Logistical considerations have always played a strategic role in business. Among retailers and wholesalers, they transcend inventory management and transportation to include one of the most critical factors in business success—location in relation to markets or sources of supply. Among manufacturers, logistics concerns itself with matters as basic as plant location, sourcing of raw materials, and standards of customer service. In recent years, changes in the business environment have forced companies both large and small to pay particularly close attention to how this function relates to others. Government regulation, the health of the nation’s transportation system, energy restrictions, and technological developments all represent important considerations in the formulation of a business strategy. As the author shows in this article, many companies have responded to these challenges by developing competitive strategies based in part on such concepts as postponement and speculation, standardization, consolidation, and differentiation. These are companies in which management has conducted either formal or informal logistics audits, has redesigned systems to provide more effective support for corporate strategies, and has taken steps to ensure continued appraisal of opportunities over the long run.
Logistics can spell the difference between success and failure in business. For example, a few years ago a young engineer-entrepreneur began to build a company from scratch. His first product was liquid bleach. Actually, he didn’t know much about the business at the time. He knew that liquid bleach is nearly all water and that the U.S. market is divided among two large manufacturers, Clorox and Purex, and a number of smaller producers that sell branded and private-label bleach on a regional basis. He also knew that the market for private-label bleach in New England, where he wanted to be, was dominated by a manufacturer located in New Jersey. So the entrepreneur decided to found a private-label bleach manufacturing company near Boston. This location provided his company with a distinct transport cost advantage over its chief competitor. But he didn’t stop there. He located his plant near a concentration of grocery chain retail outlets. This enabled him to sell his bleach under an arrangement in which retailers’ trucks were loaded with his bleach after making their retail deliveries and before returning to their respective distribution centers. Given this double cost advantage, he was able to go one step further. By adding other items to his product line, he was able to obtain efficient truckload orders from his retail chain customers. Another new venture in which logistics plays a major role was set up by two honors students. On their graduation from business school, they devised an innovative, low-cost way to distribute a high volume of milk and other products. Building a retail “store” that consisted of a convenience-oriented self-service front end and a large truck dock in the rear, they have raw milk delivered by tank trucks and put into vats in the rear of the store. Milk and cream is then separated, homogenized, and bottled on site for sale direct to consumers at significantly lower prices than through traditional channels. Having expanded its line to include other food items often purchased in large quantities, this retailer now enjoys one of the highest sales-per-squarefoot ratios of any retailer in the United States and does a volume of sales through its relatively small outlet that many supermarket operators would be pleased to achieve. Logistics-oriented strategies are also important in large companies. As an example, one of the world’s largest chemical manufacturers recently had to replace its ships. The ships carried materials in bulk from plants in the Caribbean to Gulf and East Coast ports for subsequent transfer to barges and rail cars for delivery to terminals at which customers’ orders were packed into containers for final delivery by rail and truck. Instead of merely replacing its ships with more modern versions of the same design, the company instead is converting its entire distribution system to one using containers. This system requires that orders processed in Puerto Rico be shipped in containers that will be delivered direct to customers in the eastern United States by a combination of river barge, rail, and truck. As a result (1) repackaging at all inland terminals eventually will be eliminated, (2) material handling costs and capacities at Gulf and East Coast port facilities will be greatly reduced, and (3) because of the increased frequency of departures of ocean-going container barges from plants, orders will be delivered to customers with little or no increase in order response time and only a small increase in total inventory in the system. Because of the company’s sales volume, it is unlikely that competitors will be able to emulate the program even though their geographic production and transport patterns are similar.
What do these examples have in common? They all involve decisions that are long-term in their implications. All involve actions that are big-dollar in relation to the overall size of the companies in which they are implemented. All provide a competitive advantage that, unlike pricing or other actions, is hard for competitors to duplicate. And they all are based on nontraditional approaches to logistics, encompassing those activities that facilitate product movement and the coordination of supply and demand in accomplishing specified cost and service objectives, as suggested in Exhibit I.
Exhibit I The Logistics Process
These are but three of a growing number of companies that place major reliance on logistics in their business strategies. In this article I shall explore the reasons behind the rebirth of interest in this method of developing competitive advantages, the common elements of successful logistics-oriented strategies, the questions to be asked in auditing the extent to which your management has taken advantage of opportunities for making logistics an integral part of its strategy, and the ways of factoring logistics into strategy formulation.
