There are many and varied elements that go together to produce an effective distribution and logistics operation. These elements interrelate, and they need to be planned over suitable time horizons. The planning and control of an operation can also be described within the context of a broader planning cycle.
This emphasizes the need for a systematic approach, where continual review takes place. This is a particularly important concept in logistics, because most operations need to be highly dynamic — they are subject to continual change, as both demand and supply of goods and products regularly vary according to changes in customer requirements for new products and better product availability. One example of a fairly common framework is shown as the planning and control cycle in Figure 2.
The key stages in the cycle are as follows: 1. This might be through a regular information feedback procedure or through the use of a specific logistics or distribution audit. The second stage is to determine the objectives of the logistics process, to identify what the operation should be trying to achieve. These objectives need to be related to such elements as customer service requirements, marketing decisions, etc.
The third stage in the cycle is the planning process that spans the strategic and operational levels previously discussed. Finally, there is a need for monitoring and control procedures to measure the effective- ness of the distribution operation compared to the plan. This should be undertaken on a regular weekly, monthly and annual basis. Where are we now? This allows for the dynamic nature of logistics, the need for continual review and revision of plans, policies and operations.
This must be undertaken within a positive planning framework in order to ensure that continuity and progress are maintained.
Logistics has traditionally been seen as an operational necessity that cannot be avoided; however, a good logistics operation can also offer opportunities for improving financial performance. For improved business performance, this ratio needs to be shifted to increase profits and reduce capital employed. There are many different ways in which logistics can have both a positive and a negative impact on the ROI. These are outlined in Figure 2. This shows ROI as the key ratio of profit and capital employed, with the main elements broken down further as sales revenue less cost representing profit and inventory plus cash and receivables plus fixed assets representing capital employed.
One of the aims of many service level agreements is to try to achieve OTIF on time in full deliveries — a key objective of many logistics systems. On the other hand, costs can be minimized through efficient logistics operations. For example, there are many different types of inventory held by companies, including raw materials, components, work-in-progress and finished goods. The key logistics functions impact very significantly on the stock levels of all of these. This impact can occur with respect to stock location, inventory control, stockholding policies, order and reorder quantities and integrated systems, amongst others.
Cash and receivables are influenced by cash-to-cash and order cycle times — both of these being key logistics processes. Finally, there are many fixed assets to be found in logistics operations: warehouses, depots, transport, and material han- dling equipment. The number, size and extent of their usage are fundamental to effective logistics planning. Also, there may be good opportunities to outsource some or all of these operations, which has a significant effect on reducing fixed assets.
Much of this book is taken up with the practical logistics issues that enable the maximization of profit, the minimization of costs and thus the improvement of ROI. Globalization and integration One area of significant change in recent years has been the increase in the number of com- panies operating in the global marketplace. This necessitates a broader perspective than when a national company operates internationally.
In the latter, although companies may have a presence across a wide geographic area, this is supported on a local or regional basis through local or regional sourcing, manufacturing, storage and distribution. In the former, the company is truly global, with a structure and policy that represent a global business. All of these aspects serve to emphasize the added difficulty of operating effectively in a global environment.
Logistics and supply chain networks have become far more complicated and the need to plan and manage logistics as a complete and integrated system has become far more difficult. To service global markets, logistics networks become, necessarily, far more expansive and far more complex.
Once again, the need is to plan and manage logistics as a complete and integrated system. Linked closely to the globalization of business is the increase in the complexity of supply chain management.
As already indicated, globalization almost certainly leads to greater complexity. Complexity provides some significant implications for logistics operations. It is probably clear from this that there is a direct conflict between globalization and the move to the quick response, just-in-time operations that are being sought by many companies.
In global companies there is a tendency to see order lead times increase and inventory levels rise because of the distances involved and the complexity of logistics. In companies moving to the just-in-time philosophy there is a desire to reduce lead times and to eliminate unnecessary stock and waste within their operations.
For those companies trying to achieve both goals, there is a clear challenge for logistics. Integrated systems To support the need to develop more integrated operations there have been a number of developments in logistics and distribution systems that have the concept of total logistics as their basis.
The major reason for this explosion of new ideas is twofold. The first is the realization of the importance, cost and complexity of logistics. The second is the progress made in the field of information tech- nology, which has enabled the development of sophisticated information systems to support and enhance the planning and management of logistics operations, whereby very detailed data collection and analysis can be undertaken that was previously impossible.
Some of these alternative approaches to integrated physical and information systems are described in Chapter 32, where information systems in the supply chain are discussed. In addition, some of the key aspects of integration are reviewed in Chapter 12, which considers recent develop- ments in manufacturing techniques. Many of the origins of integrated systems have a back- ground in manufacturing.
