Matthew Walker
and Sophie Playle at Pearson Education in the preparation of this text and their
encouragement to meet deadlines! Also, we thank the reviewers who made many
valuable comments on earlier editions of this book. We are very grateful to all of
these, and to the many others who made smaller contributions to making this
book possible. Cathi Maryon helped to research several of the cases and to project manage the manuscript. Finally, we thank Lynne Hudston for helping wherever she could – in addition to helping to run our Supply Chain Research Centre
at Cranfield!
Publisher’s acknowledgements
We are grateful to the following for permission to reproduce copyright material:
Figures
Figure 1.2 from Operations Management, 2nd ed., FT/Prentice Hall (Slack, N, Chambers,
S., Harland, C., Harrison, A. and Johnston, R. 1997); Figure 1.5 from Initial conceptual
framework for creation and operation of supply networks, Proceedings of 14th AMP
Conference, Turku, 3–5 September Vol. 3, pp. 591–613 (Zheng, J., Harland, C., Johnsen, T.
and Lamming, R. 1998); Figure 1.6 from JIT in a distribution environment, International Journal of Logistics and Distribution Management, Vol. 9, No. 1, pp. 32–4 (Eggleton,
D.J. 1990), © Emerald Group Publishing Limited all rights reserved; Figure 1.7 from
www.supply-chain.org; Figure 2.4 from Understanding customer expectations of
service, Sloan Management Review, Spring, pp. 39–48 (Parasuraman, A., Berry, L. and
Zeithaml, V. 1991); Figure 2.5 from The impact of technology on the quality-valueloyalty chain: a research agenda, Journal of the Academy of Marketing Science, Vol. 28,
No. 1, pp. 168–74 (Parasuraman, A. and Grewal, D. 2000), With kind permission from
Springer Science and Business Media; Figure 2.6 from Relationship Marketing for
Competitive Advantage, Butterworth Heinemann (Payne, A., Christopher, M., Clark, M.
and Peck, H. 1995); Figure 2.8 from Developing Supply Chain Strategy: A management
guide, Cranfield University (Harrison, A., Godsell, J., Julien, D., Skipworth, H.,
Achimugu, N. and Wong, C. 2007); Figures 2.10, 2.10, 2.13 from Developing Supply
Chain Strategy: A management guide, Cranfield University (Harrison et al 2007); Figure
2.14 from Logistics – the missing link in branding: Bacalhau da Noruega vs. Bacalhau
Superior, ISL – Logistics Conference Proceedings, Lisbon (Jahre, M. and Refsland-Fougner,
A-K 2005); Figures 3.1, 3.3, 3.7, 3.8 from Sri Srikanthan; Figures 3.9, 3.10 from Understanding the relationships between time and cost to improve supply chain performance, International Journal of Production Economics (Whicker, L., Bernon, M., Templar, S.
and Mena, C. 2006), with permission from Elsevier; Figure 3.11 from Using the balanced scorecard to measure supply chain performance, Journal of Business Logistics,
Vol. 21, No. 1, pp. 75–93 (Brewer, P.C. and Speh, T.W. 2000), Reproduced with permission of Council of Supply Chain Management Professionals in the format textbook via
Copyright Clearance Center; Figure 3.12 from The Influence of Supply Chains on a
Company’s Financial Performance, Cranfield University (Johnson, M and Templar, S.);
Figure 3.13 from http://www.tesco-careers.com/home/about-us/visions-and-values;
Figures 4.11, 4.12, 4.13 from Reconfiguring the supply chain to implement postponed
manufacturing, International Journal of Logistics Management, Vol. 9, No. 1, pp. 95–110
(van Hoek, R.I. 1998); Figure 6.1 from Manufacturing Planning and Control for Supply
Chain Management, 5th Ed., McGraw Hill (Vollman, T.E., Berry, W.L., Whybark, D.C.
and Jacobs, F.R. 2005), Reproduced with permission of the McGraw-Hill Companies;
Figure 6.8 from ‘Relationships in the supply chain’ in J. Fernie and L. Sparks (eds) Logistics
and Retail Management: Insights into current practice and trends from leading experts, Kogan
Page (After Fernie, J 1998); Figure 6.9 from Shrinkage in Europe 2004: a survey of stock loss
in the FMCG sector, ECR-Europe, Brussels (Beck, A 2004); Figure 8.6 from The impact of
modular production on the dynamics of supply chains, International Journal of Logistics
Management, Vol. 9, 25–50 (van Hoek, R. and Weken, H.A.M. 1998), © Emerald Group
Publishing Limited all rights reserved; Figure 8.9 from www.santonishoes.com,
xx Publisher’s acknowledgements
reprinted by permission of Santoni Shoes; Figure 8.12 from An empirical investigation
into supply chain management, International Journal of Physical Distribution and Logistics Management, Vol. 28, No. 8, pp. 630–650 (Speckman, R.E., Kamauff, J.W. and Myhr,
N. 1998), © Emerald Group Publishing Limited all rights reserved.; Figure 8.14 from
The pervasive human resource picture in interdependent supply relationships, International Journal of Operations and Production Management, Vol. 27, No. 1, pp. 8–27
(Koulikoff-Souviron, M. and Harrison, A. 2007); Figure 9.6 from McKinsey Quarterly
2007/1, Excerpt from McKinsey Quarterly 2007/1. www.mckinseyquarterly.com
Copyright © 2010 McKinsey & Company. All rights reserved. Reprinted by permission.; Figure 9.10 from An integrative framework for supplier relationship management, Industrial Management and Data Systems, Vol. 110, No. 4, pp. 595–515 (Park, J.,
Shin, K., Chang, T-W., and Park, J. 2010), © Emerald Group Publishing Limited all
rights reserved; Figure 9.15 from Vendor rating for an entrepreneur development
programme: a case study using the analytic hierarchy process method, Journal of the
Operational Research Society, Vol. 50, pp. 916–30 (Yayha, S. and Kingsman, B. 1999)
Tables
Table 2.5 from Strategy formulation in an FMCG supply chain, Proceedings of the EurOMA
Conference, Copenhagen (Godsell, J. and Harrison, A, 2002); Table 2.6 from Logistics
service measurement: a reference framework, Journal of Manufacturing Technology
Management, Vol. 15, No. 3, pp. 280–90 (Rafele, C. 2004), © Emerald Group Publishing
Limited all rights reserved.; Table 3.1 from Management Accounting, Official Terminology,
CIMA (1989); Table 3.2 from Sri Srikanthan; Table 3.6 from www.supply-chain.org;
Table 4.7 from www.rlec.org, reprinted by permission of Reverse Logistics Executive
Council; Table 4.8 from CSR Guideline for Suppliers, revision 2, October 2006,
www.nec.co.jp/purchase/pdf/sc_csr_guideline_e.pdf, reprinted by permission of NEC
Corporation
Text
Case Study 1.2 from JIT in a distribution environment, International Journal of Logistics
and Distribution Management, Vol. 9, No. 1, pp. 32–4 (Eggleton, D.J. 1990); Case Study
1.5 from Backing the future, Marketing (00253650), pp. 16–17 (Barry, M. and Calver, L.
