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Logistics and

Competitive strategy
Chapter Eleven
By Martin Christopher

Dimensions of Logistics:
Introduction

Unit 1

Logistics has come a long way since the


1960s.
The big challenge is to manage the whole
logistics system in such a way that order
fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the individual
firms logistics system but also recognizing
that no logistics system operates in a vacuum.

Strategic Logistics Management

What is Logistics?

Popular logistics terms:

Logistics Management
Business Logistics Management
Integrated Logistics Management
Materials Management
Physical Distribution Management
Marketing Logistics
Industrial Logistics
Distribution

Unit 1

Strategic Logistics Management

Definition of Logistics:

Council of Logistics Management


(CLM, 1985)
Logistics is the process of planning,
implementing and controlling the
efficient, effective flow and storage of
raw materials, in-process inventory,
finished goods and related information
from point of origin to point of
consumption for the purpose of
conforming to customer requirements.

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Strategic Logistics Management

Logistics - Definition
Logistics is the process of strategically
managing the procurement, movement and
storage of materials, parts and finished
inventory (and the related information flows)
through the organisation and its marketing
channels in such a way that current and
future profitability are maximised through
the
cost-effective fulfilment of orders.
Martin Christopher
Logistics and Supply Chain Management

Unit 1

Strategic Logistics Management

Supply Chain Management


The management of upstream and
downstream relationships with
suppliers and customers in order to
deliver superior customer value at
least cost to the supply chain as a
whole.

Unit 1

Strategic Logistics Management

What is Logistics?:
21st Century View of Logistics (4
subdivisions)
1. Business Logistics supply chain process
that plans, implements, and controls the
efficient, effective flow of goods, services,
and related information from the point of
origin to the point of use or consumption
in order to meet customer requirements.
2. Military Logistics design and integration
of all aspects of support for the operational
capacity of the military forces, and their
equipment to ensure readiness, reliability,
and efficiency.
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Strategic Logistics Management

What is Logistics?:
21st Century View of
3. Event Logistics network of activities,
Logistics
facilities, and personnel
required to

organize, schedule, and deploy the


resources for an event to take place and to
efficiently withdraw after the event.
4. Service Logistics acquisition, scheduling,
and management of the facilities/assets,
personnel, and materials to support and
sustain a service operation or business.

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Strategic Logistics Management

3 major dimensions of
Logistics

1.

2.

3.

Unit 1

The macro environment of Logistics:


Economy Perspective
The micro environment of Logistics:
Firm dimension
The logistics components and its
internal relationship

Strategic Logistics Management

1. Logistics in the Economy:

As indicated in Figure 2-2, logistics costs


A
Macro
Perspective
as a percentage of GDP have declined
from 16 percent in 1980, to under 10
percent in 1999.
Early to mid-1970s saw the figure closer
to 20 percent.
This reflects a serious improvement in
the efficiency of logistics systems.
Figure 2-3 shows a further breakdown
of logistics costs for 1999.

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Strategic Logistics Management

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Figure 2-2: Logistics Costs as a


Percentage of GDP

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Strategic Logistics Management

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Figure 2-3:
Total Logistics Costs --- 1999

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Strategic Logistics Management

12

Logistic cost as a percentage of


GDP across the world is shown in
the following table
Country
Logistic cost as a
percentage of GDP
Korea
tn $)
China
tn $)
Japan
tn $)
India
France
UK

16 (GDP 1.12
15 (GDP 7.32
14 (GDP 5.86
13
12
11

(GDP
(GDP
(GDP

1.82
2.74
2.45

tn
tn
tn

$)
$)
$)

1. Logistics in the Economy:

The two largest cost categories in logistics


A
Macro
Perspective
systems are transportation and inventory.
While we will look at this later, motor
carriers share of total freight expenditures
is $450 billion versus $99 billion for all
other carriers.
The most frequent trade-off in logistics is
between transportation and inventory cost.

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Strategic Logistics Management

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1. Logistics in the Economy:

As indicated
in Figure
2-4, the
A Macro
Perspective
Federal Reserve measure of inventory
to sales ratios from 1991 to 1999
clearly indicate that companies are
getting better at managing inventory.
Companies have been supporting
larger amounts of sales with
decreasing amounts of inventory.

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Strategic Logistics Management

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Figure 2-4:
Inventory Sales Ratio

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Strategic Logistics Management

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1. Logistics in the Economy:

Contributing
to this
decline
A Macro
Perspective

Improvement in transportation cost


Better inventory management
Turnover has had a very positive impact
upon the return on investment for
companies

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Strategic Logistics Management

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The role of Logistics in


Macro economic
(i) Value added role
(ii) Economic impact

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(i) Add values to product/services:


4 principal VAs of economic utility
1.
2.
3.
4.

Form utilityPlace utilityTime utilityPossession utility-

(what)
(where)
(when)
(why)

production
logistic
logistic
marketing

Also referred to as the seven Rs --- Right product, Right


quantity, Right condition, Right place, Right time, Right
customer, and Right cost.

