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8/4/2019 Supply Chain Management and Cost of Production
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Supply Chain Management and Cost of Production Nexus - An
Empirical Analysis
Md. Entazul Huque*
Md. Anwarul Islam
**
Abstract: It is only in the recent past that business organizations have
come to recognize the vital impact that logistics/ supply chain management
can have in the achievement of competitive advantage. There are important
five generic competitive strategies to achieve competitive advantage. The
vital one is low-cost. Logistics / supply chain management has the
potential to assist the organization in the achievement of cost / productivity
advantage and a value advantage. The productivity advantage gives a
lower cost profile and value advantage gives the product or offering a
differential plus over competitive offerings. Logistics costs represent a
significant proportion of total costs. As the logistics/ supply chain process
strategically manage the procurement, movement and storage of materials,
parts, and finished inventory ( and related information flows) thorough the
organization and its marketing channels in such a way that current and
future profitability are maximized through the cost-effective fulfillment of
orders, so the scope of taking advantage of lowering unit cost is very
significant. Further that Logistics/ supply chain management increaseefficiency. Productivity plays an important role in this respect. The higher
productivity is, the lower costs are in producing goods and services, the
lower prices can be. Therefore, logistics/ supply chain management has the
scope of planning, implementing and controlling the efficient and effective
flow and storage of goods, services, and related information from the point
of origin to the point of consumption in order to meet customers
requirements. To survive in the present context of globalizing the business,
increase in competitors and explosion of production technology as well as
information technology compelled the business firms to think effective &
efficient logistics/ supply chain management. It is a fact of priority that
will contribute significantly to achieve competitive advantage by lowering
unit cost.
Key words:Logistics, supply chain, productivity, efficiency, logistics/ supply chainmanagement, competitiveness, and competitive advantage.
*Professor & Chairman, Dept. of Business Administration, Bangladesh University
**Professor, Department of Marketing, Dhaka University
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INTRODUCTION
Despite advancement of management theory and information system,
logistics management/ supply chain management has evolved in scope
and influence in the private sector since mid to late 1940s. In 1950s and
60s, the military was the only organization using the term logistics
(Edward H. Frazelle, 2004). There was no true concept of logistics in the
private industry at that time. In the 1960s, material handling,
warehousing, and traffic were grouped together to become known as
physical distribution: procurement, marketing, and customer service
were grouped together to become known as business logistics.
Even today in many academic institutions, logistics is still divided along
these lines; where logistics is taught in the business school, it is taught as
business logistics and in the engineering schools as physical distribution
(Edward H. Frazelle, 2004). Throughout the history of mankind wars
have been won and lost through logistics strengths and capabilitiesor
the lack of them. It has been argued that the defeat of the British in the
American war of independence can largely be attributed to logistics
failure (Martin Christopher, 2005). An organization capable of supplying
the army was not developed until 1781 and by then it was too late . In
the Second World War logistics also played a major role. The allied
Forces invasion of Europe was a highly skilled exercise in logistics. In
the early part of 1991 the world was given a dramatic example of the
importance of logistics.
In the late 1960s and early 1970s, cost was the primary concern, a hold-
over from the philosophy of the 1950s that manufacturings only
objective was to minimize production costs. However, as more and more
companies began to produce low-cost products, the need became
apparent to develop other ways to differentiate themselves from their
competitors. The priority thus shifted to quality. Companies at this time
obtained a competitive advantage by producing high quality products,
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Supply Chain Management and Cost of Production Nexus - An Empirical Analysis 3
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which allow them to change morealthough price still was a factor in
the consumers buying decision. However, competition again soon
caught up, and everyone was offering high-quality products thatreasonably priced. Companies, in looking to obtain competitive
advantage in the market place turned to speed of delivery as a means of
differentiation themselves from the rest of the competitors (Aquilano,
Chase, Davis: Fundamental of operation management, second edition).
George Stalk, a leading management guru has identified speed as one
of the major factor of competitive advantage1(a)
. Eventually, the
competition again caught up and the more aggressive firms looked for
still another means to obtain a competitive advantage. This time the
flexibility was selected as manifested by the ability of the firms to
produce customize products. In 1993, the companies have taken into
consideration service as another item for competitive advantage. As the
rules for operation strategy shifted from that of primary reducing
manufacturing costs to that of including quality, speed of delivery,
flexibility, and service the paradigm for logistics / Supply chain
management functions has also came in picture of considering
maximizing value along with the cost minimizing of products(Aquilano,
Chase, Davis: Fundamental of operation management, second edition).
Supply chain is about creating valuevalue for customers and suppliers
of the firm, and value for the firms stakeholders. Value in logistics/
supply chain is primarily expressed in terms of time and place. Product
and services have no value unless they are in the possession of the
customers when (time) and where (place) they wish to consume them.
The mission of logistics/supply chain management is to plan and
coordinate all those activities necessary to achieve desired levels of
delivered service and quality at lowest possible costs (Martin
Christopher, 2005). Logistics/ supply chain management must therefore
be seen as the link between the market place and the operating activities
of the business. Logistics management, from this system viewpoint, is
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the means whereby the needs of customers are satisfied through the
coordination of the materials and information flows that extend from the
marketplace, through the firm and its operations and beyond that to
suppliers.