2009), Reproduced from Marketing magazine with the permission of the copyright
owner, Haymarket Business Publications Limited.; Case Study 2.4 from Based on an
article by John Arlidge, Sunday Times, 26/10/2003; Case Study 2.6 from Logistics – The
Missing Link in Branding: Bacalhau da Noruega vs. Bacalhau Superior, ISL – Logistics
Conference Proceedings, Lisbon (Jahre, M. and Refsland-Fougner, A-K. 2005); Case Study
4.2 from Sunday Times, 20/05/2007 (Jon Ungoed-Thomas); Case Study 4.2 from
www.cranfield.ac.uk/cww/perspex, Reprinted by permission of Cranfield University;
Case Study 6.1 from Dr. Heather Skipworth, after an original by Dr Paul Chapman;
Case Study 8.3 from Integration of the Supply Chain: The effect of Inter-Organisational
Interactions between Purchasing-Sales-Logistics, PhD thesis, Cranfield School of Management (Aitken, J. 1998); Case Study 8.5 from Professor Huo Yanfang, Tianjin University
School of Management; Case Study 8.7 from The pervasive human resource picture in
interdependent supply relationships, International Journal of Operations and Production
Management, Vol. 27, No. 1, pp. 8–27 (Koulikoff-Souviron, N. and Harrison, A. 2007)
In some instances we have been unable to trace the owners of copyright material,
and we would appreciate any information that would enable us to do so.
How to use this book
This book is divided into four parts, centred around a model for logistics. The
model for logistics is introduced in the first chapter of Part One, which places logistics in terms of its contribution to competitiveness, customer service and the
creation of value. Part Two of the book focuses on leveraging logistics operations
within the context of quality of service and cost performance objectives. Part Three
focuses on working together, and Part Four pulls together four elements of leadingedge thinking in logistics, homing in on future challenges for the subject.
Part One
Part Two
Competing
through
logistics
Leveraging
logistics
operations
Part Three
Part Four
Working
together
Changing
the future
The book has been arranged to take you through the subject in logical stages.
The limitation of a text presentation is that the subjects are then arranged in sequence, and links between stages have to be made by the reader. We have set out
to facilitate cross-linkages by including:
●
activities at the end of many of the sections, which are aimed at helping you to
think about the issues raised and how they could be applied;
●
discussion questions at the end of each chapter to help you assess your understanding of the issues raised, and give you practice in using them;
●
case studies, which draw together a number of issues and help you to think
about how those issues are linked together in a practical setting. Use the study
questions at the end of each case to guide your thinking.
We have sought continually to break up the text with figures, tables, activities
and case studies, so you will rarely find two successive pages of continuous text.
You should therefore regard the activities and case studies as an integral part of
the method used in this book to help you to learn.
xxii How to use this book
Where possible, discuss the activities and case study questions in groups after
you have prepared them individually. Discussion helps to broaden the agenda
and create confidence in handling the issues. While you are studying this book,
think about the logistics issues it raises – in your own firm or ones that you know
well, and in articles in newspapers such as the Financial Times and magazines
such as Business Week. Follow up the website addresses we have included in the
text and again link them with the issues raised in the book.
A few words on terminology are appropriate here. We have taken the view that
logistics and supply chain management (SCM) are sufficiently different for separate definitions to be needed. We have included these definitions in Chapter 1:
logistics is a subset of SCM. ‘Supply chain’ and ‘supply network’ are used interchangeably, although we favour ‘chain’ for a few organisations linked in series
and ‘network’ to describe the more complex inter-linkages found in most situations. Again, our position is explained in Chapter 1.
A summary is provided at the end of each chapter to help you to check that
you have understood and absorbed the main points in that chapter. If you do not
follow the summary points, go back and read the relevant section again. If need
be, follow up on references or suggested further reading. Summaries are also there
to help you with revision.
We have designed this book to help you to start out on the logistics journey
and feel confident with its issues. We hope that it will help you to improve supply chains of the future.
Plan of the book
Part One COMPETING THROUGH LOGISTICS
Chapter 1
Logistics and the supply chain
Chapter 2
Putting the end-customer first
Chapter 3
Value and logistics costs
Part Two LEVERAGING LOGISTICS OPERATIONS
Chapter 4
Managing logistics internationally
Chapter 5
Managing the lead-time frontier
Chapter 6
Supply chain planning and control
Chapter 7
Just-in-time and the agile supply chain
Part Three WORKING TOGETHER
Chapter 8
Integrating the supply chain
Chapter 9
Sourcing and supply management
Part Four CHANGING THE FUTURE
Chapter 10
Logistics future challenges and opportunities
Part One
COMPETING THROUGH
LOGISTICS
Focal firm
Information flow
Time
End-customer
Downstream
Upstream
Material flow (supply)
End–customer
Raw material
Raw material
Our model of logistics structures the supply network around three main factors: the
flow of materials, the flow of information and the time taken to respond to demand
from source of supply. The scope of the network extends from the ‘focal firm’ at the
centre across supplier and customer interfaces, and therefore typically stretches across
functions, organisations and borders. The network is best seen as a system of
interdependent processes, where actions in one part affect those of all others. The key
‘initiator’ of the network is end-customer demand on the right: only the endcustomers are free to make up their mind when to place an order. After that, the
system takes over.
Chapter 1 explains how networks are structured, the different ways in which they
may choose to compete, and how their capabilities have to be aligned with the needs
of the end-customer. Chapter 2 places the end-customer first in logistics thinking, and
develops the theme of aligning logistics strategy with marketing strategy. Chapter 3
considers how value is created in a supply network, how logistics costs can be
managed, and how a balanced measurement portfolio can be designed.
CHAPTER 1
Logistics and the supply chain
Objectives
The intended objectives of this chapter are to:
●
identify and explain logistics definitions and concepts that are relevant to
managing the supply chain;
●
identify how supply chains compete in terms of time, cost, quality and
sustainability. Also, how there are supportive capabilities and soft
objectives;
●
show how different supply chains may adopt different and distinctive
strategies for competing in the marketplace.
By the end of this chapter you should be able to understand:
●
how supply chains are structured;
●
different ways in which supply chains may choose to compete in the
marketplace;
●
the need to align supply chain capabilities with competitive priorities.
Introduction
It only takes only 17 hours or so to assemble a car, and a couple more days are
needed to ship it to the customer via the dealers. So why does it take more than a
month for a manufacturer to make and deliver the car I want? And why are the
products I want to buy so often unavailable on the shelf at the local supermarket?
These are questions that go to the heart of logistics management and strategy.
Supply chains today are slow and costly in relation to what they will be like in
the future. But let us start at the beginning, by thinking about logistics and the
supply chain in terms of what they are trying to do. It is easy to get bogged down
in the complexities of how a supply chain actually works (and very few people actually know how a whole supply chain works). We shall address many of those
details later in this book. First, let us focus on how a supply chain competes, and
on what the implications are for logistics management and strategy.
The overall aim of this chapter is to provide an introduction to logistics and
set the scene for the book as a whole. The need is to look outside the individual
organisation and to consider how it aligns with other organisations in a given
4 Chapter 1 • Logistics and the supply chain
supply chain. This is both a strategic and a managerial task: strategic, because it
requires long-term decisions about how logistics will be structured and the systems it will use; managerial, because it encompasses decisions about sourcing,
making and delivering products and services within an overall ‘game plan’.
Key issues
This chapter addresses four key issues:
1 Logistics and the supply chain: definitions, structure, tiering.
2 Material flow and information flow: the supply chain and the demand chain.
3 Competing through logistics: competitive criteria in the marketplace.
4 Logistics strategies: aligning capabilities across the supply chain.
1.1 Logistics and the supply chain
Key issues: What is the supply chain, and how is it structured? What is the purpose
of a supply chain?
Logistics is a big word for a big challenge. Let us begin by giving an example of
that challenge in practice, because that is where logistics starts and ends.
CASE STUDY
1.1
Tesco
Tesco is the UK’s largest food retailer, with a Group sales turnover of more than €67 billion.
It has over 2,100 stores in the US, central Europe, Ireland and the Far East, and over
2,300 in the UK alone. This number has increased rapidly as Tesco entered the convenience store market with its Tesco Express store format. The product range held by the
stores has grown rapidly in recent years – a larger store can hold up to 20,000 products –
as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery,
clothing and the like. This massive range is supported by thousands of suppliers, who are
expected to meet agreed service levels (correct time and quantities) by delivering to
Tesco within specific time ‘windows’. Volumes are impressive. In a year, some 2.1 billion
cases of product are shipped from suppliers to the stores.
