Logistics Performance in a Consumer Product Distribution Channel - Research Paper Example

Logistics Performance in a Consumer Product Distribution Channel In the corporate world today, business processes have evolved beyond direct interactions between primary producers and sellers. The network of businesses that are required to be connected to be able to provide products and services to consumers have grown so much more complicated that no one linear entity and structure can be able to manage them efficiently. Thus, the supply chain management system was born. Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. It covers all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption. In general, supply chain management is tasked to integrate supply and demand management within and across companies. Operationally, it involves specific planning and management in sourcing, procurement, conversion and logistics, coordination and collaboration with channel partners such as suppliers, intermediaries, third-party service providers, and customers. There are companies that allot a big amount of their sales on purchases. Since a big amount of the companies costs are determined by purchasing, relationships with suppliers have become integrated and long term. The procurement and supplier relationships have to be managed better, thus the need for supply chain management. Supply chain management is basically the integration of activities that procure materials and services, transform them into intermediate goods and final products, and deliver them to customers. These activities include purchasing and outsourcing activities, plus may other functions that are important to the relationship with suppliers and distributors. It includes the determination of (1) transportation vendors, (2) credit and cash transfers, (3) suppliers, (4) distributors, (5) accounts payable and receivable, (6) warehousing and inventory, (7) order fulfillment, and (8) sharing customer, forecasting and production information. The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer. Competition has evolved from just between companies to actual supply chains. Because in the end, the supply chains have a direct impact on the products and services the companies provide. Some of the problems supply chain management systems have to address include distribution network configuration (number, location and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks and customers); distribution strategy (centralized, decentralized or shared operating control, direct shipment, pool point shipping, cross docking, direct store delivery, closed loop shipping delivery schemes, motor carrier, truckload, LTL, parcel, railroad, intermodal such as TOFC and COFC, ocean freight, airfreight modes of transportation, pull, push or hybrid replenishment strategies, owner-operated, private carrier, common carrier, contract carrier, or 3PL transportation control); information (integration of and other processes through the supply chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration); inventory management (quantity and location of inventory including raw materials, work-in-progress and finished goods); cash-flow (arranging the payment terms and methodologies for exchanging funds across entities within the supply chain). Supply chain execution is therefore all about managing and coordinating the movement of materials, information and funds across the supply chain, which is basically bi-directional. As can be seen here, a big portion of supply chain management must cover logistical management. Logistics is the entire process of materials and products moving into, through and out of the firm. Inbound logistics covers the movement of materials received from suppliers. Materials management describes the movements of materials and components within the firm. Physical distribution refers to the movement of goods outward from the end of the assembly line to the customer. Several trends in the business world allowed for the growth of importance of supply chain management or logistics and business distribution management. The first trend is that transportation expenses rose very rapidly. Traditional methods of distribution had become more expensive, and management became aware of the need to control these costs better. In the 1970s these factors became more critical with soaring fuel prices and spot shortages. Transportation could no longer be considered a stable factor in the business planner’s equations. Higher-level management had to become involved in transportation related aspects of logistics at both operating and policy levels because of the many new decisions that had to be made to adapt to the rapid changes in all areas of transport. In addition and more recently, deregulation of common-carrier transportation changed many of the long-established “rules of the game” that had governed shippers’ use of transportation. Many operating- and policy- level decisions had to be made by the users of transportation in order to take advantage of the new laws and regulations. A second trend is that production efficiency was reaching a peak. It was becoming very difficult to generate significant additional cost savings because the “fat” had been taken out of production. Physical distribution and logistics, however, heavily untouched. A third was that there was fundamental change in inventory philosophy. At one time, retailers held approximately half of the finished product inventory and wholesalers and manufacturers held the other half. During the 1950s, more sophisticated inventory-control techniques, especially the grocery business, reduced the total amounts of inventory and changed the ratios to only 10 percent held by retailers and 90 percent by distributors and manufacturers. A fourth trend is that product lines proliferated, a direct result of the marketing concept of giving each customer the exact product he or she desires. For example, until the mid-1950s, products such as typewriters, light bulbs, appliances and tissue paper were largely functional in nature. More recently, differences in products are no longer limited to real structural dissimilarities. The fifth trend was computer technology. Management of the logistics approach involved a tremendous amount of detail and data. The following are examples of the information that must be available: (1) location of