How the leading-edge companies manage logistics
A study carried out for the companies that were at the leading edge of logistics management found that they had the following characteristics in common.
- Exhibit overriding commitment to customers
- Emphasize planning
- Encompass a significant span of functional control
- Commit to external alliances with service suppliers
- Have a highly formalized logistical process
- Place a premium on operational flexibility
- Employ comprehensive performance measurement
- Invest in state of the art information technology
Most of us work in organizations that are hierarchical, vertical and functionally defined. The organization chart of a typical company resembles a pyramid like structure where every individual knows his function in relation to others. There is no doubt that this structure has helped businesses a lot in the past but there are an increasing number of questions that are asked whether they will be suitable for a future where highly responsive and evolutionary structures are required.
From functions to processes – conventional organizations have been vertical in design or in other words they have been designed around functions such as production, marketing, sales and distribution. The problem with this design is that it emphasizes the use of resources and rather than the creation of output. The only method that output can be measured is in terms of customer satisfaction achieved at a profit. This can only be achieved by co-coordinating and cooperating horizontally across the organization. These horizontal linkages mirror the materials and information flows that connect the customer with the business and its suppliers.
From profit to performance – there is no doubt that in the long run sustained profit has to be the prime reason for the existence of any commercial organization. In most management meeting what get discussed are key profit figures and revenue and cost structures that brought about the profit. As the management philosophy says what gets measured gets managed – this implies that most of our attention goes to cost and revenue management and not to improving performance with depends critically on customer satisfaction. Some of the key non-financial performance indicators that should be measured are:
- Customer retention
- Brand preference
- Dealer satisfaction
- Service performance
- Flexibility – set up times, common components and materials, reduce complexity
- People commitment – employee turnover, suggestions implemented, internal service climate and culture, training and development.
From products to customers – Although the marketing concept has found widespread acceptance there is still a tendency to manage products rather than customers. This has resulted in measuring profits based on products accurately but not knowing profit per customer which is critical. It has been discovered that 20% of a business’ customers generate 80% of profit. More importantly studies have shown that some customers contribute to the loss.
Our articles on customer relationship management gives further insight.
From inventory to information – It has been said that ‘uncertainty is the mother of inventory’ this means that companies are unsure of future demand and stock up on goods on a just-in-case basis. This has severe impact on the bottom-line. The conventional solution to uncertainty is to make forecasts. But to make forecasts accurate information is required. To get information to the production floor and purchasing it is important that marketing side of the organization has a means of communicating quickly and accurately there requirements. For example in the fashion industry where preferences change very quickly it is important to have on-line links to the garment factories and to purchasing people to ensure that orders reach the market before time.
From transactions to relationships – The drive in the past has been to winning customers and not to retaining them. This has led to low profitability in companies in an attempt to meet market share targets. Therefore the need to avoid these costs is to develop long term profitable relationships with customers rather than dealing only on individual transactions. Studies have shown that the longer that the customer stays with you the more profitable he becomes – since he is easier to maintain and more easy to satisfy. Please look at our detailed report on customer relationship management.
The following table summarizes the paradigm changes that need to take place for logistics to achieve true value addition in the business context.
| Paradigm shift | Leading to | Skills required |
| From functions to processes | Integral management of materials and goods flow | Cross functional management and planning skills |
| From products to customers | Focus on markets and the creation of customer value | Ability to define, measure and manage service requirements by market segment |
| From revenue to performance | Focus on the key performance drivers of profit | Understanding of the cost to serve and time based performance indicators |
| From inventory to information | Demand based replenishment and quick response systems | Information systems and information technology |
| From transactions to relationships | Supply chain partnership | Relationship management and win-win orientation |
Re-configuring the value chain
One of the distinguishing features of the value chain is to postpone the final creation of the product as much as possible. The idea behind this is that maximum flexibility can be achieved through postponement by obtaining time place and form utility. This can be achieved by aggregating production systems rather than catering to individual customer requirements.
The role of information in the virtual supply chain
It has been recognized that the key to supply chain management is the information system. It has been more recently discovered that demand and supply can be matched in multiple markets with different needs, in ever shorter time frames through good information systems.