Describe the key logistics processes at tesco

Logistics Management & Strategy

Alan Harrison & Remko van Hoek

Competing Through the Supply Chain Fourth Edition

Logistics Management & Strategy Competing Through the Supply Chain Fourth Edition

www.pearson-books.com

A concise, applied and up-to-date introduction to logistics and supply chain management, perfect for modern managers and students.

Logistics and supply chain management continue to transform the competitive landscape and have become one of today’s key business issues. This fourth edition of Logistics Management and Strategy continues to take a practical, integrated and international approach to logistics; the very latest research is used to refl ect the innovative and exciting developments in this area.

A clear framework guides the reader through the four parts of the book, covering: • an introduction to logistics and its contribution to competitiveness and value creation • leveraging logistics operations within the context of the customer • supplier partnerships, interfaces and the challenges of integration • leading-edge thinking in logistics and the future challenges ahead.

New to this edition… • continued development of the theme of sustainable logistics • revised chapters on Just-in-time and the agile supply chain, and on supply chain planning and control • new chapter on sourcing and supply management.

Every chapter features case studies with study questions, activities and end-of-chapter discussion questions to help students explore logistical concepts in operational detail. Many of the case studies are new or updated for this new edition.

Alan Harrison & Remko van Hoek

Alan Harrison is Professor of Operations and Logistics at Cranfi eld School of Management, and Director of Research at The Cranfi eld Centre for Logistics and Supply Chain Management.

Remko van Hoek is visiting Professor of Supply Chain Management at The Cranfi eld Centre for Logistics and Supply Chain Management. He is also Chief Procurement Offi cer at GDF SUEZ/Cofely the Netherlands.

‘This is my ‘go to’ book. It is a highly informative, practical and above all understandable reference book about the supply chain business. It also teaches us to challenge our own thinking’ – Leigh Pomlett, President Northern Europe, CEVA Logistics

‘Excellent work which covers all the relevant concepts in an attractive way that’s easy to read’ – Professor Jack van der Vorst, Chair, Operations and Logistics Group, Wageningen University

Teaching support notes and PowerPoint slides for lecturers can be downloaded from the book’s website at www.pearsoned.co.uk/harrison

Logistics M anagem

ent & Strategy Com

peting Through the Supply Chain

Fourth Edition

Alan Harrison & Remko van Hoek

CVR_HARR0224_04_SE_CVR.indd 1 12/11/2010 13:08

Logistics Management and Strategy

We work with leading authors to develop the strongest educational materials in logistics, bringing cutting-edge thinking and best learning practice to a global market.

Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work.

To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk

Logistics Management and Strategy Competing through the supply chain

Fourth Edition

Alan Harrison

Remko van Hoek

Pearson Education Limited Edinburgh Gate

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 publisher or a licence permitting restricted copying in the United Kingdom issued by the 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.

Harlow Essex CM20 2JE

To Cathi, Nick, Katie, Maryl and Ticho, with love.

Contents

Foreword xiii Preface xv Authors’ acknowledgements xvii Publisher’s acknowledgements xix How to use this book xxi Plan of the book xxiii

Part One COMPETING THROUGH LOGISTICS

1 Logistics and the supply chain 3 Introduction 3 1.1 Logistics and the supply chain 4

1.1.1 Definitions and concepts 6 1.1.2 Supply chain: structure and tiering 8

1.2 Material flow and information flow 12 1.2.1 Material flow 12 1.2.2 Information flow 15

1.3 Competing through logistics 16 1.3.1 Hard objectives 17 1.3.2 Supportive capabilities 19 1.3.3 Soft objectives 25 1.3.4 Order winners and qualifiers 26

1.4 Logistics strategy 27 1.4.1 Defining ‘strategy’ 28 1.4.2 Aligning strategies 29 1.4.3 Differentiating strategies 30 1.4.4 Trade-offs in logistics 31

Summary 32 Discussion questions 33 References 33 Suggested further reading 34

2 Putting the end-customer first 35 Introduction 35 2.1 The marketing perspective 36

2.1.1 Rising customer expectations 37 2.1.2 The information revolution 37

2.2 Segmentation 38 2.3 Demand profiling 46 2.4 Quality of service 50

2.4.1 Customer loyalty 51 2.4.2 Value disciplines 53

viii Contents

2.4.3 Relationship marketing and customer relationship management (CRM) 53

2.4.4 Measuring service quality 56 2.5 Setting priorities for logistics strategy 56

2.5.1 Step 1: Diagnose current approach to market segmentation 58 2.5.2 Step 2a: Understand buying behaviour 59 2.5.3 Step 2b: Customer value analysis 60 2.5.4 Step 3: Measure logistics strategy drivers 60 2.5.5 Step 4: Specify future approach to market segmentation 63

Summary 68 Discussion questions 69 References 70 Suggested further reading 71

3 Value and logistics costs 73 Introduction 73 3.1 Where does value come from? 74

3.1.1 Return on investment (ROI) 75 3.1.2 Financial ratios and ROI drivers 77

3.2 How can logistics costs be represented? 79 3.2.1 Fixed/variable 81 3.2.2 Direct/indirect 85 3.2.3 Engineered/discretionary 87

3.3 Activity-based costing (ABC) 89 3.3.1 ABC example 91 3.3.2 Cost–time profile (CTP) 92 3.3.3 Cost-to-serve (CTS) 94

3.4 A balanced measurement portfolio 95 3.4.1 Balanced measures 96 3.4.2 Supply chain management and the balanced scorecard 97 3.4.3 Supply chain financial model 99

3.5 Supply chain operations reference model (SCOR) 101 Summary 105 Discussion questions 105 References 106 Suggested further reading 106

Part Two LEVERAGING LOGISTICS OPERATIONS

4 Managing logistics internationally 109 Introduction 109 4.1 Drivers and logistics implications of internationalisation 111

4.1.1 Logistical implications of internationalisation 114 4.1.2 Time-to-market 115 4.1.3 Global consolidation 116 4.1.4 Risk in international logistics 119

4.2 The tendency towards internationalisation 120 4.2.1 Focused factories: from geographical

to product segmentation 120 4.2.2 Centralised inventories 121

Contents ix

4.3 The challenges of international logistics and location 124 4.3.1 Extended lead time of supply 125 4.3.2 Extended and unreliable transit times 125 4.3.3 Multiple consolidation and break points 125 4.3.4 Multiple freight modes and cost options 126 4.3.5 Price and currency fluctuations 126 4.3.6 Location analysis 128

4.4 Organising for international logistics 130 4.4.1 Layering and tiering 130 4.4.2 The evolving role of individual plants 131 4.4.3 Reconfiguration processes 132

4.5 Reverse logistics 141 4.6 Managing for risk readiness 143

4.6.1 Immediate risk readiness 143 4.6.2 Structural risk readiness 144

4.7 Corporate social responsibility in the supply chain 145 Summary 150 Discussion questions 150 References 151 Suggested further reading 151

5 Managing the lead-time frontier 153 Introduction 153 5.1 The role of time in competitive advantage 154

5.1.1 Time-based competition: definition and concepts 154 5.1.2 Variety and complexity 155 5.1.3 Time-based initiatives 156 5.1.4 Time-based opportunities to add value 157 5.1.5 Time-based opportunities to reduce cost 159 5.1.6 Limitations to time-based approaches 161

5.2 P:D ratios and differences 162 5.2.1 Using time as a performance measure 162 5.2.2 Using time to measure supply pipeline performance 163 5.2.3 Consequences when P-time is greater than D-time 165

5.3 Time-based process mapping 168 5.3.1 Stage 1: Create a task force 169 5.3.2 Stage 2: Select the process to map 169 5.3.3 Stage 3: Collect data 170 5.3.4 Stage 4: Flow chart the process 170 5.3.5 Stage 5: Distinguish between value-adding

and non-value-adding time 170 5.3.6 Stage 6: Construct the time-based process map 171 5.3.7 Stage 7: Solution generation 171

5.4 Managing timeliness in the logistics pipeline 176 5.4.1 Strategies to cope when P-time is greater than D-time 177 5.4.2 Practices to cope when P-time is greater than D-time 178

