Developing Logistics Strategy

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  • 7/31/2019 Developing Logistics Strategy


    Next 3 sessions------

    Developing logistics strategy.

    Dependent and independent coordinates of

    logistics system.(Foundations of Logistical


    logistics system design.

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    Logistical management is to do with design andadministration of systems to control the flow of material,WIP and FG to support business strategy.

    Involves ,Integration of Information, Transport, inventory,warehousing ,material handling and packaging.

    Prime responsibility -- to position R.M, WIP & FG wherereqd at lowest possible cost.

    Logistical expenditure ranges between 3 to 35% of sales,

    depending on type of business, geographical area andweight/vol ratio. Cost second only to materials, sold inwhole sale or retail.

    Key is in understanding how select firms position their

    logistical competency to gain competitive advantage.Logistically sophisticated firms are attractive suppliers andideal business partners , by performing above average interms of inventory availability as well as speed andconsistency of delivery.

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    Outstanding or competitively superior logistical performancecan become the cornerstone of overall enterprise strategy.

    Vast majority of essential work is performed outside the vision

    of direct supervision . Each task performed in logisticsfunction is a potential target for work standardisation ,simplification, or potential elimination during logisticsreengineering.

    Logistics functions were often managed as end objectives in

    themselves, rather than contributing to achieving overalllogistical goals.

    The performance cycle which happens both in time andacross geography ,(Temporal & spatial), provides theoperational structure for logistical integration.

    Logistical competency is dedicating logistical performance tosupporting any or all marketing and manufacturingrequirements in a manner that exploits delivery capability.

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    Superior logistics is charactarised by flexibility, time-based service ,operational control, and commitment to perfect service performance.Logistics is an essential competency required to ensure -Creation ofcustomer value.

    In final analysis logistical service is balance of service priority and cost.

    In most situations impact of logistical failure directly affects the customer( intra or final) involved.

    Logistical service performance is measured in terms of :-

    1. Availability:- Technology ( Web connectivity, Real time exchange ofdata, Satellite communications system) is providing new ways to

    achieve high availability of inventory of material or product , withouthigh investment .

    2. Operational performance:- Deals with time elapsed between orderreceipt to delivery. Involves speed and consistency, flexibility.

    Another aspect is salvaging-malfunction ..failure such as damaged

    product incorrect assortment, inaccurate documentation.. and timetaken for recovery out of such situation

    3. Service reliability:- Established by quality attributes through accuratemeasurement of 1 & 2 above.

    The attributes will be varying for different customers , and must bematched to accommodate unique preferences and purchase potential

    of the customer.

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    Lowest possible cost or the highest attainable customer service areextremes , and can not constitute a desirable logistics strategy.

    Formulation of a sound strategy requires capability to estimate costrequired to achieve alternate service levels. Obviously alternatelevels of service performance is to be viewed in terms of overallmarketing and manufacturing strategy.

    Melding of human and physical assets , done with training anddevelopment over an extended period of time can not beduplicated by a competitor so easilylogistical competency is

    difficult to copy or replicate.In past era -- three things were deterrent to evolution of integratedlogistics..

    1. Transport or purchase managers were sceptical @ organisationalchanges ( amenable) for implementation of the broader processes.

    2. Basic idea that you can earn more profit by spending more onresponsive transport was difficult to digest.

    3. It was difficult to quantify hard core return on investment .General management could not quantify the real cost ofinventory.

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    How Integrated logistics emerged :-

    1. Advent of Computers and quantitative techniques , breededthought of cross functional integration of logistics.

    JIT, QR-Quick response, CR- Continuous replenishment, AR-Automatic replenishment necessitated high responsiveness.

    2. Continuous pressure of profit improvement along witherratic market conditions , and saturation of scope in

    reduction of production /product quality costs.3. Wide spread adoption of Quality Initiatives.( Zero defect DOL


    4. Growth of partnerships and alliances, increasing outsourcingand concentration on core competencies by all enterprises.

    Customers and suppliers became business partners, forreduction of duplication and waste of efforts byconcentrating on ways of doing business that facilitated jointsuccess.

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    Developing Logistics Strategy.