Mindful of its responsibilities, Tesco is the UK’s market leader in the use of bio fuels
and works hard to reduce its CO2 emissions per case delivered, through initiatives including rail, barge and alternative fuels. The company also buys considerable numbers
of double-deck trailers to move more cases per trip.
Tesco states that its core purpose is ‘to create value for customers to earn their lifetime loyalty’. A wide product range and high on-shelf availability across that range are
key enablers of that core purpose. So how do you maintain high availability of so many
product lines in so many stores? This question goes to the heart of logistics management for such a vast organisation. Logistics is about material flow, and about information flow. Let us look at how Tesco deals with each of these in turn.
An early reform for supermarket operation was to have suppliers deliver to a depot
rather than to every store. During the 1980s, distribution to retail stores was handled by
Logistics and the supply chain
26 depots. These operated on a single-temperature basis, and were small and relatively
inefficient. Delivery volumes to each store were also relatively low, and it was not economic to deliver to all stores each day. Goods that required temperature-controlled
environments had to be carried on separate vehicles. Each product group had different
ordering systems. The network of depots simply could not handle the growth in
volumes and the increasingly high standards of temperature control. A new distribution
strategy was needed.
Many small depots with limited temperature control facilities were replaced by
Fresh Food depots which can handle many products at several temperature ranges.
The opportunity is to provide a cost-effective daily delivery service to all stores.
Typically, a Fresh Food depot can handle over 80 million cases per year on a 40-acre
site. The warehouse building comprises 36,000 square metres divided into three
temperature zones: ⫺25°C (frozen), 1°C (chilled) and 12°C (semi-ambient). Each
depot serves a group of between 48 and 335 retail stores. Delivery vehicles for Fresh
Food depots use insulated trailers divided into chambers by means of movable
bulkheads so they can operate at different temperatures. Deliveries are made at
agreed, scheduled times. Grocery and Non-Food goods such as cans and clothing
are delivered separately.
So much for the method of transporting goods from supplier through to the stores,
but how much should be sent to each store? With such a huge product range today,
it is impossible for the individual store to reorder across the whole range (store-based
ordering). Instead, sales of each product line are tracked continuously through the till
by means of electronic point of sale (EPOS) systems. As a customer’s purchases are
scanned through the bar code reader at the till, the sale is automatically recorded for
each stock-keeping unit (sku). Cumulative sales are updated every four hours on
Tesco Information Exchange (TIE). This is a system based on internet technology
that allows Tesco and its suppliers to communicate trading information. The aim of
improved communication is to reduce response times from manufacturer to stores
and to ensure product availability on the shelf. Among other things, TIE aims to
improve processes for introducing new products and promotions, and to monitor
service levels.
Based on cumulative sales, Tesco places orders with its suppliers by means of
electronic data interchange (EDI). As volumes and product ranges increased during
the 1990s, food retailers such as Tesco aimed to de-stock their depots by ordering
only what was needed to meet tomorrow’s forecast sales. For fast-moving products
such as types of cheese and washing powders, the aim is day 1 for day 2: that is, to
order today what is needed for tomorrow. For fast-moving products, the aim is to pick
to zero in the depot: no stock is left after store orders have been fulfilled. This means
that the same space in the depot can be used several times over. Deliveries to stores
are made in two waves, at specific times and within defined windows. This helps to
improve product availability at stores throughout the day, and thus support changes
in demand.
Updated by Joe Thomas (Tesco) 2010
Questions
1 Describe the key logistics processes at Tesco.
2 What do you think are the main logistics challenges in running the Tesco operation?
5
6 Chapter 1 • Logistics and the supply chain
So why is Tesco growing in an intensely competitive market? It describes its
core purpose as being ‘to create value for customers to earn their lifetime loyalty’.
Loyalty is an important term that we return to in the next chapter. In order to
achieve loyalty, Tesco has to understand customer needs and how they can be
served. Its products must be recognised by its customers as representing outstanding value for money. To support such goals, it must ensure that the products that
its customers want are available on the shelf at each of its stores at all times, day
and night. Logistics is the task of planning and controlling the purchase and distribution of Tesco’s massive product range from suppliers to stores. Logistics is
concerned with managing two key flows:
●
material flow of the physical goods from suppliers through the distribution
centres to stores;
●
information flow of demand data from the end-customer back to purchasing
and to suppliers, and supply data from suppliers to the retailer, so that material
flow can be accurately planned and controlled.
The logistics task of managing material flow and information flow is a key
part of the overall task of supply chain management. Supply chain management is
concerned with managing the entire chain of processes, including raw material
supply, manufacture, packaging and distribution to the end-customer. The Tesco
UK supply chain structure comprises three main functions:
●
distribution: the operations and support task of managing Tesco’s distribution
centres (DCs), and the distribution of products from the DCs to the associated
stores;
●
network and capacity planning: the task of planning and implementing sufficient capacity in the supply chain to ensure that the right products can be procured in the right quantities now and in the future;
●
supply chain development: the task of improving Tesco’s supply chain so that its
processes are stable and in control, that it is efficient, and that it is correctly
structured to meet the logistics needs of material flow and information flow.
Thus logistics can be seen as part of the overall supply chain challenge. While
the terms ‘logistics’ and ‘supply chain management’ are often used interchangeably, logistics is actually a subset of supply chain management. It is time for some
definitions.
1.1.1 Definitions and concepts
A supply chain as a whole ranges from basic commodities (what is in the ground,
sea or air) to selling the final product to the end-customer, to recycling the used
product. Material flows from raw materials (such as a bauxite mine as a source of
aluminium ore) to the finished product (such as a can of cola). The can is recycled after use. The analogy to the flow of water in a river is often used to describe
organisations near the source as upstream, and those near the end-customer as
downstream. We refer to firms that are involved in supply chains as partners, because
that is what they are. There is a collective as well as an individual role to play in
Logistics and the supply chain
7
the conversion of basic commodity into finished product. At each stage of the
conversion, there may be returns which could be reject material from the preceding firm, or waste such as the finished can that needs to be recycled. Sometimes,
the whole product is wasted because the consumer throws it away.
A supply chain is a network of partners who collectively convert a basic commodity
(upstream) into a finished product (downstream) that is valued by end-customers,
and who manage returns at each stage.
Each partner in a supply chain is responsible directly for a process that adds value
to a product. A process:
Transforms inputs in the form of materials and information into outputs in the
form of goods and services.
In the case of the cola can, partners carry out processes such as mining, transportation, refining and hot rolling. The cola can has greater value than the bauxite
(per kilogram of aluminium).
Supply chain management (SCM) involves planning and controlling all of the
processes from raw material production to purchase by the end-user to recycling
of the used cans. Planning refers to making a plan that defines how much of each
product should be bought, made, distributed and sold each day, week or month.
Controlling means keeping to plan – in spite of the many problems that may get
in the way. The aim is to coordinate planning and control of each process so that
the needs of the end-customer are met correctly. The definition of SCM used in
this book is adapted from the Council of SCM Professionals (CSCMP, 2010):
SCM encompasses the planning and controlling of all processes involved in procurement, conversion, transportation and distribution across a supply chain. SCM includes coordination and collaboration between partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence, SCM integrates supply and demand management within and between companies in order to
serve the needs of the end-customer.
‘Serve the needs of the end-customer’ has different implications in different contexts. In not-for-profit environments, such as public health and local government,
serving implies ‘continuously improving’, ‘better than other regions/countries’,
‘best value’ and the like. In the commercial sector, serving implies ‘better than
competition’, ‘better value for money’ and so on. In either situation, the focus of
managing the supply chain as a whole is on integrating the processes of supply chain
partners, of which the end-customer is the key one. In effect, the end-customer
starts the whole process by buying finished products. It is the buying behaviour of
the end-customer that causes materials to flow through the supply chain.