Logistics / supply chain management functions integration are shown in
a flow diagram-1:
Materials flow
Supplier Procurement Operations
Distribution Customers
Information flow
Diagram: 1
From the diagram-1, we can draw the definition of logistics in a simplest
way as Logistics is the flow of material, information, and money
between consumers and suppliers (Martin Christopher, 2005).
Supply Chain Management is relatively a new field of integrated
management in comparison with the traditional fields of finance,
marketing, and production. Logistics is the part of supply chain process.
Supply Chain Management is a term that has emerged in recent years
that captures the essence of integrated logistics and even goes beyond it.
Supply chain management emphasizes the logistics interactions that take
place among the functions of marketing, logistics, and production within
a firm and those interactions that take place between legally separate
firms within the product flow channel. Therefore, supply chain
management can be defined as the systematic, strategic coordination of
the traditional business functions and the tactics across these business
functions within a particular company and across business within supply
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chain, for the purpose of improving the long-term performance of the
individual companies and the supply as a whole (Benjamin S. Blanchard,
2005, 2006).
Over the years, several studies have been conducted to determine the
costs of logistics for the whole economy and for the individual firm.
These are widely varying estimates of the cost levels. According to the
International Monetary Fund (IMF), logistics costs average about 12% of
the worlds gross domestic product. For the firm, logistics costs have
ranged fro 4% to over 30% of sales. Value is added by maximizing the
logistics costs and by passing the benefits on to customers and to the
firms shareholders. It is the point of empirical analysis of the researcher
that the firm must deeply exercise their knowledge and skill in logistics
/supply chain management to understand as well as to apply it in the
manufacturing process so that firm can be benefited to reduce costs. The
results from a cost survey of individual firms are shown in Table-1
below:
Table-1 Average Physical Distribution cost
Cost Category Cost in terms of % of
Sales
Transportation 3.34%
Warehousing 2.02%
Customer service/order entry 0.43%
Administration 0.41%
Inventory carrying cost @18%/ year 1.72%
Total distribution cost 7.65%
Source:Herbert W. Davis and William H. Drumm,Logistic costs and service
Database2002, Annual Conference proceedings), (San Francisco,
CA: Council of Logistic management, 2002) atwww.cclml.org.)
http://www.cclml.org/http://www.cclml.org/http://www.cclml.org/http://www.cclml.org/8/4/2019 Supply Chain Management and Cost of Production
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OBJECTIVE OF THE RESEARCH
1. To address the subject of logistics/ supply chain management ingeneral, to include some terms and definitions, and to describe
the importance /need for logistics in the context of current
competitive global environment.
2. Introduces the concept of logistics/ supply chain managementwith a brief review of its evolution and adoption within industry
3. To introduce new and evolving concept for greater application inthe industry and to achieve benefit in terms of increasing
efficiency and productivity.
4. To develop clear understanding about the way of cost reductionby application of logistic / supply chain management so that firm
can significantly play role in the competitive environment to get
competitive advantage.
5. It is an academic based empirical analysis that will help theprofessionals to explore further knowledge in order to fine tuning
as well as to deliver knowledge to academic pursuits.
METHODOLOGY
For making the research success relevant knowledge and information
were collected from two sources, viz. from text books and fro different
journal. It is worthwhile to say that remarkable research or publication
on this issue has not been found. So, information & knowledge, used in
this study, has been collected from text book, internet source and journal
/ conference discussion records. Ideas have been developed from the
requirement and necessity of this aspect in the industry for precise
application to become benefited in the competitive global business
environment. Moreover, the researcher feels the enduring use of logistic/
supply chain management knowledge to impart to educational institution
through seminars and workshops.
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Literature related to this aspect has been studies to provide references
with confident. Theories of logistic and supply chain management,
Logistic engineering, supply chain strategy, marketing, production &operation, strategic management and economics have been studied from
the text books and knowledge of these theories has been exercised
precisely to clear the issue of research article.
The experience of the researcher in the field of logistic and supply chain
management helps to analyze and develop concrete idea as well concept.
Graphical representation and other tools and techniques have been used
to analyze the operational definition of variables, system, and outcome to
draw concluding rational findings.
RESEARCH DESIGN
The research design for the current study includes analytical framework,
application of theory and practices, and empirical knowledge.
In order to attain the objectives of the study we have identified some
factors or attributes which are expected to have crucial relationship with
ensuring access to cost reduction and increase of efficiency and
productivity. Empirical analysis are then developed to identify factors
relating to access to reach cost reduction in production, procurement,
information flow, and distribution level and factors explaining the need
for cost reduction and attaining efficiency as well as productivity. In
order to examine the determinants of accessibility and magnitude of cost
reduction, during empirical the researcher used a number of explanatory
variables identified in literature review to observe their potential impact
to cost reduction and to increase efficiency and productivity of a firm.
The essence of theories of logistics and supply chain management,
marketing, production & operation, strategic management and
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economics has been used from the concerned text books for empirical
analysis. The concept of application of productivity advantage, value
advantage, customer service, elements of logistics, logistics information,
the evolution of logistics, logistics framework, universal system of
manufacturing/ service organization (inputtransformationoutput),
value chain system have been actively considered during empirical
analysis of the research article.
