The development of logistics management introduction
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| LOGISTICS MANAGEMENT 1 THE DEVELOPMENT OF LOGISTICS MANAGEMENT Introduction From the preceding discussion it may be noted that any movement of goods is largely dependent on logistics and supply chain processes and activities. The concept of logistics and the management thereof is not a new one. The role of the distribution function (and more broadly logistics), together with the production function, has always been key to solving the economic problem. Society has always required the movement of materials and goods for their existence and particularly their development. The economic problem however is related to the fact that individuals and society have unlimited needs and wants which must be fulfilled or remain unfulfilled with the limited number of resources at their disposal. The optimum solution of the economic problem is thus the process of obtaining maximum want satisfaction from the available resources. (Begg, Fischer & Dornbusch, 1984). 2 Logistics systems, and the management and improvement thereof, have a key role to play in this solution - increasing customer satisfaction and/or decreasing costs to ensure improved want satisfaction with the available resources. A reduction in the costs of distribution, for example, in relation to other things, increases flexibility for example in the location of industry, the exploitation of natural resources, and the achievement of industrial efficiency. With the development of the logistics function, it is therefore important to note its expansion from an operational (albeit important) activity where the concern of management was focused on mainly on costs, to a strategic function responsible (to a large degree) for the management of resources required to achieve specific levels of customer satisfaction. (Gattorna & Walters, 1996). This development of the logistics function will be considered in more detail in the following sections. 3 The historical development of logistics management As has been alluded to in the introduction to this section, distribution (and more broadly logistics) has always been key to satisfying the needs of individuals and society. Lynch (2000), for example, quotes Ackerman (2000) who suggests that one of the first business logistics arrangements is described in the Bible, in Genesis Chapter 41. This is an account of the seven years of plenty during which the people in the land of Egypt accumulated crops for the predicted seven years of famine. The grains and other fruits of their labours were taken to storehouses for safekeeping – the grain was placed in storehouses for later redistribution during the time of need. Lynch goes on to point out that in Europe, a number of logistics service providers can trace their origins back to the Middle Ages with the first commercial warehouse operations having been built in Venice, Italy in the 14th century. Merchants from all across Europe used these as collection and distribution points. 4 As an area of study, logistics in the US started to receive attention in the early 1900s, with an investigation into the distribution of farm products, as a manner of supporting organisational business strategy, and in its role of providing time and place utility. The Report of the Industrial Commission on the Distribution of Farm Products was thus the first text to deal with the costs and factors affecting the distribution of farm products and in 1916 a text titled An Approach to Business Problems discussed the strategic aspects of logistics, while a further text The Marketing of Farm Products introduced the concepts of marketing utilities and channels of distribution. (Stock & Lambert, 2001). In the 1920s, the term logistics was defined in a way similar to the definition used today. In the US in the 1930s, Al Capone managed the logistics activities associated with his movement (smuggling) of liquor from Canada to Chicago by outsourcing these, in an effort to keep his associates out of harm’s way. Since most shipments were subject to hijacking and other unpleasantness, Capone minimised his risk through strategic alliances with fledgling ambitious and aggressive service providers. 5 Another example of the historical development of logistics in the US commenced in 1971 when Frederick W. Smith used a $4 000 000 inheritance and over $90 000 000 in other capital to acquire a Little Rock, Arkansas, used aircraft business. It was Smith’s intention to provide an overnight delivery service. In 1973, Federal Express, with 389 employees and 14 Dassault Falcon planes, began operations at the Memphis International Airport. By 2000, it employed 150 000 people located around the world and had a fleet of 648 aircraft and 64 000 vehicles. (Lynch, 2000). With these few brief historical highlights as a background to the development of logistics management, the increasing focus on the role of logistics in business will be investigated. This is particularly significant if the increasing importance of strategic decisions in logistics management, such as the outsourcing of aspects of logistics activities, is to be understood. 6 The increasing focus on the role of logistics As has already been pointed out, logistics activity is actually thousands of years’ old, dating back to the earliest form of organised trade. However, due to many societal and economic developments worldwide, the role of logistics in companies and economies, is receiving increasing attention. A significant impact with respect to the increasing focus on the role of logistics was the contribution which logistics made to the victory of the Allies in World War II, at which time it began to receive increased recognition and emphasis. In the 1950s, with the development of the new corporate philosophy of marketing, logistics came to be associated to an even greater degree with the customer service and cost components of a company’s marketing efforts. Companies began to emphasise customer satisfaction at a profit with customer service later becoming the cornerstone of logistics management. Also in the 1950s an - 28 important study of the economics of air freight added a further dimension to the field of logistics. 