5.5 A method for implementing time-based practices 179 5.5.1 Step 1: Understand your need to change 179 5.5.2 Step 2: Understand your processes 180 5.5.3 Step 3: Identify unnecessary process steps and large

amounts of wasted time 181

x Contents

5.5.4 Step 4: Understand the causes of waste 181 5.5.5 Step 5: Change the process 181 5.5.6 Step 6: Review changes 181 5.5.7 Results 182

5.6 When, where and how? 183 Summary 183 Discussion questions 184 References 184 Suggested further reading 184

6 Supply chain planning and control 185 Introduction 185 6.1 The supply chain ‘game plan’ 187

6.1.1 Planning and control within manufacturing 187 6.1.2 Managing inventory in the supply chain 193 6.1.3 Planning and control in retailing 198 6.1.4 Inter-firm planning and control 201

6.2 Overcoming poor coordination in retail supply chains 203 6.2.1 Efficient consumer response (ECR) 204 6.2.2 Collaborative planning, forecasting

and replenishment (CPFR) 210 6.2.3 Vendor-managed inventory (VMI) 214 6.2.4 Quick response (QR) 217

Summary 218 Discussion questions 219 References 219 Suggested further reading 220

7 Just-in-time and the agile supply chain 221 Introduction 221 7.1 Just-in-time and lean thinking 223

7.1.1 The just-in-time system 224 7.1.2 The seven wastes 228 7.1.3 JIT and material requirements planning 229 7.1.4 Lean thinking 232 7.1.5 Application of lean thinking to business processes 234 7.1.6 Role of lean practices 235

7.2 The concept of agility 236 7.2.1 Classifying operating environments 241 7.2.2 Preconditions for successful agile practice 242 7.2.3 Developing measures that put the end-customer first

to improve market sensitivity 246 7.2.4 Shared goals to improve virtual integration 247 7.2.5 Boundary spanning S&OP process to improve

process integration 248 Summary 249 Discussion questions 250 References 251 Suggested further reading 252

Contents xi

Part Three WORKING TOGETHER

8 Integrating the supply chain 255 Introduction 255 8.1 Integration in the supply chain 257

8.1.1 Internal integration: function to function 258 8.1.2 Inter-company integration: a manual approach 259 8.1.3 Electronic integration 260

8.2 Choosing the right supply relationships 264 8.3 Partnerships in the supply chain 270

8.3.1 Economic justification for partnerships 271 8.3.2 Advantages of partnerships 271 8.3.3 Disadvantages of partnerships 271

8.4 Supply base rationalisation 272 8.4.1 Supplier management 272 8.4.2 Lead suppliers 272

8.5 Supplier networks 273 8.5.1 Supplier associations 273 8.5.2 Japanese keiretsu 276 8.5.3 Italian districts 278 8.5.4 Chinese industrial areas 280

8.6 Supplier development 284 8.6.1 Integrated processes 284 8.6.2 Synchronous production 285

8.7 Implementing strategic partnerships 285 8.8 Managing supply chain relationships 290

8.8.1 Creating closer relationships 290 8.8.2 Factors in forming supply chain relationships 291

Summary 292 Discussion questions 294 References 295 Suggested further reading 297

9 Sourcing and supply management 299 Introduction 299 9.1 What does procurement do? 301

9.1.1 Drivers of procurement value 302 9.2 Rationalising the supply base 314 9.3 Segmenting the supply base 316

9.3.1 Preferred suppliers 319 9.3.2 Strategic relationships 320 9.3.3 Establishing policies per supplier segment 320 9.3.4 Vendor rating 321 9.3.5 Executive ownership of supply relationships 322 9.3.6 Migrating towards customer of choice status 324

9.4 Procurement technology 326 9.5 Markers of boardroom value 326 9.6 What does top procurement talent look like? 327

xii Contents

Summary 328 Discussion questions 329 References 329 Suggested further reading 330

Part Four CHANGING THE FUTURE

10 Logistics future challenges and opportunities 333 Introduction 333 10.1 Changing economics? 334 10.2 Internal alignment 336 10.3 Selecting collaborative opportunities upstream and downstream 340 10.4 Managing with cost-to-serve to support growth and profitability 343 10.5 The supply chain manager of the future 345 10.6 Changing chains 347 Summary 349 Discussion questions 350 References 350 Suggested further reading 350

Index 351

Supporting resources Visit www.pearsoned.co.uk/harrison to find valuable online resources

For instructors ● Complete, downloadable Instructor’s Manual, containing teaching notes, notes on case

studies and teaching tips, objectives and discussion points for each chapter ● Downloadable PowerPoint slides of all figures from the book

For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/harrison

Foreword

I am delighted to introduce Logistics Management and Strategy, now in its fourth edition – a further aid in our ability to drive our understanding of such a critical part of the business environment. In Bausch and Lomb logistics remains a key area of management attention, given its central role in customer service and the opportunities it provides for cost control, two fundamental essentials for any global business today.

Bausch and Lomb is built on a tradition of developing state of the art Optical products – from contact lenses to cataract surgery and the fast-growing optical pharmaceutical markets. These complex supply chains cover five continents and serve varying types of customers including hospitals, opticians and multiple retailers. They involve stock-keeping units (skus) requiring temperature control, serial traceability and sterility, and make for a diverse and challenging set of logistics demands.

When you then add these challenges to a range of over 100,000 skus – with some products being offered in over 7,000 different refractive powers/pack sizes – then you can understand why utilising the very latest approaches to logistics management and strategy is absolutely crucial.

In recent years we have invested heavily in automated warehouses, such as at our site in Amsterdam, recently recognised as one of the ‘top ten’ logistics facilities in the Netherlands. We have also developed our utilisation of agile logistics. This has been addressed by reducing the number of base products produced in our 17 factories, whilst increasing our customer responsiveness through postponement of labelling, bundling, promotional artwork and lan- guage compliance. In this regard, being a member of the Agile Supply Chain Research Club at Cranfield and working with Alan has been a rewarding and beneficial experience. I note that some of our experience has been invested in Chapter 7.

In the last two years Bausch and Lomb has greatly reduced inventory holdings through a number of logistics initiatives – improving working capital whilst maintaining, and even improving, customer service levels.

But the fight goes on, and it is with texts such as Logistics Management and Strategy in your armoury that you can continue to drive further improvements in your supply chain. The great aspect of this text is its readability – it does not seek to lecture the reader, but imparts its wisdom in a straightforward and practical manner. Fundamentally, I believe that is the essence of the science of logistics. Every element of our complex logistical environment is captured in this book with new sections covering sustainability, planning and control, and particularly the strategic role of procurement – all adding to the rich content.

In introducing this collaboration between Alan and Remko my parentage springs to mind. This was another Anglo-Dutch partnership – albeit with differ- ent outcomes!

xiv Foreword

I have spent the last twenty-five years in logistics, working in both British and Dutch environments. The last ten of these years have been in a global role. The output of Alan’s and Remko’s partnership rings true in so many areas – and offer methods and approaches which will continue to drive our improvements in the coming years.

Paul Mayhew MSc, MCILT Vice President, Global Logistics

Bausch and Lomb.

Preface

Logistics has been emerging from Peter Drucker’s shadowy description as ‘the economy’s dark continent’ for some years. From its largely military origins, logis- tics has accelerated into becoming one of the key business issues of the day, pre- senting formidable challenges for managers and occupying some of the best minds. Its relatively slow route to this exalted position can be attributed to two causes. First, logistics is a cross-functional subject. In the past, it has rightly drawn on contributions from marketing, finance, operations and corporate strat- egy. Within the organisation, a more appropriate description would be a business process, cutting across functional boundaries yet with a contribution from each. Second, logistics extends beyond the boundaries of the organisation into the sup- ply chain. Here, it engages with the complexities of synchronising the movement of materials and information between many business processes. The systems na- ture of logistics has proved a particularly difficult lesson to learn, and individual organisations still often think that they can optimise profit conditions for them- selves by exploiting their partners in the supply chain. Often they can – in the short term. But winners in one area are matched by losers in another, and the los- ers are unable to invest or develop the capabilities needed to keep the chain healthy in the long term. The emergence of logistics has therefore been depend- ent on the development of a cross-functional model of the organisation, and on an understanding of the need to integrate business processes across the supply network.