LITERATURE REVIEW
Logistics and logistics management:
The word Logistics has originated from the Greek word logistikos and
from the Latin word logisticus, meaning science of computing and
calculating.
Logistics is that part of supply chain process that plans, implements, and
controls the efficient, effective flow and storage of goods, service, and
related information from the point of origin to the point of consumption
in order to meet the customers requirement (Ronald H. Ballau, 2005) .
Logistics is also referred to as physical distribution. Philip Kotler defines
logistics as planning, implementing, and controlling the physical flows
of materials and finished goods from the point of origin to the point of
use to meet the customers need at a profit.
Logistics Management is basically an integrative process that optimizes
the flow of materials and supplies through the organization and its
operations to the customer.
Martin Christopher says that logistics is essentially a planning process
and an information based activity.
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Supply chain and supply chain management
According to Ronald H Ballou in his book- Business logistics / supply
chain management (page-5) supply chain is the networks of facilities,vehicles, and logistics information systems. Supply chain encompasses
all activities associated with the flow and transportation of goods from
the raw materials stage (extraction), through to the end user, as well as
the associated information flows. Supply chain management is the
integration of these activities, through improved supply chain
relationship, to achieve a sustainable competitive advantage.
Relationship of Logistics and supply chain
There is a lot of confusion surrounding the terms logistics and supply
chain. Edward H. Frazelle in his book supply chain management
(Page-8) has distinguished the two by explaining that the supply chain is
the network of facilities (warehouse, factories, terminals, ports, stores
and homes), vehicles ( trucks, trains, planes, and ocean vessels), and
logistics information systems (LIS) connected by an enterprises
suppliers suppliers and its customers customers. Logistics is what
happens in the supply chain. Logistics activities (customer response,
inventory management, supply, transportation, and warehousing)
connect and activate the objects in the supply chain.
The Evolution of Logistics and Supply Chain Management
There was no true concept of logistics in private industry up to late
1940s. Its application started in military operations in 1950s and 1960s.
The development of logistics in industry starts very slowly in the five
phases namely, i) Workplace logistics, ii) Facility logistics, iii) Corporate
logistics, iv) supply chain logistics , and v) Global logistics. This
development is shown in the diagram-2:
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10
Scope
&I
nfluence
Workplacelogistics
FacilityLogistics
CorporateLogistics
SupplyChain
Logistics
GlobalLogistics
1950s 1960s 1970s 1980s 1990s
Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published
by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi
110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301).
Diagram-2
Workplace logistics: Workplace logistics is the flow of materials at
single workstations. The objective of the workplace logistics is to
streamline the movement of an individual working at a machine or along
an assembly line. Ergonomics is the example of workplace logistics.
Facility logistics: Facility logistics is the flow of material between
workstations within the four walls of a facility. The facility could be a
factory, terminal, warehouse or distribution center. Facility logistics can
be termed as material handling. In 1960s, material handling,
warehousing, and traffic were grouped together to become known as
physical distribution; procurement, marketing and customer service were
grouped together to become known as business logistics.
Corporate logistics: Corporate logistics is the flow of material and
information between facilities and processes of a corporation. In 1970s,
the first application of true logistics within a corporation starts by
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assimilating and synthesizing departments (material handling,
warehousing and so on) into functions (physical distribution and
business logistics). The objective is to develop and maintain a profitablecustomer service policy while maintaining and reducing total logistics
costs.
Supply chain logistics: Supply chain logistics is the flow of material,
information, and money between corporations (interworkstation,
interfaculty, inter-corporate, and intra-chain).
Global logistics: Global logistics is the flow of material, information,
and money between countries. Global logistics flows have increased
dramatically during the last several years due to globalization in the
world economy, expanding use of trading blocs, and global access to
Web sites for buying and selling merchandise. Global logistics is much
more complex than domestic logistics, due to the multiciplicity of
handoffs, players, languages, documents, currencies, time zone, and
cultures that are inherent to international business.
Gaining competitive advantage through logistics
To gain competitive advantage over its rivals, a firm must deliver value
to its customers through performing value chain activities. Value chain
activities have been categorized in two groupsprimary activities
(inbound logistics, operations, outbound logistics, marketing, and sales
& service) and support activities (general administration, human
resource management, technology development, and research). This is
depicted in diagram-3 below:
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The Value Chain
Diagram
PurchasedSupplies &
Inboundlogistics
OperationsOutboundlogistics
Sales &marketing
serviceProfitmargin
Primaryactivities
and cost
Human resource management
Product R&D, Technology, and System development
General Administration
SupportActivities& cost
1 2 3 4 5 6
Diagram-3
Logistics deliver s value to the customers through three logistical
processes.
Inbound logistics: Operation preceding manufacturing. This includes: i)
Movement of raw materials, ii) Components for processing from raw
materials.
Process logistics: Operations directly related to processing. This
includes:-i) Storage & movement of raw materials and components
within the manufacturing premises as per manufacturing schedule
ii)The inventory management of stored material and in-process goods is
part of process logistics.