All distribution costs storage, transport, etc are therefore assigned to a specific product rather than taking an average over a whole product range. Thus, in the same way that a budg- etary system operates, the actual costs of distributing a product are monitored and compared to a standard cost determined using DPP. In this way, areas of inefficiency throughout the whole logistics operation can be identified.
Subsequently, manufacturing resource plan- ning MRPII was developed with the objective of improving productivity through the detailed planning and control of production resources. MRPII systems are based on an integrated approach to the whole manufacturing process from orders through production planning and control techniques to the purchasing and supply of materials see Chapter 12 for further discussion.
Distribution requirements planning is the application of MRPII techniques to the management of inventory and material flow — effective warehousing and transportation support. DRP systems operate by breaking down the flow of material from the source of supply through the distribution network of depots and transportation modes. Integrated systems of this nature require sophisticated, computerized informa- tion systems as their basis.
The benefits of an effective system can be readily seen in terms of reduced freight, storage and inventory holding costs and improved customer service. Just-in-time JIT JIT originated as a new approach to manufacturing and has been successfully applied in many industries such as the automotive industry. It has significant implications for distribution and logistics. The overall concept of JIT is to provide a production system that eliminates all activities that neither add value to the final product nor allow for the continuous flow of material — in simple terms, that eliminates the costly and wasteful elements within a production process.
As with all such approaches, JIT has some negative points as well as the more positive ones listed above. It can, for example, lead to increased transport flows due to the need for smaller but more frequent deliveries of goods to the customer. Competitive advantage through logistics Attitudes towards distribution and logistics have changed quite dramatically in recent years. It was commonly thought that the various elements within logistics merely created additional cost for those companies trying to sell products in the marketplace.
Although there is, of course, a cost associated with the movement and storage of goods, it is now recognized that distribution and logistics also provide a very positive contribution to the value of a product. This is because logistics operations provide the means by which the product can reach the customer or end user, in the appropriate condition and required location.
It is therefore possible for companies to compete on the basis of providing a product either at the lowest possible cost so that the customer will buy it because it is the least expensive or at the highest possible value to the customer eg if it is provided exactly where, when and how the customer wants it. Some companies may, perhaps unwisely, try to achieve both of these cost and value objectives and probably succeed in neither! It is particularly important to understand which competitive stance a company is trying to achieve when planning a logistics operation.
These ideas are illustrated in Figure 2. This shows that a company may compete as a service leader, where it is trying to gain a value advantage over its competitors by providing a number of key service elements to differentiate its product.
Or it may compete as a cost leader where it is trying to utilize its resources so that it offers the product at the lowest possible cost, thus gaining a productivity advantage. Examples of how this might be achieved are given in Figure 2. It might include a guaranteed service level or a regular update on the status of orders. For a cost or productivity advantage, this may include a number of different means of cost minimization, such as maintaining very low levels of inventory and ensuring that all manufacturing and distribution assets are kept at a high utilization.
It should also be emphasized that for many companies it is necessary to develop differently configured logistics structures to cater for the variety of service offerings that they need to provide.
Leading com- panies are segmenting their supply chains according to the service and cost needs of the customer. The concept of the supply chain is really an extension of the ideas that have been developed in this and the previous chapter concerning the integrated nature of logistics.
The total logistics concept advocates the benefits of viewing the various elements of logistics as an integrated whole. Supply chain management is similar, but also includes the supplier and the end user in the process or, as indicated in Figure 1. This is the major difference between supply chain management and traditional logistics. There are four distinct differences claimed for supply chain management over the more classic view of logistics, although some of these elements have also been recognized as key to the successful planning of logistics operations.
The supply chain is viewed as a single entity rather than a series of fragmented elements such as procurement, manufacturing, distribution, etc. This is also how logistics is viewed in most forward-looking companies. In an integrated supply chain, however, both the suppliers and the end users are included in the planning process, thus going outside the boundaries of a single organization in an attempt to plan for the supply chain as a whole.
Supply chain management is very much a strategic planning process, with a particular emphasis on strategic decision making rather than on the operational systems. Supply chain management provides for a very different approach to dealing with inventory.
Traditionally, inventory has been used as a safety valve between the separate components within the pipeline — thus, often leading to large and expensive stocks of products. Supply chain management aims to alter this perspective so that inventory is used as a last resort to balance the integrated flow of product through the pipeline.
Central to the success of effective supply chain management is the use of integrated information systems that are a part of the whole supply chain rather than merely acting in isolation for each of the separate components. These enable visibility of product demand and stock levels through the full length of the pipeline. This has only become a possibility with the recent advances in information systems technology.