each customer; (2) size of each order; (3) location of production facilities, warehouses, and distribution centers; (4) transportation costs from each warehouse or plant to each customer; (5) available carriers and the service levels they offer; (6) location of suppliers; and (7) inventory levels currently available in teach warehouse and distribution center. The sheer magnitude of these data rendered manual analysis virtually impossible. Fortunately, just as the physical distribution and logistics concepts were being developed, along came the computer, which allowed the concepts to be put into practice. The sixth factor is related to the increased use of computers because even if a specific firm did not use computers, its suppliers (vendors) and customers did. It became possible for firms to study systematically the quality of service they received from their suppliers. Based on this kind of analysis, many firms were able to pinpoint suppliers who consistently offered substandard levels of physical distribution service. Many firms were rudely awakened and made to realize the need to upgrade their distribution systems. And, as manufacturing firms shifted to “just-in-time” (JIT) systems, their materials delivery requirements placed very exacting demands upon their suppliers. The seventh factor is the increased public concern for the recycling of products, which is likely to become even more important in the twenty-first century. This has many interfaces with logistics in terms of packaging and developing return channels for the recycled materials. Consumers are demanding that firms be actively engaged in recycling activities. To address all these, there has to be a focus on strategic logistics, which is defined as using logistical competency and channel-wide partnership alliances to gain competitive advantage. The development and maintenance of inter-organizational logistical alliances that span organizational boundaries is not easy to achieve. A firm with true strategic capability is willing to commit performance capabilities to customers in advance and then perform as expected under microscopic scrutiny. Effective strategic logistics requires the leveraging of combined assets of a company with key suppliers of material and services. The net result of a strategic orientation is that logistic managers are beginning to spend less time in internal company operations and more time interfacing with suppliers and customers. To give an example, we can look at the close interfacing between a carrier and a shipper. The carrier is Conrail and the shipper is American Honda’s Marysville, Ohio plant, where approximately 1,500 new Hondas are shipped out every day. “Conrail Trainmasters Gary Homan and Wayne Malz, both of whom are based right at the Honda facility, play key roles in managing the flow of rail cars in and out of the plant. “We work closely with the contractor that handles the loading of the autos onto the rail cars,” explained Homan. Both trainmasters are in constant touch with with Conrail’s Columbus, Ohio-based train dispatchers and with Conrail’s busy Buckeye Yard, also in Columbus. The trainmasters, working with other local operating people, help ensure that the day’s orders make the right connections with Conrail trains departing the area for those cities so that they can meet Honda’s delivery standards.” Another buzz word introduced is leading-edge logistics in the following context: “A small number of leading-edge North American firms enjoy a superior level of logistical competency. These companies use logistics as a competitive weapon to secure and maintain customer loyalty. They are more responsive and flexible, are committed to their customers, are more aware of their results, work more closely with their suppliers, are more likely to embrace technology, and are more involved with their firm’s strategic direction. The leading-edge firms do many things differently. First, leading-edge organizations seek to use logistical competency to gain and maintain competitive superiority. Secondly, excellent companies seek to add value to the products and services they market supporting this goal by operating a cost-effective logistics system. And lastly, leading edge-firms leverage their assets by forming strategic alliances with service suppliers. These alliances help the firms achieve preferred-supplier status with key customers.” Logistics is a classic example of the systems approach to business problems. From a company’s point of view the systems approach indicates the company’s objectives can be realized by recognizing the mutual interdependence of the basic functional areas of the firm (marketing, production and finance). The same reasoning can be applied to the areas of logistics. The logistics manager must balance each functional area and see that none is stressed to the point where it becomes detrimental to others. One definition to systems approach is: “The systems approach to a problem involves not only a recognition of the individual importance of the various elements of which it is composed but also an acknowledgment of their interrelationship. Whereas field specialists concentrate restrictively on their own particular balliwick, the more versatile systems people, in their capacity as generalists, seek the optimum blend of many of these individual operations in order to fulfill a broader objective.” The objective of a physical distribution system is, with a specified level of service provided to customers, to minimize the costs involved in physically moving and storing the product form its production point to the pint where it is delivered. The objective of materials management, which is concerned with the inbound flows of materials, is to meet the firm’s need for those materials in an orderly, efficient and low-cost manner. The objectives of logistics encompass efforts to coordinate physical distribution and materials management in order to save money or improve service. Examples of such coordination are the use of the same truck both to make deliveries and to pick up supplies, and the use of a computer program that monitors orders being processed and determines how filling the orders will deplete stocks of goods on hand, require new production runs, and consume raw materials in the new production runs. To achieve these objectives, the logistics manager uses the total-cost approach. This approach is built on the premise that all relevant functions in moving and sorting materials and products should be considered as a whole, not individually. The following functions are included in the total-cost approach to logistics because they often fall under a firm’s logistics umbrella: (1) customer service; (2) demand forecasting; (3) documentation flow; (4) interplant movements; (5) inventory management; (6) order processing; (7) packaging; (8) parts and service support; (9) plant and warehouse site selection; (10) production scheduling; (11) purchasing; (12) returned products; (13) salvage scrap recycling and disposal; (14) traffic management; (15) warehouse and distribution center management. Supply chain management is a cross-function approach to manage the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished good, and then the movement of finished goods out of the organization toward the end-consumer. Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries. SCOR is a supply chain management model promoted by the Supply Chain Council. Another model is the SCM model proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical and operational levels of activities. Strategic activities include: (1) strategic network optimization, including the number, location, and size of warehousing, distribution centers, and facilities; (2) strategic partnerships with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping and third-party logistics; (3) product life cycle management so that new and existing products can be optimally integrated into the supply chain and capacity management; (4) information technology infrastructure to support supply chain operations; (5) Where-to-make and what-to-make-or-buy decisions; (6) aligning overall organizational strategy with supply strategy. Tactical activities include: (1) sourcing contracts and other purchasing decisions; (2) production decisions, including contracting, scheduling and planning process definition; (3) inventory decisions, including quantity, location and quality of inventory; (4) transportation strategy, including frequency, routes and contracting; (5) benchmarking of all operations against competitors and implementation of best practices throughout the enterprise; (6) focus on customer demand; (7) milestone payments. Operational activities include: (1) production scheduling for each manufacturing facility in the supply chain (minute by minute); (2) sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers; (3) inbound operations, including transportation from suppliers and receiving inventory; (4) daily production and distribution planning including all nodes in the supply chain; (5) demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers; (6) production operations, including the consumption of materials and flow of finished goods; (7) outbound operations including fulfillment activities, warehousing and transportation to customers; (8) order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers and other customers. Examples of companies that embraced strategic supply chain management include Kraft, Inc. 3M Corporation, Bayer AG and Canon, Inc. Here are their situations: Kraft sells about $10 billion of food and food products each year. It is divided into eight domestic operating divisions and one overseas division. Its major customers are food chains and grocery wholesalers. Distribution of its many products is complicated by the fact that some are frozen, some are refrigerated, and many have different shelf lives. Operating out of seven distribution centers, Kraft ships nearly a million cases per day. One of the company’s customer service accomplishments is that it ships 98.5 percent of all cases ordered. Each distribution center has a toll-free 800 telephone number that customers may call to advance order dates, add products to current orders or expedite shipments. The firm’s operations are an example of integrated logistics. “The distribution structure successfully links it to other parts of the material flow chain including purchasing, asset management, production scheduling, inventory control, and transportation.” Kraft operates three truck fleets (1) to handle interplant shipments, (2) to make deliveries to customers, and (3) for administrative and service purposes. Within the materials management unit at Kraft, decisions are made regarding inventory locations, transportation modes to be used, and sourcing. The main objectives of the material management group include: (1) cost competitiveness in each aspect of procurement, distribution and transportation; (2) unwavering commitment to quality, including assured quality from suppliers and carriers; (3) effective utilization of computers; (4) development of individualized relationships with providers of materials and services; (5) management development to attract, hire and develop people in each position with a net outflow to other organizational units of Kraft. Note the objective of developing “individualized relationships with providers of materials and services.” This is an example of strategic logistics; that is, forming alliances with outside firms. One such alliance between Kraft and the carriers who serve it results in additional trailers being provided so truckers do not have to wait for unloading. This benefits both the trucker and the Kraft distribution center, which has more time to unload trailers. In June 1983, 3M Corporation (with annual sales then of $7 billion, $205 million of which was spent on domestic transportation) invited eighty-five senior carrier executives to its St. Paul headquarters to discuss its “partners in quality” program. The one-day seminar was designed to alert its for-hire carriers that from then on 3M would expect specific service standards from all its carriers. Roy Mayeske, executive director for transportation, noted the theme of the meeting: “If you do it right, you’re going to lower your cost of doing business. Hence, you’ll lower your price to the customer.” Specifically, 3M noted that, for every carrier to be utilized in the future, performance standards would be established. Once the carrier agreed to the standards, the goal would be 100% on time, damage free delivery. 