Outbound logistics: Operations following the production process. This
includes:- i) Warehousing, ii) Transportation, iii) Inventory management
of finished products.
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Interdepended logistics activities
The definition of logistics and supply chain management speaks itself the
interdependent activities of customer response, inventory planning andmanagement, supply, transportation, and warehousing. The
interdepended activities are summarized below in diagram-4:
Interdependent logistics activities
warehousing
Customer
response
Logistics
Inventory
management
supply
transp
ort
atio
n
-customer service policy
-customer satisfaction-order entry
-order processing-inventory & collection
-forecasting-order quantity engineering
-fill rate planning-control policy
-deployment
-Supplier service policy
-sourcing-supplier integration-purchase order processing-buying and payment-
-network design
-shipment management-fleet container management
-carrier management-freight management
-receiving-put away
-storage-order picking-shipping
Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published
by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi
110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)
Diagram-4
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Logistics Master Planning (LMP)4:
LMP three steps LMP Methodology
implement
innovateinvestigate
LMP
-Profile currentlogistics activity
-Measure currentlogistics performance
-Benchmark performanceand practices versusworld- class standards.
-Simplify (eliminateAnd combine activities-Optimize (apply decisionSupport tools todetermine Optimalresource Requirements)-Apply world-classpractices
-systematize (develop and document detailed procedures)-Automate (justify, select, and implement appropriate systems)-Humanize (design, populate, and develop organization plansfor human resource
processes
Custo
merresp
onse
Inventorym
anagemen
t
Supp
ly
Transportatio
n
wareho
using
investigateinnovate
implement
LogisticInformationsystem
Mea
sure
s
&goal
Logisti
cs
org
aniz
ati
on
Master planning Logistics
This methodology can and has been used in aWide variety of industries, countries, any otheroperating situation.
Source: Strategic management, Pearce & Robinson, sixth edition. Logistics and supply
chain management, Martin Christopher, second edition
Diagram-5
Logistic master planning is a planning process that develops short-and
long-term metrics, process definitions, information system requirements,
and organizational requirements for logistics as a whole and for logistics
activities like customer response, inventory management, supply,
transportation, and warehousing separately. There are three steps in
logistics master planning namely, i) investigate, ii) innovate, and iii)
implement. The LMP methodology and its three steps are shown
separately in diagram-5:
Competitive advantage
The transition of volume-based growth to value based growth will
require ensuring much greater focus on the core processes of the
business. As the competitive model in the contemporary competitive
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business environment rely on process rather than product, the question of
determining factors of competitive advantage has come in the frontline.
The factors on which competitive advantage depend on are describedbelow in a statement in the mathematical form:
Competitive advantage5= product excellence x process excellence
Process excellence is related to logistics/supply chain. The key issues of
process excellence are responsiveness, reliability, and relationships.
Responsiveness refers to shorter lead time, flexibility and quick solution
to the problem of customers. In other words the customers desire an
environment of agility. Agility implies the ability to move quickly and to
meet customer demand sooner. A key to improving reliability in logistics
process is enhanced pipeline visibility. Buyer/ supplies relationships
development is trend towards fulfillment of demanddriven marketplace.
Supply chain management by definition is about the management of
relationship across complex networks of companies. Therefore, the three
themes of responsiveness, reliability and relationships provide the basis
for successful logistics and supply chain management which in tern
support competitive advantage.
An inputoutput perspective on logistics productivity7:
Logistics / supply chain management recognize the amount of logistics
resources consumed in providing in target customer service levels.
Hence a fair set of performance indicators will include measures of
logistics resource utilization and productivity. Those measures describe
utilization and productivity for the logistics workforce, transportation
capacity, logistics facilities, and inventory. The perspective on logistics
productivity in an inputoutput diagram-6 is shown below:
Diagram-6
Logistics processesCustomer responseInventory managementSupplyTransportation
Warehousing
Logistics OutPerfect ordersStorage capaci
Information
Logistics requirements:
WorkforceSpace
InventoryTransport systemsLogistics information system
Sal e
s
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1.11 Financial measures of Logistics performance: Diagram-7Logistics Financial Measures
Corporate FinancialMeasures with notation
Logistics FinancialMeasures with notation
Description ofLogistics expenses items
Revenue-R
Expense-E
Profit-P=R- E
Asset Value-AV
Asset Turnover-AT=R/AV
Asset carrying rate-ACR
Corporate capital charge-CCC
Total corporate cost-TCC=E+CCC
Cost sales ratio-CRS=(E+CCC)/R
Return on assets-ROA+P/AV
Economic value added-EVA=P- (AV x ACR)
Logistics expenses-LE
Logistics asset value-LAV
Logistics assets turnover-LAT=R/LAV
Logistics capital charges-LCC=LAV x ACR
Total logistics cost-TLC=LE+LCC
Logistics cost sales ratio-LCSR=TLC/R
Return on logistics assets-ROLA=LP/ LAV
Logistics value added-LVA=P- ( LAV x ACR)
Telecommunications, inbound & outboundfreight, fuel, fees to third parties and
leased or rented space.