Stage one: baseline material flow customer service purchasing material production sales distribution control Stage two: functional integration material flow customer service materials manufacturing distribution management management Stage three: internal integration material flow customer service materials manufacturing distribution management management Stage four: external integration material flow customer service suppliers internal supply customers chain Key: Inventory Source: Stevens Figure 2.
Many companies have moved to functional integration, with some achieving an element of full internal integration. Figure 2. The extent of integration has a big impact on the logistics structure of a company. A company with limited integration will hold stocks in many parts of its operation. A highly integrated company will hold very limited stocks, with the emphasis on the steady flow of product throughout the physical system.
The figure emphasizes this need for poorly integrated organizations to hold large inventories at frequent intervals throughout the supply chain. Summary The realization of the need for the effective planning and control of logistics, coupled with the obvious interrelationships within logistics systems, has led to the development of several new approaches towards integrated systems. The recent advances in information technology have made the practical application of these new approaches feasible.
All in all, there has been a very positive move towards an integrated approach to logistics, although for many companies, both large and small, there is still considerable scope for improvement.
The more complex and sophisticated systems and concepts such as DPP and DRP have been adopted by a number of large, generally multinational companies. Smaller companies have been slower to adopt these concepts, despite the clear benefits to be gained. For many small and medium-sized companies, there is also the very pertinent factor that they need to learn to walk the logistics path before they attempt to run on it.
However, even for companies such as these, there is a great deal to be gained from taking those first few steps towards recognizing that logistics should be viewed as an integrated system and that there is a strong interrelationship between the different elements of transportation, storage, informa- tion, etc. In addition, there is the need to adopt a positive approach to the planning and control of those systems. Fortunately, in the past few years, companies have, to a greater or lesser extent, realized the importance and relevance of logistics to their business as a whole.
Thus, organizational struc- tures and planning policies are now beginning to reflect this integrated approach. The financial impact that logistics has in a business has been described. The importance of the need to integrate the various logistics components into a complete working structure that enables the overall system to run at the optimum has been identified. Some key aspects of planning for logistics have been reviewed.
Finally, a number of recent developments in logistics thinking have been described, including the globalization of companies, integrated planning systems, the use of logistics to help create competitive advantage and the concept of supply chain management.
When pressed, however, there are many companies that find it difficult to describe exactly what they mean by customer service or provide a precise definition of customer service measures.
For any company or organization it is vital, therefore, to have a clear definition of customer service and to have specific and recognized customer service measures.
It is also important to understand that customer service and customer service requirements can and will differ not just between industries and companies but additionally between the market segments that a business might serve. Another relevant factor is the recognition of the complexity of customer service provision. Customer service is inextricably linked to the process of distribution and logistics.
Within this process, there are many influences that may be relevant to customer service. These range from the ease of ordering to stock availability to delivery reliability. Finally, there is the need to balance the level of service provided with the cost of that provision.
The downfall of many a service offering is often the unrealistic and unrecognized high cost of providing a service that may, in the event, be greater than is required by the customer.
The key to achieving a successful customer service policy is to develop appropriate objectives through a proper framework that includes liaison with the customer, and then to measure, monitor and control the procedures that have been set up.
The importance of customer service As already suggested, there are few companies that do not recognize the importance of the provision of good customer service.
But, why is it so important? One way of considering customer service is to differentiate between the core product itself and the service elements related to the product.
This is depicted in Figure 3. The core product concerns the item itself: the technical content, the product features, the ease of use, the style and the quality. There is a long list as we shall see later in this chapter , and clearly not all of the service items on our list are relevant to all products.
The marketing departments of many companies recognize that the product surround elements are very important in determining the final demand for a product. In addition, these aspects often represent only a small percentage of the cost of a product. Thus, no matter how attractive the product may be, it is essential that the customer service elements are satisfactory and, as we shall see, logistics plays a crucial role in providing good customer service. These are the right quantity, cost, product, customer, time, place and condition; and the concept of applying these to customer service can be seen in Figure 3.
All of these dif- ferent aspects can be key requisites of a good customer service offering — indeed, each of them may be essential to ensure that a product achieves its expected sales in the various markets where it is made available.
It is notable that all of these elements are affected by the standard and quality of the logistics operations that are essential to getting a product to market. Thus, these elements can provide the basis for identifying the different aspects of logistics that should form a part of any customer service offering, and also, and this is of equal importance, these elements should become the basis of the key measurements that are used to monitor opera- tional success or failure.
This will be considered in the final sections of this chapter. The components of customer service The logistics components of customer service can be classified in different ways. They may be seen as direct transaction-related elements, where the emphasis is on the specific physical service provided, such as on-time delivery, or they may be seen as indirect support eg non- transactional, or pre- and post-transactional attributes that are related to overall aspects of order fulfilment, such as the ease of order taking.
