Logistics.

THE AGE OF LOGISTICS

A mini- reference guide

NEW HAMPSHIRE COLLEGE Graduate School of Business 2500 North River Road, Manchester, NH 03102, USA Home Page: www.nhc.edu Phone: (603) 644-3102 For additional Copies send email to: logistics@themarketingconsultant.com

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PREFACE
History shows that field of transportation and logistics was integrated in the study of economics due to the important role played by transportation in economic growth. The academic study of transportation and logistics is not new; indeed, it goes back to the 1850s (almost 150 years) when Henry Adams, an economist, who was also the president of Yale University, offered a course in the Economics of Transportation. After World War II, trade groups such as the National defense Transportation Association, the American Society of Transportation and Logistics, and the Delta Alpha Transportation Fraternity were established. Special challenges and opportunities confront the marketer who intends to serve the area of logistics and distribution management. A growing number of collegiate schools of business in the United States, Europe, and other parts of the world have added Logistics and Distribution Management to their curricula. In fact, most of them have set up a separate department for Logistics because of its growing importance in the business world today. The following is a secondary research publication done in the area of logistics and distribution management. This publication will also serve as a supplementary-reference for the business teacher and student likewise. This publication concentrates of the following aspects of logistics: 1. Distribution Channels. Particular attention is given to the nature of distribution channels, channel behavior, channel design decision, channel management decisions, and physical distribution. 2. Supply Chain Management. This area covers aspects on building a supply chain, critical likes in the supply chain, supply chain teams, efficiency in the efficiency in the supply chain, transportation in the supply chain, the role of IT in the supply chain, and the benefits of improving the supply chain. 3. Logistics and the Internet. Importance has been given to the effects of ecommerce on logistics, virtual retailing, Internet retailing, and the influences of the web on logistics software. 4. Customer Satisfaction. The relationship between logistics and customer satisfaction and sales. 5. Mass Customization. The varying degrees of product customization and the role played by logistics in the area of mass customization have been discussed. 6. The Corporate Role. The contribution of logistics strategy towards improvement in ROI has been discussed. Emphasis has also been given to the building of a cohesive logistics strategy, Just-in-Time, supply chain strategy, and the role of logistics in increasing shareholders value.

Additional copies of this publication may be obtained by sending an email to: logistics@themarketingconsultant.com

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ACKNOWLEDGEMENTS
First, we would like to thank Dr. Nichoas Nugent for carefully reviewing the manuscript at various stages of development and also for providing incisive comments and valuable suggestions that helped in improving this secondary report. Second, we would like to thank Dr. Philip Vos Fellman, Dr. Bulent C.Aybar, and Prof. Marc A. Rubin for showing a special interest in the making of this publication. We would also like to thank the Shapiro Library for providing us with excellent materials without which this project wouldnt have been complete. Manu Rajan Hemant Gajria Biju Moopan August 1999

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SUMMARY
What is Logistics? Logistics involves getting the right goods to the right place, at the time, at the right cost, in the right condition, and with due care and attention to the environment. The Institute of Logistics defines logistics as the time related positioning of resources within the supply chain. Academics define it as the management of the chain from source of procurement to the final user A few other definitions: Logistics is a sat of distribution-activities, that make products available to customers when and where they need them. The council of Logistics Management defines it as: The process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point-of-orgin to point-of-consumption for the purpose of informing to customer requirements. Logistics commonly includes: Transportation Warehousing Inventory/Stock control Communication/Information systems Packaging Manufacturing management In business, logistics is fundamental to: Retailing Production management & control Forecasting Purchasing & supply Materials management Packaging Installation & servicing Property Quality Order processing Project management Re-use & recycling Information technology Importing & exporting.

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Logistics is also fundamental to: Governments The armed forces Welfare agencies Logistics is the management of the storage and movement of goods and information. Good logistics cuts costs; speeds work, and improves customer service. Logistics also involves the co-ordinated management of material and information flows throughout your organization. Supply Chain Management deals with the same issues throughout the chain from your sources to your customers. Its objective is to simplify the supply chain to control total cost, improve total quality, maximize customer service, and increase profit. Comparing Logistics and Supply Chain Management Supply chain management is about getting a smooth and efficient flow from raw material to finished goods in your customers hands. It is a concept, which is increasingly replacing traditional fragmented management approaches to buying, storing and moving goods. Traditionally, the management of material flows has centered on stocks of product: on trains and boats and trucks; in warehouses and stores and factory-floor queues. Managing those stocks meant buying enough goods far enough in advance to ensure that long, steady production runs were seldom jeopardized by shortages of components. Tougher competition has brought shorter product life cycles and made that approach increasingly expensive. Replacing these inventory-driven systems are service-driven systems. This type of system, pulled by customer demand rather than pushed by a supply system, is long-familiar in retailing and over the last decade has become a necessity in many manufacturing sectors. What is the supply chain? Traditionally, companies have dealt with moving and storing goods in a disparate way, and under a number of different managers. In manufacturing, transport from supplier to plant was handled by suppliers themselves or by purchasing departments. Transport and storage within the plant was handled by the stores department (in the stores) and by manufacturing operations (within the plant). Transport from plant to customer was handled by purchasing; sales forecasts by marketing and communicated to manufacturing and procurement in a generally one-way information flow. This approach splits functional departments into watertight compartments when, as every manager knows, business isnt like that. Particularly in this area, where the essence of supply chain Management is managing flows across departments, sites and oftencompanies. So a high degree of management integration is needed. Logistics deals with geography, time and value. Many of its concerns are with things in places and transport between the places. In this view logistics deals with everything from

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raw materials through their movement into and between various stores and processes to the customer. It looks at material flows within sites as much as between sites. Figure: A Traditional Food and Drink Industry Supply Chain Raw materials suppliers Processing plant Packaging suppliers warehouse Manufacture process Finished goods storage

warehouse

Third party warehouse Retail centre warehouse Intermediate store

Cash n carry

In-store stockroom

retailer

Traditional food and drink industry supply chain Characteristics: A large number of participants Many intermediate stages, often involving logistics processes Long lead times difficult to meet sensible service targets high costs Understanding your supply Chain Before improving your supply chain, you must understand how your system works. This involves collecting information about how you ship, handle and store goods; about how you move information, and about the requirements of your customers and suppliers for the form and timing of goods and information flows. With this information you will

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understand a lot about how your business works, and can get on with the job of improving it. Site location Physical distribution Warehousing Materials handling Inventory management Information handling Forecasting Commercial relationships and transactions Who manages improvement?

There are a number of ways of analyzing the supply chain and managing the operation of it. One of the most useful is the node and link model, which plots links usually representing movement over distance and nodes - places where goods are stored or processed. Customer suppler

Suppler

warehous e

Plant

Plant Suppler Customer

Customer

Figure: Overall Model of Nodes and Links for a Supplier Plant Warehouse-Customer System.

This is useful as it provides a model of the overall shape of your Supply Chain which can then be exploded into greater detail.

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local hauler

bulk/long distance carrier Unload, handle, reload

local hauler Unload, handle, reload

Figure : Exploding a Link can Reveal New Links and Nodes. The Explosion Process can be Repeated Almost Indefinitely. Put together, all the nodes and links in your system create a logistics channel a way of getting goods, services, and information through to your customers. Every business will have a different logistics channel. Most will involve: Physical distribution Materials handling Information handling and transactions Commercial relationship and transactions. Each of these issues can be measured and assessed through information on: Inventory Controllability and Cycle time. How big is the supply chain? Most businesses are surprised by how complex their supply chain is. A good first task is to discover how many suppliers and how many customers you have, where they are, and how important each is as a percentage of sales or purchases. Clearly, the more complex the system, the harder it is to manage, and this information will be invaluable later when you are improving and then simplifying your systems. Site location The location of existing sites has far-reaching implications for logistics flows and costs, particularly in the single European market. Decisions about new locations for stores and manufacturing sites should be fed with information on customers, suppliers, and transport links.

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Physical distribution Goods move a lot during manufacture and distribution: you need to identify at each stage how they are moved the transport mode and who does the moving - the transport operator. Inside your site(s) there is likely to be transport, but this shades into materials handling issues, so concentrate on transport between suppliers and your sites, and between your sites and customers or intermediaries such as public warehouses or distributions. Physical distribution is not only a significant cost for most businesses, it has a direct impact on your competitiveness through speed, reliability and its controllability (or otherwise) in getting goods to your customers on time. All customers are becoming more demanding. Producers of intermediate goods are finding that their customers are demanding JIT (Just in Time) Scheduling of deliveries. JIT has been used in retailing for many years. And while specialist transport operators have developed their services to meet these needs, many firms have been slow to adapt. Transport mode Air, sea, road, rail? Canals? For most routes, there is a choice. In many companies, the choice is made after rudimentary cost analysis. But all modes have characteristics beyond simple cost per kilogram/kilometer. For each link in the logistics channel particular modes will have particular advantages. Most freight is now carried inside the UK by road, a mode that has advantages of speed, flexibility and cost. Rail transport is obviously suited to trucking bulk loads or very heavy individual items. But even within the road transport mode, there are many choices depending on your circumstances. Transport modes operate between nodes, which have their own characteristics. Is the mode matched to materials handling and storage systems? How flexible is a mode? A shipment system based on delivering full containers to distributors starts to cost serious money if your market changes and a lot of part-loads start to be needed. This is one of several ways in which the demands of your customers dictate your transport modes. Owning and controlling the means of distribution Owning transport is expensive. Increasingly, companies are looking hard at whether they should own their own transport. As a trip down any motorway will confirm, many have decided that contracting-out their distribution makes economic sense. There are exceptions: distribution-based businesses are obvious examples. The local service company which offers free collection and delivery of clean shirts or typesetting as an important part of its value to customers in another. Apart from total cost, key factors involved in deciding whether or not to own your own transport include: Control The ability to decide what to do with your own transport can be important. Against that, some contract distribution companies offer good control without burdening you with the inflexibility of your own vehicles. Customer service Whatever the ownership patterns, the key characteristic of successful distribution is that it

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delivers the right service to customers. Whatever the relative costs and convenience, if you cant buy a distribution service that target; you will have to operate your own transport. Flexibility Using your own vehicles commits you to a particular mix of shipping sizes and modes. Common carriers and contract distribution companies allow much faster switching between modes and types of transport within a mode. For some people, the answer could be a mixture of methods, combining a van for small deliveries, a truck which can handle base demand at full utilization fates, plus outside operators used to deal with peaks and unusual demands. Management Skills Unless your business is managing transport there are strong arguments for using a transport specialist. Large companies can support the fleet sizes needed to justify the management quality and specialist tools by competitive transport operations, but it is among larger companies that the move to contract distribution management has been strongest. If your transport management is weak, you become uncompetitive. If your transport management is strong; you may be diverting valuable talent from the rest of your business. Recruitment and training Can you afford to hire and train the right people to operate your vehicles? Road transport is the least productive transport mode in terms of tonne-kilometres per person hour, so labor is always a significant cost. Warehousing Both the main goals many business operations in the nineties deliveries direct to production lines or retail stores, and make-to-order within hours suggest that warehouses are dinosaurs whose time has gone. But warehouses will be with us for a long time. They are often very badly organized and thus very expensive. They may be needed to store incoming components and raw materials. Perhaps supplier production cycles dont match your production cycles as with, for instance, a flavoring producer who must buy plants when they are harvested, rather than when it wants to process them. The warehouse must be in the right place. It must to the right size. It must properly protect its contents. And it must be organized to allow: Efficient delivery and placing. Cost-effective use of its space Adequate access to stored materials

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Security from theft and weather Enough flexibility to deal with the largest (and smallest) items, which will need storage in the numbers that will be needed.

Within the ware house and between warehouse and overall inventory management and purchasing systems there is a need for interlocking mechanical and information systems so that stock is Put into known order Retrieved quickly and in the right quantity Rotated properly (for example, first-in, first-out) As with transport (see Owning and controlling the means of distribution above) you have the option of owning and/or managing your own storage facilities, or of contracting out management and/or operations. Materials handling Within a node- a warehouse, a plant, a retail store - goods to be moved between incoming transport, storage, processes, and outgoing transport. The spectrum of available systems ranges from one person with strong arms through arms through the supermarket trolley (in its way revolutionary technology) to fully-automated systems incorporating robot order picking and automated guided vehicles (AGVs). Most handling systems, and the packaging adopted by suppliers, are geared to supplier-warehouseprocess transactions. In fact increasing numbers of businesses are moving towards JIT deliveries: once supplier quality is sorted out; incoming goods can go directly into the process, without inspection or spending any time in a store. This can have important implications for handling and packing for instance, shrink wrapped pallet loads of small parts are unlikely to suit JIT deliveries where the processes are based on assembly stations. A smaller load unit, with no unpacking needed, might be the right answer, at the price of higher-cost machinery to unload from the suppliers truck into robot carts. Bar coding gives instant recognition of individual items to stock management systems and to production systems. Inventory management Few business consider the total inventory in the supply chain, including stock at suppliers premises, stock on trucks and boats, in plant at distribution outlets. Considered throughout the Supply Chain stock can be accumulated at places where it is cheap (that is, before value is added) and/or where it adds value to the customer (for example, at or near the customer rather than at or near your plant Manage it as a whole system In order to manage your stock effectively, you must know how much you have, its value, and where and how it is stored. Some of this about information systems; some is about analyzing the physical storage, which interacts closely with materials handling systems.

You must also know what your inventory costs.

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The costs above suggest trade-off between the factors. A few orders mean low purchase costs but high stock cost; many small orders mean low stock costs but high purchase costs. High buffer stocks mean low stock-out costs but high stock carrying costs. You need to strike the right balance between these various factors. External factors You also need to take account of external factors over which you have no control. You could, for instance, buy a years supply of an important raw material all at once. If prices rise, or there are shortages, you gain an advantage over your competitors. But apart from the stock costs, prices might fall. In this situation, you will only know what you should have done after you have done it. Avoiding risk is therefore another factor in the quantity equation. You are also constrained on quant to make the goods that you want - their lead-time. If you want to buy small quantities once a week but your supplier takes three weeks from to delivery, you may have problems. Information handling Goods cant flow without information: information allowing, forbidding, and directing physical flows; information checking and confirming; information to provide proof and audit trails for taxes and billing. Because the information flows are so intimately connected with the physical movement of goods, it is sensible to deal with them as part of the same system. Too often, too much of the wrong information moves too slowly to the wrong people. In many companies, this is the legacy of systems based on nineteenth-century technology, unchanged because by and large the right things happen in the end. Examining your information flows allows you to: identify important information needs discard flows that dont add value speed and automatic routine information transactions.

Physical link

Information link (shipping notes, schedules, orders)

Figure: Goods cant flow without parallel information flows. Forecasting Forecasting is a key information resource. Material networks, even when well managed, are relatively lumbering beasts, and should be driven by forecasts (or better still, by firm orders) rather than by hope. So sales forecasting is a vital ingredient. If customers insist on being volatile, sellers must adapt. In some businesses, demand can be increased in
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slack periods - the summer sale is a familiar example. In others, output flexibility must be increased. Better forecasting and a more responsive supply chain are the key ingredients in a virthuous circle of improvement in customer service. Good forecasting reduces the need for instantly responsive supply chains: responsive supply chains reduce the need for clairvoyance in forecasts. Together they increase your ability to guarantee levels of service. Commercial relationships and transactions Parts of your supply chain are within your premises or otherwise under your direct control. But other parts involve links with third parties, incluting: Customers Suppliers of goods Suppliers of services(e.g. shippers) Regulatory authorities (customs, transport, taxation etc). Links with these external bodies involve flows of goods and information. Clearly, your processes and links must work with the processes and nodes represented by your customers and suppliers. Who manages improvement? Supply chain management involves a lot of operational areas in your business. So who should be responsible for improvements for making sure that the logistics function delivers efficiency and profit improvements? Should there be a single senior manager with their own department and authority to impose on other departments? Should there be a less-senior information-oriented manager to co-ordinate the logistics aspects of work among departments? Or can you manage without any full-time logistics professionals, perhaps relying of outside consultants to help solve problems and develop systems? Each approach has its merits for particular businesses, but you will have to find the right approach based on the needs and resources of your business. Logistics professionals often argue for the logistics supreme, responsible for all logistics-related activities, including production planning, transport, storage and purchasing. Such appointments are still rare, though they are increasing. And it may not suit your business. More common are two trends: The gradual coming together and eventual merger of purchasing/ materials management and transport/distribution functions. The diffusion of the process through setting joint targets and objectives between existing functional groups and managers within the business, with project teams tackling individual improvement programs. Smaller firms in particular may find the second of these approaches useful, perhaps using a consultant to help sort out job descriptions and define projects and objectives.

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TABLE OF CONTENTS Subject page Executive Summary Introduction Distribution Channels and Logistics Overview .. The Nature of Distribution Channels ... Channel Behavior Channel Design Decisions .. Channel Management Decisions . Physical Distribution Supply Chain Management Overview Building a Supply Chain The Critical Link in a Supply Chain .. Teaming up for Supply Chain Success .. The Real Supply Chain Test .. Efficiency in the Supply Chain .. Transportation in the Supply Chain .. The IT Enabled Supply Chain .. Benefits of Improving Supply Chain management . Logistics and the Internet Overview .. Electronic Commerce and Logistics Virtual Retailing and Logistics . Internet Retailing . The Web and Logistics Software .. The Web as a Gateway to Logistics Data . Logistics Driven Customer Service Overview Logistics and Sales Logistics and Mass Customization V 1 4 6 8 11 14 14 17 18 23 25 30 32 33 41 43 51 53 55 57 64 66 68 70 75

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TABLE OF CONTENTS Continued The Corporate Role of Logistics Overview ....... Building a Cohesive Corporate Logistics Strategy Just-in-Time and Inventory Investment Reeducation Supply Chain Strategy Evaluating the Supply Strategy . Logistics and Shareholder Value Conclusion Closure Logistics in the New Millennium ... Bibliography . Quick Pointers Glossary ..

83 86 88 90 92 93 98 102 104 107 113

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THE AGE OF LOGISTICS A Mini- Reference Guide Manu Rajan, Hemant Gajria and Biju Moopan INTRDUCTION TO LOGISTICS Logistics is set of distribution activities that make products available to customers when and where they need it. Logistics management has undergone significant change from the 1960s to the 1990s. The logistics function was called traffic management during the 1960s with traffic managers managing freight movements after World War II. The 1970s were fraught with economic problems, which forced traffic managers to help companies cut costs. The 1980s were marked with the deregulation of the trucking and rail industries while the 1990s have become the era of logistics. The 90s are shaping up so far as the era of logistics, as corporate America embraces business strategies based on speed to market and achieving supply-chain efficiencies. Today, product replenishment must be accomplished promptly and efficiently to avoid losing a sale. Order-cycle time has been compressed drastically. In the 1960s, the amount of time needed to convert an order to shipment was 30 days. Now, the average is two or three days. To provide faster, continuous replenishment, companies have to join forces to synchronize product deliveries. Having pared corporate costs as much as possible over the past decade, CEOs have come to realize that companies in a particular industry must work together to achieve group saving in the supply chain. In the grocery industry alone,

one estimate hold that wholesalers and suppliers could reap $30 billion in supply-chain saving by joining forces.

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Supply-chain saving require swift and accurate information on consumer demand. In theory, consumers will pull the products they want through pipeline and agile manufacturers will build replacement products to order. Such supply-chain strategies have different names in different industries Efficient Consumer Response in the grocery industry, Quick Response in the retail industry. Whatever the name, the strategies embody the same idea: Companies in a channel must work together as an extended enterprise to reduce costs and increase profits. Speed-to-market replenishment strategies wouldnt be possible without hug leaps in modern technology. Bar coding makes it possible for retailers to know whats selling at the checkout counter. Powerful desktop computers from retailer to manufacturer can relay that information. Manufacturers product then can be tracked from the sellers to the buyers dock. Orbiting satellites now can keep eye on over-the-road shipments, while warehousing workers with scanners and radio-frequency technology can update inventor records instantaneously in real time. Information now can supplant buffer inventory. Continuous replenishment, of course, would be all but impossible if the carriers werent able to act and react without government approval. But fortunately for carriers, Thats now the case. The job of deregulation itself begun a decade earlier was complete by the federal government in 1994 when it extended deregulation to the states. Spurred on by deregulated companies, Washington lawmakers passed legislation pre-empting states from regulating the routes, prices, or services for motor carriers within state borders.

