INTRODUCTION TO LOGISTICS & OPERATIONS MANAGEMENT STRATEGY

Contents 1 Business Strategy & Logistics ...............................1 2 Production Systems ................................................2 3 Logistics Definitions ..............................................5 4 The Tools of the Trade...........................................8 5 The Strategic Role of Logistics ............................11 6 Order Winning & Order Qualifying Criteria ...........................................................................11 7 Time Based Competitive Strategies .............13 8 Impact of the Product Life Cycle on Logistics ...........................................................................16 5.4.E-Business..................................................19 5.5 Third-Party logistics (3PL).......................19 5.6. Basic Elements of Logistics Strategy .......21 9 Conclusion ............................................................22 10 Tutorial Revision Questions ..............................23 Written by Karen Bradbury, John Hill, Mike Newton and Morag Malins

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INTRODUCTION TO LOGISTICS STRATEGY

1 Business Strategy & Logistics
All business activity in whatever field you operate, be it manufacturing in automotive, electronics, pharmaceuticals, retail, service industries, is about adding value. This module positions the discipline of Logistics and Operations Management in the overall context of running a business and identfies how effective logistics and operations management can contribute to a successful company, fulfilling the customer demand. The following diagram shows a simple module of a manufacturing company:

A Model of The Firm

Product and Process Management of Service Design Design Processes Support Services
CORPORATE STRATEGY

Market Needs External Drivers

Delivered product

Figure 1 - Simple diagram of a company In this module we will be discussing the 'management of processes' and in particular the management of Logistics. To explain what we mean by Logistics we will take a definition given by Jonathon Weeks, Development Director of the Kingfisher Group plc and former Chairman of the Institute of Logistics who described Logistics as :"The management of material out of the ground and back into it." It is worth noting that there are many different definitions of Logistics, and some of these will be discussed later. The significance of the importance of logistics within a company and indeed the whole supply chain, can be demonstrated by how the the companys logistics strategy and objectives form a part of the overall business structure. There can be many

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different levels of strategies and objectives in a company and Figure 2 shows how Logistics would fit into this.
BUSINESS STRATEGY Objectives Markets Products Varieties Volumes

MARKETING STRATEGY

MANUFACTURING AND LOGISTICS STRATEGY LOGISTICS OBJECTIVES

Figure 2 - A strategic planning process for the development of logistics objectives The majority of engineering businesses involve manufacture or production of a product and so in these notes we will start by examining the inputs and outputs in any production system, move on to look at different definitions of Logistics, review the basic tools required to manage Logistics in a company and finish with an examination of the strategic role of Logistics. Although the focus here is on manufacturing, it is important to note that whatever environment the company is in, manufacturing/retail/service etc, the fundamental principals of supplying what the customer requires remain the same.

2 Production Systems
Production systems are often characterised by a Black Box model, such as that shown in Figure 3, below:

Materials Machines Manpower Money

PRODUCTION PROCESS (Adding Value)

Goods Services Money

Figure 3 - Black box model of production The Four M's represent the inputs to the process (Manpower, rather than People power, is included in the interests of alliteration rather than sexism!) while the goods, services, and hopefully money, are the outputs. For the purposes of these notes both goods and services are regarded as products. This broad picture, which is usually applied to a firm, could be applied equally well to individual processes, such as a machining centre, a car wash, a plating bath, a bank's cash

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dispenser or a fast food outlet. For most industrial processes the picture is best represented with some minor alterations, such as those shown in Figure 4.

Manpower

Machines

Materials

PRODUCTION PROCESS (Adding Value)

Products

Figure 4 - Black box model of a single process This separates the flow of materials (raw materials in; products out) from the other, renewable inputs to the process. In fact, most processes can be thought of as a means of increasing the utility (or value) of a material; either the utility of form or the utility of location. For individual processes in industry, it is not common to include the transfer of money in the model, although it is an integral part of many single stage transactions in service industries, and it is implied in the manufacturing sector. Where the flow of money is included it is normally expected to travel in the opposite direction to the flow of materials, as shown in Figure 5:

Manpower

Machines

Materials Money

PRODUCTION PROCESS (Adding Value)