The degree to which the end-customer is satisfied with the finished product
depends crucially on the management of material flow and information flow along
the supply chain. If delivery is late, or the product has bits missing, the whole
supply chain is at risk from competitors who can perform the logistics task better.
Logistics is a vital enabler for supply chain management. We use the following
definition of logistics in this book:
The task of coordinating material flow and information flow across the supply
chain to meet end-customer needs.
8 Chapter 1 • Logistics and the supply chain
Logistics has both strategic (long-term planning) and managerial (short- and
medium-term planning and control) aspects. Tesco has a clear view about the
opportunities here. A breakdown of costs in Tesco’s part of the UK supply chain
is as follows:
●
Supplier delivery to Tesco distribution centre (DC)
18%
●
Tesco DC operations and deliver to store
28%
●
Store replenishment
46%
●
Supplier replenishment systems
8%
Nearly half of supply chain costs are incurred in-store. In order to reduce these
in-store costs, Tesco realises that the solution is ‘to spend more upstream and
downstream to secure viable trade-offs for in-store replenishment’. If a product is
not available on the shelf, the sale is potentially lost. By integrating external
manufacturing and distribution processes with its own, Tesco seeks to serve the
needs of its customers better than its competitors.
1.1.2 Supply chain: structure and tiering
The concept of a supply chain suggests a series of processes linked together to
form a chain. A typical Tesco supply chain is formed from five such links.
Material flow
Dairy cooperative
Cheese factory
National DC
Retailer DC
Retailer store and
end-customer
Information flow
Figure 1.1 From cow to customer
In Figure 1.1 milk is produced by a dairy cooperative and shipped to a cheese
factory. Once made, the cheese is shipped to the manufacturer’s national distribution centre (NDC), where it is stored and matured for nine months. It can then
be shipped in response to an order from the retailer, and is transported first to the
retailer’s regional distribution centre (RDC). From there, it is shipped to the store.
Looking at the arrows in Figure 1.1, material flows from left to right. Information
is shared across the chain: it is demand from the end-customer that makes the
whole chain work.
If we look more closely at what happens in practice, the term ‘supply chain’ is
somewhat misleading in that the ‘chain’ represents a simple series of links between a basic commodity (milk in this case) and a final product (cheese). Thus the
Logistics and the supply chain
9
cheese manufacturer will need packaging materials such as film, labels and cases.
Cheese requires materials additional to milk in the manufacturing process. So the
manufacturer deals with suppliers other than the milk cooperative alone. Once
made, the cheese is dispatched for maturation to the supplier’s NDC, and then dispatched to many customers in addition to Tesco. Once at a Tesco RDC, the ‘chain’
spreads again because up to 100 stores are served by a given RDC. The additional
complexity prompts many authors to refer to supply networks rather than supply
chains, a point we return to shortly. Logistics today is also concerned with what
happens after a product has been sold. Two major concerns are:
●
Reverse logistics: the return of unwanted goods and packaging in the opposite
direction (from right to left) to the normal flow shown in Figure 1.1.
●
Waste: the discarding of product at any stage in the supply chain due to quality
problems – for example, the disposal of out-of-date or damaged stock by a retailer
or by an end-customer. We consider waste more generally in Chapter 6.
A more realistic representation of the supply chain is shown in Figure 1.2, where
each link can connect with several others. A focal firm is shown at the centre of
many possible connections with other supplier and customer companies.
Upstream
First tier
customers
Second tier
customers
End-customers
First tier
suppliers
Primary manufacturers
Second tier
suppliers
Downstream
Focal
firm
Inbound logistics
Internal logistics
Outbound logistics
Supply chain management
Figure 1.2 Supply network
(Source: After Slack et al., 1997)
The supply chain can be seen in this diagram as a number of processes that extend across organisational boundaries. The focal firm is embedded within the
chain, and its internal processes must coordinate with others that are part of the
same chain. Materials flow from left (upstream) to right (downstream). If everything is as orderly as it seems, then only the end-customer (to the extreme right
of the chain) is free to place orders when he or she likes: after that, the system
takes over.
10 Chapter 1 • Logistics and the supply chain
The supply chain is tiered, in that supply side and demand side can be organised
into groups of partners with which we deal. Thus if we place an assembler such as
the Ford plant at Valencia as the focal firm, inbound logistics comprises tier 1 suppliers of major parts and subassemblies that deliver directly to Ford, while tier 2 suppliers deliver to the tier 1s and so on. Outbound logistics covers the supply by the Ford
Valencia plant to national sales companies as tier 1 customers, which in turn supply
to main dealers at tier 2 and so on. Internal logistics covers the planning and control
of parts movements within the Ford Valencia plant. The ultimate aim of supply
chain management is to integrate inbound, outbound and internal logistics into a
seamless whole, focused on meeting end-customer needs with no waste.
Other terms that are used to describe aspects of managing the supply chain are:
●
Purchasing and supply deals with a focal firm’s immediate suppliers (upstream).
●
Physical distribution deals with the task of distributing products to tier 1 customers (downstream).
●
Logistics refers to management of materials and information. Inbound logistics
deals with links between the focal firm and its upstream suppliers, while
outbound logistics refers to the links between the focal firm and its downstream
customers. Internal logistics deals with planning and control of material flow
within the boundaries of the focal firm.
Supply chain management thus appears as the ‘end to end’ (or ‘cow to customer’ as we have expressed it in Figure 1.1) management of the network as a
whole, and of the relationships between the various links. The essential points
were summarised long ago by Oliver and Webber (1982):
●
Supply chain management views the supply chain as a single entity.
●
It demands strategic decision making.
●
It views balancing inventories as a last resort.
●
It demands system integration.
A natural extension of this thinking is that supply chains should rather be
viewed as networks. Figure 1.3 shows how a focal firm can be seen at the centre of
a network of upstream and downstream organisations.
Focal firm
Figure 1.3 A network of organisations
The terms ‘supply chain’ and ‘supply network’ both attempt to describe the
way in which buyers and suppliers are linked together to serve the end-customer.
Logistics and the supply chain
11
‘Network’ describes a more complex structure, where organisations can be crosslinked and there are two-way exchanges between them; ‘chain’ describes a simpler, sequential set of links (Harland et al., 2001). We have used the terms
interchangeably in this book, preferring ‘chain’ to describe simpler sequences of a
few organisations and ‘network’ where there are many organisations linked in a
more complex way.
Figure 1.3 takes a basic view of the network, with a focal firm linked to three
upstream suppliers and three downstream customers. If we then add material flow
and information flow to this basic model, and place a boundary around the network, Figure 1.4 shows the network in context. Here we have added arrows showing the logistics contribution of material and information flows, together with the
time dimension. Material flows from primary manufacture (for example, farming,
mining or forestry) through various stages of the network to the end-customer.
Material flow represents the supply of product through the network in response to
demand from the next (succeeding) organisation. Information flow broadcasts
demand from the end-customer to preceding organisations in the network. The
time dimension addresses the question ‘How long does it take to get from primary
source to the end-customer?’ That is, how long does it take to get the product
through the various stages from one end of the supply chain to the other? Time
is important because it measures how quickly a given network can respond to
demand from the end-customer. In fact, the concept of flow is based on time:
Focal firm
Information flow
Time
End-customer
Downstream
Upstream
Material flow (supply)
End-customer
Raw material
Raw material
Flow measures the quantity of material (measured in input terms such as numbers of
components, tonnes and litres) that passes through a given network per unit of time.