    Alternative ways through which logistics

    can be deployed as a core competency.

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    -----Points covered-----1. Logistics Reengineering- comprising of -Bench marking,

    Activity based costing ,and quality initiatives.

    2. Environmental Assessment-Areas that firm shouldcritically study while formulating strategy.

    3. Time Based Logistics- Development of time basedlogistics, shifting to working based on response based

    rather than anticipatory.4. Alternative Logistics Strategies- Structural separation

    for mixing and matching echeloned and direct logisticaldeployment in a flexible format.

    5. Strategic Integration- Logistical practices to achieveinternal and external integration.

    6. Time Based Control Techniques-

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    1.Logistics Reengineering.Reengineering isthe process of identifying and studying the steps required to

    perform a specific work in order to increase likely hood of integrating


    Activities under review need to be decomposed or de averaged to achieve

    effective integration.

    The decomposition can be achieved by activity based metrics.

    Functional trade-offs need to be evaluated when planning a strategic initiative.

    Synergism creates superior performance or VALUE, through , interaction ofdifferent functions of a system.

    E.G.- Transportation and Inventory when managed as separate organisational

    units, without attention to interrelationships , can create serious barriers to

    achieving operational goals.

    Benchmarking- It is a systematic procedure for identifying the best practice, andmodifying actual knowledge to achieve superior performance.

    Activity Based costing- Most accounting practices generate averages that hide the

    true costs of performing specific activities or of providing a unique service to

    specified customers. The costs should reflect true metrics.

    Quality Initiatives- Improvement of quality on a continuous basis, based on abovetwo actions.

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    Reengineering procedure is applicable to evaluation of large scale changes ,that may radically modify the traditional way in which logistics is integrated.

    2.Environmental Assessment-The environmental assessment is concerning plans which include

    1.How many, What type, where to locate distribution warehouses.2. What inventory assortment to stock at each facility.

    3.Philosophy and practice of purchasing.

    4.Way of performing and integrating transportation function.

    5. Mtl handling methods to be deployed. & 6.Basic methods of order

    processing.An important input to this planning is - assess, monitor and evaluate

    environmental changes ,trends related to following environmentalfactors.

    1. Industry-Competitive assessment- opportunities /threats related to

    firms specific industrymkt size, growth rate, profitbility potential ,critical success factors , off-shore competition , labour issues ,leadership influence and control , rivalry and confrontation, customerand supplier power.

    2. Geomarkat Differentials- Population density of geographical areas ,traffic patterns. Mapping and understanding industry demographics

    are essential to effective logistics planning.

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    3. Technology Assessment- IT, Transportation , material handling, andpackaging.

    4. Channel structure- Channel structure determine logistical strategies . Allenterprises need to conduct logistical operations within defined set ofbusiness relationships( referred as channels). Existence of whole salersin few cases such as pharmaceuticals , where as growth in mail orderand telemarketing in various target mkt specific products . Thus changesin composition of demand , structutre of supply , no of channelparticipants , traditional channel relationships need to be regularlymonitored to maintain logistical relevancy.

    5.Economic-Social projections-Social attitudes, perceptions, lifestylechanges, level of economic activity and rate of change are importantconsiderations. When interest rates increase there is pressure to reduceinventory, this may involve use of premium transportation to maintainservice level.

    6. Service Industry trends- Increasing contribution of service sector in GDP

    of countries has led to logistical activities like transport, warehousing,order assy, inventory fulfillment , computerbased informtion systemsgaining higher importance .Proliferation of logistical service providersneeds to be reckoned as a trend .Thus logistical managers need to beabreast with knowledge of prevailing practices , and rate of growth inservice sector.

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    7.Regulatory Posture- There is a need to evaluate and predict the most likelynational ,state , and local regulatory changes that logistics managers canencounter.

    3.Time based logistics-Exploiting information technology to improve speed and accuracy of logistical


    Information sharing between partners to improve forecasts . Reduce dependenceon anticipatory deployment of inventory, safety stocks. The goal is to compressand control time from order receipt to order delivery and accelerate inventory

    turns.Reduction of uncertainties in forecast and improvement of certainty on delivery

    performance leads to inventory reduction .