Products Money

Figure 5 Single process black box including the flow of money Each process is a conduit through which materials pass, with the appropriate change of utility, being converted to a product, or output as they do so. It is something of a clich that "one man's finished product is another man's raw material", and so the output shown in Figure 5 can pass to the next process as its input:

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Manpower Machines

Manpower

Machines

Materials Money

PRODUCTION PROCESS (Adding Value)

PRODUCTION PROCESS (Adding Value)

Products Money

Figure 6 - Transfer of materials from process to process It is quite clear that if two processes can be linked in this way, then more stages can be added as necessary to construct a chain, the output from which is some clearly identifiable end product. If this chain is owned by a single organisation, then it can be regarded as one unit within the production activity of a firm, as shown in schematic form in Figure 7. This might constitute a cell, a product line, or the entire production capability of the firm concerned.

Manpower

Machines

Materials Money

Products Money

Figure 7 - Schematic model of a Production Unit or a Firm. The process of extending this model can be continued by combining a number of firms into a higher level version of the above model, as shown in Figure 8, to form what is commonly known as a Supply Chain (although the term Demand Chain would be equally appropriate).

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Materials Money

Products Money

FIRM A

FIRM B

FIRM C

Figure 8 - A chain of production units or firms Clearly, such a model is a massively simplified picture of the real situation. Real supply chains involve many cross links between product lines, flow of materials through much more tortuous paths, and complex interactions between firms, products and resources.This is further complicated through Gloablisation where links in the suplly chain can be international. Nonetheless, it is useful to see the simplified picture in order to understand the generalisations that can be made, and those that cannot. For example, it is sometimes relevant to see that the customer-supplier relationship can exist just as positively between successive stages of production within a single firm, as it can between different firms. This might be important in deciding inventory management policies, for example. On the other hand, it is much more difficult to treat the movement of money, or the fixing of prices the same way when looking at inter-department finances as opposed to inter-firm finances. The business of managing the behaviour of supply chains, such as that illustrated in a schematic way in the foregoing paragraphs, is variously described as Supply Chain management, Operations Management or Logistics. It is debatable whether any name can be regarded as unambiguously correct, but these are in common use and in the next section we will examine some of the different definitions for these terms.

3 Logistics Definitions
In recent years the name Logistics has found favour increasingly, and in an attempt to provide some focus around which to direct a common body of study and approach, attempts have been made to agree on a definition of the scope and content of the subject that bears the title. In our original definition we said that Logistics was the management of material out of the ground and back into it. This reflects the growing environmental awareness and as this awareness increases legislation is being introduced that will make the producer of goods ultimately responsible for their disposal. Legislation in Germany currently requires the producer to dispose of any packaging materials used. Logistics in future will have to cater not only for the production of products from raw materials and the delivery of those products to the customer, but also for the maintenance of those products throughout their useful life and their ultimate recycling or disposal. Logistics is defined by the British Standards Institute as; " The planning, execution and control of the movement of people, goods and related support in order to achieve an objective within a system. "

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This highlights the fact that we must align the objectives of the Logistics strategy with those of the complete system or business and in the introduction we examined the positioning of Logistics strategy. In section 2 we have been examining the basic elements of the production systems. On the basis that both brevity and breadth are to be commended in definitions, it is intended to use the following, as defined by Dr. Ian Canadine, Director General, Institute of Logistics, for the purposes of this paper:

Logistics : The time related positioning of resources. This comes quite close to an older, and more widely-used view that logistics is concerned with having : RIGHT PRODUCT RIGHT PLACE RIGHT TIME RIGHT COST Figure 9 - General objectives for any Logistics system Indeed, it is arguable that the only real difference between the two definitions is the explicit mention of cost in the second case. Having established our preferred definition of Logistics it is worth examining the specific functions or activities which we would expect to perform within a company. We will start with the traditional view of a manufacturing facility and the Logistics function, shown below. Purchasing would be responsible for negotiating with suppliers and placing the purchase orders, production planning & control would plan the production schedule whilst materials management & control would be responsible for dealing with the suppliers on a day to day basis to ensure the material arrived. The stores might be managed by a separate department or might have report to production or material control. The management of the warehouse and distribution to the customer would be handled by a separate department again and in some cases a completely separate company.

