INTRODUCTION TO SUPPLY CHAIN MANAGEMENT- CURRENT TRENDS IN LOGISTICS

MODULE 2 : Integrating the Supply Chain

Improving communications
PRESSURES TO IMPROVE LOGISTICS By the 1990s the obvious next step had arrived with
electronic data interchange (EDI). This allowed remote
● Customers are more knowledgeable, and demand computers to exchange data without going through any
higher quality, lower costs and better service. intermediaries. Early users were supermarkets, who
● Competition is getting fiercer, and organizations must linked their stock control systems directly to suppliers’
look at every opportunity to remain competitive. order processing systems. This use of EPOS – electronic
● There is changing power in the supply chain. Very point-of-sales data.
large retail chains, such as Wal-Mart, Tesco, Toys-R-Us
and McDonald’s, demand customized logistics from By 1997 about 2000 companies in the UK used EDI for
their suppliers. trade with suppliers. The mushrooming of e-mail was
● Other changes in retail markets include the growth of followed by all kinds of e-business, e-commerce – and
24-hour opening, home deliveries, out-of-town malls, soon ‘eanything’. The efficient transfer of information
retail parks, telephone and on-line shopping. has been particularly useful for purchasing, which has
● International trade continues to grow. developed into e-purchasing or e-procurement.
● Organizations are introducing new types of operation, B2B- business-to-business, where one business buys
such as just-in-time, lean operations, time compression, materials from another business.
flexible manufacturing, mass customization, virtual B2C- business-to-customer, where a final customer
operations, and so on. buys from a business.
● Some organizations are turning from a product focus
(where they concentrate on the end products) to a By 2002 around 83 per cent of UK suppliers used
process focus (where they concentrate on the way B2B,and the worldwide value of B2B trade was over
products are made). This encourages improvement to US$2 trillion. Two associated technologies have
operations, including logistics. developed to support EDI.
● There have been considerable improvements in Item coding- which gives every package of material
communication. These allow electronic data moved an identifying tag. The tag is usually a bar code
interchange (EDI), item coding, electronic fund transfer or magnetic stripe that can be read automatically as the
(EFT), e-commerce, shared knowledge systems, and package moves through its journey.
other new practices. Electronic fund transfer (EFT)- When the delivery of
● Organizations are outsourcing peripheral activities materials is acknowledged, EFT automatically debits the
and concentrating on their core operations. Logistics is a customer’s bank account and credits the supplier’s.
useful area for third-party operators, with specialized ex. Paymaya, gcash
companies offering a range of services.
● Organizations are increasing co-operation through The loop, with EDI to place orders, item coding to track
alliances, partnerships, and other arrangements. This the movement, and EFT to arrange payment.
integration is important for logistics, which is usually the
main link between organizations in a supply chain. IMPROVING CUSTOMER SERVICE
● Managers are recognizing the strategic importance of Make logistics costs as low as possible- Logistics
the supply chain. managers want low costs so that they remain
● Attitudes towards transport are changing, because of competitive, and their users want to pay as little as
increased congestion on roads, concerns about air possible.
quality and pollution, broader environmental issues, Lead time- this is the total time between ordering
government policies for the real cost of road transport, materials and having them delivered and available for
privatization of rail services, deregulation of transport, use.
and a host of other changes.
 work as materials arrive in larger packages which are
Synchronized Material Movement- This makes opened,
information available to all parts of the supply chain at
the same time, so that organizations can coordinate
material movements, rather than wait for messages to broken into smaller quantities, sorted, consolidated into
move up and down the chain. deliveries for different customers and transferred to
Personalized products- Instead of buying a standard vehicles.
textbook, for example, you describe the contents you Direct delivery- More customers are buying through the
want and a publisher supplies a volume with exactly Web, or finding other ways of trading earlier in the
these specifications. This is mass customization, which supply chain, such as mail order or buying directly from
combines the benefits of mass production with the manufacturers. This has encouraged the growth of
flexibility of customized products. It uses B2C to give couriers and express parcel delivery services such as
direct communications between a final customer and a lazada, shoppee, and tiktok shop.
manufacturer. Other stock reduction methods- One approach uses
just-in-time operations to co-ordinate activities and
Other significant trends minimise stock levels. Another approach has vendor
managed inventory, where suppliers manage both their
Globalization- Improved communications and better
own stocks and those held further down the supply
transport mean that physical distances are becoming
chain.
less significant. Efficient logistics makes a global market
Increasing environmental concerns-logistics is moving
feasible, and other factors that encourage international
towards ‘greener’ practices. Operators use more energy
trade include less restricted financial systems, consumer
efficient vehicles, control exhaust emissions, reuse
demand for imported products, removal of import
packaging, switch to environmentally friendly modes of
quotas and trade barriers and the growth of free trade
transport, increase recycling through reverse logistics,
areas.
add safety features to ships, develop brown-field sites,
Reduced number of suppliers- The current trend, is to
and so on.
reduce the number of suppliers and develop long-term
More collaboration along the supply chain- They
relationships with the best. Working closely with a small
INTEGRATING THE SUPPLY CHAIN should not,
number of organizations can bring considerable
therefore, compete with each other, but should co-
benefits.
operate to get final customer satisfaction. It means that
Concentration of Ownership- Large companies can get
competitors are not other organizations within the
economies of scale, and they have come to dominate
same supply chain, but are organizations in other supply
many supply chains. There are, for example, many
chains.
shops and transport companies – but the biggest ones
continue to grow at the expense of small ones.
Three important themes for logistics consider
Outsourcing- More organisations realise that they can
LEANNESS, AGILITY and INTEGRATION. Ideally, logistics
benefit from using specialised companies to take over
should aim for all three of these.
part, or all, of their logistics. Using a third party for
materials movement leaves an organisation free to
BRINGING ACTIVITIES TOGETHER
concentrate on its core activities.
INTEGRATING LOGISTICS
Postponement- moves almost-finished products into
-within an organization has all the related activities
the distribution system, and delays final modifications
working together as a single function.
or customization until the last possible moment.
-This is responsible for all storage and movement of
Cross-docking- co-ordinates the supply and delivery, so
materials throughout the organization.
that goods arrive at the receiving area and are
-It tackles problems from the viewpoint of the whole
transferred straight away to a loading area, where they
organization, and looks for the greatest overall benefit.
are put onto delivery vehicles. First form, packages are
moved directly from arriving vehicles and onto
departing ones. second form there is some additional
materials management- aligned with production and their own operations and integrate more of the supply
looking after the inwards flow of raw materials and their chain.
movement through operations Benefits of external integration
physical distribution- aligned with marketing and ● genuine co-operation between all parts of the supply
looking at the outward flow of finished goods chain, with shared information and resources
● lower costs – due to balanced operations, lower
stocks, less expediting, economies of scale, elimination
of activities that waste time or do not add value, and so
Stages in integration on