    Selling merchandise before they take ownership and still qualify for promptpayment discounts . Replenishment arrangements that are highly responsive tocustomer requirements add value and reduce cost.

    Time based logistics is based on two concepts

    Postponement and consolidation.

    Postponement- The degree to which commitment to final manufacturing ordistribution of a product can be postponed until receipt of customer order .thiscan be practiced in two types.

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    Manufacturing Postponement- Vision is to manufacture products an orderat a time , with no preparatory work or component procurement untilexact customer specifications are fully known, and purchasecommitment is received. The catch word here is to achieve the

    responsiveness without sacrificing efficiency.However in manufacturing we can not ignore economic lot sizes. In such

    situation trade-off needs to be maintained between cost, riskassociated with anticipatory manufacturing and loss of economy of scale

    This may require manufacturing postponement to facilitate overall

    enterprise efficiency. This involves maintaining products in neutral ornon-committed status as long as possible . Manufacture standard, baseproduct in sufficient quantities, to derive economies of scale.

    Impact of logistical postponement is twofold-

    1. Variety of differentiated products moved in anticipation of orders is

    reduced.2. There is increased use of logistical facilities , and channel relationships ,

    to perform light manufacturing , product customisation , and final assy.With this many warehouses have changed to accommodatemanufacturing postponement .

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    Consolidation- A major operational concern- retention of transportation

    economies of scale with large size shipments. Large consignments , over

    large distances.. Is the objective . Anticipatory logistics arrangements

    facilitate consolidation , while postponement strategies generate small

    shipments, in erratic patterns.

    From operational view point , there are three ways to achieve effective

    freight consolidation-

    1.Mkt Area consolidation - Combine small shipments going to different

    customers in mkt area. This may not still ensure sufficient volumesSolution Consolidated shipments may be sent to intermediate breakbulk

    point. Individual shipments are separated and forwarded to their


    2. Scheduled Delivery- Firms may hold consolidated shipments for

    scheduled delivery on a specific day to given destination mkts . This will

    have to be backed up with rigid delivery appointments with logistical

    capability to match any size , This may not always lead to consolidation ,

    but may work partially

    3. Pooled Delivery-Utilizing services of logistics firm to pool delivery.

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    Sr.No. Anticipatorydriven value chain Response-driven value chain

    1. Financial forecast Customer focused forecast.2. Mfg based MRP/DRP Customer focused MRP/DRP.

    3. Build to anticipatory Inv. Build to customer reqts.

    4. Mixed product shipment- from stk. Alternative shipment/ special


    5. ROP inv strategy.Forecast/safety stk Shared reqts/ continuousreplenishment.

    6. Fixed replenishment schedule Flexible schedule.

    7. Profit centre philosophy. Service centre philosophy.

    8. Scheduled replenishment. Demand-based replenishment

    9. Financial Measurement - Average

    ( aggregate) profitability.

    Product profitability performance.

    When all members in a marketing channel synchronize their operations,

    opportunities exist to reduce total supply chain inventory, and eliminate

    duplicate practices that increase cost without generating customer value

    Time based Logistics operating arrangements

    The fundamental difference is in timing ,Anticipation Vs Response.

    Practicalities : In actuality logistics does not reflect the extreme of a

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    Practicalities :- In actuality logistics does not reflect the extreme of aanticipatory or fully response based arrangement due to:-

    1. Need for publicly held corporations to report and project quarterlyearnings to financial observers and investors . This means financialgoals must be reflected in operating plans and forecasts . This need

    encourages co.s to load channels , in order to create timely salesvolumes. The de loading activity which should happen in order toexercise response based environment is never timely.

    2. It is easier to manage an advarsarial ,power dominated basis than todevelop and leverage co-operative relationships . Most businessmanagers lack training and experience for instituting cooperative

    arrangements designed to share both benefits and risks . Though thereis a considerable amount of belief in the system, there is a frustrationreported when it comes to get the job done.

    Thus foreseeable future indicates existence of both response based andanticipatory arrangements. There are cases where selectively responsebased relationship with some customers and suppliers are givenpriority. Thus need for firms to participate in variety of differentarrangements has placed new performance demands on logisticalstrategy.