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Supplier Purchasing Goods Inwards Stores Production Warehouse Distributor

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Customer

In-Bound Logistics : Purchasing

In-House Logistics : Production Planning & Control and Material Management & Control

Out-Bound Logistics : Physical Distribution

Figure 10 : The traditional view of Logistics It is easy to see that the responsibility for the flow of material and for achieving production objectives changes many times as material progresses through the factory. Each manager is concerned with the efficiency of his department to the detriment of the whole. Work-inProgress tends to build up at each departmental interface and many managers have no interface with real customer requirements. Today the basic functions shown in the diagram above still remain the same ; all manufacturing companies have to carry out these activities. However, the organisation and grouping of these activities has been under review because companies have started to acknowledge that there is benefit in managing the supply chain rather than the individual parts. Described below are just 2 of the different arrangements which can be found today and which attempt to overcome these problems:1) Creation of a Logistics division to oversee all the activities shown above. This would be typical in a small to medium sized company. 2) Centralisation of Purchasing with the remaining Logistics functions devolved to Strategic Business Units (SBU). Purchasing take on a more 'strategic' role negotiating long term contracts with suppliers. Day to day control of production and the interface with the customer is taken over by each SBU giving both internal and external customer focus. This would be typical in a large company. Both of these arrangements break down the barriers between the different functions and focus more attention on the customer. However, there is a danger with an SBU organisation that learning and co-ordination between the different Logistics functions, in the SBUs, is lost with each SBU developing its own working practices. Having explained what Logistics is we will go on to examine the basic tools of the trade.

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4 The Tools of the Trade

Achieving the company's Logistics objectives normally involves a limited number of management tools. If the right products are to be in the right place at the right time, it is obviously necessary to schedule activities in an effective manner. However, no matter how good the scheduling methods may be it is unlikely that supply and demand will be in accord just as a result of chance events. It becomes necessary to manage the production resources needed to bring about the conversion therefore, so that they have sufficient capacity to meet the needs of the schedule. Furthermore, virtually all supply/production chains require the batching together of materials or products at some stage for reasons of efficiency. The inventory within these batches must achieve a balance between the advantages of working with quantities that promote "efficiency", and the disadvantages of having materials which are not being processed, and so represent money tied up in inactive stock. Consideration of the factors outlined in the previous paragraph indicates that the principal management tools required are: Management of Inventory Management of Capacity and Management of Delivery (i.e. Scheduling). As the subject develops, it will be seen that these areas interact with one another in ways that depend upon the circumstances of the production processes used, and the situation created by the demands of the market. They can be regarded as the components of a system, each having its own set of influences and constraints. However, the whole system is not simply the sum of the parts, as is shown schematically in Figure 11. In general, any decision taken in the area of capacity management will have repercussions in inventory management and scheduling. Similarly, decisions taken with respect to the other two areas will cause some reaction in the remainder of the system. The optimal operation, as far as such a notion exists, will involve balancing the separate requirements across the whole system, therefore.

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INVENTORY rig PRODUCT ht rig PLACE ht rig TIME ht rig COST ht

CAPACITY

DELIVERY/ SCHEDULE

Figure 11- Showing the interaction of the main tools of Logistics As we said in the previous section management of the total supply chain has become increasingly important and this management could also be included as one of the main tools of Logistics. A segment of a typical supply chain is shown in Figure 12. Traditionally each company maintains raw material stock to buffer against supply problems and finished goods stock to buffer against fluctuations in demand. However when the chain is viewed as a whole it is obvious that vast reductions in inventory could be achieved if the constituent parties were to work together and share information. Supply chain management offers a potential reduction in operating costs, and a potential reduction in lead-time to the customer.