Stage 1 Separate logistics activities are not given much

attention or considered important. ● improved performance – due to more accurate
Stage 2 Recognizing that the separate activities of forecasts, better planning, higher productivity of
logistics are important for the success of the resources, rational priorities, and so on
organization. ● improved material flow- with co-ordination giving
Stage 3 Making improvements in the separate faster and more reliable movements more weeks.
functions, making sure that each is as efficient as ● better customer service- with shorter lead times,
possible. faster deliveries and more customisation
Stage 4 Internal integration – recognizing the benefits of ● more flexibility- with organisations reacting faster to
internal co-operation and combining the separate changing conditions
functions into one. ● standardised procedures- becoming routine and well-
Stage 5 Developing a logistics strategy, to set the long- practiced with less duplication of effort, information,
term direction of logistics. planning, and so on
Stage 6 Benchmarking – comparing logistics’ ● reliable quality and fewer inspections with
performance with other organizations, learning from integrated quality management programmes.
their experiences, identifying areas that need
improvement and finding ways of achieving this. ACHIEVING INTEGRATION
Stage 7 Continuous improvement – accepting that Co-operation and conflict
further changes are inevitable and always searching for Factor Conflict view Co-operation view
better ways of organizing logistics. Profit One organization profits at Both share profits
the expense of the other
3 levels of logistics Relationship One is dominant Equal partners
Trust Little Considerable
Communication Limited and formal Widespread and open
Information Secretive Open and shared
Control Intensive policing Delegation and empowerment
Quality Blame for faults Solving shared problems
Contract Rigid Flexible
Focus on Own operations Customers

Different types of co-operation

Informal arrangements is that there is no commitment.
Keiretsu – Japanese companies which are groups of
The first has logistics as separate activities within an organizations that work together without actually
organization; the second has internal integration to forming partnerships.
bring them together into a single function; the third has An informal arrangement has the advantage of being
external integration- where organizations look beyond flexible and non-binding. On the other hand, it has the
disadvantage that either party can end the co-operation operations, similar management styles, common aims,
without warning, and at any time that suits them. and so on.
Formal agreements have the advantage of showing the components - which are the joint activities and
details of the commitment, so that each side knows operations used to build and sustain the relationship,
exactly what it has to do. On the other hand, they have such as communication channels, joint planning, shared
the disadvantage of losing flexibility and imposing rigid risk and rewards, investment, and so on.
conditions.
Vertical Integration
If an organization wants to go beyond partnerships, it
has to own more of the supply chain.