While its maturity as a discipline in its own right is still far from complete, we believe that it is time to take a current and fresh look at logistics management and strategy. Tools and concepts to enable integration of the supply chain are starting to work well. Competitive advantage in tomorrow’s world will come from responding to end-customers better than competition. Logistics plays a vital role in this response, and it is this role that we seek to describe in this book.

The globalisation of logistics assumes that quality can be duplicated anywhere, that risks are relatively small, and that sustainability does not really matter. Case study 4.2 quotes an environmental activist as saying ‘we are producing food in one corner of the world, packing it in another and then shipping it somewhere else. It’s mad.’ The reality is that 21st-century supply chains are developing very different profiles from those developed by the mindsets of ten or 20 years ago. Risk will become more important. Plans will need to be in place to prevent or mitigate the impact of financial, operational and political uncertainty. It is both environmentally and economically right to focus on sustainability. Logistics stands at the heart of this debate.

This text has a clear European foundation (its currency is the euro) and an in- ternational appeal. In line with the globalisation of logistics, we have included cases from other parts of the world than Europe – diverse though European logis- tics solutions are – including South Africa, the United States, Japan, China and Australia.

xvi Preface

Accordingly, we start in Part One with the strategic role of logistics in the sup- ply chain. We continue by developing the marketing perspective by explaining our view of ‘putting the end-customer first’. Part One finishes by exploring the concept of value and logistics costs. In Part Two, we review leveraging logistics operations in terms of their global dimensions, and of the lead-time frontier. Part Two continues by examining the challenges of coordinating manufacturing and retail processes, and the impact on logistics of just-in-time and the agile supply chain. Part Three reviews working together, first in terms of integrating the sup- ply chain and second in terms of sourcing and supply management. Our book ends with Part Four, in which we outline the logistics future challenge.

This text is intended for MSc students on logistics courses, and as an accompa- nying text for open learning courses such as global MSc degrees and virtual uni- versities. It will also be attractive as a management textbook and as recommended reading on MBA options in logistics and supply chain management.

In the second edition, we listened carefully to students and to reviewers alike and set out to build on the foundation of our initial offering. We updated much of the material while keeping the clear structure and presentation of the first edition. There were lots of new cases and we updated others. We attempted to touch on many of the exciting developments in this rapidly expanding body of knowledge, such as governance councils, the prospects for a radio frequency identification device (RFID) and the future of exchanges. The third edition re- tains the clarity and up-to-date content which have become hallmarks of the pre- vious editions. This edition continues to provide further new and updated cases to illustrate developments in the subject. This time, Chapters 6, 7 and 10 have been largely reconstructed, but you will also find many improvements to other chapters resulting from our research and work with industrial partners.

The fourth edition continues to build on the foundations we have developed so far, while continuing to update the content and keep it abreast of the rapidly developing logistics body of knowledge. Many of the cases have been updated too and new ones introduced. Chapters 6 and 7 have again been largely recon- structed, and we have refocused Chapter 9 around sourcing and supply manage- ment. We have continued to develop the theme of sustainable logistics, which we classify as a competitive priority right from the start. We are grateful to Paul Mayhew of Bausch and Lomb, who has written the Foreword to this edition fol- lowing the retirement of Alain Le Goff.

We hope that our book will offer support to further professional development in logistics and supply chain management, which is needed today more than ever before. In particular, we hope that it encourages you to challenge existing thinking, and to break old mindsets by creating a new and more innovative fu- ture. Transformation of supply chains is a focus for everyone in the 21st century. Since we launched this textbook in 2001, it has become a European best seller – and is popular in Australia, Singapore and South Africa. It is also developing an important following in the United States. Our book has also been launched in local language formats in Japan, Brazil, Russia, China, Poland, Mongolia and the Ukraine.

Authors’ acknowledgements

We should like to acknowledge our many friends and colleagues who have con- tributed to our thinking and to our book. Cranfield colleagues deserve a special mention: Dr Janet Godsell, Dr Carlos Mena, Simon Templar, Dr Heather Skipworth, Dr Paul Chapman (now at Saïd Business School), Dr Paul Baines and Professor Richard Wilding have all made important contributions. Sri Srikanthan helped us with the financial concepts used in section 3.2. Members of the Agile Supply Chain Research Club at Cranfield also deserve special mention, notably Chris Poole of Procter & Gamble (now of B&Q), Paul Mayhew of Bausch & Lomb (who provides the foreword for the new edition), Ian Shellard and David Evans of Rolls-Royce, Mark Brown of Pentland Brands (who updated the apparel cases 4.4 and 8.1) and Joe Thomas of Tesco (who updated Case study 1.1). We have picked the brains of several who have recently retired from the industry, including David Aldridge (formerly of Cussons UK), Philip Matthews (formerly of Boots the Chemist) and Graham Sweet (formerly of Xerox, Europe). A number of pro- fessors from other universities have contributed ideas and cases, including Marie Koulikoff-Souviron (SKEMA Business School, Nice), Jacques Colin (CretLog, Aix-en-Provence), Konstantinos Zographos (Athens University of Economics and Business), Huo Yanfang (University of Tianjin), Thomas Choi (Arizona State Uni- versity), David Bennett (Newcastle Business School) and Corrado Ceruti (University of Roma Tor Vergata). Many of our MSc graduates, such as Steve Walker and Alexander Oliveira, also made important contributions. Professor Yemisi Bolu- mole (University of North Florida) helped us to re-draft earlier versions of the first edition. Dr Jim Aitken (University of Surrey) contributed to our supply chain seg- mentation thinking in Chapter 2, and we have used his work on supplier associ- ations in Chapter 8. We also acknowledge the encouragement of Matthew Walker and Sophie Playle at Pearson Education in the preparation of this text and their encouragement to meet deadlines! Also, we thank the reviewers who made many valuable comments on earlier editions of this book. We are very grateful to all of these, and to the many others who made smaller contributions to making this book possible. Cathi Maryon helped to research several of the cases and to proj- ect manage the manuscript. Finally, we thank Lynne Hudston for helping wher- ever she could – in addition to helping to run our Supply Chain Research Centre at Cranfield!

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, Interna- tional 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-value- loyalty 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 Under- standing the relationships between time and cost to improve supply chain perform- ance, 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 bal- anced 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 permis- sion 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 Logis- tics 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, Interna- tional 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 permis- sion.; Figure 9.10 from An integrative framework for supplier relationship manage- ment, 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 Manage- ment (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 logis- tics in terms of its contribution to competitiveness, customer service and the creation of value. Part Two of the book focuses on leveraging logistics operations within the context of quality of service and cost performance objectives. Part Three focuses on working together, and Part Four pulls together four elements of leading- edge thinking in logistics, homing in on future challenges for the subject.

Part One

Competing through logistics

Part Two

Leveraging logistics

operations

Part Four

Changing the future

Part Three

Working together

The book has been arranged to take you through the subject in logical stages. The limitation of a text presentation is that the subjects are then arranged in se- quence, and links between stages have to be made by the reader. We have set out to facilitate cross-linkages by including:

● activities at the end of many of the sections, which are aimed at helping you to think about the issues raised and how they could be applied;

● discussion questions at the end of each chapter to help you assess your under- standing of the issues raised, and give you practice in using them;

● case studies, which draw together a number of issues and help you to think about how those issues are linked together in a practical setting. Use the study questions at the end of each case to guide your thinking.

We have sought continually to break up the text with figures, tables, activities and case studies, so you will rarely find two successive pages of continuous text. You should therefore regard the activities and case studies as an integral part of the method used in this book to help you to learn.

xxii How to use this book

Where possible, discuss the activities and case study questions in groups after you have prepared them individually. Discussion helps to broaden the agenda and create confidence in handling the issues. While you are studying this book, think about the logistics issues it raises – in your own firm or ones that you know well, and in articles in newspapers such as the Financial Times and magazines such as Business Week. Follow up the website addresses we have included in the text and again link them with the issues raised in the book.

A few words on terminology are appropriate here. We have taken the view that logistics and supply chain management (SCM) are sufficiently different for sepa- rate definitions to be needed. We have included these definitions in Chapter 1: logistics is a subset of SCM. ‘Supply chain’ and ‘supply network’ are used inter- changeably, although we favour ‘chain’ for a few organisations linked in series and ‘network’ to describe the more complex inter-linkages found in most situa- tions. Again, our position is explained in Chapter 1.