Figure 1.4 The network in context
Activity 1.1
Figure 1.5 shows an example network map of a chocolate bar. Draw a network map showing
how your organisation, or one that you know well, links with other organisations. Explain the upstream, downstream and internal processes as far as you can. We expect you to address at least
the first tiers of demand and supply. You will derive further benefit from researching additional
tiers, and by developing the linkage of relationships that is involved. Explain how these work in
practice, and how materials flow between the different tiers.
12 Chapter 1 • Logistics and the supply chain
Printed
materials
Wheat
Flour
Praline
Wafers
Chocolate
Confectionery
manufacturer
Aluminium
Fibreboard
Multiple
retailers
Packing
Wholesalers
Endcustomers
Others
(hospital, etc.)
Creamery
(milk)
Cocoa
beans
Sugar
Vegetable
oil
Cocoa
butter
Lecithin
Emulsifiers,
salt, etc.
Figure 1.5 Example of a confectionery network map
(Source: After Zheng et al., 1998)
An important point here is that the supply network should be viewed as a
system. All processes within the network need to be understood in terms of how
they interact with other processes. No organisation is an island: its inputs and
outputs are affected by the behaviour of other players in the network. One
powerful, disruptive player can make life very difficult for everyone else. For
example, several auto assemblers optimise their own processes, but disrupt those
of upstream suppliers and downstream distributors. The effect is to increase total
system costs and reduce responsiveness to end-customer demand.
1.2 Material flow and information flow
Key issue: What is the relationship between material flow and information flow?
As we have already seen, logistics is about managing material flow and information flow. In this section, we examine material flow and information flow in
more detail.
1.2.1 Material flow
The aim within a supply chain is to keep materials flowing from source to endcustomer. The time dimension in Figure 1.4 suggests that parts are moved
through the supply chain as quickly as possible. In order to prevent local
Material flow and information flow
13
build-ups of inventory, flow must be orchestrated so that parts movement is coordinated. The term often used is synchronous. Caterpillar Inc. makes complex
earth-moving equipment, and there are literally thousands of component parts
and subassemblies that must come together in the final assembly processes. The
vision is that parts and subassemblies should flow continuously through the
supply chain, all orchestrated like a ballet (Knill, 1992: 54):
The goal is continuous, synchronous flow. Continuous means no interruptions, no
dropping the ball, no unnecessary accumulations of inventory. And synchronous
means that it all runs like a ballet. Parts and components are delivered on time, in
the proper sequence, exactly to the point they’re needed.
Often it is difficult to see the ‘end to end’ nature of flow in a given supply chain.
The negative effects of such difficulty include build-ups of inventory and sluggish
response to end-customer demand. And sheer greed by the most powerful members of a supply chain often means that it is weaker partners (notably small to
medium-sized enterprises – SMEs) who end up holding the inventories. So management strategies for the supply chain require a more holistic look at the links,
and an understanding that organisational boundaries easily create barriers to flow.
Case study 1.2 describes how one company – Xerox in this case – re-engineered
material flow in its distribution system.
CASE STUDY
1.2
Xerox
Once the problems of introducing ‘just-in-time’ production systems (internal logistics)
had been solved at the Xerox plant making photocopiers at Venray in Holland, attention shifted towards the finished product inventory (outbound logistics). Historically,
stocks of finished products had been ‘managed’ by trying to turn the sales ‘tap’ on or
off as stocks developed. This was characterised by the familiar ‘feast or famine’ situations. The objective of the next move for Xerox became clear: making only what you
need when you need it, then shipping direct to the customer. But the key question had
to be answered: just-in-time for what? The answer is – the end-customer. And customer
surveys showed that three types of delivery were needed:
●
●
●
Commodity products should be delivered ‘off the shelf’.
Middle-range products were required in five days.
Larger products that had to be integrated into existing customer processes and systems had to be planned months ahead, but the quoted delivery date had to be met
100 per cent.
It was envisaged that this would lead to a radically different inventory ‘profile’ in the
supply chain. Figure 1.6 shows a traditional inventory profile on the left. Most of the
stock was held in local depots waiting for customer orders. If the mix had been incorrectly forecast, too many of the wrong products were in plentiful supply, while needed
products were unavailable. Further, a batch of replacement products would take a long
time to fight their way through the pipeline. A new ‘just-in-time’ strategy was conceived
to make the supply chain much more responsive. This strategy had a profound effect on
the inventory profile, pushing much of the inventory upstream. The closer that inventory
14 Chapter 1 • Logistics and the supply chain
is located towards the end-customer, the higher the value added – and the more that it
is committed to a given finished product specification. Instead, inventory was mostly
held further upstream. This was a more flexible solution, where product could be finally
assembled to known orders, and where it had lower value. Of course, it has since been
possible to remove several stages of the distribution process, thereby eliminating some
of the sources of inventory altogether.
For commodity products, Xerox coined the term deliver JIT: that is, the product had
to be delivered out of stock. Where sales forecasts are traditionally poor, the challenge
was one of flexibility, simplicity and speed of manufacture. For mid-range products, it
was unrealistic to hold ‘just-in-case’ inventories of products that are too complex to be
assembled quickly. Instead, finish JIT was the term coined to describe the new policy of
building semi-finished products with the minimum of added value, consistent with
being able to complete and deliver the product in the five-day target. Finally, build JIT
was the term used to describe the new philosophy of building larger products quickly
within a defined lead time.
The impact of the new build philosophies on the downstream supply chain processes
can be judged from Figure 1.6. While the traditional inventory profile shows a maximum number of days of stock (shown in the shaded area) at finished product level, this
is risky. It always seems that demand is greatest for the very items that are not available!
Postponing the decision on exact specification until as late as possible in the process,
when we are more likely to know precisely what the end-customer wants, helps to
create the much flattened inventory profile to the right of the diagram. These are issues
to which we return in Chapter 6. (A development of this case, tracking ‘what happened
next’, is Case study 7.4.)
(Source: After Eggleton, 1990)
Traditional
Inventory location:
Just-in-time
Customer
Local depot
National depot
International depot
Inventory
position
WIP at Rank Xerox
Parts stores
Days of
stock
In transit
WIP at supplier
Days of
stock
Supplier
Inflexible
Flexible
Notes: WIP = work in progress, i.e. products being worked on, but not yet ready for sale.
Shaded areas indicate days of stock: the wider the area, the more days of stock in that position.
Figure 1.6 Xerox: the impact on inventories
Question
1 How did inventory reduction in the supply chain lead to improved competitiveness
at Xerox?
Material flow and information flow
15
1.2.2 Information flow
As asked in the Xerox case study, just-in-time for what? It is all well and good to
get materials flowing and movements synchronised, but the ‘supply orchestra’
needs to respond in unison to a specific ‘conductor’. The ‘conductor’ in this analogy is actually the end-customer, and it is the end-customer’s demand signals
that trigger the supply chain to respond. By sharing the end-customer demand
information across the supply chain, we create a demand chain, directed at providing enhanced customer value. Information technology enables the rapid sharing of demand and supply data at increasing levels of detail and sophistication.
The aim is to integrate such demand and supply data so that an increasingly accurate picture is obtained about the nature of business processes, markets and
end-customers. Such integration provides increasing competitive advantage, as
we explore further in Chapter 8.
The greatest opportunities for meeting demand in the marketplace with a maximum of dependability and a minimum of inventory come from implementing
such integration across the supply chain. A focal firm cannot become ‘world
class’ by itself!
Figure 1.7 gives a conceptual model of how supply chain processes (source,
make, deliver) are integrated together in order to meet end-customer demand
(based on SCOR, 2010). Demand planning information (‘plan’) is shared across
the chain rather than being interpreted and then changed by the ‘sell’ process
next to the market. Demand fulfilment is also envisaged as an integrated process,
as materials are moved from one process to the next in a seamless flow. Information is the ‘glue’ that binds supply chain processes together, and which coordinates planning and fulfilment. (We explain the SCOR model in more detail in
section 3.5.)