Freed from their regulatory shackles, Transportation companies have transformed their service menus to meet the changing needs of shippers and speed-to-market strategies. Truckers like Roberts Express now act like air-express carriers, moving time-critical

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shipments overnight. Federal Express and UPS have moved away from small packages and gone after heavier freight. Other asset-based warehouse and transportation companies have become third-party logistics companies, filling in the gaps left by downsized logistics department of simply offering outside expertise as companies focus of their core retailing or manufacturing mission. During the last few years, logistics managers have started to receive the corporate recognition they deserve as companies look to the supply chain for profitability. Its a safe bet to say that the mangers will continue I the exalted role through the rest of the decade and the new millennium as companies turn to logistics to bring value to the consumer. Its also time to declare finis to the information Age. In fact, it may never have existed. What were really experiencing is the Age of Logistics a time when were learning to move everything products, services and money faster and faster. Information

technology is a facilictator of all that, but it isnt the only driver of business change. In fact, our hubris and phobias about IT may have prevented companies from seeing their real job: changing how the company adapts to the new logistics infrastructure being built. The infrastructure domain used to belong to the government. It built roads, bridges, seaports and airports. It built a national banking system and a maze of regulations. It did pretty much the same for communications, including the nomenclature for the Web. We still need all of that. But the private sector is building tomorrows business

infrastructures. Behamoth is to move products among businesses and between businesses and consumers.UPSs brown trucks are becoming the rolling physical warehouses of the

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American industry. But that warehouse is dynamic: It gets products to destinations when theyre needed. For those who want instantaneous access, the end state could lead to an updated version of the line from Star Trek: Beam me up a new PC, Scottie. As for the logistics of money, look at bank such as Boston-based State steel Corp. it just isnt a bank. Its competency is moving, holding and managing money and securities around the globe. Its ambition is to do that in ever less time. The Age of Logistics is more than a change in terminology. Its a new state of mind. Logistics has finally become an important issue in the business world as companies realize its value in providing customer satisfaction. In fact, corporate management is finally recognizing that logistics is not actually a necessary evil but a useful instrument for customer service enhancement and cost reduction. In todays competitive environment, logistics has to take a fully integrated approach to realize its potential. All the processes n logistics must therefore function as one, with each involved party more aware of the complete logistics function. This means that logistics has to address three requirements: business requirements, customer requirements and logistics requirements.

DISTRIBUTION CHANNELS AND LOGISTICS MANAGEMENT

Overview

Distribution channels, are identified as being a set of independent organization involved in the process of making a product or service available for use or consumption by the consumer or business. Making decisions involving distribution channel are among the most complex and challenging decisions facing the firm. Each channel system (and there can be several) creates a different level of sales and costs. Unlike flexible elements of the

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marketing mix (price decisions for example), once a distribution channel has been chosen, the firm must usually stick with their choice for some time. In addition, the chosen channel strongly affects, and is affected by, the other elements in the marketing mix. A strategic planner limits their options if they consider only one channel choice. Each firm needs to identify alternative ways to reach their market. There are many means available. Some of the choices include the range of direct selling to multiple intermediary levels that may involve several distribution relationship. Each of these options has advantages and disadvantages associated with them. Vertical and horizontal systems are more sophisticated than the basic channel alternative and each is explained in context with their contemporary usage. Channel design begins with assessing customer channel-service needs and company channel objectives and constraints. The company then identifies the major channel alternatives in terms of the types of intermediaries, the number of intermediaries, and the channel responsibilities of each. No system, no matter how well it has been planned, is without conflict. Managing distribution conflict is a necessity if quality service and low cost are to be delivered. Since distribution relationships tend to be long-term in nature, the choice of channel partners is very important and should be taken very seriously, In todays global marketplace, selling a product is sometimes easier than getting it to customers. Therefore, physical distribution and logistics management are receiving

increased attention from strategic planners. The task of physical distribution systems is to minimize the total cost of providing a desired level of customer services while bringing those services to the customer with the maximum amount of speed. Major logistics

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functions order processing, warehousing, inventory management and transportation are discussed and explored. The Nature of Distribution Channels A distribution channel (marketing channel) is a set of interdependent organization involved in the process of making a product or service available for use or consumption by the consumer or business user. The use of intermediaries results from their greater efficiency, in making goods available to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own. From the economic systems point of view, the role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers. Intermediaries play an important role in matching supply and demand. Producers produce narrow assortments, but consumers want broad assortments. Intermediaries buy large quantities of many producers and break them down into the smaller quantities preferred by consumers. A distribution channel moves goods from producers to consumers. It overcomes the major time, place, and possession gaps that separate goods and services from those who would use them. Members of the marketing and distribution

Information gathering and distribution Promotion Contact with prospective buyers Matching buyers with sellers

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Negotiation so ownership can take place Others include: Physical distribution (such as transportation and storage) Financing Risk Taking

The question is not if these functions be performed but rather who will perform them. All of the above functions have three things in common: 1. They use up scare resources. 2. They can often be performed better through specialization. 3. They can be shifted among channel members. If the channel is functioning the way that it should, the work of the channel should be divided so that the various functions can be assigned to that channel members who can perform them most efficiently and effectively to provide satisfactory assortments of goods to target consumers. Distribution channel can be described by the number of channel level involved .A channel level is layer of middleman that perform some work in bringing its product and its ownership closer to the final buyer. 1) The number of intermediary level indicate the length of the channel

2)

These channel can be described as being: a) A direct marketing channel there are no intermediary level between manufacture and consumer.

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b) An indirect marketing channel there can be numerous and variety of intermediaries involved in bringing the good or service from the manufacture to the consumer or the business customer. 3) Business marketing channel are similar in their design except the intermediaries

perform function relative to the business market rather than the consumer market .

Channel behavior and organization

Distribution channels are more than simple collections of firms tied together by various flows. They are complex multifaceted behavioral systems. A distribution channel consists of dissimilar firms that have banded together for their common good. Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. However, disagreements over goals and roles generate conflict. Channel conflict is disagreements among marketing channel members on goals and roles who should do what and for what rewards. Horizontal conflict is conflict between firms at the same level of the channel (retailer to retailer for example).

Vertical conflict is conflict is conflict between different levels of the same channel (wholesaler to retailer for example).

Some conflict can take the form of healthy competition. Traditionally, distribution channels have lacked the leadership to assign roles and manage conflict. Vertical marketing systems Historically, distribution channel have been loose collections of independent companies, each showing little concern for overall channel performance. The conventional

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distribution channel (also known as a traditional channel) is a channel consisting of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profit for the system as a whole. These channels have lacked strong leadership and have been troubled by damaging conflict and poor performance. The goals of traditional a channel are as follows: Manufacturer: Market Exposure. Marketing support activities. Maximum sales volume from each dealer.

Retailer: Exclusive distribution rights in an area. Minimum support activities. Assortment sales/ not sales of a particular manufacturers products.

In contrast is the emergence of vertical marketing systems. A vertical marketing system is a distribution channel structure in which producers, wholesalers, and retailers act as a unified system one channel member owns the others, has contracts with them, or has so

much power that they all cooperate. These systems often allow for more efficiently run operations, and , with self-interest no longer the driving force, it is possible that synergy may occur. VMSs centralize the power in one place, rather than in traditional channels, with the individual members competing against one another. Advantages of a VMS over a traditional channel are: One management group with a common set of goals.

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Possible to shift marketing activities to appropriate level within the channel. Reduces duplication of marketing activities. Management has total control over marketing of the product.

The major types of VMS include: 1) In a corporate VMS, coordination and conflict management are attained through common ownership at different levels of the channel. 2) In a contractual VMS, coordination and conflict management are attained through contractual agreements among channel members. There are three primary types: a) Wholesaler-sponsored voluntary chains are systems in which

wholesalers organize voluntary chains of independent retailers to help them compete with large chain organization b) Retailer cooperatives are systems in which retailers organize a new,

jointly owned business to carry on wholesaling and possibly production. c) Franchise operations are contractual vertical marketing systems in

which a channel member, called a franchiser, links several stages in the production-distribution process. There are several form of franchises: 1. Manufacture-sponsored retailer franchise system (automobile industry).

II.

Manufacture- sponsored wholesaler franchise system (softdrink industry).

III.

Service-firm-sponsored retailer franchise system (auto-rental business).

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3)In an administered VMS, leadership is assumed by one or a few dominant channel members. General Electric, Kraft, and Campbell Soup are examples. Horizontal Marketing Systems Horizontal marketing systems are where two or more companies at one level join together to follow a new marketing opportunity. By working together, they can combine their capital, production capabilities, or marketing resources to accomplish more than if they were working alone. Hybrid Marketing Systems Hybrid marketing systems are multi-channel distribution systems in which a single firm sets up two or more marketing channels to reach one or more customer segments. More and more firms are adopting this concept. With each new channel, the marketer using this technique expands sales and market coverage and gains opportunities to tailor channels to the specific needs of diverse consumer segments. These systems are harder to control. Many forms of conflict can be eliminated using this form of system. Channel Design Decisions In designing marketing channels, manufacturers struggle between what is ideal and what is practical. The problems can be complex (building a new channel from scratch) or

simple (getting a few intermediaries to carry your line). Channel systems evolve to meet market opportunities. Several steps are followed to design channels: 1. Analyzing Customer Service Needs The first step is to analyze customer service needs. To design an effective channel, the designer must know the service levels

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desired by customers. The company must balance consumer-service needs against the feasibility and costs of meeting those needs and consumer price preferences. Example questions to consider are: Do they want to buy from nearby or are distant locations all right? Would they rather buy in person or is some other method such as telephone acceptable? Do they want immediate delivery of can they wait?

2. Setting the Channel Objectives and Constraints - The second is to set the channel objectives and constraints. Channel objectives should be stated in terms of the desired service level of target consumers. Usually the company can identify different segments that objectives are influenced by: Product characteristics (perishable products would need different arrangement). Company characteristics (size and financial situation would have an effect). Intermediates characteristics (find those willing and able to perform needed tasks).

Competitors channels (be near your competition) Environmental channels (economic and legal constraints have effects).

3. Identifying Major Alternative The next step is to identify major alternatives available for concerns are: The types of middlemen. Look at the company salesforce, manufacturers agency, and industrial distribution to give you option on how to distribute the good or service.

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The number of middlemen. Alternative strategies are: Intensive distribution-the product is stocked in as many outlets as possible (candy, gum, etc).

Exclusive distribution giving a limited number of dealers the exclusive right to distribute the companys products in their territories.

Selective distribution the use of more than one, but fewer than all of the intermediaries who are willing to carry the companys products (television, furniture, etc.).

Responsibilities of channel members. Each alternative should be evaluated against the following criteria: Price policies. Conditions of sale. Territorial rights. Specific services to be performed by each party.

4. Evaluating the Major Alternatives The final step is to evaluate the major channel alternatives. Each alternatives should be evaluated against the following criteria:

Economic criteria (a company compares the likely profitability of different channel alternatives).

Control issues (how should control be distributed and to whom) Adaptive criteria (examine flexibility versus long-term commitment).

5. Designing International Distribution Channels international marketers face many additional complexities in designing their channels. Each country may have different rules and traditions that the firm must be willing to adapt.

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Channel Management Decisions Once the company has decided on the best channel design, it must make some channel management decisions. Selecting Channel Members The first decision that must be reached is to select the channel members. The fact is that some manufacturers vary in their ability to attract qualified intermediaries. At the other extreme is the manufacturer who everyone wants to work with. The best approach is to determine what characteristics are necessary, and be able to distinguish the better intermediaries. Motivating Channel Members Once selected, intermediaries must be continuously motivated to do their best. They must not only sell through them but to them as well. Positive and negative measures are possible positive is preferred. Evaluating Channel Members

Finally, the producer must regularly check on the intermediarys performance against set standards. Periodic re-qualification is advised. Be sensitive to the needs of dealers and they will be sensitive to the firms needs as well. Physical Distribution and Logistics Management Physical distribution (marketing logistics) involves the tasks of planning, implementing, and controlling the physical flow of materials and final goods from point of use to meet the needs of customers at a profit.

(PTO)

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There is a greater emphasis on logistics because: Customer service and satisfaction have become the cornerstones of marketing strategy. Logistics is a major cost element. The explosion in product variety has created a need for improved logistics. Improvements in information technology have created opportunities for major gains in distribution efficiency. Goals of the Logistics System Most companies state their objective as getting the right goods to the right places at the right time for the least cost. While this objective is noteworthy it is difficult to achieve. The goal should be to provide a targeted level of customer service at the least cost. To do this, objectives must be set. The major logistics decision includes the following:

1)

Order Processing Physical distribution begins with a customer order. Once received, they must be quickly and accurately processed. Everyone benefits when this system works well.

2)

Warehousing - A storage function is needed because production and consumption levels rarely match. A company must decide how many and what type of warehouses it needs, and where they will be located.

a) b)

A storage warehouse stores goods for moderate to long periods. A distribution center is a large and highly automated warehouse designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.

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3)

Inventory Inventory decisions involve knowing when and how much to order. The goal is to maintain the delicate balance between carrying too much and too little. When to order and how much to order are questions to be answered. Orderprocessing and inventory-carrying costs must be analyzed.

Under a just-in-time system, only a small amount of inventory is carried, but quick re-order turnaround is essential.

4)

Though sometimes complicated, the JIT system can save needed resources. Transportation The choice of transportation carriers affects the pricing of products, delivery performance, and condition of the goods when they arrive.

All of these will affect customer satisfaction. Five basic choices are: a. b. Rail Truck

c. d. e.

Water Pipeline Air

The transportation mode selected depends on several criteria: a) Speed. (door-to-door delivery time) b) Dependability. (meeting schedules on time) c) Capability.(ability to handle various products) d) Availability.(number of geographic points served) e) Cost. (per ton-mile) Containerization puts goods in boxes or trailers that are easy to transfer between two transportation modes. They are used in multimode systems commonly referred to as

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piggyback (rail and trucks), fishy back (water and trucks), trainship (water and rail), and airteuck (air and truck).

SYPPLY CHAIN MANAGEMENT AND LOGISTICS Overview Supply-chain management is a collaborative-based strategy to link cross- enterprise business operations to achieve a shared vision of market opportunity, says Bowersox, who has researched and written extensively on the subject. It is a comprehensive arrangement that can span from raw-material sourcing to end-consumer purchase. Now as to why supply-chain management should matter to any company The short, and not necessarily over-simplified answer is that it exerts a powerful near- and long-term impact

on the things that really matter to an enterprise profits, customers, market share to cite some of the more prominent examples. Looked at another way, if younot effectively managing the supply-chain, youre losing ground to those competitors who are acting aggressively in this area. Implementing supply chain management strategies is important for improving the competitiveness of logistics service companies. The technique emphasizes cooperation among the chain of parties responsible for logistics operations. Establishing a supply chain management program involves forging links within the company and consolidating these internal link with external business partners. The different technology tools needed for the management program must also be accessed. Furthermore, implementers of

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supply-chain management always strive to achieve the overall goals and vision of the program.

Supply Chain Management

Supplier s Purchasin g Producti on Distrib ution Custo mers

Information Flow Information-Based Tools POS dala acquisition EDI document transmission JIT materials management Enhanced Customer Value

replenishment

Building a Supply-Chain The process of capitalizing on this potential and initiating the design process begins internally. Before an organization can design and implement a collaborative supply chain that embraces the outside partners the tier 1 and 2 suppliers, the contract manufacturers, the logistics services the customers it needs to get its own house in order. Put simply, functional silos need to give way to seamless integration of people and processes. Functional integration must occur within the organization before integration can occur throughout the entire supply chain, says Richard H. Thompson, a partner in the Chicago

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office of Ernst & Young LLP. Included in that integration effort should be all of the logistics-related functions such as inbound and outbound transportation, distribution, warehousing, and fleet management. Supply-management activities like sourcing, vendor selection, and purchasing are critical elements, too. Manufacturing-related activities such as production planning, scheduling, and packaging must be part of the integration effort as well. And dont forget information technology. Throughout the internal design process, its wise to keep in mind who has the power in the organization, says Bruce C. Arntzen, president of Global Supply Chain Associates in Maynard, Mass. In most companies, Arntzen explains, the power lies in manufacturing or marketing. A lot of attempts by logistics professional to integrate the supply chain cross-functionally hit a wall because they dont have the support of these

key functional areas. The biggest challenge is getting these bigger, more powerful departments to cooperate with you. Arntzen suggests a couple of ways to obtain the needed cooperation. One is for logistics people to present a persuasive argument to these other departments as to why integrated supply-chain management would benefit the company overall and their function in particular. An even better way, he adds, is to build a solid rapport with manufacturing and marketing. In essence, position yourself as being part of their team. The internal walls invariably are the toughest to scale. Consultants who have worked on the problem say that top managements must give their full and visible support to dismantling the barriers. They can accelerate the process by linking measures and rewards to overall supply-chain goals, rather than focusing narrowly on individual functional performance. Money ever remains a powerful motivator.

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The next step in the design process is to integrate the internal organization with the external partners the suppliers, customers, and logistics-services providers that will work with you up and down the pipeline. Forging partnerships does not come easy to most organizations. The traditional business model is to look out for your own best interests and let the other guy do the same. But being a partner means sharingsharing information about upcoming production plans, promotions, new-product introductions, and even certain financial data. That need to share is particularly important in the relationship between a company and its logistics-services providers. Jumes P. Fields, vice president of business development at Menlo Logistics, explains: For the partnership between the customer and the logisticsservices provider to reach its full potential, customers must openly share accurate information on their business, hteir customers, their suppliers, and any other relevant

information about the operating environment. This helps the service provider build a supply-chain strategy that supports the business strategy. Partnershipping also means sharing the risks and rewards. Now, sharing the risks doesnt pose much of a problem for most companies. But sharing the rewards demands a leap of faith that many companies still find difficult to make. James E. Morehouse, vice president of A.T.Kearney, believes that enlisting partners in the supply chain effectively creates a partnership paradigm that closely resembles a good marriage. It means that we are going to share common values, Morehouse wrote in a recent issue of Supply Chain Management Review. We are going to intermix our people and processes. We are going to openly share costs and other information. We are going to conduct business not as combatants, but rather as partners who actually talk to

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one another. For most companies, the Kearney consultant concludes, this represents breakthrough thinking. In More houses opinion, a winning supply chain incorporates a number of core components. It embraces all of the partners in an overlapping manner, free from the rigid gaps that traditionally have separated parties in the business transaction. Goods move seamlessly from sources from sources to consumers. Information flows immediately and openly up and down the chain. Activity in the funds conduit is triggered when the consumer actually purchases the product No discussion of supply-chain design can be complete without focusing on the information-technology component. As Bowersox of Michigan State University has pointed out, Technology serves as the primary enabler to facilitate supply-chain-wide integration while simultaneously allowing key business relationships to be conducted on

an exclusive enterprise-to-enterprise basis. Tending from advanced internet to more traditional EDI and hardwired communication, such cross-enterprise technology linkage provides the backbone of successful supply-chain strategy, Technology requirements- both current and future need to be factored into the supply chain design equation, According to AMR, a Boston-asked market-analysis firm that specializes in supply-chain technology, options in the supply-chain space abound. By the end of 1997, the supply-chain management software market alone had hit $2 billion in revenue. And its projected to increase exponentially as the year 2000 approaches. Available software now covers virtually all aspects of the supply-chain management process, says AMR, enabling all of the participants to communicate mote effectively and to make better-informed management decisions.

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Main categories of supply-chain management software include advanced planning systems (APS), demand management and forecasting software, enterprise resource planning applications with supply-chain functionality, warehouse management software (WMS), transportation management systems (TMS), and electronic commerce, which includes the internet, intranet, and EDI. The latest offering in this space, AMR repots, is customer asset management (CAM) software, which helps companies attract and retain a customer base. Throughout the process of designing a supply-chain strategy, managers need to keep one overarching consideration in mind: the companys overall strategy and direction. Logistics and supply-chain decision cannot be made that dont support or worse yet, run counter to the bread business objectives.