Segment of a Supply chain

RAW PRODUCTION MATERIAL

FINISHED GOODS STOCK

RAW PRODUCTION MATERIAL

FINISHED GOODS STOCK

DUPLICATE INVENTORY

Figure 12 - Potential cost reduction due to Operations management

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The ideal of managing the entire supply chain as a single entity is probably a wildly optimistic objective for most, if not all products of any complexity. It is true that Marks and Spencer's buyers not only deal with their first line suppliers, but also with the sub-tier contributors to the products that they order. For example, when buying shirts from a garment manufacturer M&S tell them what materials to use, and from where they must buy it. The suppliers of the cloth are told where it must be dyed and/or Mercerised, and so on. This degree of control is unusual however, and in the case of a more complex product the amount of intervention that would be needed to achieve the same level of overall management would be prohibitive. A typical motor car is composed of many thousands of individual parts, while an aeroplane may have several millions, and the task of overseeing every individual piece, throughout its life must add to the cost of production. As a result, the usual procedure is for trading to occur only between adjacent stages in the chain. In the illustrations shown in Figure 8, this might be between Firm A and Firm B, or between Firm B and Firm C, for example. There is less likelihood of direct dealing between Firm A and Firm C. Even within this limited level of inter-firm dealing there is little or no interference in the internal management processes of suppliers. Vendor rating procedures are concerned mainly with the output from the process, such as delivery performance, cost and the quality of products delivered. In a small number of cases large customers insist on their suppliers using particular methods of quality management, such as SPC and will audit operations in a fairly general way. For example, both Boeing and Ford operate their own systems, and require their suppliers to have the same systems. The real linking of management activities in the manner that is associated with "the Systems Approach" is rarely encountered. It is not difficult to understand why this is so. Usually, the finances of companies are entirely separate. Indeed, the tradition in Western industry has been for confrontational dealing between firms, so that one can only make a profit at the expense of the other. This relationship makes it difficult to share the activities that affect the level of profits, if the profits themselves are a consequence of competition between the parties. One important, additional factor is that one supplier may trade with several customers, all of whom have different requirements. Adopting procedures to satisfy one customer has often been seen as a barrier to doing business with the others. This attitude is changing as the levels of business activity have declined, so that any orders are regarded as good orders. Furthermore, There are attempts to establish standards which are acceptable to all, or at least a large majority, of international organisations such as ISO, BSI and the European institutions.

The following diagram attempts to show how the various Logistics tools and techniques, presented on this module, fit together. Supply Chain Management, Industrial Engineering and Forecasting provide data to support all three of the basic management areas ; inventory, capacity and scheduling but the diagram shows the area where they have most impact.

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PLANNING & CONTROL SYSTEMS TOOLS

JIT INVENTORY CAPACITY MRP

Supply Chain Management OPT

DELIVERY/ SCHEDULE

Industrial Engineering MRPII

Forecasting STATISTICAL STOCK CONTROL

Figure 13 - Logistics Elements

5 The Strategic Role of Logistics

Since the business community (and the business schools) discovered manufacturing as a part of the strategic arsenal there has been a great deal of debate on the way that it contributes. This section will consider first how Logistics strategy can help deliver the order winning criteria in a company, move on to look at the role of Logistics in a time based competitive strategy and finally consider the impact of the product life cycle.

6 Order Winning & Order Qualifying Criteria

The notion of "order-winning criteria" in the 1970/80's pointed to the need for firms to identify the distinctive features that attract new customers, and then to protect these features. Initially these criteria were concerned mainly with product features such as design (style, originality etc.) performance and price. However, the current tendency is for the less and less distinction between one brand of product and another, so that these features are of diminishing importance in order-winning. For example, there is little to distinguish one make of personal computer (PC) from another, and virtually the same specification is available from many suppliers. The same can be said of motor cars, airlines or white consumer goods (such as washing machines). This trend is shown in the Figure 14 and demonstrates how companies are moving towards strategies based on customer service and compressing time. This chart was developed by Tom Ridgeman when working on the Time Compression Programme at Warwick.

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High

New Corporate Strategy =

Cost Strategies

Level of Development

The most for less cost in the least time.