Demand signal
Plan
Supplier’s
Supplier
Return
Make
Deliver
Source
Return
Return
Supplier:
internal or external
Make
Deliver
Source
Return
Return
Make
Deliver
Plan
Focal firm
Sell
Return
Customer:
internal or external
Demand fulfilment
Figure 1.7 Integrating demand and supply chains
Activity 1.2
Write a brief (200 words) appraisal of material and information flow in the supply network
affecting one of the major products in the response you gave in Activity 1.1. Perhaps the
current situation is different from the above ideals?
Customer
Source
Customer’s
Supply
16 Chapter 1 • Logistics and the supply chain
1.3 Competing through logistics
Key issues: How do products win orders in the marketplace? How does logistics
contribute to competitive advantage?
There are many potentially conflicting demands on an organisation today. All
those unreasonable customers seem to want it yesterday, at lower prices and
to be compensated if it goes wrong! Within a given supply chain, it is important that each organisation understands how each group of products competes in the marketplace, and that it aligns its capabilities with those of its
partners.
A ‘product’ is actually a combination of the physical product (for example, a
200g pack of Camembert cheese) and its accompanying service (for example, how
it is merchandised in the store – easy to find, always available, attractive presentation, lighting, temperature). While the physical product is determined by marketing and research and development (R&D), service is heavily influenced by
logistics.
It is impossible to be outstanding at everything, and supply chain partners
need to give priority to capabilities that give each product group its competitive
edge. These are the advantages where supply chain partners ‘dig in deep’ by giving priority to investment and training, and by focusing product development
and marketing efforts. They need only to match industry average performance
on other criteria. Let us now look at the competitive priorities that can be delivered
by logistics in the supply chain.
There are various ways in which products compete in the marketplace. Perhaps
a given product is something that no one else can match in terms of price. Or
maybe you offer a product that is technically superior, such as Gillette razors.
While new product development has logistics implications, the key advantage
provided by logistics – as suggested in Case study 1.1 about Tesco – is availability
of conforming product in the marketplace at low cost. Logistics supports competitiveness
of the supply chain as a whole by:
meeting end-customer demand through supplying what is needed in the form it is
needed, when it is needed, at a competitive cost.
Logistics advantage thus shows up in the form of such competitive factors as
better product availability in the marketplace and low product obsolescence.
Defining logistics advantage means that we need to set goals that are clear, measurable and quantifiable. We distinguish three ‘hard objectives’ for creating logistics
advantage: quality, time and cost. There are three further important ways of creating
logistics advantage: controlling variability in logistics processes, dealing with uncertainty and sustainability. We have called these ‘supportive capabilities’, and they
can be just as important as hard objectives. Finally, there are ‘soft objectives’,
which relate to service aspects such as the confidence customers develop in
the way the logistics operation is performed. Let us look at each of these ways of
creating advantage in turn.
Competing through logistics
17
1.3.1 Hard objectives
Traditional ways of competing are to offer the end-customer advantages related
to product quality, the speed with which it is delivered, and/or the price at which
it is offered. We refer to quality, time and cost as ‘hard objectives’ because they
are easy to measure and relatively obvious to the end-customer.
The quality advantage
The most fundamental objective – in that it is a foundation for the others – is to
carry out all processes across the supply chain so that the end product does what
it is supposed to do. Quality is the most visible aspect of supply chain performance. Defects, incorrect quantities and wrong items delivered are symptoms of
quality problems in supply chain processes that are all too apparent to the end-customer. Such problems negatively influence customer loyalty. Robust processes are
at the heart of supply chain performance. Internally, robust processes help to reduce costs by eliminating errors, and help to increase dependability by making
processes more certain. When quality was positioned second to sales growth and
cost, even the iconic Toyota Motor Company’s brand suffered – as a string of recalls and safety concerns in recent years has shown (see, for example, Cole, 2010).
While conformance quality in the factory may be controlled to defect levels
that are below 25 parts per million (ppm), a product may end up on the retailer’s
shelf with between 2 and 5 per cent defects, which is 10,000 to 20,000 ppm. This
huge escalation takes place as the result of cumulative problems in successive
supply chain processes. Cases may be crushed when shrink-wrapped at the
manufacturer’s NDC. In the back of the retail store, cases may be cut open with a
sharp knife – despite instructions to the contrary. The end-customer sees the
product on the retail shelf at its worst state of quality performance, and that is
where the buying decision is made that drives the supply chain as a whole.
In many logistics situations, ‘quality of service’ is concerned with selecting the
right quantity of the right product in the right sequence in response to customer
orders. For example, store orders must be picked from a range of thousands of
skus (stock keeping units) at a Tesco RDC. This must be carried out accurately
(correct sku, correct quantity) against tight delivery schedules day in and day out.
Pick accuracy (for example, 99.5 per cent correct sku and correct quantity) is
widely used to measure the quality of this operation. And increasing requirements for in-store efficiencies mean that categories of product (for example,
shampoos and toothpastes) need to be picked in a set sequence to facilitate
direct-to-shelf delivery at the store. Logistics service providers who can implement and maintain the highest standards of service quality place themselves at
an advantage over those who cannot.
The time advantage
Time measures how long a customer has to wait in order to receive a given product or service. Volkswagen calls this time the customer to customer lead time: that
18 Chapter 1 • Logistics and the supply chain
is, the time it takes from the moment a customer places an order to the moment
that customer receives the car he or she specified. Such lead times can vary from
zero (the product is immediately available, such as goods on a supermarket shelf)
to months or years (such as the construction of a new building). Competing on
time is about survival of the fastest!
Time can be used to win orders by companies who have learned that some customers do not want to wait – and are prepared to pay a premium to get what they
want quickly. An example is Vision Express, which offers prescription spectacles
‘in about one hour’. Technicians machine lenses from blanks on the premises.
Staff are given incentives to maintain a 95 per cent service level against the onehour target. Vision Express has been successful in the marketplace by re-engineering
the supply chain so that parts and information can flow rapidly from one process
to the next. Compare this with other opticians in the high street, who must send
customer orders to a central factory. Under the ‘remote factory’ system, orders
typically take about ten days to process. An individual customer order is first dispatched to the factory. It then has to join a queue with orders from all the other
high street branches around the country. Once the order has been processed, it
must return to the branch that raised the order. While this may be cheaper to do
(a central, highly productive factory serves all of the branches), it takes much
longer to process an order.
The time advantage is variously described as speed or responsiveness in practice.
Speeding up supply chain processes may help to improve freshness of the end
product, or to reduce the risk of obsolete or over-aged stock in the system. Time
is an absolute measure, that is, it is not open to interpretation as quality and cost
are. By following a product through a supply chain, we can discover which
processes add value and which add time and cost but no value. We explore this
further in Chapter 5, which is about managing time for advantage in the supply
chain.
The cost advantage
Cost is important for all supply chain processes – that goes without saying. Low
costs translate into advantages in the marketplace in terms of low prices or high
margins, or a bit of each. Many products compete specifically on the basis of low
price. This is supported from a supply chain point of view by low cost manufacture, distribution, servicing and the like. Examples of products that compete on
low price are ‘own brand’ supermarket goods that reduce the high margins and
heavy advertising spend of major brands. They also perhaps cut some of the corners in terms of product specification in the hope that the customer will consider
low price to be more important than minor differences in product quality.