The supply-chain strategy must be in synch with the business strategy, insists Timothy C. Brown, director of Andersen Consultings supply chain design grout. You cant make decisions aimed at cutting transportation costs and paring down the number of warehouses, for example, if the key business driver is not to cut costs, but rather to enhance customer service. The supply-chain design should not proceed in a vacuum, Brown continues. It needs to take full account of the companys position with regard to assets, mergers, and growth plans. You dont want to build a TajMahal of a warehouse if the business strategy is to reduce the asset base and outsource warehousing because it is not a core competency. That supply-chain strategy developed in support of the business strategy will have to be implemented an activity even more challenging than the design itself. Veteran management consultants recommend that the implementation process like the design

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Itself utilize cross-functional teams. When individuals feel that they have a proprietary interest in making supply-chain management work, the experts say, theyre more committed to affecting a positive outcome. Importantly, as the strategys implementation proceeds, the supply-chain team must keep management aware of the progress being made. As James Fields of Menlo Logistics explains, Its important to be able to document improves, or wines, in terms of whats important to the company. This means drawing attention to specific benefits like better returns, lower operating costs, or higher market share. The longer-term payback of deigning and implementing a world-class supply chain can be profound. In fact, it can lead to market leadership. One need only look at the supply chain leaders like Wal-mart, Procter & Gamble, Xerox, and sun Microsystems for proof. As for the near-term impact, how much can successful supply-chain management bring to

the bottom line? Well, it depends of course, on any number of competitive factors. But according to Timothy brown of Andersen Consultings Supply chain Design Group, the payback is coming a lot faster these days, thanks in large part to the new technology available. And it can be quite substantial. We know of cases, Brown notes, Where supply-chain redesign has saved an organization close to $100 million/ The Critical Link in a supply-chain The success integrated supply chains within organizations lies in the logistics manager. Since a supply chain approach I essentially a shift in focus to the customer, the logistics department as that aspect of operation which deals more directly with customers should lead supply-chain efforts. Specifically, integrated supply-chains require a focus on what customers want and the best way to provide it. Logistics professionals should thus orient

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All other department on the re-emphasis on customers and be at the forefront of activities toward supply-chain integration. The quest for speed, value, efficiency, quality, and reliability has brought the worlds business to the brink of the supply-chain revolution. To my mind, the only question is, what looks everyone so long? After all, were not talking about rocket science. Were talking about a re-emphasis on the same basic tenet of business success that has existed since the birth of commerce. When you get right down to it, a supply-chain approach to business is simply a refocusing on whats important, the customer. As a logistics professional, youve no doubt been waiting quite some time for this day to come. No aspect of a businesss operation deals more directly or regularly with its customers than its logistics department. Its only logical that as supply-chain initiatives

force a clearer focus on what the customers want and how best to deliver it, logistics professionals will lead the charge. You know this makes sense, but dont expect everyone else in your company to see it. For some of your colleagues, moving form a focus on spreadsheets to a focus on the customer is a revolutionary change. It will be tempting to cast a cynical eye on these coworkers as they burst onto the scene with a briefcase (or laptop pc) full of what they think are original ideas. Theyll talk about heightened levels of customer service. Theyll talk about using logistics operations to add value for customer. Theyll exclaim that the company will be able to operate with virtually no inventory. Be kind. Dont burst their bubble. Just let them enjoy their revelation, even though its no revelation to you. Dont be sarcastic. Dont tell them that this could have happened a long time ago if the company had focused on growing business rather than cutting costs.

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Just smile, nod, and then get to work. As a key player in your companys logistics operations, you will assume the critical role in making integrated supply-chain initiatives a success. The notion of integrated approaches within a company is fine, but without logistics to drive and support that integration, its just not going to happen. Supply-chain initiatives arent just an invitation to the party for logistics executives; theyre an invitation to be the life of the party. Teaming up for supply-chain success Most carrier companies are developing supply-chain teams that would help and assist them in terms of decision-making process within the organization. The members of the teams are expected to communicate, coordinate and cooperate extensively to achieve satisfactory business results. Top companies such as Nike, IBM, Wal-Mart, Proctor and

Gamble, Xerox and Gillette considered a supply-chain team as a indispensable part of their business success. When it comes to moving product to market, integrated teams are far more effective than individuals. For logistics professionals, the days of rugged individualism are long gone or should be. No longer will the transportation department make a carrier-selection decision without first coordinating with customer service. No more will the warehouse supervisor implement a stock-location strategy independent of the production-planning people. And never again will purchasing or sourcing decisions be affected without a sound knowledge of how much and when that commodity will move upstream. In place of this rugged individualism-so characteristic of the decision-making process within the silos of most organizations successful companies are developing supplychain teams. These teams cut across organizational boundaries, embracing all of the

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parties who participate in moving product to market. The best of these also extend beyond the organization to include the external participants in the supply chain. The members of these leading-edge teams communicate, coordinate, and cooperate extensively. When working at peak efficiency unfettered by the functional turf protection that inhibits progress supply- chain teams can achieve some remarkable business results. For proof, consider market leaders such as Nike, IBM, Wal-Mart, Procter & Gamble, Xerox, and Gillette. Each and every one of these companies can point to a supply-chain item as an integral part of its overall business success. Moving from a highly segmented functional approach to a cross-functional team orientation can be a challenging task because of peoples natural resistance to change.

But as the industry leaders have demonstrated, its well worth the effort in terms of cost reduction, operational efficiency, and customer satisfaction. In tacking this assignment, one of the first questions companies ask is, who should be on the team? According to one industry expert, certain core members always should be represented, with additional members added depending on the business situation. More and more companies are working to develop a team-based approach to managing their supply chains, confirms David M. Bovet, a vice precedent with mercer management consulting in Lexington, mass. Yet industries and organizations vary so widely in terms of their traditional practices, that its difficult to prescribe a single model for all situations. Bovet and others who have helped companies build supply-chain teams do say, however, that a number of key functions must be represented on any team. These include logistics

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(Inbound and outbound transportation, distribution, and warehousing); supplymanagement functions such as sourcing, vendor-evaluation, and purchasing; and manufacturing-related activities such as production planning, scheduling, and packaging. Inventory management and customer service must be represented on the team, too. Most successful teams also count information systems as a core member, underscoring the notion that information technology is a key enabler for achieving the desired communication, coordination, and cooperation. Depending on the industry and the individual company, however, other members of the organization should be included on the supply-chain team. In a heavily promotionoriented industry, for example, the sales and marketing people should be represented

R&D should be considered for inclusion in new-technology-intensive industries like medical equipment or computers. Yet while its important to have all relevant areas represented on the supply-chain team, theres a danger of getting too many people involved. Be careful no to include too many functional areas on the supply-chain team, advises David G. Frentzel, a partner with Northeast Logistics, a consulting company based in Sherborn, mass. The problem is that the ream begins to mirror the entire organization, which can shift the focus away from the real supply-chain issues. In his work with clients, Frentzel has observed certain characteristics that lead to team success. Hes also seen obstacles to team building that can derail a team effort unless squarely addressed and overcome. To achieve any measure of success, the supply-chain team-like any organization-must set specific goals and objectives. It must clearly articulate what needs to be accomplished in key areas such as order cycle time, fill rates,

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inventory turns, on-time delivery performance, and so forth. Are there major purchasing or sourcing objectives to be met and what role will each of the team members play in helping achieve them? How about plans to reduce the amount of paperwork transmitted both within the organization and between the supply-chain partners? Setting and achieving these kinds of objectives demands a strategy and implementation plan. Performance measures also must be put in place. And the team needs a quantifiable means of measuring progress against the supply-chain objectives set. The accompanying sidebar offers a practical action plan for designing and implementing team strategy. Developed by professors Robert M. Monczka and Robert J. Trent, this comprehensive plan helps users cover all of the necessary bases. Though the potential risks. Applying a

cross functional team approach to streaming the flow of product to market represents a radical change for most companies. Not surprisingly, a change of this magnitude usually encounters resistance. In the typical organization, functional barriers have built up over the years. These barriers made of brisk and not of straw, are hard to bring down. The main reason why functional silos persevere, says consultant Frentzel, relates to the rewards system. Specifically, managers traditionally have been measured and rewarded on what they have achieved be it cost cutting or savings realized within their department or functional area. The notion of sub-optimizing their numbers for some larger goal is an unwelcome one. The first step in breaking down these barriers, says Frentzel, is for management leadership to make people understand that they may have to make decisions that may not be optimal for their particular functional area, but are advantageous from the stand-point

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of the companys overall supply chain. This process can be facilitated, he adds, by linking objectives and incentives to overall supply-chain goals. (The sidebar included here gives six specific recommendations for bringing down the organizational barriers.) Everyone agrees on the need to assemble the right team and set the proper objectives and implementation plan within the organization. But to realize the supply chains full competitive and market potential, the experts say, companies have to do more. They need to link their organization with external participants of the supply chain, crating an extended team. These partners include suppliers, vendors, distributes and customers. One of the most vocal proponents of the extended supply-chain concept is A.T Kearney Vice president James E. Morehouse, who has spoken and written extensively on the

topic. In the 21st century, were no longer going to have competition between companies, Morehouse writes in the fall 1997 issue of Supply chain Management Review. We are going to have a group of partners working together to serve the consumer better. And this group will be trying to outdo the other group. Given the extended supply chains collaborative nature, it becomes crucial to pick your partners with the greatest of care. You want companies that not only are tops in terms of the product or service provided, but also have staying power. The partner relationship in the extended supply chain should be viewed as a long-term arrangement, Morehouse says, not unlike a marriage. Importantly, the successful extended supply chain needs an information conduit that connects that connects all of the participants. Most companies have the requisite technology in place to extend the enterprise, Morehouse observes. The problem is they are not using it property.

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Ideally, information that becomes available at the most critical point of the chain that is, when the consumer makes the purchase should be immediately shared upstream with all of the other participants. This means carries, distributors, manufactures, component vendors, raw- materials suppliers and anyone else involved. Providing real-time visibility over point-of-purchase information helps everyone manage more closely to actual market demand, Morehouse says. And this, in turn, takes costly excess inventory out of the pipeline. Organizations that have successfully created a cross-functional supply chain- particularly one that extends to the outside partners consistently enjoy a competitive edge, according to the authorities in this area. There is definitely a strong correlation between

integrated supply-chain management and business success, concludes Bovet of Mercer Management Consulting, and related to the size of the company, either. Any organization of any size can benefit. The Real Supply-Chain Test The efficiency of logistics service companies in managing in managing the unstable conditions of their supply-chain is important in attaining optimum supply chain performance. Managing the chain should be preceded by applying the principles of the operations excellence and should be followed by a planned reaction to the increase and decline of demand. Executives should also identify the causes of preventable surges and shortages of demand while crating flexible management solutions to resolve these trends. Many companies have focused on enhancing their supply-chain performance though operations excellence. They have been able to achieve efficient and effective manufacturing by employing by employing a number of operational strategies, including cellular

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operations; quick setup/changeover

and just-in-time (JIT) principles; efficient

distribution operations that are thoughtfully designed and effectively managed; effective buying, scheduling and management of transportation; and developing the best process and technologies for demand planning and inventory management. Operations excellence embraces considerations that are necessary but are not sufficientfor achieving superior supply-chain performance. Although operations excellence is important, the real determinant of supply-chain performance is how companies manage surge and uncertainty that is, how they respond to any unplanned rise and fall in demand. These situations generally arise from

circumstances outside of the supply-chain organization. Resolving them, therefore, requires collaboration across the full management team. The most splendidly designed and managed supply chain will perform poorly if surge and uncertainty are not managed. That is because surge and uncertainty create unnecessary (and costly) capacity requirements, unnecessary inventory, and unnecessarily complex and therefore inefficient operations. Some causes of unnecessary surge and uncertainty include: Quarter-end, month-end, and year-end loading, which cause capacity constraints and peek management issues at every point in the supply chain; Poorly planned trade promotions; Long planning or processing-cycle times; Limited visibility into channel usage inventory levels; Poorly designed forecasting and demand-planning process; and

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Poor cross-functional communication and collaboration.

These issues generally are beyond the control of logistics and supply-chain managers. To achieve superior supply-chain performance, therefore, companies must establish crossfunctional management processes that allow their managers to address these broad-based issues. Otherwise, their investments in building superior supply-chain capabilities will not be fully exploited. Efficiency in the supply-chain

If supply chain solutions and identified and properly implemented, companies overall logistics costs can be reduced by more than 20% in many cases, according to john McKay, a partner with ProAction LLC, a Chicago-based global consulting firm. Too many top executives are still looking at downsizing and reducing labor expenses as a means of cutting business costs rather than at more effective, long-term operational-based supply chain solutions, claims McKay. One of the unfortunate facts associated with corporate downsizing is that top most manufacture companies represent 5-15% of the overall cost of doing business, as opposed to the 50-75% of costs that relate to the purchase of materials and distribution of finished goods. It is in these areas of operations that senior executives should be looking to build long-term cost and service efficiencies into their strategic business plans. Executives can find a quick fix by lying off employees, but thats all it is. The real, long-term cost reductions are achieved though improved efficiencies in logistics and supply chin management, says McKay. He adds that in todays complex, global business environment, often with extended supply chains, the need for cross-functional understanding and communications of

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Strategic goals are critical to achieving customer-focused purchasing and distribution solutions which provide competitive advantages. Functions such as distribution cannot operate in a vacuum. If true cost saving are to be achieved, it is essential that all business functions such as finance, marketing, purchasing, logistics and top management work together. There must be a though understanding of company strategies and risk management by all functions within the organization, says McKay.

While cutting costs through increased long-term logistics solutions requires more indepth strategic planning than downsizing, the result of integrated supply chain management can be significant, according to McKay. When we work with clients to help them define their best areas for cost-cutting and increased productivity, we focus on purchasing and distribution, he says. Then we help implement cross-functional agreements and alliances with third-party carries and vendors. Improved efficiencies in logistics and visibility throughout the supply chain typically result in reduced cycle times, improved quality, cost reductions and improvements are achieved through a close study of overall supply chain needs, beginning with the customer and extending back throughout the supply chain. Transportation in the Supply-chain Companies can realize significant cost savings in their supply chains by accommodating transportation concerns which represent a critical part of business strategies and logistics managements programs. Logistics programs should be enhanced to further improve supply

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chains that influence manufacturing operations and inventory levels. Information technology can be utilized to automate systems and to produce real-time data that supports inventory management tasks. It can also be used to accommodate various business processes designed to meet customer requirements from a logistics perspective. Moreover, information technology can be utilized to meet shipping compliance standards, reduce transportation costs and integrate pertinent business information.

Transportation is one of the last areas in the supply chain where business is focusing on reducing the cost of the goods, says John Foster, transportation vice president for the summit group, a Mishawaka Indiana-based systems integrator and developer of logistics software. As a key developer in his companys transportation management software, foster has watched this age-old industry grow up before his eyes. Where once the transportation process was seen as a lost cause something that had to be done it is now viewed as an important business strategy. Today, in fact, when coupled with business strategy warehousing, the distribution process commands respect under its working title of logistics management. Logistics management is a movement business cant ignore. College business schools now support departments - and even institutes dedicated to training people in logistics management. On the other end, we have all witnessed parcel carriers drive to maintain a competitive edge, which has created phenomenal logistics networks in the name of getting it there on time. Companies such as UPS and Federal Express have gone from quoting an average delivery time of five days to having it to your door by 10:30 a.m. the next day whether your business is in Atlanta or Amsterdam.

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When U.S Department of Commerce reports that nearly 60% of all fortune 500 companies logistics costs are spent on transporting products, executives begin to realize there is money to be saved in this area. The global marketplace cant be overlooked for its contribution to transportations new status, according to Philip Evers, Ph.D., an assistant professor of logistics management at the University of Maryland in college Park. Transportation is more important than ever in the sense that firms supply chains

are becoming more and more global, says Evers. Thus it is more important to be able to move product from overseas points to domestic points and vice versa. With total supply chain management, the manufacture is challenged to study and then forecast the entire operation: who ordered what from where and when? Based on that, what do you need to make, and when? And based on that, who do you need to buy from, and when? Business must examine their logistics supply chain to answer those questions accurately. Transportation is critical because it offers a variable- a window of time that is built into manufacturings link to the forecast of orders. And so, in this 90s practice of total supply chain management, transportation is now rather suddenly a critical piece, says Ducat. For Evers, the working reality of total supply chain management is information technology. Information is a substitute for inventory, he says. The better the information we have, the fewer inventories we need. In todays world, that necessary information is achieved through automated systems and the real-time data that are generated. Evers says that means firms are striving to manage their inventories through automation in other words, reducing their inventories by implementing information technologies.

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From simply the transportation aspect alone, the pressure to have the right information at the right time increases with every customer. As one industry veteran puts it, There is not much you can predict about transportation except for three things: it will be better, faster, and cheaper. In the current environment, shippers may revel in carrier service options, information abundance, and reduced inventories, yet at the same time struggle to meet carrier compliance standards and customer needs.

The business process of meeting customer requirements from a logistics side has become much more complex. As everyones critical piece of the supply chain, transportation has become completely a customer service issue on the outbound side, Ducat says. When it comes to keeping inventories down, for example, if manufacturing falters, logistics has to make it right. With lean logistics (similar to just-in-time manufacturing), customers put pressure on the vendor to have product available and get it to them when promised. Large firms have added to the pressure by enforcing rules as to how, when, and with whom a supplier is to ship. From Fortune 500 companies to mom-and-pop operations, the process has gone beyond manual handling. With all the requirements order patterns, supply patterns, information requirements, customer rules, export documentation, and bar coding a business may well lose its competitive edge if it does not move toward some form of electronic data interchange or information integration, Ducat says. While large companies have their own logistical puzzles to solve, automated industry seems most insensitive to the small shipper. Naturally, smaller companies dont have the budgets or perhaps even the need for the more robust, full-function software packages,

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not to mention the additional $10,000-plus needed for a radio frequency system device and printer. Evers emphasis that all roads leading to lean logistics follow the information technology. Whether by in-house operations or by outsource vendors, automating the transportation process cuts the costs, conquers shipping compliance rules, and meets customer requirements.

Currently, for example, the major carriers offer rate terminals-stand-alone PC-based terminals that give customers access to the carries shipping rates. These, however, clearly restrict the advantage of weighing different carrier costs. Stand-alone terminals also require manually transferring the days shipping data into the business system, a labor expense businesses find more and more difficult to justify. Major carriers are marking the trail with their drive toward information integration. In the future, we all need to be electronically connected, says Teri Darnell, marketing project manager for UPS. In March, the worldwide carrier sent letters to customers using vendor-shipping systems stating that, as of July 1, 1998, all new installations had to be connected electronically. The move further emphasizes the industrys conviction that integrated information saves time and money for all parties involved. The UPS OnLine Compatible vendor program assists all shippers in making the move toward the more extensive automating software programs. These third-party vendors provide UPS-certified shipping solutions that electronically connect with UPS by providing access to all of UPS tracking services from the shippers PC. In addition to in house integrating and automating benefits, shared features for shipper and carrier include

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shipments tracked with the shippers own reference numbers generated from its inventory or billing system, elimination of the paper trial, streamlined shipping procedures, reduced labor costs, and alternative billing options. Today, almost all shippers accept electronic transmissions, which give businesses the advantage of immediate information on the location of a package or shipment.

Furthermore, the demographic information gained from an automated system is the first step in offsetting costs and gaining customer service prowess. What would any growth industry be without the boon of a new service to sell? Third party logistics provides known as 3PLs are business that handles transportation management functions for shippers. The business may turn over all or only selected portions of the process. Typically 3PLs take the finished goods and complete the label and manifestation process of shipping. They are responsible for the personnel, the building, and, in most cases, the automating software. This industry has grown dramatically through the 90s, says Evers, who speculates that the growth rate will only continue. While many of the large carries now offer third-party logistics management services, there is also a growing number of smaller independent operations. In response to the growing industry, Mercer Management Consulting has conducted an annual survey of third-party logistics practices since 1991. The 1997 survey indicates that, after starting conservatively, fortune 500 users buy a wide variety of third party logistics services. The logistics functions most frequently outsourced are shipment consolidation, warehouse management/operations, logistics information systems, carrier selection, and rate negotiation.

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The surveys response from third-party logistics provider CEOs shows continued growth rates for the industry of between 20 percent and 30 percent. The trend that began with fortune 500 companies will continue to trickle down. A lot of what has been done in the way of 3PLs has been by these larger companies because it is a way to get around some of the fixed costs of their operations, says Evers.