Pre-transaction elements: these are customer service factors that arise prior to the actual transaction taking place. They include: —— written customer service policy; —— accessibility of order personnel; —— single order contact point; —— organizational structure; —— method of ordering; —— order size constraints; —— system flexibility; —— transaction elements.
Transaction elements: these are the elements directly related to the physical transaction and are those that are most commonly concerned with distribution and logistics. Under this heading would be included: —— order cycle time; —— order preparation; —— inventory availability; —— delivery alternatives; —— delivery time; —— delivery reliability; —— delivery of complete order; —— condition of goods; —— order status information.
Logistics customer service elements can also be classified by multifunctional dimensions. The intention is to assess the different components of customer service across the whole range of company functions, to try to enable a seamless service provision. One of the main consequences of this approach is that it enables some very relevant overall logistics measures to be derived.
These will be considered later in this chapter. The four main multifunctional dimensions are: 1. Each of these can be broken down into further detailed elements. One example of this is shown in Figure 3. Total order fulfilment cycle time is When identifying and measuring order fulfil- ment cycle time it is important to be able to break it down to all of the key components. Thus, if there is a customer service problem it can be measured and traced quickly and easily and the actual detailed problem can be identified and remedied.
As indicated already in this chapter, there are many different elements of customer service, and their relevance and relative importance will vary according to the product, company and market concerned. Two different models of service quality are considered: a very basic model and a more complicated, extended model. Basic service model A very simple, yet effective, view of service quality is that it is the match between what the customer expects and what the customer experiences.
Note that the customer viewpoint is what the customer perceives or believes to be happening, not necessarily what is actually happening in terms of what the sup- plier is providing or thinks they are providing. Perceived quality is always a judgement that the customer makes — whatever the customer thinks is reality, no matter what the supplier may believe to the contrary!
This is another reason why careful measurement of customer service is necessary: to be able to demonstrate that certain agreed standards are being achieved. This is particularly useful in helping to identify and measure the critical elements of service for key customers. The main factors are outlined in Figures 3. The aim of this approach is to identify the various different service gaps that can or might appear throughout the customer service process.
Measures are then set up to assess the relative importance of each of these gaps and to monitor them on a regular basis. The boxes in Figure 3. From this, the supplier should develop appropriate service quality stand- ards and specifications. These should then be communicated to and agreed with the customer. Subsequently, the service is provided by the supplier via the logistics operation.
The customer will then have a certain expectation of the service level to be provided and can compare this to the service that he or she perceives is being received.
In Figure 3. Working backwards, the main issue is likely to be the one between the service that the cus- tomer expects and the service that the customer perceives to be provided Gap 6. How is this undertaken? As described later in this chapter, there are a number of different types of customer service studies that can be carried out to achieve this. However, it is also important to be able to identify why any such service failure has occurred, and the different reasons can be identified by measuring the other service gaps that appear in Figure 3.
This gap may, typically, be caused because the supplier and the customer are measur- ing service in a different way. This gap may be caused by a misunderstanding in communication. The cause for this gap may be inefficiency within the delivery service.
Perceived service — expected service gap Perceived service 5. Actual service — perceived service gap 4. Service standard — service delivery gap gap 1. Customer expectation — Service quality standards management perception and specification gap 2. Management perception — service standard gap supplier Management perception of customer expectation Based on work by Parasuraman and Zeithaml Figure 3. This gap is likely to be caused by an inadequate initial opera- tional set-up.
This gap is usually caused because the supplier does not under- stand the real customer requirements. Conceptual models of this nature are valuable to help the understanding of the underlying issues that are involved. They need to be interpreted into a practical format to enable actual service policies to be derived. The remaining sections of this chapter address this requirement.
Developing a customer service policy Every company that provides products and services to its customers should have an appropri- ate customer service policy. The next few sections of this chapter describe how this can be done. Because there are so many different elements of customer service, this policy must be very clearly and carefully defined. Also, there are many different types of customer even for the same product. The legal position of visiting forces transcends domestic and international law and is of growing importance in our increasingly globalized and insecure world.
The Handbook of Market Design. Authors: Nir Vulkan, Alvin E. Roth, Zvika Neeman. This Handbook brings together the latest research on applied market design. Back Matter Pages About this book Introduction The third-party logistics industry is a growing field. This is the first practical handbook to support managers in the creation and negotiation of logistics contracts from the legal and economic perspective.
The book provides the general framework and an extensive analysis of the content, structure and best practices of logistics contracts. He has extensive experience in logistics, operations and supply-chain management, having held various management positions at HP in these areas.
His recent research is focused on the performance of logistics alliances.
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