3M noted that if it were the cause of the carrier missing the goal, the carrier would not be penalized for the system breakdown. Many carriers were at first skeptical about such demanding goals. However, 3M found that the better carriers, upon reflection, were not afraid of having their service levels closely monitored. By the end of 1984, all three hundred carriers utilized, from all modes except pipeline, were covered by performance standards. 3M did not bluff – if carriers consistently did not meet their performance standards, the carrier was no longer used. How was compliance determined Both delivery times and service standards were verified using customer surveys and electronic link-ups with its major customers. In addition, 3M had computer-to-computer links with twenty-seven trucking firms, and data from these sources could be utilized to determine if the carriers were meeting predetermined performance standards. 3M maintained that the overall goal of the logistics system was to ensure predictable, consistent, and reliable service at a reasonable cost. In a number of cases, 3M did not utilize the lowest-cost carrier because of service problems. The objective was a quality logistics system and 3M defined quality as “not having to redo things not done right the first time.” Bayer AG is a huge chemical company headquartered in Leverkusen, Germany, with annual sales equivalent to $25 billion. It operates 320 plants in 67 different nations and distributes 25,000 different products ranging from biochemical and pharmaceutical items to herbicides and plastics. The firm’s work force totals 173,000 and this includes 2,200 who work in the field of logistics. Bayer’s annual logistics budget is about $5 billion; it involves 3,000 different distribution points handling about 740,000 different shipments. In terms of tonnage shipped, over half of what Bayer ships is considered “hazardous”, meaning that it requires special handling, packaging and documentation. These hazardous materials result in two differences in Bayer’s distribution patterns, compared with those of most other firms. Some hazardous materials cannot be placed in the same vehicle, so shipment consolidation (the grouping of many small shipments into a single larger one that moves at a lower rate per pound) is more difficult to achieve. Even if only one of the products is hazardous, its presence may slow the handling of the entire shipment. Secondly, as Bayer’s customers move to just-in-time inventory systems and want smaller, more frequent shipments to arrive by air, many hazardous materials do not move by air, so it is more difficult for Bayer to provide just-in-time deliveries. Bayer’s president, Hermann Josef Strenger, notes that taking care of the environment is not only an important social responsibility of the chemical industry but will also make the industry more acceptable to the public. Bayer is taking a variety of measures to prevent environmental disasters. Canon, a Japanese-based firm originally known only for its cameras, is now known for its office equipment as well, especially its copy machines. In addition, it produces video equipment, optical products, laser-beam printers, and semiconductors. The firm is on Fortune’s list of the largest one hundred multi-national corporations. In the late 1980s Canon had a “global corporation plan” that included three parts: (1) by restructuring trade patterns, we promote increased production overseas. A higher level of procurement and larger imports of quality materials and components will help redress trade imbalances; (2) explore new business areas and new product concepts; (3) to strengthen worldwide marketing capability. In Europe, Canon developed plants in Germany, France and Italy, as well as a research facility in England. Its European headquarters is near Amsterdam. At this site is the company’s major distribution center, stocking eight thousand different products and eighty thousand components for distribution to four hundred sales outlets in forty different countries in Europe, Africa and the Middle East. In 1990, that facility received 51,000 tons of materials – 5 percent by air, 64 percent by sea, 29 percent by truck, and 2 percent by combined water and air. Outbound shipments from the facility usually move by truck, with 85 percent to 90 percent delivered within three days. At present, the European operation is groping with two challenges; the relaxed trade barriers that are occurring in Western Europe and increased access to markets in Eastern Europe. Worldwide, Canon is concerned with environmental issues. Its ecology department in the internal headquarters in Japan recently began a recycling program for the cartridges used in printers and copiers: “We ask our customers to return all the cartridges to us, and we send them to the Dalian plant in Chin where they are disassembled and recycled. It is a huge and costly program, but Canon does not want to see its name in the news for polluting the environment.” In the United States, where Canon is a well-known firm, buyers of toner cartridges receive a preaddressed UPS label and instructions for returning the empty cartridges to Canon at the company’s expense. The cartridges are returned to Brisbane, California and are then sent by sea to the China plant, where they are disassembled and melted down into raw materials for reuse. In order to encourage customers to return the used cartridges, Canon donates $1 for each returned container in the United States to the National Wildlife Federation and the Nature Conservancy. Looking at all these four cases, we can realize that logistics as a strategy for better service is an important tool for global corporations. Supply chain management can be made more integrative by putting focus on areas that are traditionally not taken into consideration and intuitively may seem not for the good of the company such as environmental responsibility, better quality and better customer feedbacking and service. These new tools will allow the supply chain management system to be more integrative of the needs of both the firm and the consumers, ensuring better quality of service, and higher profits for the corporation. References Ballou, Ronald H. 1992. Business Logistics Management, 3rd ed. Prentice Hall Inc: USA. Johnson, James C. and Wood, Donald F. 1993. Contemporary Logistics, 5th ed. Macmillan Publishing Company: New York. Buytenen, P.M. Van. 1976. Business Logistics. Martinus Nijhoff: The Hague. 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