7 The study introduced the concept of total cost analysis, air freight being the highest cost form of transportation. However, air freight, when used instead of other modes of transportation, could result in lower inventory and warehousing costs as the company distributed them directly to its customers. This text which essentially introduced the concept of total cost analysis to the area of logistics, thus increasing the focus on the important role of logistics, was titled The Role of Air Freight in Physical Distribution. (Stock & Lambert, 2001). Lambert, et al. (1998) further discuss in some detail how the first dedicated logistics texts began to appear in the early 1960s, which was also the first time that Peter Drucker, a noted business expert and author, stated that logistics was one of the last real frontiers of opportunity for organisations wishing to improve their corporate efficiency. Also in the early 1960s, Edward Smykay, Donald Bowersox, and Frank Mossman wrote one of the first texts on logistics management. 8 The book examined logistics from a company-wide perspective and discussed the total cost concept. In 1963 the National Council of Physical Distribution Management (now the Council for Logistics Management – CLM), was formed to develop the theory and understanding of the distribution process, promote the art and science of managing distribution systems and to foster professional dialogue and development in the field. During the remainder of the 1960s, on into the 1970s, and still, a multitude of textbooks, and conferences were devoted to the subject of logistics management. Deregulation of the transport sector in the US in the late 1970s and early 1980s gave organisations more shipping options, increasing competition within and between transportation modes. As a result, carriers became more creative, flexible, customer-oriented, and competitive in order to succeed. The trend in industry moved from businesses undertaking the many different aspects of running their organisation, to their focusing on their core businesses and outsourcing activities such as transport. 9 This was made possible because of the competition between the different transport providers and the solutions provided by logistics and technological providers. The added benefit to the end user of innovative and additional service elements, as provided by logistics companies, became well recognised. (Lambert, et al. 1998). During the 1970s and 1980s, many companies also found it increasingly difficult to maintain traditional profit levels and growth rates because of increasing domestic and foreign competition, saturated markets, government regulation, and other factors. Accordingly Stock and Lambert (2001) point out that an organisation can pursue one or more of three basic strategies in a profit-squeeze situation. First, it can attempt to generate additional sales volume through increased marketing efforts. However, this may be very difficult and costly as incremental sales increases in saturated or highly competitive markets are hard to achieve while in low-growth markets, the rate of growth may be less than the company needs to generate additional sales. Even in high-growth market situations, a company may be unable to achieve desired sales increases because of resource problems, competition, and other market conditions. A second way to improve profitability may be to increase the price of the company’s product. Again, such increases may not be possible given market conditions and depending on demand elasticity, price increases may not have the desired impact on sales. 10 Furthermore, companies hesitate to increase prices unless higher costs of materials, production, or labour make those increases unavoidable. Therefore, a third strategy, that of reducing the organisation’s costs of doing business, has been the one most companies have pursued. As companies have looked inward attempting to identify areas for cost savings and/or productivity increases, most have found logistics to be an area with the most potential for significant cost savings. Already during the 1970s therefore, the notion was proposed that the problems of sub-optimal performance might be overcome if sub-optimal performance in one, or even two, of the distribution activities be accepted (even introduced) and that the economies obtained from the other activities would lower the overall costs of the distribution function. This is what happened and once the behavioural issues and problems had been overcome, stronger much more effective distribution functions became available. (Gattorna & Walters, 1996). 11 At the same time there has also been a proliferation of products and services, with manufacturers beginning to offer their standard product in an increasing number of colours and patterns, often merely to increase the shelf-space they could command in a retail outlet. Often, however, each different product line had to be handled separately in the company’s distribution system resulting in various problem areas and the need to analyse, evaluate and assess the causes and institute correction. Furthermore, it was variously estimated that in the 1970s physical distribution costs (as a percentage of sales) could vary between less than 10%, to in excess of 40% of sales revenue. (Gattorna & Walters, 1996). By this time physical distribution managers were also becoming very much part of the organisational structure of many companies. By the 1990s many organisations were also evaluating their business processes to determine whether there was a better way of performing them, with logistics presenting a major functional area where re- engineering efforts have resulted in significant improvements. The supply chain management approach has also been recognised as an important concept, its development and implementation being initiated in many industries. 