Growing Influence of Logistics
There are a number of reasons for the growing influence of logistics in business strategy. Included among these are:
1. An increasing number of alternatives for meeting cost and service standards—containerization, minicomputers, air freight, and worldwide satellite communications systems.
2. The threat of energy shortages. During periods of energy shortages, transport costs may figure more heavily in plant and warehouse location decisions. And the locations of retail facilities from resorts to department stores may be influenced more strongly by their proximity to major markets.
3. Closer scrutiny of the long-standing trend toward complex product lines. To a greater extent, the threat of material shortages is injecting logistics as opposed to marketing considerations into product-line decisions.
4. The recent emphasis on effective inventory management through wide swings in business cycles characterized by varying rates of increase in labor costs, fluctuating interest costs, and changing rates of sale. This pressure has been accompanied by the assumption on the part of management that developments in computer-oriented inventory control methods have more than kept pace with user needs—an assumption not always borne out in practice.
5. The increasing involvement of federal and state agencies in issues ranging from the seminationalization of a portion of the transportation network to the availability of advertised sale merchandise on the shelves of retail establishments.
Patterns in Uncommon Responses
The increased size and complexity of business operations combined with the application of problem-solving techniques and computer technology have made it possible for many companies to consider less common logistical responses to perceived competitive cost or service disadvantages. Among these are strategies that involve postponement and speculation, standardization, consolidation, and differentiation.
Postpone & speculate
Automakers practice postponement by operating market-oriented distribution centers at which relatively light manufacturing takes place. Although these facilities commonly are called assembly plants, they really are distribution centers equipped to receive orders, assemble automobiles to the individual desires of millions of prospective auto owners from stocks of standard components, and deliver individually designed autos to dealers and customers in a reasonable period of time. Similarly, steel service (distribution) centers have become important distribution links for fabricated steel by bending, cutting, shaping, and even welding basic steel products to order. The wave of decentralized packaging of standard products shipped in bulk to distribution centers suggests that postponement will continue to be an effective means of providing a wide array of desired items from a smaller number of mass-produced and bulk-shipped finished components or ingredients.
Standardize products
In purchasing, a technique called value analysis has led on occasion to decisions to purchase fewer items and in larger quantities. This has resulted in price discounts and logistical savings that more than compensate for the application of standard components to tasks for which smaller, less-expensive components might be suited under programs not emphasizing standardization.
The potential for product standardization represents an important element of “slack” in the productive capacity of many companies. As an illustration, after it had cut its product line in half late in 1973 in response to soaring demand and restricted capacity, one manufacturer of white papers found that it could achieve 116% of the theoretical capacity of its mills through reduced machine setups. This discovery has led to more stringent guidelines in this company for the evaluation of new-product proposals.
Consolidate services
Suppliers could maintain speed of service for many customers under these programs by advising them of scheduled shipping dates so that those located in particular areas to which consolidated shipments were destined could time their orders to coincide with the schedules. This practice provided an acceptable level of service while maximizing use of limited fuel and lowering delivery costs significantly.
The use of shared or pooled services such as common carrier transport, shippers’ cooperatives, and public warehouses is another form of consolidation.1 Potential savings from the use of shared services have led many manufacturers to consider joint efforts with makers of complementary products requiring similar logistical efforts.
Differentiate distribution
For some years, many managers intuitively have recognized potential economies from the differentiated treatment of various product-line items in their distribution. For example, using ABC inventory methods managers establish more restrictive inventory rules for high-value, low-sales-volume items than for others in a product line. This effort reduces inventory holding costs in relation to a given sales volume. It represents a way in which the “80/20” relationship can be used effectively as an integral part of a company’s strategy, as suggested in the sidebar, “How the 80/20 Relationship Applies to Logistics Strategy”.
Factoring Logistics Into Strategy
To employ logistics as an effective competitive lever and as a significant component of strategy, management must take two actions. First, it must adapt logistics programs to support ongoing corporate strategies in the short term. Second, it must factor logistics into the design of business operating strategies on a continuing long-term basis. Steps necessary to ensure this include the performance of a logistics strategy audit, possible logistics system redesign, and the maintenance of procedures to ensure continued attention to logistics as an integral element of corporate strategy.
Courtesy: best logistics company in Lahore
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