Quality Technology / Innovation Customer Focus

Low Old

Time Compression

New

Figure 14 - Development of competitive strategies in manufacturing

The consequence of this convergence is that distinguishing one product from another is shifting towards the customer service aspects, such as delivery performance, reliability (especially of supply) and flexibility. This is the business of Logistics. This diagram could now be extended to included the use of e-technologies through e-business as a competitive strategy. There are customers who now consider the suppliers ability to participate in etechnologies as a factor in selecting that supplier. One view of this relationship from Costa R, Hill J F & Jardim E G M, illustrated schematically in Figure 15, is that the product features represent the "order-qualifiers", i.e. those characteristics which must be present for the customer to even consider placing an order. Then the logistics features are the order-winning characteristics.

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Order Order Qualifiers Winners

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Product Quality Technology Product Performance Durability etc.

Delivery (Consistency, Reliability, Frequency) Responsiveness Flexibility

Figure 15 - Order-winners and Order-qualifiers.

7 Time Based Competitive Strategies

From the point of view of the customer the crucial characteristic is delivery. Quite simply, the customer expects to receive the goods ordered at the time requested. From the point of view of the supplier however, this is a simplification of the real need. As stated in an earlier section (Tools of the Trade) delivery is inseparable from the other logistics controls of capacity and inventory. For the supplier to satisfy the customer and remain profitable there is a skilful balancing act to be performed in which the productive capacity is used as efficiently as possible, consistent with the response times required by the customer(s). This is sometimes characterised as the P:D ratio.

Procurement

Manufacture

Delivery

Customer order cycle

Customer places order

Customer requires delivery

Figure 16 - Illustrating P:D Ratio The ratio, which shows the relationship between the Customer order cycle time and the time needed to produce and deliver the product, may be critical in deciding the logistics parameters of the suppliers' business. If the ratio is less than one there may be no need to make forecasts of demand, no need to hold inventory, and customer satisfaction should be easy to achieve. However, if the ratio is greater than one then decisions have to be made about how to

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anticipate demand, and how to deploy the firm's resources to satisfy the unknown needs of the customer in the "best" way. This means that even the definition of "best" needs to be considered in advance. A balance must be found between the expensive option of holding stocks of finished goods (assuming this is possible), holding part-finished goods/raw materials, carrying spare capacity and/or failing to meet the full requirements of the customers. This is the balance illustrated in Figure 16, and its nature will depend upon the corporate or business objectives of the firm, and the characteristics of the market in which it operates. Clearly, one way to avoid this dilemma is to shorten the Production lead time (P) in order to reduce the ratio to the level where the problem disappears. (This process is part of the approach to Logistics/Operations management becoming known as Time Compression.) However, the structure of P may be more complex than that shown in Figure 16, and can depend upon a number of different factors, not least of which is the age of the product being considered. It can be thought of as comprising three separate elements: 1. Time to Market. 2. Time to Volume. 3. Time to Customer. This is a WMG classification, other sources may classify this differently, for example, in some text books, Time to Market is the total of Pm, Pv and Pc. 1. Time to Market is the time taken from the identification of a need for a particular product to the point where it is ready to go into service. This will vary, depending upon the novelty and originality of the product (does it need research or development before we can be sure it will work ?) the extent of the customer specification (are we simply satisfying a specific request, or is market research needed ?) and the involvement with other organisations, internal or external to our own. 2. Time to Volume is the time that is taken from an accepted product being "handed over" to production (hopefully they were involved in its development anyway) and the point where it can be supplied in the quantities required by the customer. In a firm that uses simultaneous engineering and/or "Design-Build Teams" this time could be expected to be relatively short already. However, there might be a need to buy in some component parts or sub-assemblies from external vendors, which will increase the overall time, and there might be a need to go back to the customer several times, for clarification or concessions on the specification. There is an increasing trend in the development of products such as cars and planes for the suppliers to be involved at the Time to Market stage as part of the design time. This has many advantages, including spreading the capital costs and risks of developing a new product. These considerations, along with some of those mentioned in the previous paragraph, need to be examined to be sure that we are satisfying the correct criteria. There is little advantage in producing an innovative and exciting piece of engineering if it arrives too late to be used by the customer. Maybe a modification to an existing product would have allowed us to reach the market first, even if the product is "safe" rather than creative.