Strategic alliances- the basis of a strategic alliance or One common arrangement has an organization taking a
partnership is when an organization and a supplier are minority share in another company. A manufacturer, for
working well together, they may both feel that they are example, might take a minority share in a wholesaler, to
getting the best possible results and neither could get some influence in the way that its products are
benefit from trading with other partners. Then they distributed.
might look for a long-term relationship that will Another option is for two organizations to start a joint
guarantee that their mutual benefits continue. venture, where they both put up funds to start a third
company with shared ownership.
The following list gives the main features of alliances:
VERTICAL INTEGRATION- describes the amount of a
● organizations working closely together at all levels supply chain that is owned by one organization.
● senior managers and everyone in the organizations
supporting the alliance
● shared business culture, goals and objectives
● openness and mutual trust
● long-term commitment
● shared information, expertise, planning and systems
● flexibility and willingness to solve shared problems
● continuous improvements in all aspects of operations
● joint development of products and processes
● guaranteed reliable and high quality goods and If an organization buys materials from outside suppliers
services and sells products to external customers, it does not
● agreement on costs and profits to give fair and own much of the supply chain and has little vertical
competitive pricing integration (as shown in Figure 2.5). If the organization
● increasing business between partners owns initial suppliers, does most of the value adding
operations, and distributes products through to final
Partnerships customers, it owns a lot of the supply chain and is highly
-Partnerships can lead to changes in operations vertically integrated. If the organization owns a lot of
-It can be difficult to form a successful partnership. the supply side it has backward or upstream integration;
-Forming a partnership is only the first step, and it still if it owns a lot of the distribution network it has
needs a lot of effort to make it a success. downstream or forward integration
In some circumstances vertical integration is the best
drivers - which are the compelling reasons for forming way of getting different parts of the supply chain to
partnerships, such as cost reduction, better customer work together. Ford of America, for example, has at
service, or security different times owned everything from steel mills
facilitators - which are the supportive corporate factors through to distributor networks and repair shops.
that encourage partnerships, such as compatibility of
HORIZONTAL INTEGRATION- a business strategy in Operational decisions are the most detailed and
which one company grows its operations at the same concern activities over the short term; they involve few
level in an industry. resources and little risk.
-Horizontal integration is a competitive strategy where
business entities operating at the value chain level and There are several types of strategic decision (as shown
within the same industry merge to increase the in Figure 3.1). People use different names for these, but
production of goods and services. the most common are:
-The overall gain from a horizontal integration is an mission – a statement to give the overall aims of the
increase in the market power and minimal loss for being organization; ( goal/objective of the organization)
non-integrated.

-Horizontal integrations help companies expand in size, corporate strategy – which shows how a diversified
diversify their product offerings, reduce competition, corporation will achieve its mission; (growth, stability
and expand into new markets. and renewal)
business strategy – which shows how each business
Horizontal integration is an expansion strategy that within a diversified corporation will contribute to the
involves the acquisition of another company in the corporate strategy; (cross selling products, product
same business line. Vertical integration is an expansion differentiation, pricing strategies, customer retention
strategy where a company takes control over one or and sustainability)
more stages in the production or distribution of its functional strategies – which describe the strategic
products. direction of each function, including logistics.
(marketing, financial, operational and human resources)