The pressure to reduce prices at automotive component suppliers, and hence
costs to the assemblers, is intense. The assemblers have been setting annual price
reduction targets for their inbound supply chains for some years. Toyota announced demands for a 30 per cent reduction in prices on many components by
the time that new models are launched in 2013. But unless a supplier can match
reduced prices at which products are being sold by means of reduced costs, that
supplier will gradually go out of business. As a result, many suppliers are cynical
about the ‘price down’ policies of the assemblers. Reduced prices are the reward
Competing through logistics
19
of cost cutting, and that is most often a collaborative effort by several partners in
the supply chain. So suppliers are unlikely to meet Toyota’s demands on their
own: ‘Toyota is going to have to do a lot of work itself, by switching more quickly
to global platforms and using more common parts’ (Soble, 2009). As indicated in
section 1.1, Tesco can make only limited inroads into its in-store costs without
the help of its supply chain partners.
1.3.2 Supportive capabilities
While the hard objectives listed above are always important to competitive advantage, supportive capabilities can also be key to creating logistics advantage in
the marketplace. When there is little to choose in terms of quality, time or cost,
supportive capabilities can make all the difference to the end-customer. Variability refers to real and identifiable differences within a population, such as the differences in time each patient at an optician has to wait for his or her eyes to be
tested. Uncertainty refers to our lack of knowledge (Thompson, 2002): in logistics
terms, uncertainty results in us having to deal with events that are not known in
advance. Sustainability addresses the improvement of social and environmental
issues in the design of logistics systems.
Controlling variability: the dependability advantage
Time is not just about speed. Quality is not just about meeting defect targets.
Behind both ‘hard’ objectives is the need to control variability in logistics
processes. Variability undermines the dependability with which a product or
service meets target. While Vision Express offers a one-hour service for prescription glasses, the 95 per cent service level is a measure of the dependability of
that service against the one-hour target. Firms who do not offer instantaneous
availability need to tell the customer – in other words to ‘promise’ – when the
product or service will be delivered. Delivery dependability measures how successful the firm has been in meeting those promises. For example, the UK’s
Royal Mail quality of service target for letters posted with a ‘first class’ stamp is
that 93.0 per cent will arrive the next working day (Royal Mail, 2009). It is important to measure dependability in the same ‘end to end’ way that speed is
measured. Dependability measures are widely used in industries such as train
and air travel services to monitor how well published timetables are met. And
in manufacturing firms, dependability is used to monitor a supplier’s performance in such terms as:
●
on time (percentage of orders delivered on time and the variability against target);
●
in full (percentage of orders delivered complete and the variability against target);
●
on quality (percentage of defects and the variability against target).
So logistics is concerned not just with the average percentage of orders delivered
on time but also with the variability. For example, a manufacturer has to cope with
the day-to-day variability of orders placed. In practice, this is more important than
the average orders placed because of the resource implications of demand variability.
Case study 1.3 explores the impact of variability on a supplier’s processes.
20 Chapter 1 • Logistics and the supply chain
CASE STUDY
Measuring schedule variability
1.3
A problem that is all too familiar to suppliers in the automotive industry is that of schedule variability. A vehicle manufacturer issues delivery schedules to specify how many
parts of each type are required each day for the following month. And each day a
‘call-off’ quantity is issued, which specifies how many the vehicle manufacturer actually
wants. The two sets of figures are not necessarily the same, although they usually add
up to the same cumulative numbers for the month as a whole. In other words, the
total scheduled quantities and the total call-off quantities are the same. So what is the
problem?
The problem is that the supplier has to cope with the variability of call-off quantities
that create huge problems for the supplier’s process. Let scheduled demand ⫽ S,
and call-off quantity ⫽ A. Then the difference D between schedule and actual is given
by D ⫽ S ⫺ A. If the supplier produces to schedule, then S ⬎ A, the supplier will
over-produce the part and end up with excess stock. Where S ⬍ A, the effects could
either be a reduction in stock held by the supplier, or a shortfall of (S ⫺ A) of parts
from the supplier. The two conditions (S ⬎ A and S ⬍ A) therefore have different
logistics implications.
Figure 1.8 shows that actual demand, totalled across four different parts at PressCo
(a supplier of pressed metal components), may be up to 1,600 units above schedule,
or 2,200 below schedule in the case of vehicle assembler WestCo. This range has been
divided up into intervals of 100 units. The mode (0 ⫺ 99) indicates that S ⫽ A for a
frequency of 18 per cent of the observations.
Frequency
30
A
B
C
D
20
10
0
⫺1500
⫺1000
⫺500
0
500
1000
1500
2000
Difference
(number of parts)
Figure 1.8 Distribution of differences between scheduled and actual demand for
WestCo
Assuming that the distribution is roughly normal, the standard deviation (SD) is 573,
which is characteristic of the flat, wide spread of data. Figure 1.9 shows the distribution
of S ⫺ A for four similar parts from the same supplier but to a different vehicle assembler; EastCo. This time, the SD for the distribution is 95, representing a much narrower
spread of differences than for WestCo.
(Source: Harrison, 1996)
Competing through logistics
21
80
70
S
R
Q
P
Frequency
60
50
40
30
20
10
0
⫺1500
⫺1000
⫺500
0
500
1000
1500
2000
Difference
(number of parts)
Figure 1.9 Distribution of differences between scheduled and actual demand
for EastCo
Questions
1 What are the logistics implications to PressCo for delivery reliability to customers
WestCo and EastCo?
2 What steps will the supplier need to take in order to satisfy call-off orders from WestCo?
3 If separate parts of the PressCo factory were dedicated to production for WestCo and
for EastCo, which would be the more efficient in terms of labour costs and inventory
holding?
Quality is not just about meeting target pick accuracy or target defect levels. It
is also about controlling variability. The same argument can be made about costs.
The implication of dependability for logistics is that supply chain processes need
to be robust and predictable. In Chapter 6 we develop the case for dependability
in supply chains under the themes of planning and control and lean thinking.
Dealing with uncertainty: the agility advantage
Dealing with uncertainty means responding rapidly to unknown problems that
affect logistics processes. Sometimes, problems can be foreseen – even if their timing cannot. Toyota UK manages inbound deliveries of parts from suppliers in
southern Europe by a process called chain logistics. Trailers of parts are moved in
four-hour cycles, after which they are exchanged for the returning empty trailer
on its way back from the UK. One hitch in this highly orchestrated process means
that incoming parts do not arrive just-in-time at the assembly plant. Toyota demands that its suppliers and logistics partner plan countermeasures. This means
that alternative routes for suppliers to deliver to its Burnaston assembly plant in
the UK have been planned in advance to deal, for example, with a French channel ferry strike at Calais. The weather is also a cause of uncertainty in logistics –
for example, it may mean that Tesco has to switch between salads and soups as
the result of a cold snap. Other forms of uncertainty concern events where neither the problem nor its timing can be foreseen. Case study 1.4 provides an example of such an event and how two organisations responded differently to it.
22 Chapter 1 • Logistics and the supply chain
CASE STUDY
1.4
Nokia deals with uncertainty
In March, 2000, a thunderstorm struck the Philips semiconductor plant at Albuquerque
in New Mexico, which made silicon chips for products such as mobile phones. Damage
at first seemed minor, and firefighters soon left the premises. At first, Philips told major
customers such as Nokia and Ericsson that the delay to production would only be one
week. But damage to some of the clean areas in the plant – created by smoke and water –
was actually going to take months to remedy. Clean rooms in semiconductor plants
must be spotless, and particles of more than 0.5m are filtered out.