Inventory, logistics facilities, transportationFleets, material handling system, logistic
Information system.
Product of the investment in logistics assets,And the asset carrying rate.
Customer response, inventory planning &
Management, supply, transportation, andWarehousing.
Customer response: cost of labor, space forOrder processing, telecommunication.Inventory management: inventory carrying cost,
Cost of personnel, system cost.Supply: cost of labor, space, system, andTelecommunication for performing activities.
Transportation cost: Inbound & outbound cost.Ware housing cost: Cost of labor, space,
material handling system, and information hand-Ling system
Logistics is playing an increasingly important role in value creation,
revenue enhancement, capital consumption, and expense control. As a
result, logistics financial performance is playing a bigger role in
corporate financial performance. Like our corporate financial measures
we have similar logistics financial measures. To sharpen focus of our
Costs
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vision in respect to logistics financial measures and logistics
performance measures it is necessary to produce two matrix namely i)
Logistics financial measures matrix, and ii) Logistics performancemeasures matrix wherein the aspects like logistics activities, logistics
financial measures with notation, corporate financial measures with
notation, logistics productivity indicators, quality indicators, and
response tome indicators are shown. The cost items involved against
logistics expense, logistics asset value, and logistic capital charges are
shown, in brief, under the description of logistics expenses column in
diagram-7.
(Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-3, published
by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi
110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)
Total logistics cost (TLC)
Total logistics costs are defined to include expense and capital costs in
the five logistics processes: customer response, inventory planning andmanagement, supply, transportation, and warehousing. The total logistics
costs are made up of the costs namely i) Total customer response costs
(CRC), Total inventory costs (TIC), Total supply costs (TSC), Total
transportation costs (TTC), and Total Ware housing costs (TWC).
Therefore, the total logistic costs can be written in a mathematical
formula as:
Total Logistics Costs, TLC = TRC + TIC + TSC + TTC + TWC.
Analysis of important aspects related to subject of the article
The researcher has outlined and explained, in the literature review, the
theories and practices of logistics/ supply chain management. The
purpose is to reach a conclusion that cost reduction of the product/
service is achieved significantly through logistics/ supply chain
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management. Therefore, a systematic analysis is presented to provide an
understanding as well as in-depth knowledge about logistics and the need
of its application in the present global business environment.
Competitive advantage through productivity & value advantage
Traditionally, it has the wide spread opinion that the main route to cost
reduction was by gaining greater sale volume and there can be no doubt
about the close linkage between relative market share and relative costs.
However, it must also be recognized that logistics management can
contribute significantly to reduce costs. In other words, it is central
theme that effective logistics management can provide a major source of
competitive advantage in other words a position of enduring
superiority over competitors in terms of customer preference may be
achieved through logistics. Competitive advantage can be achieved
through productivity advantage and value advantage or combination of
two. The productivity advantage provides a lower cost profile and value
advantage provide the differential product offerings and customer
service. Service is as a means of gaining a competitive edge. Service in
this context relates to the process of developing relationships with
customers through the provision of augmented offer in the form of
delivery service, after-sales services, financial packages, technical
support and so forth. Firms can able to reach cost and service leader
position in the industry based upon both a productivity advantage and a
value advantage as shown in matrix (a). Indeed the challenge to
management is to identify appropriate logistics strategies to take the
organization to the right hand corner of the matrix (b).
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Logistics and competitive Marketing logisticsadvantage matrix strategic goal
Serviceleader
Cost andService leader
Commoditymarket
Costleader
Productivity advantage(a)
Valueadvantage
LO HI
LO
HI
HI LO
HI
LO
Relative delivered costs(b)
Relativedifferentiation
Matrix-1(a) and Matrix-1(b)
Competitive advantage & value chain: Competitive advantage through
logistics is another important issue in the competitive business
environment. In this respect the contribution of Michael Porter,
Professor, Harvard Business School has been recorded in his research
and writing8,9
. One concept, in particular, that Michael Porter has
brought is the value chain
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A Model of supply Chain Management
SupplyChainFlows
The supply Chain
The global environment
Intercorporate coordination
( Functional shifting, third-party providers,relationship management, supply chain structures.
Customer
Satisfaction/Value/
Profitability/Competitiveadvantage
Products
Services
Information
FinancialResources
Demand
Forecasts
Marketing
Sales
Trust Research & Development
Commitment Forecasting
Risk Production
Dependence
Behaviors
Purchasing
Logistics
Information system
Finance
Customer service
InterfunctionalCoordination
Suppliers supplier supplier Focal firm Customer Customers customer
Source: Mentzer et al; Defining supply chain management, Journal of Business Logistics, Vol.22, No. 2 (2001), p. 19) Table-3
Value chain activities, categorized into two pats, are integrated functions
(shown in the diagram of value chain). Competitive activities are derived
from the way in which firms organize and perform these discrete
activities within the value chain. Therefore, to gain competitive advantage
over its rivals, a firm must deliver value to its customers throughperforming these activities more efficiently than its competitors or by
performing the activities in a unique way that creates greater
differentiation. Another consideration is the supply chain networks that
are involved through upstream and downstream linkages in the different
processes and activities that produce value in the form of products and
service. In the past it was simply considered as relationship with the
suppliers and customers. It is the case today for judgment of cost
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reduction or profit improvement at the expense of their supply chain
partners. Companies should realize that simply transferring costs,
upstream and downstream, may not make them more competitive. So,supply chain management is essentially required to combat the cost
reduction or profit maximization situation. To ensure such situation
companies shall consider a model of supply chain management model in
Table-3.