    No single best way exists to service all customers, individual customersrequire and expect suppliers to accommodate their unique

    requirements . Also performance demands of individual customer alsoconstantly change

    4 St t l ti d Fl ibl l i ti l

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    4.Structural seperation and Flexible logisticaloperating arrangements:-

    Logistic operations can be specialised based on unique channelrelationships and structures. Structure signifies the business

    relationships for performing work required to completelogistical process.

    Structural separation involves isolating efforts related toownership transfer and logistical compliance. The efforts needto be co-ordinated without requirement of putting in same

    efforts by the same channel specialists or at the same time .This phenomenon is based on belief that typical channelarrangements are not normally ideal to accomplish bothmarketing and logistics performance. The streams are isolated ,because of the fact that efficiency in logistics requires different

    skill set , normally contradictory to improve or hinder marketingperformance . While advertising, promotions , credit , personalselling and other transaction creating elements of marketinghave a significant effect on logistical requirements . Bothfunctions can benefit from specialisation through structuralseparation.

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    Structural seperation is generally practised by

    products such as white goods, appliances ,

    furniture , television sets etc. These products

    offer variety of options in colour , model ,features .It is difficult for retailer to stock the

    items in full range.





    DistributorDirect sales










    Local Delivery



    Logistics Channel Marketting Channel

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    Logistics Channel Marketting Channel

    General sales office works with District sales

    office to facilitate exchange of FG.

    Products-FGs as per forecast are moved

    from factory to Regional warehouse.

    DSO forecasts sales.

    DSO attempts to sell products to distributors.

    Distributors seek commitments from


    FGs are moved from Regional ware house to

    public ( 3PL) warehouse, instead of

    distributor investing in a pvt warehouse.

    Distributor takes legal title of the product

    upon sale.

    Though transaction is initiated at retailers

    end, logistical support is provided by direct

    shipment to customers residence from

    public warehouse.

    Retailer displays limited no of products ,and

    offers next day delivery to consumers.

    Products on display are on consignment

    from the distributor.

    Benefits of logistical specialisation result in

    low cost delivery and effective marketing.

    Consumer sales typically include promise to

    deliver a specified model , color and style of

    the product to a designated location at a

    particular time.

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    Structural separation does not mean they can stand alone ,both are essential to create customer value.

    There is increased opportunity for specialisation throughseparation .

    The benefits of separation are independent of combiningorganisation units with outside specialistswhether youinvolve outside partners performing different functions...oryou dont.

    From ownership transfer view point ,the customer valuecreation process is not complete until logistical promisesare fully performed .

    Depending on the products involved, logistics operationsmay start with anticipation of , or be simultaneous with, orfollow transactional negotiation .

    Logistics performance must comply to specificationsestablished during negotiations w.r.t. time, location , andterms of delivery .

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    Logistical Operating Arrangements(in structured seperation):-

    Channel design is a complex task, basic system designoffering accepable balance of performance ,cost ,andflexibility should be the first priority . There is hardly anystructural similarity in variety of logistics systems usedthroughout the world to service widely diverse markets .However logistical arrangements have two commoncharacteristics :-

    1. They are designed to facilitate inventory management .The risks involved are directly related to inventorypositioning and velocity.

    2. Alternative systems are designed around the prevailinglevel of technology adopted within logistical functional

    areas.These two determinants of logistical structure result in

    somewhat common operating arrangements .listedbelow.

    Echelon Structure-

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    Echelon Structure-

    Flow of products typically proceeds through a common arrangements offirms and facilities as product moves from origin to destination .

    Echelon implies stocking some amount of inventory at each consecutivelevel- justifies costbenefit trade-off .

    Echelon systems utilise break bulk and consolidation warehouses. These twoare opposite in nature.

    Consolidation warehouses are required by manufacturing firms that haveplants at different geographical locations .

    Break bulk is distribution of large vol. low variety in to high variety low

    volume to many destinations .Echelon systems utilise warehouses to create inventory assortments and

    achieve consolidation economies associated with large-voltransportation shipments . Inventories positioned in warehouses areavailable for rapid deployment in accordance with customerrequirements.