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3. Time to Customer is the time taken between receiving an order for a delivery of the product(s) and the receipt of the goods or services by the customer. This is the cumulative time shown in Figure 16 as P. It is the time which is most often regarded as the concern of Logistics and Operations, but as stated earlier, the particular product type and the market into which it is being sold will decide whether or not Figure 16 should be redrawn as shown below, in Figure 17.

Time to Market Time to Volume Time to Customer

P D

= =

PM

PV

PC

Customer order cycle

Customer places order Figure 17 - Alternative View of P:D Ratio

Customer requires delivery

The value presented previously (in Figure 16) as P is shown here as Pc and is only one component in the total time to be considered. Focusing on time compression in all three areas, but particularly through Logistics management, can bring about a number of benefits, some of which may be unexpected. For example the benefit of cost reduction :-

'Time-based companies reduce cost indirectly through compressing time. When a company attacks time directly, the first benefits to show up are usually shorter cycle time and faster inventory turns... So when a company goes after time reduction in the right way, it tends to get both time and cost out. The reverse is not always so.'
Stalk & Hout, 1990

Companies introducing focusing on a Time Based Strategy which achieves business responsiveness discover a number of paradoxes:-

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2) Costs do not increase with greater investment and emphasis in quality; they decrease. 3) Costs do not go up as product variety increases and response times reduce; they go down. An interesting example taken from Stalk & Hout's book, "Competing Against Time" (published in 1990 by The Free Press, Macmillan, New York ISBN 0-02-915291-7), is of a building products manufacturer who reduced the time to customer (i.e. total process time) to less than 10 days. Competitor times remained at the 30 to 45 day level. The consequences of this situation are that in an economy that was growing on average by only 3% the Time Based company grew by 10% and had a pre-tax return on net assets of 40%, double the industrial average. Typically the reason for this is that it is common to find that the level of value adding activity within Non-Time based organisations is of the order of only 5%. A 25% lead time reduction doubles labour productivity and leads to cost reductions of 20% as indirect costs drop out of the process. The distribution of time between the different stages (time to market, time to volume and time to customer) is likely to change during the life of a single product, and so there is no such thing as an ideal system of logistics management, only a system which is most appropriate for a particular product, at a particular stage in its life.

8 Impact of the Product Life Cycle on Logistics

The initiation, evolution, decline and demise of a product is often characterised by a curve known as the product life cycle. It illustrates the demand for the product as a function of time, and has been shown to represent the pattern of behaviour for a wide range of goods and services. The total duration of the life cycle curve varies enormously from case to case, and some curves (such as that for the aeroplane or television) obviously has a long time to run, without any clear idea of when they will run out. For industries such as aerospace or automotive where there is a requirement for provision of spares over a long period of time following end of new manufacture, there is an impact on logistics. In general the curve is as shown in Figure 18.

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Intro. Demand Growth Maturity

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Decline

Time

Figure 18 - A Schematic Product Life Cycle There are four stages that are normally identified in the Life Cycle: 1. Introduction is the phase during which a product is first introduced into the market. During this phase the emerging product may be very vulnerable, and might not survive the initial period. When Ford Motor Co. decided to replace the Cortina by the Sierra they had the major share of the market for that class of car. However, the public was not ready for the rather unusual shape of the new model, and its launch coincided with an extremely successful period for General Motors with the Cavalier range, a direct competitor. The result was a disastrous few months, in which the sales figures failed to come near the expected level. Had this been a company smaller than Ford the car might well have entered a terminal decline, and taken a number of the smaller suppliers along with it. During this phase therefore, it is important to make the right decisions about production levels, and about investment in production capacity. If a large investment is made, and the product fails to take off the losses may be fatal for the firm (and its supporters). On the other hand, if the product does meet with the approval of the market, and demand rises sharply, a failure to invest might mean a loss of potential sales, lost market share and a loss of reputation as a result of dissatisfied potential customers airing their views. 2. Growth tends to occur at an increasingly rapid rate once a product has established itself. During this period the success of the product is its own best advertisement as potential customers see, or hear about, the enthusiasm of friends and neighbours that have taken the plunge. There is an element of "copy-catting" when it is fashionable to buy the new product. For example, satellite dishes for television were slow to appear initially in the UK but they are now common. If demand is rising rapidly it is important that the capacity is able to keep pace. Many firms have made the double error of missing the peak in demand, when the greatest profits were

