17

Strategic Logistics: Looking Beyond the Basics

After reading the chapter, the students should be able to understand:

• Logistics competitive framework
• Logistics strategies across the product life cycle
• Logistics strategic planning
• Logistics strategies and implementation

Logistics function has to achieve two polemic goals of cost reduction and superior customer service, which are becoming increasingly difficult to achieve under the severe environmental pressure. Logistics strategy is a reactive approach to face competition. However, leading firms across the world now bank on strategic logistics—a proactive approach for developing sustainable competitive advantage in a dynamic business environment. Peter Drucker has rightly said, “Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action.”

Competitive organizations will develop logistics service strategies to address an evolving global marketplace and customized logistics offerings to reach customer segments—vertical, horizontal and global¹

—J. T. Mentzer

17.1 LOGISTICS COMPETITIVE FRAMEWORK

In today’s dynamic business environment, competitive pressures and the customer’s demands are forcing the majority of firms to shift their priorities to understand the logistics supply chain process in order to deliver superior value to the customer. To fulfil this objective, logistics has left behind the old role of warehousing, transportation and material storage and handling to assume a new role that is much more comprehensive and pervades through the entire supply chain of the firm. There is no doubt that logistics is indispensable to the supply chain process for its efficiency and effectiveness in providing superior service to the customer. It is a powerful tool for gaining a competitive edge with support from the emerging technologies. The operational process of logistics today covers conceptualization, purchasing, processing, distribution, after-sales service and customer satisfaction. The new competitive framework of logistics as a service function includes responsiveness, reliability, relationship and rationalization. As customers today seek added value, logistics strategies need to be augmented with the above-mentioned service variables.

Responsiveness

Responsiveness refers to the speed in responding to customer demand. It needs to be reflected in all phases of the transaction. In the competitive environment, a response to the customer’s pre-sales enquiry is of prime importance in getting a potential order to be fulfilled in shorter lead time. The degree of responsiveness can be enhanced through the use of the latest information and communication technologies. A winning logistics strategy is to supply the material in accordance with the customer’s needs in terms of the lot size as well as place and frequency of delivery. In order to reduce inventory-related cost, the customer may demand frequent deliveries in small lots. Deliveries may further be required at various assembly centres that are in proximity to the markets. Under such circumstances, the emphasis in formulating the logistics strategy will be on developing a flexible system for the customized requirements of strategic customers. The deciding factor in responsiveness strategy is differentiation, which can be speedily achieved through mass customization with a flexible back-end support in all the three phases of transaction process, so as to have the winning edge in competitive markets.

Reliability

Reliability is the factor that decides the degree of trust a customer has in your capability to honour a commitment. The supplier has to exhibit certain service characteristics for being perceived by the customer as a reliable supplier of products or services. The inventory-planning exercise at the customer’s end is based on certain assumptions of the reliability factor that the supplier exhibits. A higher degree of reliability in material delivery will help the customer release some of his resources to be used for productive purposes. Consistency in on-time delivery performance will help the customer reduce the inventory level or operate on the just-in-time (JIT) system. Hence, the prime objective of the logistical system should be reliability in meeting customers’ service needs according to the assumptions in their planning exercise for resource allocations and risk bearing.

Rationalization

Today, many leading companies across the world are adopting the rationalization approach in logistics to reduce cost and enhance customer service. This involves reducing the supplier base and working in partnership with select-few suppliers. The buyer treats the supplier’s facility as an extension of his/her own facility and shares the information, experience and resources for mutual benefits. The rationalization approach reduces the transaction cost and allows the buyer to operate on the JIT system so as to take inventory-related cost out of the supply chain. With better control on material movement, customer service capability is enhanced and is leveraged for competitiveness.

In competitive markets where products are at the maturity stage in their life cycle, leading firms resort to the strategy of mass customization. However, this strategy works well only when product designs are rationalized to have minimum standard components or parts to offer variety in product or service. With the existing logistics product portfolio, the service provider may cater to the different logistics service needs of a variety of customers, but certainly not all segments of customers. The logistical strategy should be to rationalize and organize the service modules in such a way that, with permutation and combination, the specific logistical needs of a large number of customers are met and a wider coverage is possible.