Yes, I see the use [of 3PLs] as probably most important for small companies that do not have the transportation and shipping expertise. If you outsource, do you loss control? Not necessarily, says Ducat. if you 3PL is good, it becomes a vendor to you. It is critical, however, that your 3PL has the same service guidelines as your business. Furthermore, Ducat emphasizes the importance of the data to be maintained. If the data are valuable to you and they should be integration between your business system and the 3PLs is essential. Handing over transportation and frequency, warehousing functions to a third-party provider can be very appealing to a shipper of any size, but the prospect of losing control is daunting. According to the Mercer survey, Reservations concerning the possible use of third-party services continue to focus on uncertainties about the ability of the 3PL to deliver the services at the agreed-upon price, loss of control issues, and uncertainties about the third-party providers ability to meet service requirements. For many companies, the rig solution takes a little innovation. For example, one national manufacture of retail goods has found a way to take advantage of third-party transportation and warehousing services while retaining control of the all-important data issue. Although the third-partys distribution site and the manufactures head quarters are in different states, the transportation software erases the geographic distance.

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From its headquarters, the manufacture manages the input of different customer and carrier rules, rates, and requirements into the system. At the distribution end, the third party executes the labeling, documenting, rating, and shipping functions of the system. The end result is a jointly managed system in which the manufacturer maintains control and integration with its systems while still outsourcing the cost of managing the facility.

More and more this company will move the transportation function down to the distribution site, Ducat says. Yet eventually what they really will have done is move the control of the transportation function completely to the software. Ultimately, the system itself, though joint rule creation, will manage distribution for them. As industry steels toward the millennium, transportation will continue to demand its right of way within the supply chain. It is no surprise, for example, that the internet is going to become an integral transmission pipe for transportation management. Carries already on the internet with rate information and routing and delivery schedules have made it that much easier for customers to reach them. There is no doubt that agility is going to be impotent in the future, Evers said. Firms will need to be even more flexible to handle all sorts of customer demands, managing one truckload or a thousand at a time. Ducat says that the vice precedent of distribution who spends time figuring out how to get jobs done today will soon fall behind competitive counterparts who spend their days figuring out how to do jobs better. A business goal is to build its logic into its systems and hardware so that the focus can be on improving, versus managing the mundane tasks of everyday execution, he says.

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With the right system in place whether it is an in-house information integration system, an outsourcing system, or a combination, or a combination distribution personnel can tackle questions they previously never had time for: how to be more productive, how to save costs, and how to build leverage with both customers and carries. And keep in mind

that while the systems in place afford them the time to question, it is the information that is generated that reveals the answers. The IT-Enabled supply chain Several features should be integrated in information technology-based logistics supply chain program. The supply chain program should integrate an enterprise resource planning software with finance, distribution and materials management features. It should also support channel integration software that promotes electronic data interchange and forecasting applications. Moreover, the logistics supply Chain program should accommodate decision support software with manufacturing, Network analysis and transportation scheduling capabilities. IT developments over the past eight years have enabled companies to achieve a quantum leap in their supply-chain performance. Those that do not have robust IT- enabled supply-chain capability, by contrast, simply can not compete effectively in todays business environment. An IT-enabled supply chain requires the following elements: Enterprise Resource Planning (ERP) software, which links functions such as finance, sales distribution, materials management, and production planning in an integrated way with a common database. ERP is particularly valuable for linking global operations and providing a current and common view of a corporation operational

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status, such as current sales by customer or geographic area, inventory status, and so forth. Decision Support software, including supply-chain optimization and demandplanning software. These programs, which include such capabilities as

forecasting, Distribution Resource Planning, manufacturing, scheduling, network analysis, operations planning/optimization, and transportation scheduling, often are very important for effective supply-chain management. These capabilities are being integrated with ERP software as ERP vendors expand their softwares functionality and conclude alliances and formal product-integration programs with decision-support software developers. This convergence is one of the most powerful developments affecting the potential of supply-chain management. Manufacturing and Logistics Execution software, which manages shop-floor control, costs, documents, warehouse-management systems, transportation, etc. The integration of this software with the types of operating software mentioned above is contributing to enhanced supply-chain performance. The emergence of real-time inventory-development software, moreover, provides companies with entirely new tools for logistics, management. Channel Integration software, such as electronic data interchange (EDI) and new approaches such as collaborative planning, forecasting, and replenishment (CPFR) and other Internet-based application. The emergence of these software packages is allowing companies to manage the extended supply chain more effectively and efficiently.

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To develop distinctive supply-chain capabilities, companies still will need to make the most of their supply-chain infrastructure, operating processes, and organizational design in addition to fully using IT support. Nevertheless, with advances in application software, network linkages, and the ability to integrate more types of software, an IT-enabled

supply chain will be at the core of differentiated supply-chain strategies in the new e new millennium.

Benefits of Improving Supply Chain Management Supply chain management enables businesses to reduce costs related to the movement of finished products from the production line to consumers. The product reaches the

consumers in the most efficient way possible through the coordination of activities among suppliers, distributors, carriers and the customers. Studies of companies who participated in supply chain management initiatives reveal that costs in inventory management, transportation and warehousing are minimized. Furthermore, customer satisfaction is enhanced through timely deliveries and accurate responses to custom orders. Supply-chain management is on everybodys mind these days. Articles in the trade press and business publications like Fortune are heralding it as the next source of strategic competitive advantage. Leading authors such as re-engineering guru Michael Hammer and retail-marketing maven Roger Blackwell are spotlighting the supply chain in their latest work. At industry conferences, too, supply-chain topics have moved front and center on the agenda. Why the instance, widespread interest in this emerging management technique? The answer is simple: Companies increasingly recognize the tremendous payoff potential in

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Successful supply chain management. They read about Wal marts leveraging of the chain to achieve a dominant position in the retail market place. They hear of companies like Dell computer reconfiguring the supply chain to respond almost immediately to

customized orders. Theyre intrigued by the bold measures taken by M&M Mars to virtually eliminate standing inventory from the pipeline. The supply chain payoff can come in many forms. It might be a reduction in transaction costs through eliminating unnecessary steps in moving product to market. It could be enhanced customer service that comes from closer coordination among sources and vendors upstream and carries, distributors, and customers downstream. Or maybe it is the improved market share that flows from better customer service or lower costs. In any case, successful supplychain management brings compelling bottomline benefits. All you have to do is look at supply chain leaders like Xerox, IBM, Chrysler, Nabisco, Procter & Gamble and Becton Dickinson, says David M. Bovet, a vice president of Mercer Management Consulting. There is definitely a strong correlation between companies that are paying attention to the integrated supply chain and business success, Boyer observes. The research and consulting firm of Pittiglio Rabin Todd & McGrath (PRTM) has attempted to quantify this correlation. Through its comprehensive integrated Supply Chain bench marking study, PRTM found that best practice supply chain management companies enjoyed a 45 percent total supply chain cost advantage over their median competitors. Specifically, their supply chain costs as a percentage of revenues were anywhere from 3 to 7 percent less than the median depending on the industry.

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Though theres general agreement that coordinating and integrating the flow of goods to market makes eminent business sense, mast companies have a tough time assigning a quantitative payback figure to this exercise and yet as any professional who has ever tried

to advance a project know, top management wants to here about the return expected from the investment it is being asked to make. Put another way, its Show me the money. Part of quantification challenge lies with the nature of the term itself. For one thing, far too many executives still fail to grasp the basic components and processes much less the strategic potentialof successful supply chain management. A common frame work of understanding is, in fact, a prerequisite to the quantification process. One of the best definitions of supply chain management offered to date comes from Bernard J. (Bud) LaLonde, Professor Emeritus of logistics at Ohio State University. LaLonde defends supply chain management as follows: The delivery of enhanced customer and economic value through synchronized management of the flow of physical goods and associated information from sourcing to consumption. Within the organization the supply chain embraces a wide range of functional areas. These include logistics related activities such as inbound and outbound transportation, warehousing and inventory control. Sourcing, procurement and supply management fall under the supply chain umbrella, too. Forecasting production planning and scheduling order processing r and customer service are all part of the process as well. As the from sousing to consumption part of our definition suggests, though, achieving the real potential of supply chain management requires integration not only of these entities within the organization, but also of the external partners. The latter include the

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Suppliers, distributors, carriers, customers and even the ultimate consumers. All are central players in what James E. Morehouse of A.T. Kearney calls the extended supply chain. The goal of the extended enterprise is to do a better job of serving the ultimate

consumer Morehouse explains. Superior service, he continuous leads to increased market share. Increased share, in turn, brings with it competitive advantages such as lower warehousing and transportation costs, reduced inventory levels less waste and lower transaction costs. The customer is the key to both quantifying and communication the supply chains value confirms Shrawan Singh, wise precedent of integrated supply chain management at Xerox. If you can start measuring customer satisfaction associated with what a supply chain can do for a customer and also link customer satisfaction in terms of profit or revenue growth, Singh explains then you can attach customer values to P&L and to the balance sheet. Given the broad scope of supply chain management activities and particularly considering the extensive integration of outside partners involved quantification of the pay back may not be easy. This is really one of the biggest challenges facing supply chain professionals today, says Peter J. Metz, deputy director of the Center for Transportation Studies at the Massachusetts Institute of Technology. And yet that need this kind of quantification to get management to invest in the development of supply chain resources. Based of his experience with companies participating in MITs Integrated Supply chain management program, Metz has found that the most commonly reported bottom line benefits sender on reduced costs in such areas as inventory management, transportation.

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And warehousing, and packaging; improved service through techniques like time based delivery and make to order; and enhanced revenues, which result from such supplychainrelated achievements as higher product availability and more customized products.

The companies studied by Metz have recorded a number of impressive supply chain accomplishments, including: A 50-percent inventory reduction. A 40-percent increase in on time deliveries. A 27-percent decrease in cumulative cycle time. A doubling of inventory turns coupled with a nine-fold reduction in outof stock rates. A 17-percent revenue increase.

On a broader scale, research conducted by Mercer Management Consulting Reveals that organizations with the best supply chain typically excel in certain pivotal performance areas. Specifically, they outperform their counterparts along such key metrics as reducing operating codes, improving asset productivity, and compressing order cycle time. In a separate study Mercer found that close to half of all senior executives survived had specific supply chain improvement projects among their top ten corporate initiatives. This is a resounding affirmation at the highest levels of supply chain managements competitive potential. A study by the management consulting firm of A.T Kearney has come at the supply chain pay back from another angle the costs of not paying careful attention to the supply chain process. The Kearney consultancy found that supply chain inefficiencies could waste as much as 25 percent of companys operating costs. Thus assuming even a

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Relatively low profit margin of 3to4 percent, a 5-percent reduction in supply-chain waste could double a companys profitability.

Finally, the PRTM study cited earlier documented the powerful advantages of supplychain management across a range of critical measures. The leading companies, for example, enjoyed a cash-to-order cycle time that was fully one-half of the median companies. Similarly, their inventory days of supply turned out to be 50 percent less than the median. The best-in-class companies, moreover, met their promised delivery dates 17 percent more often than the rest of the pack. These are some of the big-picture numbers. Most companies, though, find it more meaningful to focus on the payback potential of specific activities within the total supplychain process. The following examples illustrate the kinds of benefits that can be

realized. Individually, these improvements can bring important cost savings and service enhancements, collectively; they can lead to dramatic breakthroughs in profitability and market share. Distribution network optimization. Optimizing the distribution network- that is determining the best location for each facility, setting the proper system configuration, and selecting the right carriesbrings immediate cost advantages of 20 to 30%. Thats the figure determined by IBMs Wholesale Distribution Industry Segment, based on consulting engagements in a wide range of industries. This typically breaks down into transportation savings of 15 to 25 present and improvements in inventory- carrying cost of 10 to 15 percent, says Mark Wheeler, national solutions manager for the IBM consulting unit.

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Shipment consolidation. A proven, though often overlooked, supply-chain lever lies in shipment consolidation. Nabisco offers an instructive example in this

regard. For one retail customer, the company had been delivering product from multiple plants via six different LTL deliveries. Through the use of a third-party logistics provider, it was able to consolidate these multi-vendor loads into two truckloads. By strategically consolidating the shipments, reports Rick D. Blasgen, senior director of product supply, Nabisco cut its transportation costs by half. On top of that, it reduced inventory levels, increased inventory turns, cut lead-time, improved on-time delivery, and enchased case-fill rates. Cross-docking. Another supply-chain technique with proven payback potential is cross docking. This is the practice of receiving and processing goods for reshipping in the shortest time possible and with minimum handling and no storage. According to Maurice Trebuchon of coopers & Lybrands SysteCon division, cross docking can yield savings of 25% or more over conventional warehousing. Speaking at this years annual CLM meeting, Trebuchon cited one manufacture that used cross docking to achieve a net savings of $0.84 per ton of fright processed. The savings came from the elimination of costs related to put away and picking and storage. Supplier management. Research from McKinsey & Co. demonstrates the substantial improvements possible through aggressive supply management. An article by McKinsey consultants in the winter 1998 issue of supply chain management review mentions a client in the automotive industry that had successfully integrated vendors into its product-development process. On one particular team, the integration paid dividends in triplicate: the parts count dropped by 30 percent, the number of

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assembly steps and material specifications was reduced by half, and development time shrank from years to months.

Supplier integration. The abundant advantages of supplier integration were again evident in a two-year study conducted by the Global Procurement and Supply Chain initiative at Michigan State University. Drawing on responses received from around the globe, the study showed that companies that involved suppliers earlier on in the product-design and -development process consistently outperformed those that did not. This was true across a range of supplymanagement metrics. The comparative improvement in purchased material costs alone was 15 percent.

The examples given above merely illustrate the kinds of competitive advantages that can be captured through aggressive supply-chain management. In actually, opportunities for cost savings and enhanced service abound at all points in the chain-from initial sourcing all the way to the point-of-sale business transaction. For those companies that act quickly and decisively to capitalize on supply-chain opportunities, the long-term, bottom-line benefits are there for the taking. Just look at the acknowledged supply-chain leaders-from Wal-Mart on down. As for those organizations that choose the business-as-usual approach to moving goods to marketwell, OK. But keep in mind this admonition from Damon Runyon: the race does not always go to swiftest or the strongest, but thats the way to bet.

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LOGISTICS AND THE INTERNET

Overview

The Internet. Only a few short years ago, the word was part of the argot of academic and government specialists. Now, it is the most talked-about application of technology since Alexander Graham Bell made the first phone call to Mr. Watson. It is touted as the shopping mall of the future, something that will change the way that consumers and corporations alike do business. Widespread access to the internet, largely via the World Wide Web a graphical interface that makes the internet user friendly- is having a profound effect on the way goods and services are sold worldwide. But exactly what will those effects be? What does it mean for logistics managers? Is the internet ready for prime time? Is it really the pathway to commerce? All that still is largely guesswork. Logistics managers increasingly recognize the impact that the internet will have on business in the next few years. However, logistics professionals are bound to encounter unfamiliar concepts and catch phrases as they join the information superhighway. These buzzwords include ASC X12 or Accredited Standards committee X12, commerce server, electronic commerce, electronic data interchange, MIME or Multipurpose Internet Mail Extensions, the RSA or Rivest-Shmir-Adleman cryptography method, transaction set and value-added network. Sorting the buzzwords from the balderdash remains a difficult task. Lets take a look at those concepts and catch phrases that will surface time and time again as you make decisions about your electronic future.

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ASC X12: Accredited standards committee X12 is responsible for developing the most common set of electronic data interchange (EDI) standards in the United States. Its

administrative arm is data interchange standards association Inc. A standard called Tradacoms is common in Europe. Both will likely be blended into EDI-FACT (Electronic Data Interchange For Administration commerce and transport), a worldwide EDI standard championed by the international standards organization. Commerce server: A transaction-capable network server. Often integrated with a regular web page and set up to interface with other business applications to verify a consumers credit-card information or query and update databases. Electronic commerce: A very broad term. Its when one companys computer conducts a business transaction with another companys computer. But for logistics professional EC can include everything from collecting data via barcode scanners to tracking shipments via the web. Electronic Data interchange: The technology that makes electronic commerce possible. It features standardized transaction sets that feed information to purchase orders, shipping documents, and so forth. EDI software translates data extracted from a database into a standard format that can be transmitted by communications software. Some businesses have been slow to adopt EDI because the transaction sets dont fit their current business process. MIME: Who says electronic commerce has in to involves database and Web interfaces? Multipurpose internet main extensions allow binary files to be sent over the internet. You can attach shipping manifests and purchase orders to e-mail messages. Your system must support SMTP, the internet protocol governing electronic mail transmissions.

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RSA: This is the Rivest-Shmir-Adleman highly secure cryptography method developed by RSA data security Inc. Its built into many commerce servers. RSA uses a two-part

key. The owner keeps the private key. The public key is available to others. The public key is used to encrypt and send messages to you that only you can open with your private key. Some people use RSA to crate a simple digital signature that travels with a message. The senders public key is used to authenticate the signature. Transaction set: In simple terms, its a collection of transactions in a standardized format. Your W-2 tax form is a transaction set with fields that represent your name, address, income, etc. Any field can be updated separately, but information is usually transmitted as a full set. Value-added network : In general, its a data-switching network that assists with other functions that a business needs, from translating data to fit specific transaction sets to storing and forwarding business data at set times.

Electronic commerce and Logistics The emergence of electronic commerce is expected to affect business in general and logistics activities in particular. It will facilitate a direct connection to consumers and enable companies to bypass channel partners, such as wholesalers and retailers, to create a new cost structure. As for logistics, electronic commerce is anticipated to significantly alter forecasting, order management and inventory planning. These changes should compel logistics managers to learn about electronic commerce. We are seeing the beginnings of a revelation in the marketplace, brought on by the rapid evolution of electronic commerce or e Commerce. The rapid development and adoption of the internet as a marketing tool over the past two years have brought the concept of

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electronic commerce to life. The internet has created a new marketing channel that will have profound implications for how companies do business and for their logistics activities. The e commerce revolution has the potential to significantly change how companies operate. For example, e commerce will provide a direct link to customers, allowing companies to mine a wealth of information about their customers and then target their marketing efforts based on the information they gather. In addition, e commerce will create opportunities for disintermediation in all sectors of industry. That is because it will create not only direct access to customers but also a cost structure that may make it feasible to bypass channel partners (such as wholesalers and retailers) thereby changing whole industry structures. In some cases, e commerce will eliminate barriers to entry and allow new entrants and smaller companies to reach customers worldwide without building a global sales and distribution system. E commerce certainly will affect logistics. It has the potential to radically change forecasting, order management, and inventory planning. We see evidence of such change already: Wal-Mart, for example, is trying to create an industry standard by using the internet to share sales and channel-inventory information with its suppliers. In addition, the added flexibility offered by e commerce linkages will promote more make-to-order, configure-to-order, and postponement strategies. Finally, as disintermediation becomes more common, shippers will face new transportation requirements that generally will mean shipping smaller, more frequent orders. Logistics managers should become familiar with the internet and begin to explore and think creatively about e commerce applications. They will be here sooner than you think.

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Virtual Retailing and Logistics The concept of consumer direct and virtual relating is becoming poplar in the world. The two major requirements of the concept are order-management interface and merchandising systems and efficient delivery mechanisms. There are three possible approaches to developing efficient delivery mechanisms. These include the peapod approach where ordered items are assembled then delivered; the value-added pickup point approach which entails a designation of distribution warehouses were the item can be picked up for delivery and the in-home delivery system which entails the assembly of orders for delivery to customers who have facilities to store them. More and more consumers are ordering well on-line a development that has profound implications for logistics. Technology is beginning to penetrate everyones life. One only is people being exposed to technology at an earlier age, but they also are becoming more comfortable using technology. One need only visit a bank to see tellers sitting unoccupied while long lines queue up at the ATM machines to realize that technology is rapidly being accepted by people in all walks of life. In addition, more and more homes have (and are using) personal computers. As a result, on-line services are growing at astronomical rates. One trend that is motivated by these two forces known as consumer direct or virtual retailing is beginning to take hold. In a nutshell, it involves consumers selecting and ordering goods on-line, rather than by visiting a retail establishment. The goods then are either delivered direct to the consumers home or are made available for pickup. Though consumer direct unlikely to ever dominate the retail scene, most

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analysts believe it will be a significant (and profitable) industry segment. Some estimates show it gaining as much as 15 to 20% of grocery sales in the next seven years. Consumer directs requires two key capabilities. The first is a virtual shopping and ordermanagement interface. This can be as simple as a catalog and a fax or as sophisticated as a virtual supermarket with aisles displayed on a personal computer.