A summary is provided at the end of each chapter to help you to check that you have understood and absorbed the main points in that chapter. If you do not follow the summary points, go back and read the relevant section again. If need be, follow up on references or suggested further reading. Summaries are also there to help you with revision.

We have designed this book to help you to start out on the logistics journey and feel confident with its issues. We hope that it will help you to improve sup- ply chains of the future.

Chapter 10 Logistics future challenges and opportunities

Part One COMPETING THROUGH LOGISTICS

Part Two LEVERAGING LOGISTICS OPERATIONS

Chapter 1 Logistics and the supply chain

Chapter 4 Managing logistics internationally

Chapter 6 Supply chain planning and control

Chapter 2 Putting the end-customer first

Chapter 5 Managing the lead-time frontier

Chapter 7 Just-in-time and the agile supply chain

Chapter 3 Value and logistics costs

Part Three WORKING TOGETHER

Part Four CHANGING THE FUTURE

Chapter 8 Integrating the supply chain

Chapter 9 Sourcing and supply management

Plan of the book

Part One

COMPETING THROUGH LOGISTICS

Our model of logistics structures the supply network around three main factors: the flow of materials, the flow of information and the time taken to respond to demand from source of supply. The scope of the network extends from the ‘focal firm’ at the centre across supplier and customer interfaces, and therefore typically stretches across functions, organisations and borders. The network is best seen as a system of interdependent processes, where actions in one part affect those of all others. The key ‘initiator’ of the network is end-customer demand on the right: only the end- customers are free to make up their mind when to place an order. After that, the system takes over.

Chapter 1 explains how networks are structured, the different ways in which they may choose to compete, and how their capabilities have to be aligned with the needs of the end-customer. Chapter 2 places the end-customer first in logistics thinking, and develops the theme of aligning logistics strategy with marketing strategy. Chapter 3 considers how value is created in a supply network, how logistics costs can be managed, and how a balanced measurement portfolio can be designed.

Material flow (supply)

Information flow

Time

En d–

cu st

om er

En d-

cu st

om er

D ow

ns tr

ea m

U p

st re

amR aw

m at

er ia

l Ra

w m

at er

ia l

Focal firm

CHAPTER 1

Logistics and the supply chain

Introduction

It only takes only 17 hours or so to assemble a car, and a couple more days are needed to ship it to the customer via the dealers. So why does it take more than a month for a manufacturer to make and deliver the car I want? And why are the products I want to buy so often unavailable on the shelf at the local supermarket? These are questions that go to the heart of logistics management and strategy. Supply chains today are slow and costly in relation to what they will be like in the future. But let us start at the beginning, by thinking about logistics and the supply chain in terms of what they are trying to do. It is easy to get bogged down in the complexities of how a supply chain actually works (and very few people ac- tually know how a whole supply chain works). We shall address many of those details later in this book. First, let us focus on how a supply chain competes, and on what the implications are for logistics management and strategy.

The overall aim of this chapter is to provide an introduction to logistics and set the scene for the book as a whole. The need is to look outside the individual organisation and to consider how it aligns with other organisations in a given

The intended objectives of this chapter are to:

● identify and explain logistics definitions and concepts that are relevant to managing the supply chain;

● identify how supply chains compete in terms of time, cost, quality and sustainability. Also, how there are supportive capabilities and soft objectives;

● show how different supply chains may adopt different and distinctive strategies for competing in the marketplace.

By the end of this chapter you should be able to understand:

● how supply chains are structured;

● different ways in which supply chains may choose to compete in the marketplace;

● the need to align supply chain capabilities with competitive priorities.

Objectives

4 Chapter 1 • Logistics and the supply chain

supply chain. This is both a strategic and a managerial task: strategic, because it requires long-term decisions about how logistics will be structured and the sys- tems it will use; managerial, because it encompasses decisions about sourcing, making and delivering products and services within an overall ‘game plan’.

Key issues This chapter addresses four key issues: 1 Logistics and the supply chain: definitions, structure, tiering.

2 Material flow and information flow: the supply chain and the demand chain.

3 Competing through logistics: competitive criteria in the marketplace.

4 Logistics strategies: aligning capabilities across the supply chain.

1.1 Logistics and the supply chain

Key issues: What is the supply chain, and how is it structured? What is the purpose of a supply chain?

Logistics is a big word for a big challenge. Let us begin by giving an example of that challenge in practice, because that is where logistics starts and ends.

Tesco

Tesco is the UK’s largest food retailer, with a Group sales turnover of more than €67 billion. It has over 2,100 stores in the US, central Europe, Ireland and the Far East, and over 2,300 in the UK alone. This number has increased rapidly as Tesco entered the conven- ience store market with its Tesco Express store format. The product range held by the stores has grown rapidly in recent years – a larger store can hold up to 20,000 products – as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery, clothing and the like. This massive range is supported by thousands of suppliers, who are expected to meet agreed service levels (correct time and quantities) by delivering to Tesco within specific time ‘windows’. Volumes are impressive. In a year, some 2.1 billion cases of product are shipped from suppliers to the stores.

Mindful of its responsibilities, Tesco is the UK’s market leader in the use of bio fuels and works hard to reduce its CO2 emissions per case delivered, through initiatives in- cluding rail, barge and alternative fuels. The company also buys considerable numbers of double-deck trailers to move more cases per trip.

Tesco states that its core purpose is ‘to create value for customers to earn their life- time loyalty’. A wide product range and high on-shelf availability across that range are key enablers of that core purpose. So how do you maintain high availability of so many product lines in so many stores? This question goes to the heart of logistics manage- ment for such a vast organisation. Logistics is about material flow, and about informa- tion flow. Let us look at how Tesco deals with each of these in turn.

An early reform for supermarket operation was to have suppliers deliver to a depot rather than to every store. During the 1980s, distribution to retail stores was handled by

CASE STUDY

1.1

Logistics and the supply chain 5

26 depots. These operated on a single-temperature basis, and were small and relatively inefficient. Delivery volumes to each store were also relatively low, and it was not eco- nomic to deliver to all stores each day. Goods that required temperature-controlled environments had to be carried on separate vehicles. Each product group had different ordering systems. The network of depots simply could not handle the growth in volumes and the increasingly high standards of temperature control. A new distribution strategy was needed.

Many small depots with limited temperature control facilities were replaced by Fresh Food depots which can handle many products at several temperature ranges. The opportunity is to provide a cost-effective daily delivery service to all stores. Typically, a Fresh Food depot can handle over 80 million cases per year on a 40-acre site. The warehouse building comprises 36,000 square metres divided into three temperature zones: �25°C (frozen), 1°C (chilled) and 12°C (semi-ambient). Each depot serves a group of between 48 and 335 retail stores. Delivery vehicles for Fresh Food depots use insulated trailers divided into chambers by means of movable bulkheads so they can operate at different temperatures. Deliveries are made at agreed, scheduled times. Grocery and Non-Food goods such as cans and clothing are delivered separately.

So much for the method of transporting goods from supplier through to the stores, but how much should be sent to each store? With such a huge product range today, it is impossible for the individual store to reorder across the whole range (store-based ordering). Instead, sales of each product line are tracked continuously through the till by means of electronic point of sale (EPOS) systems. As a customer’s purchases are scanned through the bar code reader at the till, the sale is automatically recorded for each stock-keeping unit (sku). Cumulative sales are updated every four hours on Tesco Information Exchange (TIE). This is a system based on internet technology that allows Tesco and its suppliers to communicate trading information. The aim of improved communication is to reduce response times from manufacturer to stores and to ensure product availability on the shelf. Among other things, TIE aims to improve processes for introducing new products and promotions, and to monitor service levels.

Based on cumulative sales, Tesco places orders with its suppliers by means of electronic data interchange (EDI). As volumes and product ranges increased during the 1990s, food retailers such as Tesco aimed to de-stock their depots by ordering only what was needed to meet tomorrow’s forecast sales. For fast-moving products such as types of cheese and washing powders, the aim is day 1 for day 2: that is, to order today what is needed for tomorrow. For fast-moving products, the aim is to pick to zero in the depot: no stock is left after store orders have been fulfilled. This means that the same space in the depot can be used several times over. Deliveries to stores are made in two waves, at specific times and within defined windows. This helps to improve product availability at stores throughout the day, and thus support changes in demand. Updated by Joe Thomas (Tesco) 2010

Questions 1 Describe the key logistics processes at Tesco.