Logistic environment and pressing current issues: As the competitive
context of business continues to change, bringing with it new
complexities and global concerns for management in reality, it is the
time to be recognized that the impact of these changes on logistics can
not be overlooked rather it is a time for giving due attention to logistics /
supply chain management. Indeed, of many strategic issues that confront
the business organization today, perhaps the most challenging are in the
area of logistics. The researcher at this stage would like to highlight, in a
brief diagrammatic form diagram-8, about the most pressing issues
considered currently:
The customer
Serviceexplosion
Changing Logistics Environment Due To Pressing Current Issues
1
Time compression2
Globalization
Of industry3
Organizationalintegration
4
Current issues Description of current issues
The customer in todays marketplace is more demanding, not just of productquality, but also of service. The companies that have achieved recognitionfor service excellence, and thus have been able to establish a differential
advantage over their competition are those companies where logistics
management is a high priority. Xerox, BMW, Dell Computers are example.
One of the most visible features of recent years has been the way in which
time has become a critical issue in management. The concept of logistics lead
time is one of prominent issue. From the moment when decisions are takenon the sourcing and procurement of materials and components through themanufacturing sub assembly process to final distribution and after-market
support, there is a true scope of logistics lead-time management.
The third issue that provide a challenge for logistics management is the trend
towards globalization. In the global business materials and components are
sourced worldwide, manufactured offshore and sold in many different
countries along with local customization. The global company seeks toachieve competitive advantage by identifying world markets exercising effortthrough logistics management.
The challenges that face the business organization in todays environment are
quite different to those of the past in respect of many issues and out of those -organizational integration is another important one. Now we need broad-
based integration with Production, marketplace, service delivery system, andinbound as well as outbound logistics.
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(This diagrammatic form is designed and developed by the researcher from the
knowledge gained from text book. Source: Logistic and supply chain management;
Strategies for reducing cost and improving service, Second edition, written by Martin
Christopher.)
Diagram-8
Alignment of organization structure: The transition to the 21st
century
seems to have been accompanied by ever-higher levels of turbulence in
the organizational structure in the business environment. Traditional
organization has grown heavy with layer upon layer of management and
bureaucracy. Such companies have little chance of remainingcompetitive in the new market place. Experienced observers and
commentators of the logistic management process have general
agreement that the major barrier to the implementation of the logistics
concept is traditional organizational structure. Moreover, the companies
do not recognize the need for organizational change, and still have poor
knowledge about logistics /supply change management and its effect on
production cost and profit maximization. Therefore, most of the
organization maintain and manage the activities on a functional basis
(production, marketing, HRM, finance & accounting, R & D,
engineering etc.). It may be mentioned here that the process of satisfying
customer demand begins with inbound supply and continues through
manufacturing or assembly operations and onwards by way of
distribution to the customers. To manage this process it is required a
complete system involving the logistics / supply chain management. By
doing this the organization can achieve a smooth- flowing logistics
pipeline that facilitates end-to-end process management. The cost
reduction by way of this process management can effectively be
managed which ultimately give rise to profit. As markets, technologies
and competitive forces change at ever-increasing rates and the trend
towards globalization of industry is a future-oriented avenue so the
imperative for organizational structure change is required considering
logistics as driving force. The importance of logistics / supply chain
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incorporation in the traditional organizational structure is a must to avoid
problem and at the same time to make alignment of organization without
separating the logistics management from the functional activities. Thegradual approach of evolutionary steps to an aligned logistics
organization is outlined hereunder in Diagram-9:
Evolutionary steps to an aligned logistics organization
Evolutionary steps to an aligned logistics organization
LogisticsCouncil
PerformanceMeasuredefinition
Training&
development
RemunerationBased on
performance
AlignedLogistics
organization
Logistics council comprised of the individuals whose decisions impact the flows of
Materials, information, and money across the organization. It includesrepresentation from inbound and outbound transportation, warehousing,
procurement, inventory planning, customer service, manufacturing, informationTechnology, and finance.
To develop a set of standard of measuring to reach a commonpurpose of satisfying customers at the total lowest logistics costsand maximizing share holder value added concepts by the council
Training & education forthe individuals about theAligned logistics organization
Remuneration on the basis of
Performance to be decided by
The council so that employeesperform effectively & efficiently.
Aligned logistics organization includes process organization,matrix organization, integrated logistics organization, globalLogistics organization, business unit logistics organization,
distributed logistics organization, hybrid model.
Diagram-9
Source: Text Book: supply Chain Strategy; Edward H, Frazelle, Ph.D. TATA McGraw-Hill Edition.