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available, and then responding so late that capacity overshoots demand, adding to waste, inefficiency and further loss of profitability. To make the best use of the demand growth it is important to make good forecasts, have flexible systems, and minimise response times by good planning. 3. Maturity or Stability is the phase at which demand tends to level off. Much of the demand might well be the replacement market at this stage. For example, the great majority of customers for domestic appliances are replacing existing products that have worn out, or have become unfashionable. The same is true of motor cars, clothes, footwear etc. While this removes the pressures due to uncertainty in demand, this is the period when there is most likely to be competition from other firms who have seen the success of the product and decide to try to take a part of the market for themselves. In particular, these newcomers have the advantage of seeing the features of the established product, and being able to enhance their own offerings. Further, if the bulk of customers are seeking replacements for old items they will hope to buy something "better" in terms of its technology, performance, style etc., and all of these factors mean that the design and specification of the product require continuous updating . In the words of the White Queen in the childrens fairy story Alice in Wonderland by Lewis Caroll "Round here it takes all the running you can do just to stay in one place. If you want to go anywhere you must run at least twice as fast as that." This means that inventory must be managed to avoid obsolescence, and schedules must be capable of coping with changes in routing at more or less frequent intervals. 4. Decline is the phase when the product begins to lose its popularity, and will eventually lead to its demise. If the product is a fairly trivial one (not many producers would admit to that description for their own product) and/or if demand is dependent upon fashion, production can be stopped with little or no problems. For many products, however, there might well be agreements, perhaps bound up in contracts, that require spares and replacement parts to be made available for a fixed period. For example, in the aerospace industries this might be twenty years or longer. This means that production equipment has to be kept running long after the most profitable part of the life cycle has ended. It also means that space that was allocated on the basis of high demand is still tied up when demand has shrunk to a fraction of its peak. Production facilities that were designed to balance the demand for Original Equipment (OE) quantities may be completely out of balance as some parts of the products in the field wear out much faster than others. For all of these reasons, and others, the competent systems designer attempts to take into account the way that a product will be phased out, as well as the way that it will be managed in the boom period. (Consider the case of Nuclear Power.) In some industries there is a requirement for life cycle support where after-sales and service are crucial to the competitiveness of the product. This can include not only reverse logisitics and recycling but aftersales service,support and product recall and disposal. This cradle-to-cradle logistics can be a significant cost in the whole operartion. (Bowersox,et,al, 2007)

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5.4.E-Business
An additional competitive strategy that is becoming more significant within the supply chain that will have a major affect on all aspects of logistics within business-to-business and business-to-consumer supply chains is the advent of e-commerce and e-business. The Internet has enabled consumers to have direct access to manufacturers and suppliers producing a consumer focused environment. This means that whatever a companys position within the supply chain, it will need to relate to the consumer. The affect on business will be that they will need to exploit the technology available to be more flexible and efficient, improving their performance and business-to-business, business-to-customer relationships.relationships within e-business are critical as the supply chain becomes more transparent with, for example, consumer demand information being available throughout the supply chain. According to PricewaterhouseCoopers publication, Information and technology in the supply chain; e-supply chain:revolution or e-volution (Euromoney Insitutional Investor Plc, 1999, ISBN 185564 795 8), E-business can be defined as:the application of technologies to facilitate the buying and selling of products, services and information over public standards-based networks with e-commerce being the actual buying and selling of the product or service. E-business can occur at many different levels from simple one-way communication to improve transfer of logistics information such as orders and schedules to the supplier, to sharing of processes within the supply chain such as CPFR (collaborative planning, forecasting and replenishment).