2 What do you think are the main logistics challenges in running the Tesco operation?

6 Chapter 1 • Logistics and the supply chain

So why is Tesco growing in an intensely competitive market? It describes its core purpose as being ‘to create value for customers to earn their lifetime loyalty’. Loyalty is an important term that we return to in the next chapter. In order to achieve loyalty, Tesco has to understand customer needs and how they can be served. Its products must be recognised by its customers as representing outstand- ing value for money. To support such goals, it must ensure that the products that its customers want are available on the shelf at each of its stores at all times, day and night. Logistics is the task of planning and controlling the purchase and dis- tribution of Tesco’s massive product range from suppliers to stores. Logistics is concerned with managing two key flows:

● material flow of the physical goods from suppliers through the distribution centres to stores;

● information flow of demand data from the end-customer back to purchasing and to suppliers, and supply data from suppliers to the retailer, so that material flow can be accurately planned and controlled.

The logistics task of managing material flow and information flow is a key part of the overall task of supply chain management. Supply chain management is concerned with managing the entire chain of processes, including raw material supply, manufacture, packaging and distribution to the end-customer. The Tesco UK supply chain structure comprises three main functions:

● distribution: the operations and support task of managing Tesco’s distribution centres (DCs), and the distribution of products from the DCs to the associated stores;

● network and capacity planning: the task of planning and implementing suffi- cient capacity in the supply chain to ensure that the right products can be pro- cured in the right quantities now and in the future;

● supply chain development: the task of improving Tesco’s supply chain so that its processes are stable and in control, that it is efficient, and that it is correctly structured to meet the logistics needs of material flow and information flow.

Thus logistics can be seen as part of the overall supply chain challenge. While the terms ‘logistics’ and ‘supply chain management’ are often used interchange- ably, logistics is actually a subset of supply chain management. It is time for some definitions.

1.1.1 Definitions and concepts

A supply chain as a whole ranges from basic commodities (what is in the ground, sea or air) to selling the final product to the end-customer, to recycling the used product. Material flows from raw materials (such as a bauxite mine as a source of aluminium ore) to the finished product (such as a can of cola). The can is recy- cled after use. The analogy to the flow of water in a river is often used to describe organisations near the source as upstream, and those near the end-customer as downstream. We refer to firms that are involved in supply chains as partners, because that is what they are. There is a collective as well as an individual role to play in

Logistics and the supply chain 7

the conversion of basic commodity into finished product. At each stage of the conversion, there may be returns which could be reject material from the preced- ing firm, or waste such as the finished can that needs to be recycled. Sometimes, the whole product is wasted because the consumer throws it away.

A supply chain is a network of partners who collectively convert a basic commodity (upstream) into a finished product (downstream) that is valued by end-customers, and who manage returns at each stage.

Each partner in a supply chain is responsible directly for a process that adds value to a product. A process:

Transforms inputs in the form of materials and information into outputs in the form of goods and services.

In the case of the cola can, partners carry out processes such as mining, trans- portation, refining and hot rolling. The cola can has greater value than the bauxite (per kilogram of aluminium).

Supply chain management (SCM) involves planning and controlling all of the processes from raw material production to purchase by the end-user to recycling of the used cans. Planning refers to making a plan that defines how much of each product should be bought, made, distributed and sold each day, week or month. Controlling means keeping to plan – in spite of the many problems that may get in the way. The aim is to coordinate planning and control of each process so that the needs of the end-customer are met correctly. The definition of SCM used in this book is adapted from the Council of SCM Professionals (CSCMP, 2010):

SCM encompasses the planning and controlling of all processes involved in procure- ment, conversion, transportation and distribution across a supply chain. SCM in- cludes coordination and collaboration between partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, SCM inte- grates supply and demand management within and between companies in order to serve the needs of the end-customer.

‘Serve the needs of the end-customer’ has different implications in different con- texts. In not-for-profit environments, such as public health and local government, serving implies ‘continuously improving’, ‘better than other regions/countries’, ‘best value’ and the like. In the commercial sector, serving implies ‘better than competition’, ‘better value for money’ and so on. In either situation, the focus of managing the supply chain as a whole is on integrating the processes of supply chain partners, of which the end-customer is the key one. In effect, the end-customer starts the whole process by buying finished products. It is the buying behaviour of the end-customer that causes materials to flow through the supply chain.

The degree to which the end-customer is satisfied with the finished product depends crucially on the management of material flow and information flow along the supply chain. If delivery is late, or the product has bits missing, the whole supply chain is at risk from competitors who can perform the logistics task better. Logistics is a vital enabler for supply chain management. We use the following definition of logistics in this book:

The task of coordinating material flow and information flow across the supply chain to meet end-customer needs.

8 Chapter 1 • Logistics and the supply chain

Logistics has both strategic (long-term planning) and managerial (short- and medium-term planning and control) aspects. Tesco has a clear view about the opportunities here. A breakdown of costs in Tesco’s part of the UK supply chain is as follows:

● Supplier delivery to Tesco distribution centre (DC) 18%

● Tesco DC operations and deliver to store 28%

● Store replenishment 46%

● Supplier replenishment systems 8%

Nearly half of supply chain costs are incurred in-store. In order to reduce these in-store costs, Tesco realises that the solution is ‘to spend more upstream and downstream to secure viable trade-offs for in-store replenishment’. If a product is not available on the shelf, the sale is potentially lost. By integrating external manufacturing and distribution processes with its own, Tesco seeks to serve the needs of its customers better than its competitors.

1.1.2 Supply chain: structure and tiering

The concept of a supply chain suggests a series of processes linked together to form a chain. A typical Tesco supply chain is formed from five such links.

Material flow

Information flow

Dairy cooperative Cheese factory National DC Retailer DC Retailer store and end-customer

Figure 1.1 From cow to customer

In Figure 1.1 milk is produced by a dairy cooperative and shipped to a cheese factory. Once made, the cheese is shipped to the manufacturer’s national distri- bution centre (NDC), where it is stored and matured for nine months. It can then be shipped in response to an order from the retailer, and is transported first to the retailer’s regional distribution centre (RDC). From there, it is shipped to the store. Looking at the arrows in Figure 1.1, material flows from left to right. Information is shared across the chain: it is demand from the end-customer that makes the whole chain work.

If we look more closely at what happens in practice, the term ‘supply chain’ is somewhat misleading in that the ‘chain’ represents a simple series of links be- tween a basic commodity (milk in this case) and a final product (cheese). Thus the

Logistics and the supply chain 9

cheese manufacturer will need packaging materials such as film, labels and cases. Cheese requires materials additional to milk in the manufacturing process. So the manufacturer deals with suppliers other than the milk cooperative alone. Once made, the cheese is dispatched for maturation to the supplier’s NDC, and then dis- patched to many customers in addition to Tesco. Once at a Tesco RDC, the ‘chain’ spreads again because up to 100 stores are served by a given RDC. The additional complexity prompts many authors to refer to supply networks rather than supply chains, a point we return to shortly. Logistics today is also concerned with what happens after a product has been sold. Two major concerns are:

● Reverse logistics: the return of unwanted goods and packaging in the opposite direction (from right to left) to the normal flow shown in Figure 1.1.

● Waste: the discarding of product at any stage in the supply chain due to quality problems – for example, the disposal of out-of-date or damaged stock by a retailer or by an end-customer. We consider waste more generally in Chapter 6.

A more realistic representation of the supply chain is shown in Figure 1.2, where each link can connect with several others. A focal firm is shown at the centre of many possible connections with other supplier and customer companies.

Upstream

Inbound logistics Outbound logistics

Focal firm

Second tier suppliers

Pr im

ar y

m an

uf ac

tu re

rs

En d-

cu st

om er

s

First tier suppliers

Downstream

First tier customers

Second tier customers

Internal logistics

Supply chain management

Figure 1.2 Supply network (Source: After Slack et al., 1997)

The supply chain can be seen in this diagram as a number of processes that ex- tend across organisational boundaries. The focal firm is embedded within the chain, and its internal processes must coordinate with others that are part of the same chain. Materials flow from left (upstream) to right (downstream). If every- thing is as orderly as it seems, then only the end-customer (to the extreme right of the chain) is free to place orders when he or she likes: after that, the system takes over.