Shoppers can walk the aisles, select merchandise, obtain nutrition or other information about the product, and place and pay for their order on-line. At companies like peapod in Chicago, thousands of customers are using such computerized ordering and productdisplay interfaces today. The second capability that is required for consumer direct service is an efficient delivery mechanism. There are several approaches that are considered feasible: The peapod approach, where a third party walks the supermarket aisles, assembling the order and then delivering it directly to a consumers home. The value-added pickup point approach, in which a distributor establishes an item picking capability in its warehouse, picks an order, and then delivers it to a pickup point (such as a gas station ), where consumers can drive in and pick up the groceries on their way home from work. The in-home delivery approach used by streamline of Boston, which assembles grocery orders in its distribution centered for delivery to consumers who have a tree-temperature unit (shelves, refrigerator, and freezer) at home. Streamline now has broadened its services to include laundry, film processing, and video rentals. Although the efficiency and desirability of consumer direct still must be proved, this development will have profound implication for logistics managers. It will be their

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responsibility to understand emerging consumer preferences and needs, and then to develop new channels as well as new handling and delivery capabilities geared toward serving the individual consumer.

Internet Retailing Logistics plays a critical role in the success of internet retailing. As electronic shopping continues to proliferate, the pressure for retailers to be able to deliver products right at the customers doorstep has intensified. Carries and third party logistics providers that can handle the order fulfillment an distribution of internet-marketed products fill this need. Among carries, federal express has taken the lead with its service called business link, which involves on-line ordering and worldwide delivery. Logistics just might turn out to be the crucial element that separates the successful internet retailer form all the others. Consumers surfing the internets World Wide Web now have dozens of places to spend money. Retailers have opened virtual storefronts to peddle ties, books, perfume, and computers almost anything found in the shops at the local brick-and-mortar mail. Although information-technology providers have worked out most of the bugs in internet commerce, the question remains: Have retailers mastered the logistics of delivering products direct to the costumers doorstep? After all, consumers accustomed to ordering products with the click of a mouse will expect instant delivery of their purchases, intact and damage-free. Its totally against the culture of the internet to wait six days for delivery, says Michael James, vice president of marketing for FedExs Logistics, electronic commerce and catalog division.

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Electronic shopping provides a new world of opportunities for carries and third-party logistics companies that can handle the fulfillment and distribution for internet sales. At the moment, though only FedEx has announced definite plans for seizing the Net. Logistics is the most neglected element of the core services in the [on-line retail] value chain. The front end had gotten all hype, says Benn konsynski, Emory University who studies electronic commerce. Despite the rush to build electronic storefronts, web retailing can only be described as in its infancy. Konsynski says sales over the internet in 1995 amounted to less than a billion dollars, and most of those transactions involved computer hardware and software. Still, the promise it there. It will rapidly move forward, he says. The mechanisms of the market are just moving into place that builds trust in all dimensions of commercethe online shopping, payment and order fulfillment, and after-the-sale service systems. One of the first companies to seize the net in a big way is Wal-mart stores Inc. of Bentonville, Ark. The retail giant developed its own internet retail software and opened a cyber store on the web last July. Products ordered online are shipped either form a WalMart holding warehouse located in Cearci, Ark, or shipped direct from the manufactures distribution center. All orders are sent to U.S buyers via UPS 2-day ground delivery, says Wal-Mart spokeswoman Stacey Webb. At press time, the nations largest retailer was looking into ways of shipping orders overseas. But on-line retailing isnt the sole province of retail giants like Wal-Mart. The nations biggest software companies are spending millions to convince mom-and-pop merchants of the great opportunity awaiting those who invest in the requisite computer hardware and software. a professor at Atlantas

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Microsoft corp. of Redmond, Wash., for instance, bought a California company called Eshop, which had developed software for internet retailing. Microsoft used Eshops code base to develop Microsoft Merchant Server, which it hopes to market to internet access providers, companies that sell individual and businesses a gateway to the information super-highway. The access providers could, in turn, sell their own value-added services, such as creating and managing web store sites for merchants in their service areas. Microsofts archrival, Netscape communications corp. based in Mountain View, calif, also sells software that helps business set up virtual malls. A Netscape representative said about 300 merchants are using Netscapes software to sell products over the internet. One of those merchants is J.C Penney. The Dallas-based chain and catalog retailer used Netscape software to provide secure on-line transactions and Netscape software tools to help design an electronic store site established last year. J.C Penny officials report that web retailing didnt pose a distribution problem because they employ the same system used for their catalog sales operation. Six distribution centers across the country handle fulfillment for web orders just as they do for mail orders. Once an order is received, the merchandise is shipped to the store closest to the customer for pickup or sent via UPS. The fulfillment is the easy part, quite frankly, says Marisha Konkonwski, Penneys electronic retailing manager. She adds that linking databases on existing computer systems to the web retail site posed more challenges to her company than distribution has. Other companies such as IBM in White Plains, N.Y., and AT&T Easy Commerce services in Parsippany, NJ, provide hosting services that help merchants peddle products on the web. At press time, AT&T had just announced its Secure buy service for

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businesses internet retailing. The service allows merchant to accept and track orders and track orders and process credit-card purchases. However, AT&T is leaving it to the individual merchants to arrange for product delivery. IBM, for its part, has established an on-line shopping mall; world avenue, on which retailers can lease cyberspace to set up shop. IBMs world Avenue mall takes advantage of the new standard for on-line payments known as secure Electronic transactions, developed by IBM in cooperation with other financial-service and technology companies. Although IBM will provide participating merchants with special software to gather marketing statistics on online customers, it too is letting the stores handle their own distribution for the time being. Take Robert Waxman camera as a case in point. The Denver, Colo.-based company sells cameras and phographic supplies through a cyber store set up last summer on IBMs world avenue mall. Waxman Camera processes orders on some 7,000 SKUs within 24 hours of receipt and ships products from its Denver Warehouse. It offers three levels of shipping service. Most goods distributed in the United States are sent via UPS and delivered in two days. For those who cant wait, Waxman camera also offers next-day delivery via FedEx at an additional charge. DHL handles international orders. Although several technology providers can help merchants develop web sites that accept orders on line, only one company at the moment offers Net retailing services plus distribution. FedEx has started a service called Business link that integrates on-line ordering with worldwide delivery. Launched in October 1996, business link gives

merchants software to create their own on-line catalogs housed on the express carriers server.

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FedEx itself actually developed the publishing tool that creates the electronic catalog, although the carrier does use a Netscape server in order to take advantage of Netscapes on-line security features. When a consumer places an order on line, FedEx electronically transmits it to a second server at the merchants location for fulfillment. FedEx then sends a driver to pick up the merchandise, put the item in the carriers distribution system, and delivers it to the customers door. We facilitate the electronic ordering on the front end, says Janes. And we facilitate the shipping and link everything to the FedEx tracking system. A merchant then can have real-time access [to order information]. To handle catalog changes, FedEx established a non-internet direct line between the merchants server and the FedEx business Link server. That way, a merchant has access to the catalog to update items sold. He can run specials or take inventory off, says Janes. Insight Direct, which sells computer products and peripherals like monitors and printers, tested a prototype of Business link last year. As of December, the Tempe, Ariz.based mail-order Company was processing about 1,000 orders a month via business link. Insight directs offers some 24,000 SKUs form its web store. It ships orders either from its Tempe warehouse or direct forms its suppliers facilities. We transmit [orders] to our vendors via EDI so we dont have to handle them, says Denny Chit tick, Insight Directs senior vice president of information systems. But this process is transparent to our customers. Although no other carrier has yet to offer the same combination of Web-store creation and delivery services that FedEx does, its safe to say that many transportation providers

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Are keeping a close eye on the developments in internet retailing. Most carriers are looking at ways to deliver products sold over the Net, says Art Mesher, a research director at the Garther Group in Stamford, Conn. FedEx is offering to build web sites. FedEx is trying to be proactive in bringing its customer base into selling products over the internet. FedEx rival UPS says it has plans for a much larger electronic commerce strategy. Officials say they are looking at a broader supply-chain strategy that involves the business transactions between suppliers that precede the consumer sale. Company spokeswoman Jennifer Jiles says UPS is reviewing plans to become active in the total electronic commerce supply chain, not just the tail end, where the goods are handed off to the consumer. Were probably one of the few [companies] that has the infrastructure to deliver to every address in the United States and to some 200 countries, both on the ground and in the air, says Jiles. And well continue to be a major player in terms of the actual delivery of goods and service. [But] were looking to be involved in the total supply chain rather than focusing on the retailer-to-consumer [segment]. International small-package carrier DHL worldwide Express in Redwood City, Calif., still is formulating its strategy for supporting internet retailing. Alan Boehme, DHLs director of customer access and logistics marketing, worries that a role similar to FedExs could damage existing business relationships, especially if a carrier helps a manufacturer or retailer engage in internet selling that disinter mediates or eliminates the middlemans role. Were trying to work through this issue, says Boehme. What happens to those people in the middle? Youre creating a new channel. If I was person in the middle and I

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saw a shipping company doing this to me; would I want to do business with them? He adds that his company expects to announce its strategy early this year. Of course, disintermediation will only become a concern if American consumers embrace on-line shopping. Before that happens, retailers will have to convince shoppers to purchase merchandise at a virtual store rather than the one at the mall. How important then will the ability to handle home delivery be to the success of internet retailing? Some, like John Browne, Microsofts Internet commerce product manager, dont believe that logistics services will offer the defining difference for retailers on the Net. Shipping is hardly the acid test of any retailing problem, he argues. There are a lot of shipping vendors available. Basically, from a logistics standpoint, shipping is fairly straightforward. Its the same as any cataloger. There are [tough] problems [with] selling on the web, but shipping is not one of them. But other industry experts take the opposite view. They contend that building electronic storefronts is the easy aspect of internet retailing, whereas prompt, accurate order fulfillment and fast delivery are the most difficult part. The logistics challenge is the higher velocity and higher volume with its [small] order-size lots, says Konsynski of Emory University. Mesher, for one, argues that logistics will quickly become the mechanism that distinguishes successful web retailers form the also-rans. Its not hard to build a web page and put your catalog out there. Theres nothing strategic about it, he says. What does matter is service, training, warranty, and installation and it will only accelerate how quickly firms [realize the] need to use logistics as a differentiation.

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In fact, Konsynski believes that the big winners in web retailing will be the companies that rethink their logistics structures to offer new services and products that go beyond whats found in the electronic catalogs now being posted on the internet. The change in logistics opportunity alters the whole spectrum of services [offered on the Net], he says. Thats why big carries still have to be a critical part of this future. Clearly, cyber stores have the potential to crate a huge new sales channel in the 21 st century. Although retailers will look to their mail-order experience for insight into how to manage home delivery, distribution will play a role as crucial as the information technology in getting customers to try and stick with on-line shopping. Although not as sexy as the software, the home-delivery aspect will surely provide new opportunities for transportation and third-party logistics providers, especially if web retailers discover that customer service not glitz matters most to consumers.

The Web and Logistics Software It may be easy to cross internationally barriers to buy something online, but the web hasnt made delivering the package any easier. So software that can help automate all the intricacies of shipping products overseas is quickly becoming a must-have item for the big package delivery companies. Many big manufactures are already well-versed in the completive of selling and shipping overseas, said Michael Comstock, senior vice president of e-commerce and planning at DHL worldwide express in redwood city, calif. But e-commerce opens this up to more and more people, he said. Youre dealing in many cases with buyers and sellers that are unsophisticated. Now, DHL and rivals FDX corp. and United Parcel Service of America Inc. are rushing to evaluate packaged logistics applications that were designed with international trade in

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mind. Calculating the cost of tariffs and duties that will be owed on shipments is one priority for the package carries. Automating the process of vetting foreign buyers for compliance with export regulations is also high on their wish lists. Those capabilities are becoming competitive necessities, said Risk Sponholz, global e-commerce product manager at Atlanta-based UPS. But things are just starting to take shape. For example, FDK the Memphis-based parent company of federal Express Corp. and several other packages carries has invested in Vastera Inc. and is expected to use the Dulles, Va., vendors software to do export compliance checks. Stacie McCullough, an analyst at Forrester Research Inc. in Cambridge, Mass., said she expects that soon FDX will announce specific plans for helping customers with global logistics. But FDX officials wouldnt comment on that last week. UPS plans to start automating compliance checks by October, using software from NextLinx Corp. in Silver spring, Md. But at first, that will involve only the companys own customers brokers at its shipment hub in Louisville, KY. UPS has also begun to evaluate the ability of NextLinx, Vastera and New York-based Syntra Inc. to calculate overseas delivery costs. DHL is examining the same software for potential use internally and at customer sites. Calculating shipment cost is its top priority, but export compliance issues checks and calculating the full cost of foreign shipments is no easy matter because government regulations and tariff schedules from around the world need to be tracked and updated every day, said John Fontanella, an analyst at AMR Research Inc. in Boston.

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The Web as a Gateway to Logistics Data A Web-based logistics system developed by the U.S Transportations Command has only been in operation for a year, but it has already changed the way the Defense Department tracks and moves troops, equipment and supplies around the world The Global transportation Network, headquartered at Scott Air Force Base, I11. Integrates command and control, transportation and logistics data so commanders can track the identity, status and location of cargo and passengers. The network also gives commanders airlift, air refueling and sealift schedules to coordinate the movement of personnel and materiel. GTN collects data from more than a dozen transportation systems, run by the services and Defense Logistics Agency and combines it into a single 60G database that supports 5,000 users worldwide. GTN will link to more than 20 commercial Data system, including Federal Express corp. of Memphis, Tenn., and CSX corp. of Richmond, Va., and other companies that ship cargo for DOD. Commercial carriers provide more than half of DODs strategic airlift capability. It is a short leap from seeing whats coming and when it will arrive to using this knowledge to be ready to receive it, plan for its onward movement and integration into the force, said Lt. Gen . Roger Thompson, USTRANSCOM deputy commander. He described the system improvements at the recent Military Traffic Management Command Commanders Conference in San Antonio.

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GTN is so efficient, Thompson said, Trucks and buses arrive on ramp as plane hits the runway ... and unit equipment drivers arrive on the pier as the rolling stock comes down ship ramps. GTN users can run simple queries of the database anywhere in the world through a secure Web site that provides up-to-the-minute data about shipment locations and delivery times. The system currently processes more than 1 million transactions daily, with a goal of 3 million transactions per day by 2000. The system can also prioritize urgently needed material and, if necessary, divert or reroute military supplies to the appropriate destinations the cornerstone of just-in-time logistics. GTN reduces the problem of over- and under-stockpiling inventories, which occurred in 1991 during the Gulf War. To prevent such inefficiencies, the system identifies transportation bottlenecks before they lead to supply shortages or poor use of recourses. The importance of information management is growing, Thompson said. We sense that we are transitioning from pushing GTN to having awakening customers pulling it to move faster. The pace of that shift is accelerating. GTN was envisioned as a command and control system for us, and an in-transit visibility system for the customer, he said. But we are seeingit really bloomed during the last surge to the Gulfa growing realization that GTN is a command and control tool for the customer as well. Lt. Gen. Tommy Franks, the joint Task Force commander in Kuwait, spoke highly of GTN and the in-transit visibility of personnel, materiel and military forces it provided during the buildup of forces in the Persian Gulf as part of Operation Desert Thunder earlier this year, Thompson said.

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GTN is an invaluable source of information for commanders who plan, direct and control logistics operations, Thompson said.

LOGISTICS DRIVEN CUSTOMER SERVICE Logistics plays a significant role in meeting customer demands. Once an order has been placed y a customer, logistics personnel strive to fulfilled it. Companies that have successfully link their logistics and customer service programs include Chicago, IL-based Magid Glove and Safety, North Olmsted, OH-based Moen Incorporated, and wheeling, IL-based Orval Kent Food Company Inc. If you dont have a first-rate logistics operation, youre missing a huge customer-service opportunity. Every year, the logistics industrys most prominent educational conference includes more than a dozen seminars and workshops devoted to customer service. If that strikes you as odd, it shouldnt. Logistics and customer service are really two sides of the same coin. In many companies, the two are so entwined that customer service reports to a vice-president of logistics. In others, a top manager may have a title like director of logistics and customer service. Why marry the two? If you try to define logistics excellence, the answer becomes clear. In Achieving Customer Satisfaction Breakthroughs, authors Patrick M. Byrne and William J. Markham of consulting Firm A.T. Kearney Inc. Define quality in logistics as meeting agreed-to customer requirements and expectations, including the following: Ease of inquiry, order placement, and order transmission; Timely, reliable order delivery and communications; Accurate, complete, undamaged orders and error-free paperwork;

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Timely and responsive post-sales support; Accurate, Timely generation and transmission of information among the functions of the business and with external parties to support the planning, management, and execution of the above activities.

Every item on this list of quality logistics activities could just as easily describe quality customer service. The need to meet customers expectations, in fact, drives almost every aspect of a logistics strategy, including the selection of warehouse locations, delivery routes, and carries, to name just a few. To understand why logistics and customer service are so closely tied to one another, its important to first understand the value of customer service to any company. The goal of every business is to sustain profitable growth. The key to consistently attaining that goal is to attract and retain customers. In general, however, companies are not very successful at keeping their customers: Mark D. Rubin, director in the management consulting business of Arthur D. Little Inc., estimates that the average customer turnover for all U.S. businesses is between 10 and 30 percent annually. Such high turnover costs money, Rubin says. Reducing customer turnover by just 5 percent can mean a 60- to 95- percent improvement annually to a companys bottom line. Given this statistic, its clear why successful companies base their operations from product design all the way through to final delivery on that need to keep their customers satisfied and coming back for more. How does company achieve customer satisfaction? Pamela W. McNamara, director of Arthur D.Littles supply-chain management practice, replies that the key is for the entire customer experience that is, all interactions between customer and supplier to be

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orchestrated though what she calls a high-performance order- management system. The goal of this system is to satisfy the primary Stakeholders of the companys business. Stakeholders include customers, company owners, and employees. To satisfy those stakeholders, McNamara says, a company must improve critical process and align its resources and organization ho allows it to achieve that goal. That means taking a long, hard look at every function within the business and how it affects customer relations throughout the life cycle of an order. And if there are few, if anyactivities within any organization that dont affect the customers experience. Warehousing and inventory control, shipping, load tracking, and consolidation are the obvious logistics activities. But some companies also bring areas such as order processing, order expending, and production planning under logistics purview. The nature of logistics as a multifaceted function with an overview of many company activities often places it in the role of coordinator, problem-solver, and mediator with other functions, even when there is no clear line of responsibility. Regardless of how your company is organized, it simply cant achieve high levels of customer satisfaction without logistics full participation. What follows are examples of how some successful companies link logistics and customer service to keep customers happy. Logistics and sales Sales can be increased though excellent logistics performance rather than mere costcutting measures. For example, Wyle Electronics customizes and delivers orders within 48 hours by means of its accurate inventory and order data. Thomas & Betts, an electrical

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components maker, teamed up with Lease way Logistics to run its Signature Service program that guarantees delivery of orders in a single shipment at regular schedule. More companies are realizing that outstanding logistics performance is less about cost containment than about increasing sales. Suppose youre a supplier of a particular product that has a limited shelf life. For that reason, it is not practical for your customers to keep a lot of stock on hand. When they need your product, they need it fast and in perfect condition. But suppose also that your inventory-control system is in disarray, your customer-service department is slow to process orders, and once your warehouse gets those orders, it takes several days to fill them.

Whats the result? The products shelf life becomes even shorter. It may even expire before your customer can sell it. That leaves your customer stuck with expensive, unusable inventory. It wont take long before your customers realize that they are wasting money by buying from your company, and they will seek another supplier. This may

sound like an extreme case, but its not unheard of .By virtue of its impact on order processing, storage, distribution, and delivery, logistics plays a key role in meeting customers expectations. Poor performance in any of these areas certainly can result in lost sales. But the reverse also is true: Outstanding logistics performance has the ability to increase sales. In many industries, service is what differentiates one supplier from another. If you can get it there faster, in the right condition, and in compliance with your customers specific requirements- but your competitor cannot then you are likely to see increased sales at that competitors expense.