Relationship

In the prevailing competitive environment, organizations are trying to reduce their supplier base and develop a partnership with a few suppliers who are reliable and ready to mutually share the benefits. Firms are spending huge amounts in customer relationship management (CRM) programs to develop a long-term relationship for customer retention and reduce the risk element in demand management. Partnering with the right supplier, whose operations the firm considers as an extension of their own, will help in enhancing the supply chain efficiency and effectiveness. A relationship based on mutual trust will help in sharing the information, knowledge and resources for mutual gains in cost reduction, which may be leveraged for competitiveness. Leading business firms across the world now consider logistics as the best route to form a partnership with suppliers, customers and channel members. It can develop a long-term relationship to collectively fight on the competition front.

17.2 LOGISTICS STRATEGIES ACROSS PLC

Traditionally, logistics is conceived as a functional support system and used as one of the tools for extending differentiated customer service to gain the competitive edge. Logistics strategy is formulated in line with the overall business strategy of the firm to achieve the desired business objectives. Firms try to optimize the various elements of the logistics mix to achieve the desired service level to support the product-market strategy. The criticality of the various elements of the logistics mix varies with the product, market and the customer service level. For example, the distribution network for FMCG products needs a number of warehouses and an intensive channel structure to serve a large number of customers spread across the country. On the other hand, a glass (sheets) manufacturing firm will have no field distribution warehouse as their product, being of a fragile nature, is usually shipped directly to the end customer or dealer. In the case of low unit value products such as soft drinks, the distribution of these is normally within a 100-kilometre radius of the manufacturing plant. Here, the transportation route selection and vehicle scheduling are critically important factors to control transportation cost, which has a major share in the total landed cost of the product at the consumer end.

Another variable influencing the formulation of a logistical strategy is the adjustment across the life cycle phases the product is passing through (see Figure 17.1).

At each stage of the product life cycle, the requirement of logistical performance differs so as to face the market conditions.

Introduction

At the introductory stage, logistical support is basically required for making the product available at the places where product awareness is created for demand generation. The heavy promotional expenditure made might go waste if the product is not available when the customer wants it. Nonavailability of the product in such a situation will dilute the impact of the marketing strategy. It may even have a negative effect on product acceptance by prospective consumers and lead to product failure. The primary objective here is to establish consumer acceptance and market position, with the emphasis being on stock availability. During the introductory phase, the demand pattern is erratic and the shipment size is small. Hence, the logistics cost as a percentage of revenue generated is pretty high. To get over the uncertainty, firms desirous of introducing a new product invariably select a smaller geographical area, wherein the variables of the logistics mix will remain in control and the risk of service failure is minimized. In a nutshell, the firm needs to organize and mobilize the elements of the logistics mix at the introductory stage to exhibit a high level of service commitment.

Growth

In the growth stage, the emphasis shifts to the creation of logistical infrastructure. As the sales growth is witnessed, more revenues are generated and profits are assured in growth stage, the strategy focus is on investment and making the back-end support stronger for gaining a competitive edge. The logistical cost as a percentage of the revenue generated plummets because of scale economics. In the growth stage, the strategy is to achieve logistical competency through investment in technology and network to build market share and customer relationship through reliable and consistent generic logistical service.

Maturity

The maturity stage witnesses a proliferation of competition. The price war becomes intense to gain market share in the stagnated or slowly growing market. Firms try to reach the consumer through multiple channels. In this phase, the strategy focus shifts to customized logistical solutions with value-added services to gain competitiveness. Typically, the profit margins come down and the firms focus on cost control. To maintain their competitive position, the firms resort to alliances in logistics and adopt the strategy of service customization. They evolve product-, market- and customer-specific logistical solutions for strategic clients and organize various resources to integrate them with the client’s supply chain. Logistics not being the core competency of a majority of manufacturing and trading firms, they seek help from experts or logistics service providers to perform the logistical operation effectively and efficiently at reduced costs.

Decline

In this phase, the product volume shrinks, costs go up, margins plummet and the element of uncertainty creeps in. Firms slowly withdraw from the markets. Logistical operations are planned on a selective basis to support marketing operations that are now performed on a restricted scale. The logistical resources are neither overcommitted nor overstretched in the decline stage.

17.3 STRATEGIC LOGISTICS PLANNING

The importance of logistics and the supply chain was realized by firms in the last decade because of the globalization of business activities, increasing competitive pressure and uncertainties in dynamic markets. This forced business firms to re-engineer or redefine their business process so as to bring efficiency and effectiveness into the operations. Hence, there has been a continuous improvement in logistics and supply chain operations for achieving the key goals of cost reduction, flexibility, technology adaptability and superior customer service (through value additions) to gain a sustainable competitive advantage in the dynamic markets. The process of logistics strategy formation and its implementation varies with the firm’s business process, the product it deals in and the industry in which it operates. For example, a firm manufacturing plant machinery will be concerned with inbound, in-process and outbound logistics, which requires strong IT support for the integration of a large number of activities in the subsystems. The manufacturing firm may go in for an alliance with the 3PL supplier to obtain the benefits of scale economics. The trading firm (retail chains) with a wider product portfolio may, on the other hand, employ cross-docking as a strategy for increased inventory turnover resulting in reduced inventory cost and enhanced speed in customer service.