12 The significance for the development and increasing focus on the role of logistics is the notion that multiple organisations and functional areas can integrate their efforts to optimise their individual and combined performance, leading to the development of a systems approach throughout the entire channel of distribution. (Stock & Lambert, 2001). Globalisation and technological advancements have also made the marketplace increasingly competitive, and the role of logistics in the success of the company more crucial. It has furthermore become inadequate to merely provide products to the customer, the company must offer value in many forms, and an increasing number of companies are looking to logistics to provide this value to the customers. As a result of the fact that buyers prefer to do business with sellers that provide excellent logistics service, many more companies are using logistics to differentiate themselves from competitors. Logistics managers can also no longer afford to work without considering all components of the system and taking into account how any changes will affect the overall cost of the company’s distribution function. The fact is that logistics decisions and policies can influence the company’s total sales as well as the cost of its operations. 13 Information technology and communications have been an important element in the distribution process and increasing awareness of the role and contribution of logistics. Computer technology and distribution software have thus further increased the interest of businesses in logistics management. The development of computer technology has allowed executives to manage and implement logistics management much more effectively and efficiently than ever before. Companies can improve their cost efficiency because of the speed and accuracy of the computer; they can use sophisticated techniques to manage and control activities such as production scheduling, inventory control, and order processing. (Stock & Lambert, 2001). Such advances, and the resulting impact on the company's marketing, production, and financial activities, together with many other factors such as those discussed above, have been instrumental in creating top management awareness of logistics. In turn, top management has elevated the priority of logistics investment in systems and communications. (Delaney, 1999). In many companies and countries this is ongoing, as is the increasing focus on the role of logistics in general. 14 Current and continuing logistics trends From the above discussions and outline of the developments leading to the increasing focus by businesses on the importance of logistics, it is clear that companies need to recognise the role and importance of logistics management. They need to use logistics as a competitive weapon to secure and maintain customer loyalty. Companies must aim to be increasingly responsive and flexible, committed to their customers, aware of their results, working closely with their suppliers and providers, embracing technology, and committed to developing and maintaining strategic direction. Logistics management will continue to be a key element of such aims and direction. According to Davis and Drumm (1999) the first step in achieving significant improvement in both cost and service is a thorough review of logistics policies, practices and systems, particularly where they result in unsatisfactory performance levels. 15 Customer service performance, for example, needs to be accurately measured and the results compared to what the customer wants and what world-class competitors are giving. Transportation and warehousing costs and practices should also be evaluated in terms of their competitiveness and their impact on customer service performance. Furthermore, inventory management and planning, key elements in controlling costs and meeting service goals, must be structured to assure good service and low cost. A critical review of logistics policies, practices and systems is therefore an important way to determine what management needs to do to achieve high customer satisfaction and acceptable cost levels. Excellence in logistics is an important competitive capability and it is becoming increasingly difficult for companies to catch up with world-class logistics competitors. Some companies are giving excellent service and are still reducing the cost of providing it. (Davis & Drumm, 1999). 16 World-class organisations are, and will continue to be, characterised by flexibility, responsiveness, customer focus, use of information technology and continuous improvement, where world-class implies an international reputation for overall effectiveness. According to Gattorna and Walters (1996), the use of information technology is also a key trend and offers the following key attributes and contribution to creating competitive advantage: • Accurate and reliable information input for decision-making • The ability to respond rapidly • Greater knowledge and therefore understanding of the marketplace • A means of differentiating the business to reinforce its competitive advantage It should be noted however that information technology is a means to an end; it is not an end in itself. It provides a company with the capability to maintain flexibility, responsiveness, customer focus, and continuous improvement. 17 Continuous improvement, particularly in the field of logistics, is key to a worldclass, and indeed a leading-edge, organisation. (Gattorna & Walters, 1996). Therefore, to achieve continuous improvement there are certain supporting concepts a company should implement: • Best practice and benchmarking • Outsourcing where such an action will add extra value to the organisation • Empowerment of employees • Corporate strategies to expand the company's knowledge asset base • An incentive-led innovation policy For long- term success, continuous improvement is the key to differentiation and therefore to achieving sustainable competitive advantage. Successful organisations respond faster, more effectively and efficiently than competitors, doing so on a global basis. Furthermore, to ensure success continues, the world class organisation must monitor its marketplace and competitors, and constantly be aware of processes that could enhance its position through the process of best practice and benchmarking. 