10 Chapter 1 • Logistics and the supply chain

The supply chain is tiered, in that supply side and demand side can be organised into groups of partners with which we deal. Thus if we place an assembler such as the Ford plant at Valencia as the focal firm, inbound logistics comprises tier 1 suppli- ers of major parts and subassemblies that deliver directly to Ford, while tier 2 suppli- ers deliver to the tier 1s and so on. Outbound logistics covers the supply by the Ford Valencia plant to national sales companies as tier 1 customers, which in turn supply to main dealers at tier 2 and so on. Internal logistics covers the planning and control of parts movements within the Ford Valencia plant. The ultimate aim of supply chain management is to integrate inbound, outbound and internal logistics into a seamless whole, focused on meeting end-customer needs with no waste.

Other terms that are used to describe aspects of managing the supply chain are:

● Purchasing and supply deals with a focal firm’s immediate suppliers (upstream).

● Physical distribution deals with the task of distributing products to tier 1 cus- tomers (downstream).

● Logistics refers to management of materials and information. Inbound logistics deals with links between the focal firm and its upstream suppliers, while outbound logistics refers to the links between the focal firm and its downstream customers. Internal logistics deals with planning and control of material flow within the boundaries of the focal firm.

Supply chain management thus appears as the ‘end to end’ (or ‘cow to cus- tomer’ as we have expressed it in Figure 1.1) management of the network as a whole, and of the relationships between the various links. The essential points were summarised long ago by Oliver and Webber (1982):

● Supply chain management views the supply chain as a single entity.

● It demands strategic decision making.

● It views balancing inventories as a last resort.

● It demands system integration.

A natural extension of this thinking is that supply chains should rather be viewed as networks. Figure 1.3 shows how a focal firm can be seen at the centre of a network of upstream and downstream organisations.

Focal firm

Figure 1.3 A network of organisations

The terms ‘supply chain’ and ‘supply network’ both attempt to describe the way in which buyers and suppliers are linked together to serve the end-customer.

Logistics and the supply chain 11

‘Network’ describes a more complex structure, where organisations can be cross- linked and there are two-way exchanges between them; ‘chain’ describes a sim- pler, sequential set of links (Harland et al., 2001). We have used the terms interchangeably in this book, preferring ‘chain’ to describe simpler sequences of a few organisations and ‘network’ where there are many organisations linked in a more complex way.

Figure 1.3 takes a basic view of the network, with a focal firm linked to three upstream suppliers and three downstream customers. If we then add material flow and information flow to this basic model, and place a boundary around the net- work, Figure 1.4 shows the network in context. Here we have added arrows show- ing the logistics contribution of material and information flows, together with the time dimension. Material flows from primary manufacture (for example, farming, mining or forestry) through various stages of the network to the end-customer. Material flow represents the supply of product through the network in response to demand from the next (succeeding) organisation. Information flow broadcasts demand from the end-customer to preceding organisations in the network. The time dimension addresses the question ‘How long does it take to get from primary source to the end-customer?’ That is, how long does it take to get the product through the various stages from one end of the supply chain to the other? Time is important because it measures how quickly a given network can respond to demand from the end-customer. In fact, the concept of flow is based on time:

Flow measures the quantity of material (measured in input terms such as numbers of components, tonnes and litres) that passes through a given network per unit of time.

Material flow (supply)

Information flow

Time

En d-

cu st

om er

En d-

cu st

om er

D ow

ns tr

ea m

U p

st re

am

Ra w

m at

er ia

l Ra

w m

at er

ia l

Focal firm

Figure 1.4 The network in context

Figure 1.5 shows an example network map of a chocolate bar. Draw a network map showing how your organisation, or one that you know well, links with other organisations. Explain the up- stream, downstream and internal processes as far as you can. We expect you to address at least the first tiers of demand and supply. You will derive further benefit from researching additional tiers, and by developing the linkage of relationships that is involved. Explain how these work in practice, and how materials flow between the different tiers.

Activity 1.1

12 Chapter 1 • Logistics and the supply chain

An important point here is that the supply network should be viewed as a system. All processes within the network need to be understood in terms of how they interact with other processes. No organisation is an island: its inputs and outputs are affected by the behaviour of other players in the network. One powerful, disruptive player can make life very difficult for everyone else. For example, several auto assemblers optimise their own processes, but disrupt those of upstream suppliers and downstream distributors. The effect is to increase total system costs and reduce responsiveness to end-customer demand.

1.2 Material flow and information flow

Key issue: What is the relationship between material flow and information flow?

As we have already seen, logistics is about managing material flow and informa- tion flow. In this section, we examine material flow and information flow in more detail.

1.2.1 Material flow

The aim within a supply chain is to keep materials flowing from source to end- customer. The time dimension in Figure 1.4 suggests that parts are moved through the supply chain as quickly as possible. In order to prevent local

Wheat

Creamery (milk)

Cocoa beans

Sugar Vegetable

oil Cocoa butter

Lecithin Emulsifiers,

salt, etc.

Praline

Flour

Wafers

Chocolate Packing Wholesalers

Others (hospital, etc.)

Multiple retailers

End- customers

Confectionery manufacturer

Printed materials

Aluminium Fibreboard

Figure 1.5 Example of a confectionery network map (Source: After Zheng et al., 1998)

Material flow and information flow 13

build-ups of inventory, flow must be orchestrated so that parts movement is co- ordinated. The term often used is synchronous. Caterpillar Inc. makes complex earth-moving equipment, and there are literally thousands of component parts and subassemblies that must come together in the final assembly processes. The vision is that parts and subassemblies should flow continuously through the supply chain, all orchestrated like a ballet (Knill, 1992: 54):

The goal is continuous, synchronous flow. Continuous means no interruptions, no dropping the ball, no unnecessary accumulations of inventory. And synchronous means that it all runs like a ballet. Parts and components are delivered on time, in the proper sequence, exactly to the point they’re needed.

Often it is difficult to see the ‘end to end’ nature of flow in a given supply chain. The negative effects of such difficulty include build-ups of inventory and sluggish response to end-customer demand. And sheer greed by the most powerful mem- bers of a supply chain often means that it is weaker partners (notably small to medium-sized enterprises – SMEs) who end up holding the inventories. So man- agement strategies for the supply chain require a more holistic look at the links, and an understanding that organisational boundaries easily create barriers to flow.

Case study 1.2 describes how one company – Xerox in this case – re-engineered material flow in its distribution system.

Xerox

Once the problems of introducing ‘just-in-time’ production systems (internal logistics) had been solved at the Xerox plant making photocopiers at Venray in Holland, atten- tion shifted towards the finished product inventory (outbound logistics). Historically, stocks of finished products had been ‘managed’ by trying to turn the sales ‘tap’ on or off as stocks developed. This was characterised by the familiar ‘feast or famine’ situa- tions. The objective of the next move for Xerox became clear: making only what you need when you need it, then shipping direct to the customer. But the key question had to be answered: just-in-time for what? The answer is – the end-customer. And customer surveys showed that three types of delivery were needed:

● Commodity products should be delivered ‘off the shelf’. ● Middle-range products were required in five days. ● Larger products that had to be integrated into existing customer processes and sys-

tems had to be planned months ahead, but the quoted delivery date had to be met 100 per cent.

It was envisaged that this would lead to a radically different inventory ‘profile’ in the supply chain. Figure 1.6 shows a traditional inventory profile on the left. Most of the stock was held in local depots waiting for customer orders. If the mix had been incor- rectly forecast, too many of the wrong products were in plentiful supply, while needed products were unavailable. Further, a batch of replacement products would take a long time to fight their way through the pipeline. A new ‘just-in-time’ strategy was conceived to make the supply chain much more responsive. This strategy had a profound effect on the inventory profile, pushing much of the inventory upstream. The closer that inventory

CASE STUDY

1.2

is located towards the end-customer, the higher the value added – and the more that it is committed to a given finished product specification. Instead, inventory was mostly held further upstream. This was a more flexible solution, where product could be finally assembled to known orders, and where it had lower value. Of course, it has since been possible to remove several stages of the distribution process, thereby eliminating some of the sources of inventory altogether.