Strategic role of logistics

-it is concerned with major decisions that have a clear
strategic impact, such as the design of the supply chain,
size and location of facilities, relations with other
INTRODUCTION TO SUPPLY CHAIN MANAGEMENT- organizations, partnerships and alliances.
MODULE 3: Logistics Strategy
Logistics is a major user of resources, including
STRATEGIC DECISIONS transport and storage; it has an impact on
Types of decision organizational performance, including profit and
We can use their importance to classify decisions as: financial measures such as the return on assets; it
Strategic decisions are most important and set the affects lead time, perceived product value, reliability
overall direction of the organization; they have effects and other measures of customer service; it gives public
over the long term, involve many resources and are the exposure, raises safety and environmental, issues,
most risky. encourages some operations and prohibits others.
Tactical decisions are concerned with implementing the
strategies over the medium term; they look at more
detail, involve fewer resources and some risk.
LOGISTICS STRATEGY of an organization consists of all ‘product’ (through its contribution to the overall
the strategic decisions, policies, plans and culture product package),
relating to the management of its supply chains. ‘place’ (through its delivery of materials)
‘price’ (through its effect on operating costs). A logistics
The business strategy of UPS calls for ‘outstanding
strategy could usefully emphasize these features.
service’ to its customers, and this translates into a
logistics strategy of organizing a very fast parcel delivery
In practice, a logistics strategy is most likely to
service to almost any point in the world.
emphasize the following:
Logistics managers do not simply respond to this Cost: Most organizations want low costs, but some
context, they actively contribute to its formulation. adopt a positive strategy of minimizing their logistics
Their views on what levels of performance are actually costs. This leads to higher profits for the organization
achievable by logistics form one of the inputs for the and lower prices for customers.
design of higher strategies.