18 With regard to the important concepts of best practice and benchmarking, Gattorna and Walters (1996) provide the following introduction: Best practice is widely considered to be about doing things in the most effective manner, usually focusing upon a specific and key activity or operation such as customer service. Best practice is identified by searching for companies who, in similar situations excel, and then analysing the reasons for that success in terms of activities, functions and processes conducted within the business. In order to assess best practice, some form of measurement criteria needs to be applied. It is here where benchmarking is useful. Benchmarking provides insight into businesses, their processes and performance and identifies gaps between best practice and the current operating environment. Therefore benchmarking provides an insight into how best practice companies achieve superior performance as well as their objectives. 19 Performance measurement is thus key to benchmarking. In order to effectively manage a supply chain, it is necessary to benchmark and measure operations, making it possible to determine effectiveness and remove operational constraints. Significant productivity benefits and operational improvements can therefore be realised by implementing high quality performance measuring systems. Measurement of performance and success in key areas, is also crucial to determining progress towards achieving strategy. An important measure of supply chain performance, for example, is the extent to which the company’s end-user markets are being satisfied. This would include measures such as product availability and adequacy of customer service. It is also important for the company to focus on future success by setting objectives and measuring performance from a financial, customer, internal and learning/growth perspective. Apart from quantitative data for performance indicators, qualitative data or feedback also forms an essential part of the complete performance picture. 20 Both types of information need to be available and properly integrated for successful performance measurement. A balanced view of the organisation is one that includes a combination of traditional measures of historical financial success or failure, as well as indicators of areas that must change and improve in order to deliver future success. In the end, the best measures will always be that combination that are important to the customer and bottom-line. To continue the discussion of best practice and benchmarking, these are thus practices which offer organisations the opportunity to identify and replicate the practices and methodologies of successful world-class companies. It is important for companies therefore to also continuously seek best practice in logistics which may or may not, for example, include outsourcing certain logistics activities. Well- implemented best-practice activities should enable a company to copy successful companies while benchmarking ensures that the high levels of performance that are implemented are maintained and updated. However it must also be realised that context is key and practices overseas must be evaluated from a South African perspective. In the context of this thesis, therefore, the outsourcing practices in South Africa will also be considered relative to various best practices in logistics outsourcing currently implemented in the US. 21 While world-class is a key concept and status for companies to strive for, leading-edge companies go one step further and not only seek an international reputation for overall effectiveness in terms of flexibility, responsiveness, customer focus and continuous improvement but also a competitive edge and position of enduring superiority over competitors, in terms of customer preference. Leading-edge companies will therefore have, for example, a superior level of logistics competency and use logistics as a competitive weapon to secure and maintain customer loyalty. They are more responsive, flexible, committed to their customers, and aware of their results; work more closely with their suppliers, are more likely to embrace technology, and are more involved in their company’s strategic direction. Therefore, leading-edge companies: • Use logistical competency to gain and maintain competitive superiority • Add value to the products and services they market, supporting this goal by operating a cost-effective logistics system • Leverage their assets by forming strategic alliances with service providers. These alliances help companies achieve preferred-provider status with key customers. 22 Companies implementing innovative methods, systems and technologies to better manage their logistics activities and the integration thereof, are thus often referred to as leading-edge companies or organisations. Logistics management has the potential to assist the organisation in the achievement of both a value advantage and a cost/productivity advantage. (Christopher, 1998; Gattorna & Walters, 1996). These various trends, developments, and important concepts and strategies, together with reductions in trade barriers and economic integration, have also encouraged an increase in world trade. Companies seek to take advantage of these trends by entering new markets or looking to participate in global markets. Globalisation can be seen as a positive force for change that has the potential to raise living standards and drive economies forward. It also brings positive benefits for consumers, in particular, helping to increase choice, drive down prices, improve services and create new jobs and opportunities. With the effects of globalisation being felt in the majority of markets, companies need to adopt a global perspective, identifying competitors, new products and opportunities. The trend towards global organisation of both manufacturing and marketing is also highlighting the critical importance of logistics and supply chain management as the keys to profitability. (Chee & Harris, 1998). 