The one-week delay was quickly reported by Tapio Markki, Nokia’s chief componentpurchasing manager, to Pertti Korhonen, Nokia’s top troubleshooter. ‘We encourage bad
news to travel fast’, said Mr Korhonen. While Philips initially rejected offers of help from
Nokia, it soon became apparent that production delays would be much more than one
week. Korhonen put together a team to find solutions to supplying the five chips that
were affected by the Philips fire. Three were quickly re-sourced from Japanese and
American suppliers, but the other two were only supplied by Philips. This time Philips
cooperated at the highest level. Nokia’s chairman and chief executive, Mr Ollila, met
with the Philips CEO Mr Boostra and the head of the Philips semiconductor division, Mr
van der Poel. Factories at Eindhoven and Shanghai were rescheduled to supply the missing chips, and engineers from both Nokia and Philips worked to accelerate the return of
the Albuquerque plant to full production. As a result of these intensive efforts, there were
relatively minor delays to Nokia’s mobile phone shipments.
Executives at Ericsson in Sweden only learned of the problem several weeks after the
fire. Company culture was less proactive than at its Finnish rival. The bad news was
withheld from senior management long after it became clear that delays were becoming serious. By the time that Ericsson realised the magnitude of the problem, it was too
late to find alternative sources. Nokia had seized remaining world capacity, and it took
nine months for the situation to be rectified. The disruption led to a 3 per cent loss of
market share by Ericsson, and contributed in turn to its exit from the phone handset
market (it formed a joint venture with Sony in 2001).
(Sources: Sheffi, 2005; Latour, 2001)
Question
1 What are the key lessons from this case for dealing effectively with disruptions to the
supply chain?
The implication of uncertainty for supply chain processes is that they need to
be flexible. Flexibility is defined as the ‘ability to react or transform [supply chain
processes] with minimum penalties in time, cost and performance’ (Upton,
1995). Flexibility comes in two basic forms (Sawhney, 2006):
●
Proactive: to create the capability in advance to handle uncertainty – for example, Toyota’s counter-measures.
●
Reactive: to cope with uncertainty in a focal firm’s internal or external environment – for example, Nokia’s response to the fire at Philips.
Competing through logistics
23
Uncertainties, wherever they originate, may affect other supply chain partners.
In Chapter 6, we develop the case for responding to uncertainty in supply chains
under the theme of agility.
Acting responsibly: the sustainability advantage
The Bruntland report (UNWCED, 1987) defines sustainability as ‘development
that meets the needs of the present without compromising the ability of future
generations to meet their needs’. Logistics has increasingly been turned to in recent years because it offers enormous potential to mitigate damage to the environment in which we live. Many logistics decisions impact the environment – for
example, sourcing from suppliers who use renewable raw materials and who
practise ethical labour standards, and transportation modes that minimise carbon dioxide (CO2) emissions. Sustainability emerges as a way of considering the
environmental and social values of business decisions alongside their economic
value. This thinking gave rise to the term ‘triple bottom line’ (TBL, Elkington,
1997, 2004). Taking these three ‘values’ in turn:
●
Environmental: a focal firm such as Tesco is concerned with reducing consumption of non-renewable energy and materials. It is also concerned with measuring and reducing the environmental impact of processes across the SC – from
cow to customer (Figure 1.1). And collection and disposal by the end-user is
also factored in – what can be done to reduce the impact of car journeys and
the disposal of waste such as packaging? TBL thinking states that environmental polluters should not be given a free ride any more – they should be made
to pay. For example, the Australian government introduced carbon trading
(Humphreys, 2007, compares tax v trading): under the carbon pollution reduction scheme, the government requires a 5 per cent reduction in CO2 levels by
2020. Accreditation to the ISO 14001 series on environmental management
systems is becoming increasingly influential. And the Environmental Protection Agency (EPA, 2010) seeks to ‘make sustainability the next level of environmental protection by drawing on advances in science and technology, applying
government regulations and policies to protect public health and welfare, and
promoting green business practices’.
●
Social: large focal firms such as Nike and Wal-Mart have been forced to consider the social contexts of the suppliers with whom they deal. Often, suppliers
are based on the other side of the world, but consumer pressure has forced
such firms to recognise their responsibility in ensuring that goods are manufactured in socially responsible conditions – such as no child labour (see Case
study 4.5). Organisations such as the Fairtrade Foundation (2010) aim to help
farmers in developing countries:
By facilitating trading partnerships based on equity and transparency, Fairtrade
contributes to sustainable development for marginalised producers, workers and
their communities. Through demonstration of alternatives to conventional trade
and other forms of advocacy, the Fairtrade movement empowers citizens to campaign for an international trade system based on justice and fairness.
Social issues have been developed more broadly under the theme Corporate
Social Responsibility (CSR), which we examine in more detail in section 4.7.
24 Chapter 1 • Logistics and the supply chain
●
Economic: this is the net value that a firm generates after social and environmental values have been taken into account. This implies making the connection between TBL values and financial performance. The organisational changes
involved in recognising economic value can be wrenching and can take years to
implement. Nike – along with other premium brand companies – came under
enormous pressure from labour activists in the 1990s to adopt more sustainable
codes of conduct in their global supply chains. For example, purchasing teams
had to be constrained from going for lowest prices from suppliers, which
threatened short-term profitability. So Nike had to ‘offset any first-mover disadvantage by getting both its competitors and suppliers involved . . . it is essential
to work with others to move toward the adoption of a common approach to
labour compliance codes, monitoring and reporting to help ensure broader accountability across the industry as a whole’ (Zadek, 2004).
Supplier Codes of Conduct (such as Cisco Systems, 2009) are used to ‘give preference to suppliers who are socially and environmentally progressive’. In other
words, sustainability has become a competitive advantage in its own right. Case
study 1.5 outlines the operation of the Marks and Spencer ‘Plan A’.
CASE STUDY
1.5
Plan A at Marks and Spencer
In January 2007 Marks and Spencer (M&S) launched ‘Plan A’, its five-year strategy to
improve the retailer’s social and environmental impact. Plan A currently sets out 100
commitments – goals to be achieved by 2012 – covering climate change, raw materials,
waste, health and fair partnership. €300 million has been set aside to fund the plan
over the five years, and 14 staff applied to its delivery. Noted in particular for its
comprehensive approach and willingness to use the company’s influence with
customers, suppliers, investors and politicians, the plan has been praised as an example
of best practice as well as a means by which other agents may join M&S to change the
way companies do business along more socially, environmentally and ethically
beneficial lines. Plan A has so far won 27 independent awards.
In June 2009 M&S reported on Plan A’s progress to date and revealed that 39 commitments had been achieved, 24 of which have been extended. Another 50 are on or
ahead of target. Ten are behind, and only one commitment has been put on hold; to
make a 50 per cent switch to bio-diesel in its lorries, due to emerging concerns about
deforestation. Thus M&S can claim that, at the two-fifths mark, it is on track to deliver
its commitments, and furthermore stated that Plan A was cost positive by 2009.
It is not all plain sailing: carbon footprint reduction, as one example, has presented
several challenges to M&S. Its reported 18 per cent net reduction in greenhouse gas
emissions is largely based on the company’s switch to buying electricity under ‘green’
tariffs – reductions that have already been counted by energy suppliers. M&S now report gross emissions excluding this saving – which show a 2 per cent growth. A factor
in the rise is a 10 per cent increase in store size, also, M&S international air travel has increased. Mike Barry, head of sustainable business at M&S, points out that the company
has ‘decoupled’ emissions growth from commercial growth, and is firm on its commitment to reduce emissions; nevertheless this marker alone shows the conflict between
business growth and a target of reduced environmental impact.
Competing through logistics
25
M&S maintains that Plan A is not just another CSR ploy. Jonathon Porritt, adviser to
M&S, agrees and points to its integration through the whole company, its detailed
measurement of non-financial data and its focus on outcomes. Porritt asserts that Plan A
‘really works’ for shareholders as well as other stakeholders.
So how has M&S made sure Plan A ‘really works’? Feedback tells the company that customers discern and value the Plan A difference between M&S and other retailers, and this
translates into increased foot traffic and a wider customer base. And there are savings: increased energy efficiency; reduced fuel use; cutting food waste b…
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