Reshaping of Organizational Structure:
Based on organizations mission and corporate culture the existing
traditional organizational structure is to be reshaped and integrated
organizational structure including logistics/ supply chain management is
arranged in many organizations of the world in order to survive as well
as to take advantage in the competitive global business environment. The
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Distributed logistics organizational model and global logistics
organization model is shown below in Diagram-10 as an example.
Another important aspect is considered to develop logistics scoreboard
framework to present a set of indicators for aligning logistics
performance towards the unifying goals of reducing logistics costs,
decreasing the logistics labor content per order, increasing total logistics
quality, and decreasing total logistics cycle time.
CEO
Marketing Sales R&D Production Quality Finance
Logistics AnalystLogistics AnalystLogistics AnalystLogistics AnalystLogistics AnalystLogistics Analyst
Distributed Logistics Organization Model
ChiefLogistician
Global Logistics Organization Model
Global Logistics Officer
Regional Logistics ManagerNAFTA
Regional Logistics ManagerEU
Regional Logistics ManagerASIA PACIFIC
Domestic Logistic ManagerUS, Canada, Mexico
Domestic Logistic ManagerNetherlands, UK
Domestic Logistic ManagerJapan, Hong Kong
Diagram-10
Logistics optimization: To create logistics optimization it is essential to
look into the logistic activities that has been described under the heading
Interdependent logistics activities. The activities are customer
response, inventory management and planning, supply, transport, and
warehousing. Brief analysis is focused to understand the effect on cost
reduction.
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The logistics of customer response consists of five interrelated activities
as has been stated in the diagram of interdependent logistics activities.Customer response is optimized when the customer service policy (CSP)
yielding the lowest cost of lost sales, inventory carrying, and distribution
is identified and executed. The inventory planning and management
(IP&M) is the combination of five activities namely, forecasting, order
quantity engineering, service level optimization, replenishment planning,
and inventory deployment.
The objective of supply management is to minimize the total acquisition
cost while meeting the availability, response time, and quality
requirements stipulated in the customer service policy and in the
inventory master plan. The logistics of supply include developing and
maintaining a supplier service policy, sourcing, supplier integration,
purchase order possessing, and buying and payment. The objective of
transportation is to link all pick-up and deliver-to points within the
response time requirements of the customer service policy and the
limitations of the transportation infrastructure at the lowest possible cost.
The logistics of transportation include network design and optimization,
shipment management, fleet and container management, carrier
management, and freight management. The objective of warehousing is
to minimize the cost of labor, space, and equipment in the warehouse
while meeting the cycle time and shipping accuracy requirements of the
customer service policy and the storage capacity requirements of the
inventory play. The logistics of warehousing includes receiving, put
away, storage, order picking, and shipping.
Therefore, to achieve lowest cost effective management of
interdependent logistics activities shall have to be provided attention on
top priority basis. The companies who are considering this fact in reality
are known as the survival of the fittest. Nevertheless, it goes without
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saying that logistics /supply chain management has nexus to unit cost of
production provided an integrated action is matched through alignment
in the traditional organization structure.
Logistics impact on Return on investment (ROI):The impact of margin and asset turn on ROI
Profit/sales(margin)
Sales/ Capital employed(Asset turnover)
20% ROI
15% ROI
10% ROI
It illustrates theopportunities thatexits for boostingROI through eitherachieving betterMargins or higherassets turns or both
Logistics impact on ROI
Sales revenue
costs
Profit
Inventory
Accounts receivable
Cash
Fixed assets
Customerservice
Logisticsefficiency
Assets deployment& utilization Capital
employed
ReturnOn
investment
Source: Logistic and Supply Chain Management, second edition, Martin Christopher,
---
+
+
+
Graph-1 & Diagram-11
The ways in which logistics management can impact on ROI are many
and varied. Return on investment is the ratio between the net profit and
the capital that was employed to produce that profit, thus:
ROI = Profit Capital employed. This ratio can be further expanded:
ROI = Profit Sales Sales Capital employed.
The figure below shown in graph-1 & diagram-11 highlights the major
elements determining ROI and the potential for improvement through
more effective logistics management. The ways in which logistics
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management can impact on ROI are many and varied. Return on
investment is the ratio between the net profit and the capital that was
employed to produce that profit, thus:ROI = Profit Capital employed. This ratio can be further expanded:
ROI = Profit Sales Sales Capital employed.
The figure below shown in graph-1 & diagram-11 highlights the major
elements determining ROI and the potential for improvement through
more effective logistics management.
Addressing logistics/supply chain in general: To address about
logistics/supply chain it is imperative to provide some terms and
definitions, to describe the need for logistics in the current international
and global business environment, outlined logistics elements, and
alignment of the organizational structure. The researcher has described
different aspects in the foregoing paragraphs and diagrams wherein an
integrated logistics approach is emphasized and the need for considering
logistics to reduce cost for attaining competitive advantage in the
business arena is focused.
In the context of Bangladesh, the logistics/supply chain management is a
new thought although the issue is not new in the global business. In our
country logistics/ supply chain management is no more than a
distribution system. The idea is to be changed. As soon as the old
concept is prevailed in the mind of the entrepreneurs and even sustained
in the public/ autonomous office the growth of the organization /
government sector will be under threat in gaining the competitive
advantage. In the sector of agriculture, food management, glossary
shops, departmental stores, healthcare service, and even vegetables
supply logistics management should immediately be thought of so that
sustainable situation of competitive advantage can be attained through
productivity management and value advantage. The price control in the
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market can be effective by efficient integrated logistics/ chain supply
management throughout the country. For creating such situation
knowledgeable professional are to be engaged in the concerned area or
professional can be created through training and development.