5.5 Third-Party logistics (3PL)

As a result of the relisation that logistics is a source of competitive advantage, the logistics service industry is growing rapidly with many contract logistics companies reporting annual growth rates of almost 50%. Third party logistics (3PL) companies provide a combination of services from warehousing and transportation to management services increasingly on a global scale. Figure 19 shows how the various services provided can be classified:

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Introduction to Logistics & OM Strategy Physical contract Logistics services Dedicated contract carrier Dedicated warehousing Integrated contract logistics Integrated warehousing and transportation Integrated carrier, management and transportation

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Basic services Common carriage Public warehousing

Management contract Logistics services High Traffic management Warehouse management Import/export management

Physical Services

Low

Low Management Services Complexity and customisation

high

Figure 19 - Classification of services by Logistics Service Providers (Dornier (1998)) As figure 19 shows, there are many different levels to which a company may outsource its logistics function. There are many advantages in using 3PL providers such as the reduction in costs, greater flexibility in location and increase in customer satisfaction due to quick

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response. There have been problems with customer disatifaction in the service provided by 3PL however this be in some cases shown to be due to level of expectation of the customer and unclear objectives. There are disadvantages, such as loss of control by the company . When used in conjuntion with e-commerce, 3PL providers can be used to outsource the complete management function for materials and products distribution through the supply chain. In these environments the service provider may be refered to as a 4PL.

5.6. Basic Elements of Logistics Strategy

The diagram below shows the basic elements of Logistics Strategy and the supporting functions required.

Supply Chain Structure Proce s s Facilitie s Capacity Mate rials Manag me e nt

Org anis ation Human Re ourceManag m nt s e e Quality Manag m nt e e Information Manag m nt e e

Figure 20 - Elements of Logistics Strategy These elements will be revisited when examining the overall manufacturing strategy for a company but examining each element briefly :Supply Chain Structure - first the company must decide which items it will manufacture and which it will obtain from suppliers. This is usually referred to as a make-buy strategy. The company also needs to decide how it will manage the chain upstream to the customer ; will distributors be used or will the product be sold direct using the company's own salesmen. Having established this, decisions on how this chain will be managed must be taken. Process - having decided what will be made and what will be bought the company then needs to determine what manufacturing processes will be used. The sales forecasts will have a big

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impact on these decisions as volume can determine the type of equipment required. Another key decision is about the level of flexibility required ; large dedicated machinery may produce the highest volume for the smallest unit cost but they are the least flexible if demand patterns change. Facilities - having chosen the process we then need to design the location and layout of the manufacturing facilities. Location can be affected by manpower costs and availability of grants i.e. from the European Union. Layout of facilities can have a huge impact on productivity ; old established companies often look with envy and new companies who are building facilities on a 'green field site' with no restrictions. Capacity - a subject which will be discussed in detail on this module. There is the balance between inventory, scheduling and capacity to consider. Should capacity be in the form of men or machines or both ? Materials management - again a subject which will be dealt with in detail on this course. The flow of materials through the factory must be managed in terms of speed of flow and volume.

There are also supporting functions which will have a huge impact on the management of Logistics and although these will be tackled in detail as subjects in their own right they can not be isolated completely. Successful businesses have to manage all elements and organisation structure, human resource management, quality management and information management all have a big impact on Logistics.

9 Conclusion
It can be seen then, that Logistics and Operations Management is a moving target. The "best" system will depend upon many factors. The Logistics strategy may change as result of a change in business strategy, a repositioning of the 'order winners & qualifiers'. The Logistics strategy for a particular product will not even remain constant for a single product throughout the whole of its life. This means that its performance must be monitored continuously, and that flexibility to respond to changes in the demands of the market should be inherent in the approach that is used.

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10 Tutorial Revision Questions

1. What are some of the different definitions of Logistics ; explain the key elements of each ? 2. Explain the flow of the 4M's through the production process and through the supply chain. 3. What are some of the traditional problems encountered in the management of Logistics. 4. What is the difference between order winning criteria and order qualifying criteria ; how can Logistics help deliver these ? 5. Why have strategies developed towards time - based strategies ; can companies forget about cost today ? 6. A company has a P ratio of 4 times its D ratio - what are the implications for Logistics strategy ? 7. A company has a product which is near the end of its life cycle ; what is the likely impact on Logistics ? 8. Explain the difference between e-business and e-commerce. 9. Explain how a 3PL provider may be used to reduce a companys logistics costs. 10. How can each of the support functions help deliver an effective logistics strategy?

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