    Direct Systems-Direct systems do not enjoy the consolidated volume necessary to support

    echeloned structure . They use premium transport combined withinformation technology to rapidly process customer orders and achievedelivery performance. This type of delivery system is common in

    manufacturing plants from suppliers.

    Direct deliveries reduce anticipatory inventories and

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    Direct deliveries reduce anticipatory inventories andintermediate handling . With advances in IT systems thistype of arrangement is quite suitable to many productsnow a days . As a result no. of warehouses have come

    down dramatically.Flexible systems- This is a design in which there is a combined

    structure involving Direct N echeloned arrangement . Inthis case fast moving inventories are located in forward

    warehouses , and risky/costly items are kept in centralisedlocations for direct distribution to customers . Basic servicecommitment and order size economics determine themost desirable and economical structure to service a

    specific customer.Case-1.Auto component suppliers Vs machine parts supply

    co.s.2. Automotive manufacturersole supplier of sparesbehaves differently in warranty period and as cars grow

    Emergency flexible structures Meeting customer

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    Emergency flexible structures-Meeting customerrequirements from alternate warehouses , based onimportance of the specific customer and the critical

    nature of the product being ordered.Routine Flexible structure- This strategy is justified in atfour situations.

    1. servicing customer equidistant from two facilities.

    2. Size of customer order creates an opportunity to usealternate channel arrangement.

    3. Split deliveries in differentiated inventory stocking

    strategy( centralised for expensive and decentralisedfor routine items).

    4. Cross docking flow through arrengementsOr use of3PL to do job like done in cross docking.

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    To a significant degree , an effective , flexible logistics

    strategy can substitute for the safety stock maintained in

    a traditional anticipatory system.

    Flow through Flow through

    Service Supplier arrangements. Service supplier arrangements.





    n warehouse.


    Whole saler











    Direct Plant Delivery Direct store delivery( DSD)


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    5. Strategic Integration Expanding

    the strategic scope discussed in

    earlier chapters.

    6. Time Based control techniques-

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    6. Time Based control techniques

    Supply Driven--

    MRP & JIT .

    DRP- A sophisticated planning approach that considers multiple distributionstages and characteristic of each stage.

    For each site and SKU ,the schedule reports--- current on-hand balance ,safety stock, performance-cycle length( LT for completing customerorder cycle) , and order qty .

    Also for each planning period ,the schedule reports gross reqts , scheduledreceipts , and projected on-hand inv. And planned orders.

    Benefits-1. Improved service levels that increse on time delivery.

    2. Effective promotional and new product introduction.

    3. Ability to anticipate shortages.

    4. Inv coordination with other functions, since DRP facilitates a common

    set of planning no.s5. Ability to offer customers a coordinated inventory management service.

    Demand Driven---- Techniques--

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    Demand Driven Techniques

    QR- Quick Response-Monitoring retail sales for specificproducts and sharing information across supply chain toguarantee that right product assortment will be available

    when and where it is required.CR- Continuous Replenishment-Vendor managed Inventory,

    modification of QR, it eliminates the need forreplenishment orders . Supplier assumes responsibility formaintaining retail inv in reqd qts ,colour , size and styleIT

    & sufficiently large vol of sales is a necessity to adopt thistechnique.

    AR- Extends QR & CR , by giving suppliers right to anticipatefuture reqts according to their overall knowledge of

    merchandise category . Supplier simplifies retailerinvolvement by eliminating need to track unit sales , andinv levels for fast moving products . This reduces retailercost be shifting inv and replenishment responsibility tosupplier.

    Benefits of QR CR AR

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    Benefits of QR,CR,AR-

    Enhanced info flow thro exchange of reqts , orderadjustments, and shipment schedules offers

    suppliers better inv visibility.Mfgrs & wholesalers can plan reqts knowing sales vol

    and FG inv ( Echelon).

    Supplier can determine whether an order surge is due

    to actual POP sales or otherwise.

    Supplier can establish production and distributionpriorities between products and customers.

    Time based relationships and information improvecoordination between all SC members, which leadsto better efficiencies across.

    Alliance creates log term relationships with suppliers.