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A 1995 study conducted by Professors Robert A. Novak of Pennsylvania State University, Lioyd M. Rinehart of Michigan State University, and C. john Langley Jr. of the University of Tennessee examined how senior corporate executives and logistics executives perceived the value of logistics. Among the many questions they asked both groups was weather logistics service levels affected customer satisfaction and weather logistics service affected how much customers buy from their companies. Both groups agreed that high levels of logistics service have a significant impact on

customer satisfaction and on sales. For example, senior executives gave the statement customers reduce their business with us when logistics service levels are below their expectations. An average rating of 5.09 out of a possible seven. Logistics executives rated that statement at 4.86. The two groups were closer together in their assessment of how logistics quality. Ultimately, what corporate executives care about is growth and profit, says James E. Morehouse, a vice precedent of Chicagos A.T. Kearney consulting firm. A typical logistics person comes in [looking at] cost cutting. Whats going to excite [a CEO ] is not cost cutting, its if we do this, then we can get the customer to buy more, he says. Good logistics people are executive who get out of that cost- containment mode and into a revenue- enhancement mode. Some logistics managers have indeed been successful in proving that outstanding logistics capabilities can boost sales and retain customers. Here are a few examples of companies that use logistics as a selling tool: Wyle Electronics, a large electronics distributor, has a slogan on all of its sales materials: Were customer Specific. By that, Wyle means that it will customize

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orders and still get them out the door with in 48 hours. The distributor can do that because the company practices postponement of final assembly, in which it programs chips and performs assembly functions after an order has been received. To keep that system running like clockwork, Wyle must have absolutely accurate inventory and order information. And because it offers such quick delivery, the distributor also must ship a study stream of orders each day. An interesting point is that Wyles hall marketing message is based upon capabilities that were created by the logistics and distribution operations, Observes Boris Reznick, CEO of OPTUM software, which provides warehouse-management software for the manufacturer. By providing customization, Wyles Sales pitch goes, the distributor make it possible for customers to get their own new products to market faster than their competitors. Thomas & Betts is a manufacture of electrical component s that has been able to differentiate itself from its competitors and increase market share by offering a unique delivery option. Five years ago, Thomas & Betts initiated its Signature Service for some customers. The program guarantees delivery of a customers total order in a single shipment at a regularly scheduled time. As many as 24 products manufactured at 13 plants can be consolidated for delivery. Customers also receive a single invoice. Thomas & Betts decide to use a private fleet to ensure service quality. Rather than start one from scratch, the company teamed up with Lease way Logistics, which provides equipment, drivers and management personnel. Both shipper and carrier have worked with their customers to make sure the program runs smoothly. For example, some customers did not have appropriate receiving areas for rods that are up to 20 feet long, notes Dwain Becton, the companys private-fleet manager. The

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solution was for Lease way to provide curtain-sided trailers that can be unloaded from either side, making it possible to deliver the extralong items together with the rest of an order. Thomas & Betts is aiming to make it easier, faster, and more convenient for its customers to receive its products. And customers have indeed responded: Demand for the specialized delivery service has been growing in double digits each year. Both units corp., the information- systems giant, and Becton Dickinson , a multinational manufacturer of medical products and equipment, have perhaps gone a step farther than anyone else when it comes to using logistics are a sales tool. These two companies have produced brochures that detail how their logistics capabilities benefit customers. In Becton Dickinsons case, its Supply Chain Services centralizes many functions that at one time where handled separately by each product division. The group provides a single point of contact for all orders, invoices, shipments and payments. The efficiencies and cost savings a centralized system affords both buyer and sellers are obvious. But its Supply Chain Services goes even further. The brochure promotes its capabilities in the areas of distribution strategy and management, information management, order

fulfillment, and finished goods fulfillment, explaining the direct benefits they bring to customers. Top notch, customized logistics capabilities are presented as a reason to buy the companies products. In similar fashion, Unisys brochure informs potential customers about the many customized services the organization can perform. In effect, Unisys Logistics Services (ULS) acts a consultant to help customers solve problems and improve

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their own operations. Among the many areas in which ULS offers expertise are logistics strategy designs, inventory management, and import/export services. All these examples show how logistics operations can support and increase sales and customer retention. Even companies that have no problems to speak of are looking at how they can use logistics capabilities to boost sales. Hebert G. Johnson, vice president of logistics for CVS, a national drugstore chain, says his company has launched an initiative that will perfect warehouse operations, product fulfillment rates, and information availability. "The place where we make or break business is not in merchandising, he believes. Merchandising can build sales, but if we cant deliver the products, then [that effort] is for naught. Johnson reports that at his company, the importance of logistics to sales is not implied it is known. But not every company is so progressive when it comes to logistics issues. Its the logistics managers daunting task to convince top executives that the key to success is to leverage the relationship of logistics to sales and profitability. Without first class logistics performance, its doubtful a company will see sustained improvements in the other two areas.

LOGISTICS AND MASS CUSTOMIZATION Mass customization is a logistics framework that can be adapted to specific market needs to support order management, manufacturing and distribution concerns in the offering of tailor-made mass-manufactured products. It promotes a number of approaches to accommodate customer needs, including pure customization, segmented, customized, tailored, and pure standardizations. Mass customization also supports flexible

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manufacturing processes, modular product designs, complex order management and integrated information systems. In this Age of customer service, buyers are returning to our pre industrial roots, demanding customized products and pricing once again. But customization in the 20th century differs in two important respects from the way out ancestors conducted business: todays buyers want customized products in enormous quantities, and they want them as quickly as they receive standardized products. That would have seemed impossible just a few years ago. But many companies today are, in fact, able to provide customized products in short order. They do so by practicing a manufacturing strategy known as mass customization. Mass customization is an outgrowth of the customer service revolution; it involves careful coordination of order management, manufacturing, and distribution to provide customers with mass manufactured products that are made to their exact specifications. What makes that all possible? A look at how mass customization works reveals that logistics is the glue that holds it all together. The very term mass customization, with its seemingly contradictory components, indicates that it is not simply a matter of choosing pure customization or purely standardized production. Rather, there are five different approaches to fulfilled customer needs, say Joseph Lampel and Henry Mintzberg in their article, Customizing Customization in the Sloan management Review (Fall 1996). These five variations, which the business-school professors have organized as a continuum of production strategies, are based on varying degrees of customization and standardization.

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Pure standardization represents stereotypical assembly-line production of identical items using standard parts and uniform manufacturing procedures. Products are designed to appeal to the greatest number of buyers, and those buyers have no influence over design, production, or distribution. Some examples include pencils, paper clips, and Henry Fords Model T automobiles.

Segmented Standardization produces a few variations on a basic product that are targeted to the preferences of a particular group of consumers. The number of choice increases and manufactures might customize distribution, but customers still do not exert any direct influence on product design or production. Examples include such items as bread (whole wheat, white, and rye) and shoes (high heels, flats, and mid-hell styles).

Customized standardization makes products to order from standard, massproduced components. Often the choices are limited to adding components to a single, Buyers, therefore, may affect how the product is assembled and distributed, basic unit. but not the design and production of those parts. A familiar example is the process of buying a car: Customers may choose paint and upholstery and select original equipment to add to a uniform chassis and body design.

Tailored Customization customizes fabrication, assembly, and distribution. The manufacture retains control over the design, offering the buyer various options, including different kinds of materials. Depending on the product, the manufacturer may be willing to modify the design to meet the customers need. Common examples of tailored customization include selecting and printing wedding invitations and having a suit custom-made.

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Pure customization. At the opposite end of the spectrum from purely standardized products are those that are customized in every aspect of design, fabrication, assembly, and distribution require buyer and seller to collaborate as partners in developing the product. An example is the relationship between an architect and homeowner when designing and constructing a custom-built house.

Because they can be adapted to specific market needs, mass-customization strategies are being applied to a wide variety of products. Among the many companies practicing mass customization today are Hewlett-Packard, Dell, and Gateway 2000 (computers); Titlist and foot-joy Worldwide (golf clubs and shoes); Black & Decker (small appliances); Motorola (pagers); and Andersen Corp (windows). How are these manufactures able to customize products on a large scale and at high speeds? Many factors come into play, but experts say the most important keys to success are having modular product design, flexible manufacturing processes, sophisticated order management, integrated information systems, and postponement of assembly. Without modular product design, product customization would be time consuming, slow, and very closely. Products should be designed to enable, rather than inhibit, any type of customization, says Jeff C. Kimbell, vice president of CNA Consulting & Engineering in Bellevue, Wash. He cities the example of the Boeing Co., Which classifies thousands of parts, components, options, and documentation for its aircraft as standardized, configured to a finite set of options, or customized. This system has greatly streamlined ordering, engineering, and manufacturing while still giving customers exactly what they want. Dell

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Computers and gateway 2000 also depend on modular product design to allow them to assemble computers from compactable parts and components purchased from a variety of domestic and international sources. John Deere Harvester Works has found that flexible manufacturing processes allow it to produce multiple versions of its agricultural equipment with a single assembly line. The company manufactures parts for row crop planters to order in manufacturing cells adjacent to the assembly area. The planters are assembled from a combination of customized and standardized components, some of which are manufactured in the cells and some of which are purchased from outside suppliers and delivered directly to the assembly line. Finished planters then are shipped from the end of the production line. The improvement in factory production volume, finished product inventory cost, and delivery time has justified the cost of changing production methods, says Bill Fulkerson, a technology and information systems analyst at Deere & Co. Another important enabler of mass customization strategies is a sophisticated order management system. Todays Manufacturers need [Order management systems ] that provide deep and detailed customer profiles, handle the sheer volume and breadth of numerous customers and customer orders, and retain and easily access every nuance of each order, says Henry Bruce , vice president , marketing of supply chain software developer IMI Americas . The system has to be able to handle all different types of rules related to the order itself as well as to customer preferences, he adds. An order management system in a mass- customization environment also must integrate with other functions, since the high degree of customer involvement in product configuration means

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That sales, marketing, manufacturing, and distribution also may need access to accurate customer information, Bruce explains. The value of integrated information systems in a mass customization program cant be underestimated, agrees Art Brown, director of supply-chain markets for software vendor Synquest. Thats because the hallmark of customization is uncertainty, he says: You dont know what youre going to ship until you get an order. Because customized production is so dynamic and lead times from order to shipping are so short, real-time data about inventory and production and the ability to respond immediately to problems become a necessity, Brown says. Youre not able to look very far out you have to synchronize schedules. You have to be looking at what youre shipping now, and at the same time look ahead to whats coming from components. To manage that kind of minute-to-minute decision making, particularly when using parts from multiple sources, a decision- support system that integrates information from the entire range of participants in a mass-customization program is absolutely necessary, he adds. Postponement of assembly offers some of mass customizations most important; benefits: lower overhead and inventory, shorter product-development cycles, reduced stock obsolescence, postponed costs until ready to bill, and the ability to respond quickly to changing customer needs. The electronics industry, with its fast-changing technologies and short product life cycles is particularly suited for this kind of manufacturing says Paul Wimer, an associate partner in manufacturing strategy with Andersen Consul tings global supply-chain practice. Postponement helped Hewlett-Packard drastically reduce the incidence of stock obsolescence in its Asian production facilities, for example.

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No mass customization program can succeed if a manufacturer does not have efficient logistics operations and information systems in place. Logistics is, in effect, the glue that holds the system together. For example, precise management of transportation and delivery of inbound material is essential in mass customization, says Paul Wimer. That is immediately apparent in the case of computer assemblers such as Dell and Gateway 2000. The only way to implement mass customization of computers is to put together what the customer wants out of a large number of possible permutations in a very short time all while minimizing inventory, he says. Customized computers are highly depended on logistics relationship with carries If the order says you need five of something, you have to have the truck there to deliver them exactly when required. That is especially difficult when so many parties are involved. Including parts manufactures, sub assemblers, and master assemblers, Wimer notes. The sub assembler may have all the right stuff ready, but if the logistics piece isnt properly lined up, it wont work and you wont be able to meat your commitments to your customers. Companies that practice manufacturing postponement often use outside logistics provides to customize packaging and distribute product to final customer. Warehouses and distribution centers run by third parties offer flexibility and proximity to the final customer without all the costs of fixed assets, Wimer says. Thats a real advantage for a company dealing with mass customizations uncertain product flows, he adds. For outsourcing to meet customizations exacting standards, through its essential to integrate the third partys information system with those of the manufacturer, cautions

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Brown. You have to treat warehouses and distribution centers as if they were your own, regardless of who owns them, he says. The complexity of mass customization demands coordination across the entire supply chain, and logistics is the logical choice to play that role, says Henry Bruce. When I take your order, its not just a matter of how quickly I can get it to you. Its not just a stock item; its that item with a whole host of special requests. How can I do that task with lower handling costs, yet still meet or exceed delivery expectations? Only logistics has the scope and skills to take that on, agrees Art Brown. In mass customization environment, he says, logistics is like an air traffic controller, making sure everything is synchronized up and down the supply chain.

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THE CORPORATE ROLE OF LOGISTICS Those companies that recognize the contribution that a logistics strategy can make to both achievements of corporate strategic goal and financial performance often see dramatic improvements in their Return on Investment (ROI). This is achieved by improvements in market share as well as reduced costs on a lower asset base. ROI is a measure of how effective a company is, at using its fixed and current assets to create profit. These are the components of ROI:

Sales Revenue Cost of Goods Sold

Profit
Return on Investment

Inventory Accounts Receivable Cash Fixed Assets

Capital Employed

One way of improving ROI is by reducing inventory a current asset. Inventory costs are generally high, and can cost 25% of the value of that inventory just to hold it for one year. By reducing inventory levels, carrying costs are reduced, as is the total capital employed in the business a double boost to ROI.

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Changes in logistics policy will affect financial performance, contributing positively to the long-term viability of the company. The logistics strategy should therefore constantly be under review, and assets examined to ensure their effective utilization. Examples might be: warehouse space utilization, plant and depot location policy, or efficiency of vehicle routing (computerized routing can potentially reduce the number of vehicles by 20% and fuel costs by 15%). The following formula is worthily of some analysis: Return Investment (ROI) = Profit/Sales X Sales/Capital Or, ROI = Margin X Capital turnover Since margins have been squeezed throughout the recession, it often falls upon capital turnover to ensure an adequate ROI. Effective logistics management is one way of improving the use of assets and thus improving capital turnover. Many companies are rationalizing the number of product lines being inventoried in order to reduce investment. Similarly, an examination of the customer base might indicate the true cost of servicing a customer and, as a result, influence sales and marketing policy. From an inventory standpoint, an ABC<analysis will indicate items, which need to be given the highest and lowest priorities, in service terms. Any such decision, however, need to be taken carefully, so as not to eliminate opportunity costs created by slower moving items. In marketing terms, it may be possible to trade-off a reduced product range against a substantially cheaper popular product. Many companies which, up to recently, owned their own fleet of vehicles and distribution centers, are reducing their investment in fixed assets by employing outside, or third party

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Companies to mange their distribution. Although there is certain risk of loss of control over service, experience in Europe indicates that service level is excellent and cost saving and ROI are much improved. These professional distributors benefit from their specialization and economies of scale, to offer clients an excellent and cost effective service. Other companies are able to consolidate inventory locations a measure, which is directly related to inventory investment. Fewer locations mean less total inventory in the distributors chain. In fact this relationship appears to follow the square root rule of the number of locations at which a product is stocked. For example, by reducing the number of warehouses from 9 to 4, the inventory is reduced by one- third (i.e., from 9 to root4,or from 3 to 2). Finally inventory can be reduced though the two principles of postponement. The first simply states that changes to a products form and identity (which makes it unique to a particular customer) should be delayed to the last possible point in a distribution chain, keeping the product as generic as possible. And secondary, changes to inventory location should be postponed to the last possible moment to minimize total inventory in the system and to maximize its availability. The introduction of flexible manufacturing systems (FMS) in many areas will encourage companies to be creative in the way they manufacture and distribute products. It can be seen from the above that by bringing logistics into the arena of corporate strategy, many opportunities for a strengthened market position can be grasped through initiatives in customer service. Companies are never powerless to influence the market, nor their relative position within it.

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Building a Cohesive Corporate Logistics Strategy Establishing a logistics function requires the unflinching support of the precedent and the entire team of directories and vice-precedents. It also requires the logistics professional to be capable of creating policies of his own, as well as influencing the policy of other departments. In order to create a strategic plan for the logistics function, the corporate strategy must first be understood. Not only must the marketing and production strategy be studied, but the organizations entire value systems must consider. Take for example, an organization whose system of values states that expertise will be developed, primarily from within, with a minimum of outside hiring. The time-frame for developing adequate experience in the MIS or systems support areas, may require an implementation of EDI over a longer period. The logistics manager will initially assess other departmental strategies to ensure that their aims are capable of supporting, and do not conflict with the logistics strategy as it relates to the overall corporate plan. The president or managing Director must be prepared to step into disputes that might develop. After all, the development of an entirely new function will necessarily encroach on other departmental boundaries and cause questions to be raise regarding pet projects. A truly successful logistics professional will be able to create synergy across departments, as well as cost saving. Having created a functional strategy and ensured that it can be supported, given the overall company and individual departmental aims, it is important to sell this strategy within the organization. This is a major test phase for logistics as a concept. It is possible, one must ask, to create the kind of saving, across the organization, from inventory

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reductions and transportation savings, to site rationalization and effective strategic alliances with suppliers that justifies the establishment of a logistics function? Experience tells us it is. But how can we be sure? The first step in this process is to accurately measure existing logistics costs and to use this data as a means of comparing progress. This step cannot be emphasized strongly enough. In order to make progress in logistics, current performance must be measured. Experience also tells us that the kind of savings that are being anticipated can only be delivered through the application of new technology. A typical logistics strategy will likely require the creation of EDI (Electronic Data Interchange) with all major supplies and customers. Inventory reduction will require investment in inventory control systems capable of tracking inventory movements and orders, on a real-time basis. Data capture and order tracking using in-house bar-codes will likely require handheld or truck mounted radio frequency terminals. A just-in-time manufacturing system will need to be developed, using MRP II software systems and interfacing with materials management and, particularly, purchasing departments. Strategic alliances will need to be established with important supplies of raw materials and transportation services. EDI will again be important in improving the lines of communication. More importantly, however, it is essential to communicate clearly and therefore project through these alliances, the corporate values that make the company unique in the eyes of the customer.

Logistics 88 Corporate Strategy Inventory EDI to Barcode Strat.Distrbn Warehousing Logistics cost Information Hand-held Warehouse Purchasing LAN Logistics Tracking Systems Suppliers Terminals control Alliances Network Automation Systems StrategySystems

Inventory Control

Product Materials Service Quall EDI to CustomerProduct Marketing Handling Customer Selection Development Service Strategy Monitor

The process of developing an effective logistics function may take from three to five years, depending upon knowledge and experience within the corporation. The desire for change and improvement must also be present and the need for change must be recognized and supported by top management. The benefits can be enormous. A company perfuming in a mediocre manner requires drastic change to dramatically improve performance. Incremental change will result in incremental improvements. Just-in-time and Inventory Investment Reduction Just-in-Time (JIT) is a system designed to eliminate waste, improve quality, reduce cycle times, and lower inventory levels. It is based on the principle that all activities which do not add value to a product during the manufacturing process should be reduced or

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eliminated. This rationalization results in a well-balanced operation, with production geared to the capacity of the processing bottleneck, which otherwise would slow the process or cause work in progress inventories to increase. The effect on inventory levels can be quite dramatic; with reductions in inventory investment of up to 90% with more commonly experienced reductions of 20-40%. The typical JIT production system is somewhat analogous to a stream, flowing over rocks (problems). Materials entering the process emerge as a finished product, set for immediate delivery.

With JIT in place, the stream flows more quickly, inventory levels of all materials drop, and the return on investment rises substantially. Problems in the manufacturing process can be seen as rocks in the stream. By reducing the safely stock and other inventories, it is suddenly essential to address these problems

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or the entire process will fail. With an excess of inventory, it might never have come to managements attention that, for example, equipments downtime, or absenteeism, was a real problem coasting the company dearly. In this way, problems are addressed, and the balanced operation reacts to customer orders by pulling the required materials into the process at just the right rate. JIT is an invaluable tool in rationalizing production operations and improving profitability.