Customer service: Logistics controls stock levels,

delivery times, speed of response, and other measures
of customer service. By concentrating the logistics
strategy
on customer service, organizations can get a long-term
competitive advantage.
Timing: Customers generally want products as soon as
possible, so a common logistics strategy guarantees fast
deliveries. Timing can also mean rapid supply of new
products, or delivering at the time specified by a
At one end of a spectrum (shown in Figure 3.3) are customer.
organizations where logistics contributes hardly Quality: Customers demand higher quality in all
anything to the higher strategies. Logistics managers products. A common logistics strategy guarantees high
simply accept the higher strategies designed by others, quality service, even though it can be difficult to say
and design operations to make sure these can be exactly what we mean by ‘high quality logistics’.
achieved. At the other end of the spectrum are Product flexibility: This is the ability of an organization
organizations whose logistics really dictate the higher to customize products to individual specifications. One
strategies. The Channel Tunnel, for example, offers a logistics strategy is based on a specialized or customized
unique logistics service, and all its higher strategies are service, such as Pickfords’ removals.
based on its logistics operations. Volume flexibility: Changing levels of business can
cause severe problems for logistics, as you can see
during the morning rush hour in any major city. Volume
flexibility allows an organization to respond quickly to
changing levels of demand.
Technology: Logistics uses a wide range of technologies
for communications, tracking loads, sorting parcels,
identifying products, recording stock movements, and
so on. Some organizations have a strategy of developing
and using the latest technologies.
Location: Customers generally want products to be
Focus of the logistics strategy delivered as close to them as possible. This might mean
Organizations compete by concentrating on the ‘four that a book club delivers directly to your door, a shop
Ps’ – product, place, promotion and price. has a convenient location in a town centre, or a
Here logistics has a role in the wholesaler has a regional logistics centre near to major
cities. One logistics strategy is to provide a service in the The third, ‘value flow’,gets an efficient flow of
best possible location, such as bus stations in town materials, eliminating waste, interruptions, waiting and
centres. detours. The fourth principle, pull’, shows how to
control the flow of materials by pulling them.
In principle, organizations should do everything well. In The fifth principle, ‘aim of perfection’, describes a
practice, this is unrealistic. Organizations have to continuing search for improvement.
compromise, perhaps balancing the level of service with
the cost of providing it. Effectively they choose a the following areas of the supply chain where this waste
specific focus for their logistics strategy, showing is most likely to occur:
which factor they consider to be most important. Some Quality – that is too poor to satisfy customers (either
organizations, such as Ryanair, focus on cost, giving a external or internal).
cheap service; others, such as FedEx, focus on delivery Wrong production level or capacity – making products,
speed; others focus on reliability; or a customized or having capacity, that is not currently needed.
service, and so on. One of the key decisions for logistics Poor process – having unnecessary, too complicated or
managers is choosing the strategic focus. time-consuming operations.
Waiting – for operations to start or finish, for materials
to arrive, for equipment to be repaired, and so on.
STRATEGY OPTIONS
cost leadership, makes the same, or comparable,
products more cheaply; Movement – with products making unnecessary, long,
product differentiation, makes products that customers or inconvenient movements during operations.
cannot get from other suppliers. Stock – holding too much stock, increasing complexity
and raising costs.
LEAN STRATEGY- The aims are to do every operation
using less of each resource – people, space, stock, A lean strategy looks for ways of eliminating this waste.
equipment, time, and so on. It organizes the efficient The typical approach does a detailed analysis of current
flow of materials to eliminate waste, give the shortest operations, and then removes operations that add no
lead time, minimum stocks and minimum total cost. value, eliminates delays, simplifies movements, and
reduces complexity, uses higher technology to increase
The approach is summarized in five main principles: efficiency, looks for economies of scale, locates near to
value– designing a product that has value from a customers to save travel, and removes unnecessary
customer’s perspective links from the supply chain.
value stream– designing the best process to make the
product AGILE STRATEGY- The aim is to give a high customer
value flow– managing the flow of materials through the service by responding quickly to different or changing
supply chain circumstances.
pull– only making products when there is customer
demand Two aspects of agility
aim of perfection– looking for continuous First, there is the speed of reaction; agile organizations
improvements to get closer to the aim of perfect keep a close check on customer demands and react
operations. quickly to changes.
Second, is the ability to tailor logistics to demand from
The first of these principles, ‘value’, sets the target for individual customers.
the organization, seeing how to add value for the final
customer of the product. To sustain competitive advantage requires a total
The second principle, ‘value stream’, designs a means commitment to your customer’. Organizations with a
of making this product, and effectively sets the customer focus will typically:
requirements of the supply chain. ● aim for complete customer satisfaction
● allow customers easy access to the organization
● find exactly what they want import/export services, materials storage and
● design logistics to meet, or exceed, these demands information processing.
● be flexible and respond quickly to changing customer
demands OTHER STRATEGIES
● get a reputation for outstanding quality and value
● do after-sales checks to make sure the customers TIME-BASED STRATEGIES- In the simplest view, time-
remain satisfied based strategies aim for a guaranteed faster delivery
● look outwards so that they are always in touch with of products. Benefits from these strategies include
customers, potential customers, competitors, and so lower costs (by having less stock in the supply chain,
on. less expediting, and so on), improved cash flow (by not
having to wait so long for payment), less risk (by
- Organizations with satisfied customers have the reducing changes to orders, obsolete stock, and so on)
obvious benefit of bringing them back with repeat and simpler operations (by eliminating delays and
business. Satisfied customers also attract new business, unnecessary stores).
as they recommend a good service to four or five other
people – compared with dissatisfied customers who Its aim is to eliminate all the non-value-adding time.
warn a dozen potential customers about a bad seven ways of doing this:
experience. 1. simplification – making operations simpler
2. integration – improving information and material
flows
Factor Lean logistics Agile logistics
Objective Efficient operations Flexibility to meet demands 3. standardization – using standard procedures and
materials
Method Remove all waste Customer satisfaction
4. concurrent operations – moving away from serial
Constraint Customer service Cost operations and towards parallel working
Rate of change Long-term stability Fast reaction to changing 5. variance control – ensuring high quality and avoiding
circumstances waste
Measures Productivity, utilization Lead time, service level 6. automation – to improve effectiveness and efficiency
of performance 7. resource planning – to remove bottlenecks and
ensure a smooth flow of materials.
Work Uniform, standardized Variable, more local control
Control Formal planning cycles Less structured by empowered
ENVIRONMENTAL PROTECTION STRATEGIES - A small,
staff
but increasing, number of organizations are developing
strategies based around environmental protection. The
One looks to minimize costs, and sees customer service Body Shop, for example, designs products with natural
as a constraint; the other looks to maximize customer ingredients and based on sustainable development. It
service, and sees costs as a constraint. uses the same principles in its logistics, with reusable
containers and recycling of materials. There are good
STRATEGIC ALLIANCES (JOINT VENTURE, reasons for other organizations to adopt similar policies
PARTNERSHIP) of environmental protection.
- The purpose of this strategy is to get efficient supply The reality, though, is that many programmes for
chains, with all members working together and sharing environmental protection actually reduce costs. Better
the benefits of long-term co-operation. Usual reasons insulation of warehouses, for example, gives lower
for a strategy of forming partnerships include better heating bills. In the same way, regular maintenance of
customer service, increased flexibility, reduced costs, road vehicles reduces both fuel consumption and
avoidance of investment in facilities, and lack of emissions, as does minimizing the distance travelled,
expertise within the organization. The most common avoiding congestion, travelling outside peak hours and
area for partnerships is transport, where around three avoiding built-up areas. Packaging is another area with
quarters of companies use contract providers. Other large potential savings. Careful design and reusable
areas for collaboration include warehousing,
containers can save much of this packaging and
considerably reduce costs.