For commodity products, Xerox coined the term deliver JIT: that is, the product had to be delivered out of stock. Where sales forecasts are traditionally poor, the challenge was one of flexibility, simplicity and speed of manufacture. For mid-range products, it was unrealistic to hold ‘just-in-case’ inventories of products that are too complex to be assembled quickly. Instead, finish JIT was the term coined to describe the new policy of building semi-finished products with the minimum of added value, consistent with being able to complete and deliver the product in the five-day target. Finally, build JIT was the term used to describe the new philosophy of building larger products quickly within a defined lead time.

The impact of the new build philosophies on the downstream supply chain processes can be judged from Figure 1.6. While the traditional inventory profile shows a maxi- mum number of days of stock (shown in the shaded area) at finished product level, this is risky. It always seems that demand is greatest for the very items that are not available! Postponing the decision on exact specification until as late as possible in the process, when we are more likely to know precisely what the end-customer wants, helps to create the much flattened inventory profile to the right of the diagram. These are issues to which we return in Chapter 6. (A development of this case, tracking ‘what happened next’, is Case study 7.4.)

(Source: After Eggleton, 1990)

Question 1 How did inventory reduction in the supply chain lead to improved competitiveness

at Xerox?

14 Chapter 1 • Logistics and the supply chain

Traditional Inventory location:

Local depot

National depot

International depot

WIP at Rank Xerox

Parts stores

In transit

WIP at supplier

Notes: WIP = work in progress, i.e. products being worked on, but not yet ready for sale. Shaded areas indicate days of stock: the wider the area, the more days of stock in that position.

Just-in-time

Inflexible Flexible

Days of stock

Days of stock

Customer

Supplier

Inventory position

Figure 1.6 Xerox: the impact on inventories

Material flow and information flow 15

1.2.2 Information flow

As asked in the Xerox case study, just-in-time for what? It is all well and good to get materials flowing and movements synchronised, but the ‘supply orchestra’ needs to respond in unison to a specific ‘conductor’. The ‘conductor’ in this anal- ogy is actually the end-customer, and it is the end-customer’s demand signals that trigger the supply chain to respond. By sharing the end-customer demand information across the supply chain, we create a demand chain, directed at pro- viding enhanced customer value. Information technology enables the rapid shar- ing of demand and supply data at increasing levels of detail and sophistication. The aim is to integrate such demand and supply data so that an increasingly ac- curate picture is obtained about the nature of business processes, markets and end-customers. Such integration provides increasing competitive advantage, as we explore further in Chapter 8.

The greatest opportunities for meeting demand in the marketplace with a max- imum of dependability and a minimum of inventory come from implementing such integration across the supply chain. A focal firm cannot become ‘world class’ by itself!

Figure 1.7 gives a conceptual model of how supply chain processes (source, make, deliver) are integrated together in order to meet end-customer demand (based on SCOR, 2010). Demand planning information (‘plan’) is shared across the chain rather than being interpreted and then changed by the ‘sell’ process next to the market. Demand fulfilment is also envisaged as an integrated process, as materials are moved from one process to the next in a seamless flow. Informa- tion is the ‘glue’ that binds supply chain processes together, and which coordi- nates planning and fulfilment. (We explain the SCOR model in more detail in section 3.5.)

Figure 1.7 Integrating demand and supply chains

Demand signal

Demand fulfilment

Supply Source Deliver Deliver DeliverSource

ReturnReturn

internal or external internal or external

Return Return Return Return

Customer:

Su pp

lie r

Su pp

lie r’s

C us

to m

er ’s

C us

to m

erSupplier: Focal firm

Plan

Plan

SellSourceMake Make Make

Write a brief (200 words) appraisal of material and information flow in the supply network affecting one of the major products in the response you gave in Activity 1.1. Perhaps the current situation is different from the above ideals?

Activity 1.2

16 Chapter 1 • Logistics and the supply chain

1.3 Competing through logistics

Key issues: How do products win orders in the marketplace? How does logistics contribute to competitive advantage?

There are many potentially conflicting demands on an organisation today. All those unreasonable customers seem to want it yesterday, at lower prices and to be compensated if it goes wrong! Within a given supply chain, it is impor- tant that each organisation understands how each group of products com- petes in the marketplace, and that it aligns its capabilities with those of its partners.

A ‘product’ is actually a combination of the physical product (for example, a 200g pack of Camembert cheese) and its accompanying service (for example, how it is merchandised in the store – easy to find, always available, attractive presen- tation, lighting, temperature). While the physical product is determined by mar- keting and research and development (R&D), service is heavily influenced by logistics.

It is impossible to be outstanding at everything, and supply chain partners need to give priority to capabilities that give each product group its competitive edge. These are the advantages where supply chain partners ‘dig in deep’ by giv- ing priority to investment and training, and by focusing product development and marketing efforts. They need only to match industry average performance on other criteria. Let us now look at the competitive priorities that can be delivered by logistics in the supply chain.

There are various ways in which products compete in the marketplace. Perhaps a given product is something that no one else can match in terms of price. Or maybe you offer a product that is technically superior, such as Gillette razors. While new product development has logistics implications, the key advantage provided by logistics – as suggested in Case study 1.1 about Tesco – is availability of conforming product in the marketplace at low cost. Logistics supports competitiveness of the supply chain as a whole by:

meeting end-customer demand through supplying what is needed in the form it is needed, when it is needed, at a competitive cost.

Logistics advantage thus shows up in the form of such competitive factors as better product availability in the marketplace and low product obsolescence. Defining logistics advantage means that we need to set goals that are clear, measur- able and quantifiable. We distinguish three ‘hard objectives’ for creating logistics advantage: quality, time and cost. There are three further important ways of creating logistics advantage: controlling variability in logistics processes, dealing with uncer- tainty and sustainability. We have called these ‘supportive capabilities’, and they can be just as important as hard objectives. Finally, there are ‘soft objectives’, which relate to service aspects such as the confidence customers develop in the way the logistics operation is performed. Let us look at each of these ways of creating advantage in turn.

Competing through logistics 17

1.3.1 Hard objectives

Traditional ways of competing are to offer the end-customer advantages related to product quality, the speed with which it is delivered, and/or the price at which it is offered. We refer to quality, time and cost as ‘hard objectives’ because they are easy to measure and relatively obvious to the end-customer.

The quality advantage

The most fundamental objective – in that it is a foundation for the others – is to carry out all processes across the supply chain so that the end product does what it is supposed to do. Quality is the most visible aspect of supply chain perform- ance. Defects, incorrect quantities and wrong items delivered are symptoms of quality problems in supply chain processes that are all too apparent to the end-cus- tomer. Such problems negatively influence customer loyalty. Robust processes are at the heart of supply chain performance. Internally, robust processes help to re- duce costs by eliminating errors, and help to increase dependability by making processes more certain. When quality was positioned second to sales growth and cost, even the iconic Toyota Motor Company’s brand suffered – as a string of re- calls and safety concerns in recent years has shown (see, for example, Cole, 2010).

While conformance quality in the factory may be controlled to defect levels that are below 25 parts per million (ppm), a product may end up on the retailer’s shelf with between 2 and 5 per cent defects, which is 10,000 to 20,000 ppm. This huge escalation takes place as the result of cumulative problems in successive supply chain processes. Cases may be crushed when shrink-wrapped at the manufacturer’s NDC. In the back of the retail store, cases may be cut open with a sharp knife – despite instructions to the contrary. The end-customer sees the product on the retail shelf at its worst state of quality performance, and that is where the buying decision is made that drives the supply chain as a whole.

In many logistics situations, ‘quality of service’ is concerned with selecting the right quantity of the right product in the right sequence in response to customer orders. For example, store orders must be picked from a range of thousands of skus (stock keeping units) at a Tesco RDC. This must be carried out accurately (correct sku, correct quantity) against tight delivery schedules day in and day out. Pick accuracy (for example, 99.5 per cent correct sku and correct quantity) is widely used to measure the quality of this operation. And increasing require- ments for in-store efficiencies mean that categories of product (for example, shampoos and toothpastes) need to be picked in a set sequence to facilitate direct-to-shelf delivery at the store. Logistics service providers who can imple- ment and maintain the highest standards of service quality place themselves at an advantage over those who cannot.