Supply Chain strategy Logistics theory recommends a total systems approach to the flow of both materials and information. In this article, we examine the routes that these flows take, and in particular, highlight their strategic importance where they relate to marketing strategy. The rapid rate of charge within the marketplace coupled with a lack of vertical integration faced by most organizations (few have both and upstream manufacturing plant and a downstream retail chain), results in the distributor having a limited amount of control over the entire supply chain. Different processors within the supply chain, such as the manufacture, distributor and retailer will have conflicting goals. Where the manufacture seeks brand loyalty, the retailer aims to provide the widest selection of items possible; and where the distributor whishes to maximize the size of each retail shipment, the retailer refuses to use expensive retail space for storing merchandise. The basic problem here is known as the zero sum game, i.e., for one party to win, another must lose. The buyer and seller relationship, to be a long term one, must be a win-win situation, and in order to achieve this, improved logistics connections are essential. Intermediaries exist in any supply chain due to various types of gapes. These gapes include time gaps (high volume production runs versus

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continues or seasonal purchasing), space gaps (major cities cars and they are purchased all over the country), quantity gapes (produce in large lots and buy in smaller buy a wide variety of produce in a single shopping trip), and finally, communication/information gaps (the consumer cannot source the item, and the supplier is not sure where the potential purchaser is located). These gaps can be bridged by either the existing parties themselves or by an intermediary, and the choice of solution id determined often by cost. In the figure below, the effect of an intermediary in the supply chain, where 25 transaction links are reduced to 10, is obvious.

PRODUCERS

PRODUCERS

INTERMEDIARY

CUSTOMERS

CUSTOMERS

Cost, however, is not the only consideration with such problems. The marketing effectiveness of a supplier, for example, can be seriously compromised if an intermediary does not share his objectives or value system. The intermediary may also act as a distributor rot other supplies, and as a result have divided loyalties. These considerations

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must be balanced against cost. Factors such as customer convenience, product range, lower selling cost, loss of margin, and loss of marketing control, must be weighed and carefully considered before supply chain decisions with far-reaching implications are made. The impacts of supply side factors on profit are often underestimated. In most companies, 50-60% of the value of sales is spend on supplies. As a result, even marginal savings can result in significant bottom-line improvements. The effect of a vendor on a companys performance cannot be understated either. Some suppliers hold a virtual monopoly on certain items (for example , south Africa and Zimbabwe together hold 97% of known chromium recourses) and as a result there can be major questions regarding the reliability of supply. In response, some companies have been investing in backward integration: by purchasing interest in vendors to ensure supply. A less radical solution is to develop long term, stable relationships with suppliers, with an aim of mutual profitability and growth. This might include agreeing upon quality levels with the distributor or the retailer monitoring production quality at source with their own staff on the vendors premises. The advantage partnering with established suppliers is that this approach tends to be more flexible than backward integration.

Evaluating the Supply Chain If the supply chain involves intermediaries then it stands to reason that they themselves must be monitored in order to assess the effectiveness of the entire channel. Surprisingly, very few companies for quality and reliability of service. Key measurements should include: Sales performance and the cost of sales for each of the retail members of the channel.

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Inventory maintenance, where inventory is minimized and is replaced by better information and a more flexible distribution system.

Marketing capability, where some intermediaries will take on certain marketing responsibilities perhaps though their own sales people who might also promote these products.

Motivation of channel members, without which adversial relationships may develop where the mutual beneficial nature of the relationship is not clear.

Competition in channel, either between intermediaries where more than one retailer handles the same product, or between suppliers where a single retailer has competing brands in inventory. This latter from of competition can be countered through agreements where the retailer does not carry a competitors product, and enjoys preferred pricing and other incentives.

Volvos Supply Strategy Nearly 75% every Volvo is made outside of Sweden. This fact poses considerable logistical challenges and it is not surprising that very sophisticated logistics systems exist linking Volvo to its suppliers. Nor is it surprising to learn that stringent demands are placed on suppliers to produce to a well-defined production plan. Additionally, and significantly, all parts are purchased FOB vendor shipping dock. This means the cost of transportation and the control over transportation is in the hands of a company directly contracted by Volvo. Their close relationship with an international transportation organization means that the amount of influence and the required level of performance can be defined and the delivery guaranteed. All inventory from UK producers, for example, are collected and taken to a central UK warehouse that catties about 4 weeks

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inventory on hand. Volvo pays for this inventory only when the item is shipped from the central warehouse to a production plant. Crates and pallets are standardized as well to minimize handling costs and maximize efficiency. In return for this high level of responsibility placed on the supplier, Volvo produces short- (6 week firm order), medium-, and long-term projections of part requirements, which allow suppliers to plan production in the most efficient manner possible, thus reducing costs. As a result of this strategy, real costs in production and logistics have dropped significantly. It is worth noting that the most significant difference between this and more traditional supply chain strategies is information sharing. In the same way that the environment has changer for the supplier, the marketing environment for many companies has now radically altered. Aside from a proliferation of new retail sectors (for example, home computers, video etc) there has been a move towards high volume chain store outlets such as Costco, price Club and Wal-mart. The scale of operation is such that these relaters are able to dictate terms to suppliers such as price, delivery frequency, method of delivery, and even pallet type and size. The rate of change is so rapid that many manufactures have been caught unprepared for such definitive requirements, with the result that many are currently scrambling to upgrade their systems and internal processes. It is appropriate to identify the factors to be taken into account when developing a marketing channel strategy. Overall marketing objectives first need to be set and the company is well advised to know the marketplace well. What do potential customers want? Value for money? Convenience? Style? Availability? After this knowledge has

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Been gathered, the strategy can then be developed. Supply-chain strategy many be viewed in two ways by length and by breath. Channel Length: the length is a trade-off between controlling the channel (direct sales to customers, or using intermediaries). There are various choices within this range of options: the company might buy out a retail company, or it could establish franchises which sell only those products produced by the manufacture. The third alternative is to establish relationship with subsidiaries and work on a partnership basis where the degree of attachment can range from complete symbiosis (where their survival depends on each other working together effectively) down to a casual and occasional transactional arrangement. The advantage of establishing long-term relationships with intermediaries is not the flexibility motioned before but also the specialization of knowledge and skill that represents a companys unique competitive advantage. By concentrating on doing more of what it does best, or striking to their knitting, a company can contribute more effectively within a supply chain. This recognition has lead to the development of contract logistics, where companies can take over the transportation or distribution arms of established manufactures or retailers and, because their specialist knowledge allows them to operate more efficiently, reducing the operating costs significantly. Channel Breadth: Some products require a wide market availability and visibility such as the need for confectionery to be available at every gas station and grocery store in the country, to ensure sales. Other products can be selectively marketed and require fairly narrow channels, such as specialized automobiles, for example. The

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Choice of breadth is influenced by the products own characteristics, buyer behavior, the degree of control over the supply chain, and the overall marketing strategy.

Logistics and Shareholder Value

Logistics managers should understand the ways by which logistics can create shareholder value, the maximization of which has become the main goal of top executives. in fact, the ability to explain logistics- improvement programs in terms of their effect on shareholder values can result in greater credibility and influence for logistics managers. Logistics initiatives such as inventory management, customer service, costs control, facility utilization and outsourcing are guaranteed to improve overall value and share price. For top executives, the principle goal is to maximize shareholder value. Because it is a top priority for their chief executives, companies have become more sophisticated in how they analyze and measure shareholder value. Over the last decade, therefore, a variety of approaches to shareholder values analysis (SVA) have evolutes. These include discounted cash flow (DCF), Economic value added (EVA, trademarked by stem Stewart), and return on invested Capital (ROIC). These approaches are based on the idea that projecting the future free cash flows that a companys value. Furthermore, dividing that value by the number of shares of stock outstanding can provide an estimate of future stock prices. Most of these approaches are based on the following relationships: Shareholder values creation= Cash (Invested Capital x Cost of Capital) Cash can be measured by NOPAT (Net Operating Profit after Tax).

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Invested capital is the net working capital plus net property/plant/equipment plus any deferred charges.

Cost of Capital is measured as the weighted average cost of equity and debt (today, generally between 9 and 14 percent for most companies).

The critical focus is on cash, rather than simply on profits. One must give explicit consideration to the capital required to generate any profits. The idea is that values are based on generating cash in excess of ones capital charges. Its critical that logistics managers understand what drives these determinants of shareholder value. Cash is driven by revenues, costs, and depreciation and other noncash expenses. Invested capital depends on current assets, current liabilities, net property/plat/equipment/ and deferred charges. In particular, it is important to understand the ways that logistics can create shareholder value. Logistics managers can gain greater credibility and influence if they frame their explanations of logistics-improvement initiatives in terms of theist impact on shareholder value. Here are a few ways that logistics initiatives may affect overall value and share price: Inventory management. Effective inventory management lowers both the invested capital as well as elements costs (specifically interest costs and carrying cost) in the shareholder-value creation framework. Inventory reduction often has a powerful impact on value creation. Customer service. Enhanced customer service can increase revenues, which improve NOPAT.

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Cost management. Reducing logistics costs (purchased goods, transportation, warehousing, and inventory carrying) obviously has a direct impact on NOPAT.

Facility utilization. Enchasing the effective capacity utilization of warehouse or transportation provides can lower costs and/or improve customer service (and thus revenues), but it also can affect invested capital.

By becoming conversant in the emerging language of finance and shareholder value, logistics managers can have greater influence in their companies. Can communicate more effectively with top management, and can be more effective in securing support for logistics initiatives.

CONCLUSION Companies have observed to be consolidating their logistics function to increase their profits, decrease costs and improve their strategic prospers. This third diverges from the traditional practice of maintaining logistics centers in widely scattered areas. Together with the centralization trend comes outsourcing, which has also become a highly popular means of reducing costs. The competitive environment of the 1990s is profoundly changing logistics (the business of procuring, transporting, and distributing products). In the past, most companies managed the inbound transportation of raw materials and the outbound transportation of finished products as two separate functions, and typically each business unit controlled its own logistics activities. This arranged was thought to promote flexibility.

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But globalization, rising oil prices, advanced technology, and downsizing put new pressures on logistics people in the areas of cost and managerial control. The result: an increasing number of sophisticated companies started moving logistics from the field to the main office. To the complete surprise of some people who held to the belief that a decentralized logistics department is better, this change actually has been very beneficial. With a central group managing all shipping and distribution and establishing uniform operating standards across the organization, companies can manage complex, large-scale systems more effectively. An organization needs to build even stronger core-logistics competency at headquarters to effectively orchestrate and manage the ever-widening network of external relationships required in the global supply chains. Companies that have the most centralized logistics departments repot the greatest satisfaction with their ability to reduce costs and perform with flexibility. Information technology also has a key role in the transformation of the logistics function at leading-edge companies, allowing small centralized staffs to keep on top of a lot of data from many sources. A council of logistics management study showed that world-class logistics companies possess four core competencies, namely, positioning, interrelation, agility involves the about to respond to customer and market demands while measurement is the development of internal and external performance monitoring systems. These days, many companies believe that excellence in logistics is required to implement a supply-chain strategy, the synchronization of product flow across all vendors in a

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channel to the ultimate consumer. World-class logistics has become a hallmark of corporate success for companies adapting the supply-chain approach to product replenishment in a global market. In a supply-chain strategy, however, customer service is not an isolated function. Rather, producers, middlemen, and retailers all work together in partnership to ensure high levels of customer service. Such partnerships encourage the integrated movement of products and information though the distribution channel. No matter how productive a company may be, measurement systems are necessary to ensure that logistics operations are indeed the most efficient they can be. You need a measurement system to make sure that the execution I s ahead of the competitions, says consultant Jim stone, president of stone management in Chicago. The four competencies that are necessary to achieve world-class logistics are as follows: Positioning refers to the strategic and structural approaches that guide a companys logistics operation. Positioning can help a company make its logistics operation a cornerstone of its overall business strategy. For example, an officesupplies company used its logistics capabilities to respond to the emergence of office superstores. By offering overnight delivery of exact quantities direct to customers, the company was able to complete with the superstores on customer service. Integration is the internal achievement of logistical excellence and the development of supply-chain relationships. It requires partners in the supply chain to work together across corporate boundaries. The sharing of sales and replenishment data between supplier and manufacture typifies this king of integration. a retailer, for example, might share its sales information on a realtime basis with a manufacture so that the

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supplier can determine the best time to deliver specific quantities of product to distribution centers or stores. Agility relates to a firms ability to respond to its customers need and to changing market conditions. An agile company can seize unexpected opportunities by identifying a customers problems and creating solution. For example, a medicalsupplies distributor saw a need to improve the way hospitals order and receive supplies. His company created a service that took over storage, inventory control, and delivery of supplies for several area hospitals. Now, the distributor stores products in an off-site warehouse. An electronic link allows the hospitals staff to request delivery of specific items at specified times during the day. Measurement requires the creation of internal and external monitoring system to ensure that objectives are met. Not only do world-class companies use internal standards to measure their performance against corporate goals, but they also compare their performance to that of competitors and other excellent companies. They often involve their customers in the process by asking them to rate how well they achieve logistics-related objectives such ad on-time delivery and accurate order entry.

Many logistics professionals believe that a world-class logistics operation can help companies achieve their business goals, including increasing market share, improving productivity, and boosting profitability. Although all companies have room for improvement, the potential exist for word-class logistics to become a global force for business change.

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Companies should realize the impact of logistics costs on their overall financial performance. President logistics problems can hamper productivity and could adversely affect a companys corporate image. To accurately gauge the impact of logistics on long term profitability, senior executives should strive to include logistics costs in the formulation of the regular financial reports. Its painfully clear how much logistics performance can affect any companys bottom line. In most cases, however, it falls to logistics managers to educate top executives about logistics contributions to company performance. To do that, they first must identify and quantify logistics contribution and thats no easy task.

Logistics in the New Millennium The coming millennium may very will see a host of scientific and technological advancement that pose enormous challenges in the field of logistics. Foremost among these is the challenge of maintaining supply and keeping abreast of deliveries in an electronically linked international community. When a panel of top logistics professionals looks a decade into the future, they see accelerating demands on their supply chains to deliver better products faster and cheaper and in diverse global markets. Picture the world a decade form now in the United States, the first wave of baby boomers begins to retire. On the other side of the world, China and India have developed into economic powerhouses. Consumers in developed countries are comfortable shopping around the world electronically for most of their basic requirements and venture out to shops largely for pleasure. Often, new products--software, programming for smart appliances--are

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delivered electronically as well. Most trade barriers have eased, making the flow of goods around the world simpler and faster. Thats good, because all those consumers ordering over the internet or its successor expect products delivered overnight, configured to their specific requirements, and at a competitive price. That vision of what the future holds, like any other, is not likely to be entirely accurate, but it suggests that logistics and supply chain managers face enormous challenges in the next 10 years. They must help their companies manage their supply chains in ways that allow them to deliver better products reliably, faster, and cheaper; do it profitably; and do it everywhere. And they will have to do it in an environment of rapid change--changing technology, changing channels of distribution, changing government, shifting demographics. Much of the ability to meet the demands of consumers worldwide and the demands for speed will be enabled by technology. Yet, the current state of logistics and business information technology still leaves something missing, in the minds of many.

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BIBLIOGRAPHY

Bradley, P.(1997, January). Weve only just begunlogistics management in the 21st century. Logistics Management, 36(1) Bradley, P.(1997, October). Adapt or die: organizing an effective supplychain team. Logistics management, 36(10) Bradley, P.(1998). Facing the millennium: challenges in logistics. Logistics management distribution report, 37(1)45-46. Champy, J. (1998, August 24). Goodbye, info age; hello, age of logistics. Computerworld, 32. Cooke, JA.(1996 September). Are you world class? (developing word-class logistic operations).Logistics management, 35. Cooke, JA.(1997, February). Point, click, and shop. Logistics management, 36 Copacino, W.C. (1996, March). Logistics and the world of virtual retailing. Logistics management, 35(3) Copacino, W.C. (1997, February). How logistics can create shareholder value. Logistics management, 36. Copacino, W.C. (1997, March). Electronic commerce: how it will affect logistics. Logistics Management, 36(3) Copacino, W.C. (1998, April). The IT-enabled supply chain: key to future success. Logistics management Distribution Report, 37(4) Copacino, W.C. (1998, June). Surge and uncertainty: the real supply-chain test. Logistics Management Distribution Report, 37(6) .

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 Demands on supply chain get tougher. (1997, may). Logistics management, 36. [On-line] available: Expand academic search bank. Friedman, M. (1997, December). Five experts took to the future of logistics. Frozen food Age, 46(5) Gooley, T.B (1996, January). How logistics drives customer service. Traffic Management, 35(1). Gooley, T.B (1996, March). Logistics: ignore it at your peril. Logistics management, 35. Gooley, T.B (1996, November). Selling logistics: increased sales due to logistics performance. Logistics management, 35. Gooley, T.B (1998, January). The geography of logistics. Logistics management distribution report, 37(1)63. Gooley, T.B (1998, April). Mass customization: how logistics makes it happen. Logistics management distribution report, 37 (4)49 Harrison, D (1999, May). Heres a peek at logistics in the new millennium. Frozen flood Age, 47. Logistics: working with the web. (1997, June). Logistics management, 36.[online] available: expanded academic Search Bank. Macdonald, M.E (1997, February). The supply chains critical link. Logistics Management, 36(2). McCarthy, S.P. (1997, February). Learning the language of the web. Logistics Management, 36(2).

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 Quinn, F.J (1997, October). Team-up for supply chain success. Logistics Management, 36(10). Quinn, F.J (1997, December). The payoff: benefits of improving supply chain management. Logistics Management, 36(12). Quinn, F.J (1998, June). Building a world-class supply chain. Logistics Management Distribution Report, 37(6) Rheem, H (1997, January-February). Logistics: a trend continues. Harvard business Review, 75(1), 8-20. Slabodkin, G. (1998, August). Us transportation command uses Web as a gateway to logistics Data. Government Computer News, 17(28) Spalding .J.O (1998, July). Transportation industry takes the right-of-way in the supply chain. IIE Solutions, 30(7) Stedman, C. (1999, July). Web pushes delivery firms toward logistics software; package carries seek global shipping help. Computer world, 40. The importance of being online (Logistics). (1998, August). Logistics Management Distribution Report, 37/ [on-line] Available: Expand Academic Search Bank. The times, theyve been a-changing. (1997, January). Logistics Management, 36. [On-line] Available :Expanded Academic Search Bank. Tompkins, J.A (1997, February). Logistics: a challenge for today. IIE Solutions, 29(2).