Information system of the supply chain management plays a very
important role for quick response to the users/customers as well as other
stakeholders. Mode of delivery, warehousing, transportation ete is to be
arranged (on the basis of logistics activities) in the system design so that
the whole operation can be made cost-effective.
FINDINGS & RECOMMENDATIONS:
The findings after careful analysis on various aspects related to logistics
and supply chain management as well as surrounding field is captured as
under:
3.1 To achieve leadership through logistic/ supply chain managementthe organization must go through a number of fundamental
transformation such as i) from functional to a process orientation,
ii) Performance measurement through indicators of logistics
activities, iii) To switch over from the product management to
customer management, and iv) Need to change from a transaction
mentality to a relationship mentality.
3.2 A responsive supply chain by definition is highly integrated. Theyare internally integrate across functions and externally integrated
with upstream suppliers and downstream customers. A key to
supply chain integration is the open flow of information from one
end of pipeline to another.
3.3 Quick customer response is the broadly considerable aspect tocharacterize logistics strategies which aim to meet the precise
customer requirements in short time frames. Inventory
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management with minimum cost is also important related issue of
quick response.
3.4 Time compression in the pipeline has the potential to speed upresponse times and to reduce logistics/ supply chain cost. These
dual goals are achieved through reduction of non-value adding
timeand particularly time spent as inventory.
3.5 Paradoxically the trend to globalization has increased thecomplexity of logistics/ supply chain. For this reason question of
providing attention to logistics/ supply chain management has
come in the front line to combat the competitive environment.
3.6 Logistics costs can account for a large proportion of total costs inthe business, hence it is critical and attention is required to manage
carefully as otherwise cost reduction can not be possible.
Appropriate cost accounting approach (probably activity-based
costing) in place of tradition approach is important.
3.7 Manager will seek rather explore logistics strategies that developlatent opportunities to increase efficiency and productivity which in
tern deliver significant advances in customer service.
Differentiation through service excellence is an example of a well
thought through strategy for managing the logistics of service
delivery.
3.8 Professional training on logistics / supply chain management isrequired to be enhanced in order to match the knowledge in the
changing business environment. This training will also help build
awareness about impact of cost on logistics/ supply chain.
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3.9 In Bangladesh, the knowledge of logistics is in the primitive stage.Organizations and public bodies should come forward and
incorporate the modern technology and concepts of logistics /
supply chain management in order to have a chance to catch and
reach the competitive avenue both at national, international, and
global level.
3.10 In todays fast-paced and customeroriented business environment,superior logistics/supply chain performance is a prerequisite to
becoming and staying competitive. This can be achieved through
cost reduction and increasing efficiency as well as productivity
based on the logistics / supply chain integrated organizational
structure.
3.11 It is imperative to develop Human-friendly logistics which is basedon the Golden Rule treat people the way you would like to be
treated. Human friendly transportation (driver routes and
schedules that minimize the away from families, on- board
communications, Loading/ unloading facility etc.) and Human-
friendly warehousing (natural light and color coordination, lifting
aids, safety, picking facility etc.) is a factor for the customers.
CONCLUSION
Logistics/ Supply Chain Management are now a new growing concept in
the world. But more interesting aspects of this issue is effective logistics
/ supply chain management is a major source of competitive advantage
and this lead to superiority over competitors in two ways namely, i)
reducing cost, and ii) increasing profit. Success of competitive advantage
depends on product excellence and process excellence.
The trends towards globalization of industry, involving as it does the co-
ordination of complex flows of materials and information from a
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multitude of offshore sourcing and manufacturing plants to a diversity of
markets has sharply highlighted the inappropriateness of existing
structures. It is a fact that logistics/ supply chain is the driving force inthe contemporary competitive business environment for bringing
structural change of the organization.
In todays highly competitive global marketplace, the pressure on
organizations to find new ways to create and deliver value to customers
grows ever stronger. There is a growing recognition that it is through
logistic efficiency and effective management of the supply chain that the
twin goals of cost reduction and service enhancement can be achieved.
Application of logistics/ supply chain management in the organizations
of Bangladesh is still in a fluid condition. It may be pointed out that the
companies who were market leaders a decade ago have in many cases
encountered severe reversals of fortune due to failure of timely
application of logistics/ supply chain management. The industry in
Bangladesh is facing competitive disadvantage in many ways out of
which non integration of logistic/ supply chain. The importance of
logistics/ supply chain management is to understood and necessary steps
are to be taken so that products and service can be marketed with due
consideration of competitive price and customer response.
It is the sincere effort of the researcher to present this article in order to
create sensation to the entrepreneurs/ businessman/ Government
organizations about the logistics/ supply chain management knowledge
and its importance in the global business environment. This research
presentation will provide extraordinary help to the professional for
academic as well as further research purpose.
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