23 The complexity of the logistics task is furthermore increasing exponentially, influenced by factors such as increased ranges of products, shorter product life cycles, marketplace growth and the number of supply/market channels. The main objective in managing the global logistics system is to meet customer service levels at the lowest cost. All the different logistics aspects need to be co- ordinated, and companies need to look carefully at both savings opportunities and the additional costs which may be incurred when making adjustments in parts of the logistics system. (Chee & Harris, 1998). 24 In summary therefore of the current and future scenario for companies, and the development of logistics management, companies should be continuously seeking ways in which they may improve their operations. The concepts discussed above and other supporting strategies available to a company, such as the decision to outsource, where such an action will add value to the organisation, can increase the cost-effectiveness and efficiency of a company’s operations. Management should set objectives for the supply chain and individual members, and measure actual performance against planned performance. Evaluation measures should be developed over time and be used to identify problem areas. Measures of performance with respect to value created for customers and the profitability of the supply chain and its members should receive particular attention. When management evaluates the supply chain structure it must also compare the company’s ability to perform the activities internally with another member’s ability to perform these activities. It is also important to remember that for the supply chain, the goal is, by means of integrated logistics management, to improve overall efficiency, which may be achieved by means of various logistics management and strategic options, such as the practice of outsourcing which will be dealt with in greater detail in Chapter 3 . 25 Conclusion For logistics and supply chain management the goal will continue to be improvement in overall efficiency by means of integrated logistics management and sound logistics decisions. The various logistics activities, and the integrative management thereof, will play an ongoing and important role in determining whether a customer receives the right product, at the right place, in the right condition, at the right cost, and at the right time. Managing the various activities as an integrated system must lead not only to the maximisation of customer satisfaction, but also to the lowest possible total cost. In this way logistics management can contribute significantly to overall company efficiency, competitive advantage and profitability. Effective logistics management can therefore provide a major source of competitive advantage. Many of the discussions of logistics and supply chain management and the associated processes and activities refer to the competitive advantage which efficiencies therein provide for a company. Another important area for increased efficiencies will continue to be the trend toward the outsourcing of logistics requirements, which holds the potential to optimise the role of logistics in a company 26 This in turn may lead to many improvements and other possibilities for a company as it is freed up to refocus on its core competencies. It may increase customer service levels, reduce capital requirements, increase profitability, reduce supply chain costs due to economies of scale, simplify industrial relations, help companies keep up to date with world-wide technological trends, and introduce innovative ideas and concepts. Logistics decisions therefore are, and will continue to be, key to corporate profit and performance and indeed in the growth of a country’s economy and competitiveness. The role of logistics in a company’s overall strategy is key, as are the strategies within the logistics function itself. It is therefore most important to consider, in further detail, the micro-economic role of logistics or otherwise stated, the role and importance of logistics in the company. The following sections will discuss in more detail this role of logistics and the management thereof. 27 THE MICRO-ECONOMIC ROLE OF LOGISTICS MANAGEMENT Introduction As was already discussed in Chapter 1, and the preceding sections of this chapter, logistics can play a key role in the competitive advantage of a company, notably by enabling the company to find ways in which to perform strategically important activities, or ensure that these activities are performed, more efficiently than its competitors. As was mentioned, for example, in Sections 2.1.2 to 2.1.5 of this chapter, the recognition of the cost and service impact of logistics is an important step for companies. Managing the various important logistics activities as an integrated system should lead to the maximisation of customer service as well as lowest possible cost. Companies that successfully implement innovative strategies to better manage their logistics requirements will be better equipped to increase their competitive advantage and corporate profitability and to become market leaders. 28 An efficient and effective logistics system should form the basis of a company’s overall customer service and marketing strategy. The impacts of the system, in turn, on the finance, marketing, manufacturing, and other functions of the company such as human resources and information technology, must also be considered and planned for. It is also important to consider that logistics is a complex framework of relationships between manufacturer and consumer, employer and employee, manager and shareholder, and members of the business and the community in which the business operates. Having a supply chain view of these relationships, and the operations involved, represents a great opportunity for suppliers, manufacturers, and retailers to improve productivity and efficiency, and therefore revenues and profits. The key for trading partners is to understand what constitutes their supply chain, i.e. all the activities involved in supplying a product to the end customer. 29 Logistics management therefore has a key role in a supply chain, and in particular in the member companies, for example in contributing to their Yüklə 376,08 Kb. Dostları ilə paylaş:
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