The time advantage

Time measures how long a customer has to wait in order to receive a given prod- uct or service. Volkswagen calls this time the customer to customer lead time: that

18 Chapter 1 • Logistics and the supply chain

is, the time it takes from the moment a customer places an order to the moment that customer receives the car he or she specified. Such lead times can vary from zero (the product is immediately available, such as goods on a supermarket shelf) to months or years (such as the construction of a new building). Competing on time is about survival of the fastest!

Time can be used to win orders by companies who have learned that some cus- tomers do not want to wait – and are prepared to pay a premium to get what they want quickly. An example is Vision Express, which offers prescription spectacles ‘in about one hour’. Technicians machine lenses from blanks on the premises. Staff are given incentives to maintain a 95 per cent service level against the one- hour target. Vision Express has been successful in the marketplace by re-engineering the supply chain so that parts and information can flow rapidly from one process to the next. Compare this with other opticians in the high street, who must send customer orders to a central factory. Under the ‘remote factory’ system, orders typically take about ten days to process. An individual customer order is first dis- patched to the factory. It then has to join a queue with orders from all the other high street branches around the country. Once the order has been processed, it must return to the branch that raised the order. While this may be cheaper to do (a central, highly productive factory serves all of the branches), it takes much longer to process an order.

The time advantage is variously described as speed or responsiveness in practice. Speeding up supply chain processes may help to improve freshness of the end product, or to reduce the risk of obsolete or over-aged stock in the system. Time is an absolute measure, that is, it is not open to interpretation as quality and cost are. By following a product through a supply chain, we can discover which processes add value and which add time and cost but no value. We explore this further in Chapter 5, which is about managing time for advantage in the supply chain.

The cost advantage

Cost is important for all supply chain processes – that goes without saying. Low costs translate into advantages in the marketplace in terms of low prices or high margins, or a bit of each. Many products compete specifically on the basis of low price. This is supported from a supply chain point of view by low cost manufac- ture, distribution, servicing and the like. Examples of products that compete on low price are ‘own brand’ supermarket goods that reduce the high margins and heavy advertising spend of major brands. They also perhaps cut some of the cor- ners in terms of product specification in the hope that the customer will consider low price to be more important than minor differences in product quality.

The pressure to reduce prices at automotive component suppliers, and hence costs to the assemblers, is intense. The assemblers have been setting annual price reduction targets for their inbound supply chains for some years. Toyota an- nounced demands for a 30 per cent reduction in prices on many components by the time that new models are launched in 2013. But unless a supplier can match reduced prices at which products are being sold by means of reduced costs, that supplier will gradually go out of business. As a result, many suppliers are cynical about the ‘price down’ policies of the assemblers. Reduced prices are the reward

Competing through logistics 19

of cost cutting, and that is most often a collaborative effort by several partners in the supply chain. So suppliers are unlikely to meet Toyota’s demands on their own: ‘Toyota is going to have to do a lot of work itself, by switching more quickly to global platforms and using more common parts’ (Soble, 2009). As indicated in section 1.1, Tesco can make only limited inroads into its in-store costs without the help of its supply chain partners.

1.3.2 Supportive capabilities

While the hard objectives listed above are always important to competitive ad- vantage, supportive capabilities can also be key to creating logistics advantage in the marketplace. When there is little to choose in terms of quality, time or cost, supportive capabilities can make all the difference to the end-customer. Variabil- ity refers to real and identifiable differences within a population, such as the dif- ferences in time each patient at an optician has to wait for his or her eyes to be tested. Uncertainty refers to our lack of knowledge (Thompson, 2002): in logistics terms, uncertainty results in us having to deal with events that are not known in advance. Sustainability addresses the improvement of social and environmental issues in the design of logistics systems.

Controlling variability: the dependability advantage

Time is not just about speed. Quality is not just about meeting defect targets. Behind both ‘hard’ objectives is the need to control variability in logistics processes. Variability undermines the dependability with which a product or service meets target. While Vision Express offers a one-hour service for prescrip- tion glasses, the 95 per cent service level is a measure of the dependability of that service against the one-hour target. Firms who do not offer instantaneous availability need to tell the customer – in other words to ‘promise’ – when the product or service will be delivered. Delivery dependability measures how suc- cessful the firm has been in meeting those promises. For example, the UK’s Royal Mail quality of service target for letters posted with a ‘first class’ stamp is that 93.0 per cent will arrive the next working day (Royal Mail, 2009). It is im- portant to measure dependability in the same ‘end to end’ way that speed is measured. Dependability measures are widely used in industries such as train and air travel services to monitor how well published timetables are met. And in manufacturing firms, dependability is used to monitor a supplier’s perform- ance in such terms as:

● on time (percentage of orders delivered on time and the variability against target);

● in full (percentage of orders delivered complete and the variability against target);

● on quality (percentage of defects and the variability against target).

So logistics is concerned not just with the average percentage of orders delivered on time but also with the variability. For example, a manufacturer has to cope with the day-to-day variability of orders placed. In practice, this is more important than the average orders placed because of the resource implications of demand variability. Case study 1.3 explores the impact of variability on a supplier’s processes.

20 Chapter 1 • Logistics and the supply chain

Measuring schedule variability

A problem that is all too familiar to suppliers in the automotive industry is that of sched- ule variability. A vehicle manufacturer issues delivery schedules to specify how many parts of each type are required each day for the following month. And each day a ‘call-off’ quantity is issued, which specifies how many the vehicle manufacturer actually wants. The two sets of figures are not necessarily the same, although they usually add up to the same cumulative numbers for the month as a whole. In other words, the total scheduled quantities and the total call-off quantities are the same. So what is the problem?

The problem is that the supplier has to cope with the variability of call-off quantities that create huge problems for the supplier’s process. Let scheduled demand � S, and call-off quantity � A. Then the difference D between schedule and actual is given by D � S � A. If the supplier produces to schedule, then S � A, the supplier will over-produce the part and end up with excess stock. Where S � A, the effects could either be a reduction in stock held by the supplier, or a shortfall of (S � A) of parts from the supplier. The two conditions (S � A and S � A) therefore have different logistics implications.

Figure 1.8 shows that actual demand, totalled across four different parts at PressCo (a supplier of pressed metal components), may be up to 1,600 units above schedule, or 2,200 below schedule in the case of vehicle assembler WestCo. This range has been divided up into intervals of 100 units. The mode (0 � 99) indicates that S � A for a frequency of 18 per cent of the observations.

Assuming that the distribution is roughly normal, the standard deviation (SD) is 573, which is characteristic of the flat, wide spread of data. Figure 1.9 shows the distribution of S � A for four similar parts from the same supplier but to a different vehicle assem- bler; EastCo. This time, the SD for the distribution is 95, representing a much narrower spread of differences than for WestCo.

(Source: Harrison, 1996)

CASE STUDY

1.3

�1500 �1000 �500 0 500 1000 1500 2000

30

20

10

0

Fr eq

ue nc

y

Difference (number of parts)

A B C D

Figure 1.8 Distribution of differences between scheduled and actual demand for WestCo

Competing through logistics 21

Quality is not just about meeting target pick accuracy or target defect levels. It is also about controlling variability. The same argument can be made about costs. The implication of dependability for logistics is that supply chain processes need to be robust and predictable. In Chapter 6 we develop the case for dependability in supply chains under the themes of planning and control and lean thinking.

Dealing with uncertainty: the agility advantage

Dealing with uncertainty means responding rapidly to unknown problems that affect logistics processes. Sometimes, problems can be foreseen – even if their tim- ing cannot. Toyota UK manages inbound deliveries of parts from suppliers in southern Europe by a process called chain logistics. Trailers of parts are moved in four-hour cycles, after which they are exchanged for the returning empty trailer on its way back from the UK. One hitch in this highly orchestrated process means that incoming parts do not arrive just-in-time at the assembly plant. Toyota de- mands that its suppliers and logistics partner plan countermeasures. This means that alternative routes for suppliers to deliver to its Burnaston assembly plant in the UK have been planned in advance to deal, for example, with a French chan- nel ferry strike at Calais. The weather is also a cause of uncertainty in logistics – for example, it may mean that Tesco has to switch between salads and soups as the result of a cold snap. Other forms of uncertainty concern events where nei- ther the problem nor its timing can be foreseen.