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Figure 2-5 Fundamental


Utility Creation in the
Economy

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2. Logistics in the Firm:


The Micro Dimension

Logistics Interfaces with


Operations/Manufacturing
b. Logistics Interfaces with
Marketing
c. Logistics Interfaces with
Other Areas
a.

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Strategic Logistics Management

21

a. Logistics Interfaces with


Operations Manufacturing
Examples:
1. Length of production runs
Balance economies of long production
runs against increased costs of high
inventories.

2. Seasonal demand
Acceptance of seasonal
inventory to balance
lead production times.
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a. Logistics Interfaces with


Operations Manufacturing
3. Supply-side interfaces

Stocking adequate supplies to ensure


uninterrupted production now a logistics
function.

4. Protective packaging

Principal purpose is to protect the


product from damage.

5. Foreign & third party alternatives


Some logistics functions are being
outsourced.

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b. Logistics Interfaces with


Marketing

The Marketing Mix Four Ps


(i) Price
(ii) Product
(iii) Promotion
(iv) Place

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Strategic Logistics Management

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Logistics in the Firm:


(i) Price

Carrier pricing
Generally, since the larger the shipment, the
cheaper the transportation rate, shipment sizes
should be tailored to the carriers vehicle
capacity where possible.
Matching schedules
Quantity discounts should be tied to carrier
quantity discounts.
Volume relationships
Volumes sold will affect inventory
requirements.

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Strategic Logistics Management

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Logistics in the Firm:


(ii) Product

Unit 1

Consumer packaging
Generally, since the size, shape, weight and
other physical characteristics of the product
impact on its storage, transportation and
handling, the logistics managers should be
included in any decisions regarding these
product traits.
A minor correction in any of the above could
conceivably cost (or save) millions of dollars
in logistical costs.
Logistics costs are not necessarily
paramount, but they need to be considered
in the decision making process.
Strategic Logistics Management

26

Logistics in the Firm:


(iii) Promotion

Push versus pull


The most important factor is that the logistics
division is aware of any changes in demand
patterns so that it can plan for any
consequences.
Pull strategies tend to be more erratic.
Push strategies tend to more predictable.
Channel competition
The more popular a product, the easier it is to
persuade channel members to promote your
product.

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Logistics in the Firm:


(iv) Place

Wholesalers
Generally, since wholesalers are combining
purchases for multiple retailers, the shipment
sizes tend to be larger and the number of
transactions that have to be processed are
fewer, with the result that logistics costs are
smaller.
Retailers
With the exception of very large retailers who
act more like wholesalers, smaller sales are the
norm. These generally cost more for
transportation and order processing.

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c. Logistics Interfaces with


Other Areas

Manufacturing and marketing are probably the


two most important internal, functional interfaces
with logistics.
Other important interfaces now include finance
and accounting.
Logistics can have a major impact on return on
assets and return on investment.
Logistics costs reported by cost systems
measure supply chain trade-offs and
performance.

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Session 1 Summing Up

End of Session 1

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Porter's 5 Forces - Elements of Industry Structure (source: Porter, 1985, p.6)

Sources of Competitive
Advantage
Entry Barriers
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation

Suppliers

New Entrants
Threat of
New Entrants
Industry
Competitors

Bargaining Power
of Suppliers

Intensity
of Rivalry
Determinants of Supplier Power
Differentiation of inputs
Switching costs of suppliers and firms in the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to threat of
backward integration by firms in the industry

Threat of
Substitutes

Substitutes

Determinants of Substitution Threat


Relative price performance of substitutes
Switching costs
Buyer propensity to substitute

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Strategic Logistics Management

Rivalry Determinants
Industry growth
Fixed (or storage) costs / value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers

Bargaining Power
of Buyers

Buyers

Determinants of Buyer Power


Bargaining Leverage
Buyer concentration vs.
firm concentration
Buyer volume
Buyer switching costs
relative to firm
switching costs
Buyer information
Ability to backward
integrate
Substitute products
Pull-through

Price Sensitivity
Price/total purchases
Product differences
Brand identity
Impact on quality/
performance
Buyer profits
Decision makers
incentives

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Sources of Competitive
Advantage
new technologies

new or shifting buyer needs

Non-availability of Wood

changes in government regulations

Unit 1

Organic Vegetables, Green Industry

shifting input costs or availability

Apartments vis--vis Bungalows

the emergence of a new industry


segment

iPhone, Cloud Computing

Banning of Sun Control Films in Cars


Strategic Logistics Management

32

Logistics Value Proposition

Service Benefits
Availability
Operational Performance
Speed, Consistency, Malfunction and Recovery
Time

Service Reliability
Quality Aspect by standards and monitoring
Manpower, Software, Training, Continuous
Improvement,

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Logistics Value Proposition

Cost Minimization
Least Total Cost Concept
Airfreight, Air Travel,

Logistics Value Generation


Commitment

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What is logistics

Logistics is the process of strategically


managing the procurement,
movement and storage of materials,
parts and finished inventory (and the
related information flows)
through the organization and its
marketing channels
in such a way that current and future
profitability are maximized through the
cost-effective fulfillment of orders.