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QUICK POINTERS A. 1. 2. a. b. c. d. B. 1. a. b. 2. 3. 4. C. 1. 2. 3. 4. 5. D. 1. 2. E. 1. 2. 3. F. 1. a. The role of Logistics in the value chain Without logistics, marketers could not organize the flow of products through the value chain. Logistics Management is the process of managing the movement of raw materials, parts, and finished products through the value chain. Every aspect of logistics management is geared toward providing the customer with: The right product. At the right time and the right place. In the right condition. At the right price. How logistics moves Products and Information Logistics management ties together upstream and downstream activities. Inbound logistics, also known as material s management, is the inflow of raw materials; equipment, services, and information needed to make the product. Outbound logistics, known as physical distribution, is the outflow of finished products and information to the customer to complete a marketing exchange. Six logistical activities occur in the flow of products through the value chain: transportation, warehousing, materials handling, inventory management, order processing, and reverse logistics. Not every marketer places the same emphasis on each of these activities. The cost of moving products and information through the value chain in the U.S is nearly 11% of the nations gross domestic product. How Logistics Management adds Value and Builds Relationships As a marketer, you can apply logistics management to directly create time, place, information, and service utility for customers. Indirectly, Logistics Management supports both form utility and possession utility. By providing all six utilities, you can satisfy your customers requirements and generate profits. When you dont apply logistics management to crate the value your customers require, however you may lose their business. Marketers are continuously improving their logistics management systems to offer extra value that gives them a competitive edge. Ways of handling the logistic Function Some marketers prefer to handle the entire logistics function themselves and centralize logistics management at headquarters for better control Other marketers prefer to use outsourcing, leaving logistics details to specialists. Competing through Logistics Leadership Information plays a vital role in the integration of activities for logistics leadership. The vital value chain uses information to add value to activities throughout the value chain. Quick response depends on gathering, organizing, selection, analyzing, and distributing information to enhance logistics activities. How Logistics supports International marketing The logistics of Marketing in other countries is complicated and expensive. You cant control some of the environmental elements that affect your ability to obtain supplies

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b. You can develop logistics management strategies to overcome the unique challenges in each country. 2. In some countries, marketers have to start from scratch to build logistical links. 3. International customers not only expect the same quality service as domestic customers but also have concerns about buying from distant marketers. II. Building Customer Relationships Trough Logistics A. The purpose of logistics managements is to satisfy customer requirements. 1. Remember that quality is defined by customers, and service gaps are major considerations. 2. On-time response is a basic logistical component of service quality. B. Delivering Quality Customer Service 1. Quality customer service is the goal of all your logistics activities. 2. customer Service Expectations a. Accurate and timely communication about products, orders and deliveries. (1) Information is critical to quality customer service. b. Availability of products and information. (1) Customers want products and information available when and where needed. (2) You risk damaging customer relationships when you deliver a damaged product. c. Short, reliable order cycles. (1) Most organizations want to reduce the time between ordering and receiving products. (2) Keeping less inventory on hand also slashes costs. (3) Receiving goods soon after ordering is an important measure of quality service. d. Convenient, cost-effective delivery. (1) Your customers will want delivery on their schedules and at prices they can afford. e. Complete, correct orders. (1) Many retailers say accuracy is their top priority when placing orders with supplies. (2) Marketers need to pay close attention to packaging, shipping, and handling. (3) some marketers have reduced the amount of materials used and incorporate recycled materials into their products. g. Appropriate billing and after-sale support. (1) Customers need after-sale support for installation, repairs, and so on. (2) If you cant handle these services, you can established alliances or use outsourcing. 3. Customer service standards a. Knowing what your customers expect is the first step toward developing a set of standards in delivering quality customer service. (1) Youll want to look at cost considerations as well as at how your competitors manage their logistics. (2) Pay careful attention to areas in which service gaps can damage a customers assessment of your service quantity b. Decide on specific customer service standard service standards, i.e., percent orders filled correctly. c. Regularly check your performance and pinpoint for improvement. 4. Seamless Customer Service

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a. Customers care about the overall quality of customer service, not about the activities in individual departments. b. Some markets are adding customers to their project teams, involving customer in every aspects of logistics management. C. Providing Timely Response 1. Time is an important element in quality customer service. a. Speed is important in product development as well as in the order cycle. b. Timely response includes the ability to react to shifts in customer requirements and to changes in suppliers needs 2. Next-day and same-day delivery is now routine. 3. Information technology is critical to timely response. a. Electronic data interchange is a way of exchanging information about products, pricing, orders and delivery via computer to computer links. b. EDI expedites communication with suppliers. 4. Many nonfood retailers are applying information technology to implement quick response. 5. In grocery retailing, efficient consumer response (ECR) improves logistics by electronically sending data about consumer purchases upstream members of the value chain. D. Achieving Cost Efficiencies. 1. One of the goals of logistics management is to achieve cost efficiencies so that consumers get mare value of their money. 2. Sub optimization is the lowering of logistics costs in one area while increasing them elsewhere, resulting in damage to overall cost efficiency. 3. You can use the total cost concept to balance the overall costs of logistics management for optimal efficiency. a. You analyze the combined cost of activities. b. Each activity is connected to the next, so a change in one will cause a change in one or more other parts. E. Applying Tailored Logistics. 1. You can customize your logistics for individual customers. 2. When you apply tailored logistics, you customize your logistics activities to better satisfy the specific requirements of a customer. a. Some customers prefer fewer services and lower prices, while others are willing to pay more for some services. b. You can design a program and a price to meet the specific needs of customers. 3. Small businesses can also use tailored logistics to strengthen customer relationships. III. inside Logistics Management A. The ideal overall logistics management strategy balances optimal costs with optimal results. B. Transportation 1. Transportation is moving raw materials and part from point of supply to point of production, You can choose among five basic modes of transportation. In making your selection, take into account six criteria: Speed Frequency Dependability

a. b. (1) (2) (3)

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(4) Capacity (5) Availability (6) Cost c. Government restrictions on competition, pricing, and operations of the U.S transportation industry have been relaxed. d. Companies such as FedEx have altered the competitive environment in two ways: (1) They offer a variety of speedy, dependable delivery options for marketers. (2) They are capable of taking over some or all of a customers logistics activities though outsourcing. 2. Transportation by rail. a. Rail is the most commonly used mode of transportation for freight shipped in the U.S b. It is also the number one mode in china, Russian, and many others countries. c. Rail can reach nearly every urban area in the world. d. Manufactures rely on rail transportation when moving heavy materials long distances. e. Modernization of tracks in many developing countries has led to more efficient shipping. f. Railroads now run unit trains dedicated to transporting one type of commodity from the source to the market destination. 3. Transportation by Truck a. Truck transportation is a good choice for shippers using door-to-door pickup and delivery. b. Trucks are able to carry a Variety of products. c. Seventy-five percent of all U.S agriculture products travel by truck. d. Truckers have the flexibility to adjust their schedules to fit their customers needs. 4. Transportation by air a. When you need speed, and can pay for it, choose air transportation. b. The high cost of shipping by air may be offset by the benefits of the result. c. Air cargo within the U.S is dominated by FedEx and UPS, which together log more ton-miles than the next six largest air carriers. d. Passenger airlines have cleared more space in their jets for cargo and are developing better technology to track packages. 5. Transportations by water a. If you are moving heavy, bulky, low-value goods that are not time sensitive, you can use water transportation. b. Shipping by barge freighter of tanker is a slow but inexpensive bay to transport raw materials, parts or finished products. c. Many products are Containerized, or stored for water transportation in contains that are sealed for protection against damage. 6. Transportation by Pipeline a. Gas, oil and petroleum products, water and chemicals can be shipped through pipelines. b. Pipeline speeds are slow, and pipelines arent available everywhere. 7. International Transportation and freight forwarding a. Intermodal transportation is the use of more than one mode of transportation to complete a single movement of products. b. This allows you to choose the modes of transportation that offer the best combination of service and cost (1) Using piggyback transportation, products are packed in special containers so shipments can be transferred between trucks, ships, or railroad cars without unpacking.

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(2) Piggybacking on ships is called fish backing. c. Smaller marketers can use freight forwarders, companies that put many smaller shipments together to create a single, large shipment that can be transported more cost-efficiently to the final designation. (1) Freight forwarders act as wholesalers of transportation services. (2) Some offer warehousing, customs assistance, and other services. C. Warehousing 1. Warehouses are a vital link in the value chain, holding raw materials, parts, or finished products until needed. a. You may same money by buying goods in quantity, then warehousing them until you can break the lots into smaller lots. b. You may need to warehouse smaller lots until you accumulate enough for a large shipment. 2. There are two types of warehouse: a. Storage warehouses are repositories for parts, raw materials, or products that need to be stored for weeks or months before being moved to a factory or a customers site. b. Distribution centers are warehouses in which products are briefly stored before being moved to wholesale, retail or customer locations. 3. Warehousing operations have been transformed by computerized applications that can quickly and accurately receive products. 4. Some marketers minimize the time products spend in distribution centers using cross-docking, receiving incoming products and immediately transferring them to trucks for delivery. D. Materials Handling 1. Materials handling is the movement of products, parts, and raw materials within and between warehouse and manufacturing facilities. 2. Moving goods or parts can be costly and can lead to damage, theft, or waste. 3. Good materials-handling practices can help maintain a uniform flow of goods throughout the production process. 4. Automatic guided vehicle systems (AGVS) are electronically controlled vehicles that transport products within a facility follow a preset route. 5. In some plants computerized robots are used to stack, load, and unload products and containers. E. Inventory Management 1. For many marketers, inventory is a major investment. a. Marketers have traditionally used inventory: (1) As a buffer against mismatches in supply and demand. (2) As a guard against shortages when supplies cant be delivered (3) As a means of quickly filling orders. (4) As a means to accommodate extra quantities brought in at bargain prices. (5) As a way to support efficient production and shipping schedules. b. If you have too little inventory, you tie up your money for longer than necessary. c. If you have too little inventory, you risk disrupting customer and channel relationships. 2. Inventory Costs a. Many marketers cant gauge the true inventory costs because costs are spread over many departments and facilities. b. there are four types of inventory costs: capital costs, inventory service costs, storage costs, and risk costs.

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c. Your inventory level affects profitability. 3. Just in-Time and stockless inventory Management a. Marketers have developed methods for streaming inventory management. b. One method is just-in-time (JIT) inventory management, an approach in which inventory is kept at a very low level to meet immediate production demands, and additional supplies are delivered as they are needed. (1) Marketers carry little inventory and have lower storage costs. (2) TO make this work, marketers need strong value-chain relationships with suppliers (3) There is no extra inventory to fall back on, so a late delivery will delay production. c. The step beyond JIT is stockless inventory, in which suppliers make daily deliveries directly to the locations that require parts. 4. Vendor-Managed inventory a. Some retailers have turned over responsibility for maintaining inventories to suppliers, known as vendor-managed inventory. b. Information about customer purchasing patterns and inventory levels is shared with suppliers, who schedule production and delivery. c. When inventory drops to a predetermined level, supplies rush replacements to the retailers distribution center. d. With vendor-managed inventory, the store relies on its suppliers to analyze consumer purchasing data and keep shelves full. F. Order Processing 1. Order Processing may be a logistics activity, but it is essential to customer satisfaction. 2. Every step in order processing has the potential to delight or disappoint your customer. 3. You have to anticipate what customers need so you can plan production and have channel partners lined up to help. 4. Order cycle time, also known as lead-time, is the period between the placement of an order and its receipt. G. Reverse Logistics 1. Reverse logistics is the process of managing the return flow of products form customer. 2. This logistical activity has become more urgent to protect the environment. 3. Marketers can use reverse logistics to retrieve products for servicing, replacement, recycling, or disposal. 4. When you design reverse logistics systems; take into account your customers behavior patterns as well as your organizational needs and goals.

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GLOSSARY Activity-Based Costing (ABC) An accounting system that measures that measures the cost and performance specific activities performed in an organization. Advanced Shipment Notice (ASN) Detailed shipment information transmitted to a customer or consignee in advance of delivery, designating the contents and nature of the shipment. May also include expected time of arrival. Average Inventory The average inventory level over a period of time. Back Order Product ordered but out of stock and promised to ship when the product becomes available. Backhaul The return movement of a vehicle from its original destination to its original point of origin, especially when carrying goods back over all or part of the same route. Bar code A symbol consisting of a series of printed bars representing values. A system of optical character reading, scanning, and tracking of units by reading a series of printed bars for translation into a numeric of alphanumeric identification code. Benchmarking The process of comparing performance against the practices of other leading companies for the purpose of improving performance. Companies also benchmark internally by tracking and comparing current performance with past performance. Best Practice State-of-industry performance or application. Bill of Landing A transportation document that is the contract of carriage containing the terms and conditions between the shipper and carrier. Break-Bulk The separation of a single consolidated bulk load into smaller individual shipments for delivery to the ultimate consignees. Carrier A firm which transports goods or people. Common Carrier A for-hire carrier that holds itself out to transport goods and serve the general public at reasonable rates and without discrimination. Consignee The party to whom goods are shipped and delivered. The receiver of a freight shipment. Consignor The party who originates a shipment of goods (shipper). The sender of a freight shipment, usually the seller.

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Consolidation Combining two or more shipments in order to realize lower transportation rates. Inbound consolidation from vendors is called make-bulk consolidation; outbound consolidation to customers is called break-bulk consolidation. Continues Replenishment Planning (CRP) A program that triggers the manufacturing and movement of product through the supply chain when the identical product is purchased by an end user. Core competency One of a companys primary functions, which is considered essential to its success. Cost of capital The cost to borrow or invest capital. Cross-docking The direct flow of merchandise from the receiving function to the shipping function, eliminating any additional steps in between, including the need for storage. Cycle time The amount of time it takes to complete a business process. Dedicated Contract Carriage A third-party service that dedicates equipment (vehicles) and drivers to a single customer for its exclusive use on a contractual basis. Demand Chain Another name for the supply chain, with emphasis on customer or end user demand pulling materials and product through the chain. Distribution Outbound logistics, from the end of the production line to the end user. Distribution Center A post-production warehouse for finished goods. Distribution requirements planning (DRP) A system of determining demands for inventory at distribution centers and consolidating demand information in reverse as input to the production and materials system Electronic Order Quantity (EOQ) - An inventory model that determines how much to order by determining the amount that will meet customer service levels while minimizing total ordering and holding costs. Economic Value Added (EVA) A measurement of shareholder value as a companys operating profits after tax, less an appropriate charge for the capital used in creating the profits. EDI (Electronic Data Interchange) The paperless exchange of standard business transactions of information by electronic computer-to-computer transfer, generally requiring little or no human intervention.

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Efficient Consumer Response (ECR) A demand driven replenishment system designed to link all parties in the logistics channel to create a massive flow through distribution network. Replenishment is based upon consumer demand and point of sale information. Fill Rate The percentage of order items that the picking operation actually fills within a given period of time. Finished Goods Inventory (FGI) Products completely manufactured, packaged, stored, and ready for distribution. Fixed Costs costs which do not fluctuate with business volume in the short run. FOB (Free on Board) Contractual terms between a buyer and a seller which define where title transfer takes place. FOB Destination Title passes at destination, and seller has total responsibility until shipment is delivered FOB Origin Title passes at origin, and buyers has total responsibility over the goods while in shipment. Foreign Trade Zone (FTZ) An area or zone set aside at or near a port or airport, under the control of the U.S customers Service, for holding goods duty-free pending customers clearance. Full-Service Leasing An equipment-leasing arrangement that includes a variety of services to support lease equipment (i.e., motor carrier tractors). Globalization The process of marketing something worldwide in scope or application. Handling costs The cost involved in moving, transferring, preparing, and otherwise handling inventory. Hazardous Material A substance or material which the department of transportation has determinant to be capable of posing a risk to health, safely, and property when stored or transported in commerce. Hundredweight (cwt) A pricing unit used in transportation (equal to 100 pounds). Inbound Logistics The movement of materials form suppliers and vendors into production process or storage facilities. INCOTERMS International terms of sale developed by the international chamber of commerce of define sellers and buyers responsibilities.

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Integrated Logistics A comprehensive, system-wide view of the entire supply chain as a single process, from raw materials supply though finished goods distribution. All functions that make up the supply chain are managed as a single entity, rather than managing individual functions separately. Intermodal Transportation - Transporting freight by using two or more transportation modes. Inventory Raw materials, work in process, finished goods and supplies required for creation of a companys goods and services. Inventory Carrying Costs - A financial measurement that calculates all the costs associated with holding goods in storage, usually expressed as a percentage of the inventory value. It includes inventory-in-storage, warehousing, obsolescence, deterioration or spoilage, insurance, taxes, depreciation, and handling costs. Inventory Deployment A technique for strategically positioning inventory to meet customer service levels while minimizing inventory and storage levels. Excess inventory is replaced with information derived through monitoring supply, demand and inventory at rest as well as in motion Inventory management The process of ensuring the availability of products through inventory administration. Inventory Turns The cost of goods sold divided by the average level of inventory on hand. This ratio measures how many times a companys inventory has been sold during a period of time. Operationally, inventory turns are measured as total throughput divided by average level of inventory for a given period. Inventory Velocity - The speed with which inventory moves through a defined cycle, i.e. form receiving to shipping. Just-In-Time (JIT) An inventory control system that controls material flow into assembly and manufacturing plants by coordinating demand and supply to the point where desired materials arrive just in time for use. Kitting - Light assembly of components or parts into defined units. Less-Than-Truckload (LTL) Carries Trucking companies that consolidate and transport smaller (less than truckload) shipments of by utilizing a network of terminals and relay points. Logistics According to the council of logistics Management (CLM), logistics is the process of planning, implementing, and controlling, and controlling the efficient, effective flow and

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Storage of goods, services, and related information form point of origin to point of origin to point of consumption for the purpose of conforming to customer requirements. Marginal Cost - The cost produce one additional unit of output. The change in total variable cost resulting form a one-unit change in output. Materials Handling The physical handling of products and materials between procurement and shipping. Material Managements Inbound logistics from suppliers through the production process. The movement and management of materials and products from procurement through production. Materials Requirements Planning (MRP) A decision making methodology used to determine the timing and quintiles of materials to purchase. N.M.F.C. (National motor Freight Classification) A tariff which contain descriptions and classifications of commodities and rules for domestic movement by motor carries in the U.S. Optimization The process of making something as good or as effective as possible with given resource and constraints. Order Cycle The time and process involved form the placement of an order to the receipt of the shipment. Order Processing Activities associated with filling customer orders. Outbound Consolidation (Break-Bulk) - Consolidation of a number of small shipments for various customers into a larger load. Shipped to a location near the customers; then the small shipments are distributed to the customers. Outbound Logistics The process related to the movement and storage of products form the end of the production line to the end user. Outsource To utilize a third party provider to provide services previously performed in house Pick/Pack Picking of product from inventory and packing into shipment containers. Point of sale information Price and quality data from retail locations as sales transactions occur. Postponement The delay of final activities (i.e., assembly, production, packaging, etc.) until the latest possible time.

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Prepaid A freight term which indicates that charges are to be paid by the shipper. Present Value Todays value of future cash flows, discounted at an appropriate rate. Process Improvement - Designs or activities that improve quality or reduce costs, often through the elimination of waste or non-value-added tasks. Proof of Delivery (P.O.D.) Information supplied by the carrier containing the name of the person who signed for the shipment, the time and date of delivery, and other shipment delivery related information.) Quick Response (P.O.D) A business strategy for reducing inventory in the pipeline and shortening the pipeline and shortening the cycle time for a product to be made, distributed and sold. Point of sale information is electronically transmitted back to the store supplier, who is responsible for adequate supply at the store. Reengineering A fundamental rethinking and radical redesign of business process to achieve dramatic improvements in performance. Replenishment - The process of moving or respelling inventory form a reserve storage location to a primary picking location, or to another mode of storage in which picking is performed. Reverse Logistics A specialized segment of logistics focusing on the movement and management of products and resources after the sale and after delivery to the customer. Safely Stock - The inventory a company holds above normal needs as a buffer against delays in receipt of supply or changes in customer demand. Shipper- The party which tenders good for transportation. Stock keeping Unit (SKU) distinguishable from all others. Numbering system which makes a product or item

Sub Optimization Decisions or activities in a part made at the expense of the whole. Supply Chain The physical, financial and information networks, which involve the movement of material, funds, and related information through the full logistics process, form the acquisition of raw materials to delivery of finished products to the end user. The supply chain includes all vendors, service providers, customers, and intermediaries. Supply Chain Management (SCM) The management and control of all materials, funds and related information in the logistics process from the acquisition of raw materials to the delivery of finished products to the end user.

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Supply warehouse A warehouse that stores raw materials or components. Goods from different suppliers are picked, sorted, staged, or sequenced at the warehouse to assemble plant orders. Tariff A tax assessed by a government on goods entering or leaving a country. The team is also used in transportation in reference to the fees and rules applied by a carrier for its services. Third Party Logistics Transportation, warehousing and other logistic related services provided by companies employed to assume tasks that were previously performed in house by the client. Throughput A measure of warehousing output volume (weight, number of units). Also the total amount of units received plus the total amount of units shipped, divided by two. Time-Definite Services Delivery is guaranteed on a specific day or at a certain time of the day. TOFC Trailer-on-flat car (Piggyback). Total Average Inventory A decision-marketing approach that considers minimization of total costs and recognizes the interrelationship among system variables such as transportation, warehousing, inventory, and customer service. Tracking and Tracing Monitoring and recording shipment movements from origin to destination. Traffic Management The management and controlling of transportation modes, carriers and services. Transit Time - The total time which elapses between a shipments pickup and delivery. Truckload Carriers (TL) Trucking companies which move full truckloads of freight directly from the point of origin to destination. Unit cost The cost associated with a single unit of product. The total cost of producing a product or service divided by the total number of units. Value Added Increases or improved value, worth, functionality or usefulness. Variable cost A cost that volume or activity level of business.

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Visibility The ability to access or vies pertinent data or information as it relates to logistics and the supply chain Warehousing- The storage (holding) of goods. Works-in-process (WIP) parts and subassemblies in the process of becoming completed finished goods.