Logistics and competitive


advantage
Firms can achieve competitive
advantage through:
1. Differentiation, in the eyes of the
customer, from its competition
And
2.
By operating at a lower cost and
hence at greater profit.

Competitive
advantage and the
CUSTOMER
3Cs
Needs seeking benefits
At acceptable prices
VALUE

VALUE

Assets and
Utilisation

Assets and
Utilisation
COMPANY

Cost differentials

COMPETITOR

Logistics and competitive


advantage

A position of enduring superiority over


competitors in terms of customer
preference may be achieved through
logistics.
Successful companies either have
productivity advantage or they have
a value advantage or a combination
of the two.

Logistics and competitive


advantage
Productivity
Lower cost
profile
Differential
plus
Value

Productivity advantage

1.
2.

There is substantial evidence to


suggest that big is beautiful when it
comes to cost advantage. This is
partly due:
to economies of scale
to the impact of the "Experience
Curve".

Productivity advantage

In this regard Logistics management


can provide a multitude of ways to
increase efficiency and productivity
and hence contribute significantly to
reduced unit costs.

Value advantage
Customers dont buy products, they
buy benefits, these benefits may be
intangible (image or reputation)
In other words
Products are purchased for the promise
of what they will deliver.

Value advantage
Adding value through differentiation
is a powerful means of achieving a
defensible advantage in the market.
But How it could be achieved?
1.
Value segments approach
2.
Services augmented offers

Productivity and Value


advantage

Successful companies will often seek both


productivity and a value advantage.
Available options are:

Productivity and Value


advantage
Marketing logistics strategic goal would be

Gaining competitive
advantage through logistics

Competitive advantage cannot be


understood by looking at a firm as a
whole. It stems from the many discrete
activities a firm performs.
In this regard; we can use the value
chain analysis to disaggregates a firm
in to its strategically relevant activities

Gaining competitive
advantage through logistics

Margin

Gaining competitive
advantage through logistics

Competitive advantage grows out of


the way in which firms organize and
perform these discrete activities
within the value chain. (More cheaply
or better than its competitors)

Gaining competitive
advantage through logistics
Productivity advantage:
Capacity utilization, inventory
reduction, closer integration with
suppliers.
Value advantage:
Superior customer services

Gaining competitive
advantage through logistics

The mission of logistics


management

It is to plan and co-ordinate all


activities necessary to achieve the
desired levels of delivered service and
quality at lowest possible cost.
Logistics must therefore be seen as the
link between the market place and
the operating activity of the
business.

The fig illustrates total system concept

The mission of logistics


management

The previous fig suggests that the


needs of customers are satisfied
through:
The co-ordination of the materials
and information flows that extend
from the market place, through the
firm and its operations and beyond that
to supplier.

The supply chain and


competitive advantage

The supply chain is the network of


organizations that are involved( through
upstream and downstream linkages) in
the different processes and activities
that produce value (goods or/and
services).
Recall the value system in Ch 5
Supplier VC

Firm VC

Channel VC

Buyer VC

The supply chain and


competitive advantage

Supply chain management in this


regard should be after integrating
outside boundaries of the firm to
include both suppliers and
consumers

The supply chain and


competitive advantage

The main challenge would be:


Integrating and coordinating the flow of
materials from suppliers (often off
shore) and managing the distribution of
final products through multiple
intermediaries.

The supply chain and


competitive advantage

The difference between logistics and


supply chain management p157
Achieving an integrating supply chain
p158-159 fig 11.9
Scope of supply chain management
fig 11.8 p158
Very important

Fundamentals of supply
chain management
1.

2.

3.

4.

Views the supply chain as a single


entity
It calls for strategic decision making
because of its impact on overall costs
and market share
provides a different perspective on
inventories which are used as a
balancing mechanism of last not first
resort.
Requires high level of integration

The changing logistics


environment

The customer service explosion (Services


excellence, appropriate delivery systems,
committed employees)
Time compression (logistics lead time)
ORDER
CASH
Globalization of industry (offshore)
Organizational integration (Material,
production, and marketing managers)

The challenge of logistics


management

To achieve the goal of competitive


advantage through both cost reduction
and service enhancement.
Organizations need to accelerate the
movement through the supply chain and
to have more flexible Logistics systems
and this could be achieved through:

The challenge of logistics


management
- Cutting short the pipeline
(Unneeded inventory)
- Improve the pipeline visibility
(Organizational barriers removals,
better coordination)
- Managing logistics as a system

We covered so far

Definition of logistics
Logistics and competitive advantage
(Productivity and Value advantage)
Competitive advantage and value chain
management
The mission of logistics management
The supply chain and competitive
advantage
The changing logistics environment
The challenge of logistics management

Activities
1.

2.

3.

Identify the fundamentals of supply


chain management, and how they do
function.
Explain the characteristics of the most
challenging factors, in the area of
logistics.
How can we use logistics to add value
and obtain competitive advantage

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