The strategic logistics planning process starts with analysis of the external and internal environment, which will decide its limitations, resource requirements and barriers to extend superior service to the customers. The regulatory framework in the country or internal resource constraints may not allow the firm to avail of certain opportunities, or may create barriers to extend the desired level of service to customers. The environmental analysis will help in identifying the company’s strengths, weaknesses, opportunities and the threats in serving the customer. This, in turn, will help in formulating the supporting strategies and organizing the appropriate resources (logistics mix) to achieve the logistics goals.

To implement a strategy, the firm needs the structure for its implementation. The structural elements include designing a logistics network and evolving network strategy. The network design is primarily concerned with planning of warehouses at strategic locations, transportation facilities and the information flow system across the supply chain. The network strategy may decide on the warehouse type (private, public or contract), transportation modes, routes and carrier selection, and technology selection and its adoption for information flow. The structural design also needs to develop a proper interface between the firm’s channel structure (physical distribution) and the logistical network. As the channels provide the place and time utility of the product to the customer, the proper interface between the two is a must. For better customer service, the logistics programs are designed to suit the needs of the channel members. For example, the wholesaler will prefer to have large consignments with fewer deliveries to economize on freight cost, while the retailer’s preference will be for smaller consignments with frequent deliveries to save on inventory cost. The channel design is concerned with customer service and it is extended through the back-end (logistical) activities. The proximity of the warehouse to the marketplace, continuous replenishment of inventory and reliable and consistent delivery performance are critical factors for decision on the logistical structural elements.

The success of strategy implementation depends on the efficiency of the functional elements in the movement of information and inventory across the supply chain. The channel length and breadth depend on the type of product, market size and the market share to be gained. The complexity of the logistical network and its connectivity will decide whether the firm has enough resources to do a logistical operation on its own or whether it is to be outsourced, so as to extend the desired customer service and also to have a wider distribution coverage at least cost (Figure 17.2).

In the overall network design, the critical role of the subsystems cannot be ignored. For example, the warehouse layout planning exercise will be incomplete without proper consideration of material-handling equipment and the storage system. An improper layout may create barriers to free and speedy movement of inventory across the supply chain and will reduce the throughput from the warehouse. Hence, the storage layout, equipment selection and storage plan should go hand in hand.

The selection of transportation route, mode and carrier operator is important for offering and maintaining a reliable and consistent service level. Transportation management is the key functional area in customer service and accounts for a major portion of the logistics costs.

The other functional area to influence strategic logistical planning is the materials or procurement management. It is a critical linkage in the supply chain wherein co-partnership with vendors, material requirement planning and scheduled procurement help keep the supply chain lean and cost-effective.

Warehousing, transportation and inventory management require close coordination for smooth flow of material movement across the supply chain and is linked to the structural decision of the strategic logistics. The functional aspect of the structure elements plays a greater role in the success of the logistics chain to provide the desired level of service. Technologies like automatic identification, warehouse simulation, automated material handling, storage, and information and communication help in enhancing efficiency, effectiveness and productivity of the overall system. Consequently, it leads to competitiveness in delivering superior service to the customer at the least cost.

The last but not the least important aspect of strategic logistics is the implementation of strategy, the success of which is dependent on the efficiency of the people, equipment and the interfaces involved at the operating level. The major tasks at the operating level are order registration, order processing, order picking, replenishment and dispatching. These are done through proper policies and procedures at the operating level, use of the latest technology and through structuring, training and initiating the change process at the organizational level.

In conclusion, the strategic logistics process will enhance the responsiveness of the organization to the customer through the deployment of both physical and information resources.

17.4 LOGISTICS STRATEGIES

The process of logistics strategies formulation can be viewed through the following three angles:

1. Customer needs met through the implementation of strategies
2. Target customers
3. Resources required for implementation of strategies

Logistics strategy formulation is not a process that can be initiated in isolation. In fact, logistics strategies should have a goal congruent with the overall strategy of the business. In other words, there should be synergy between the logistics strategies and the other functional domains of the organization. For example, the management information system, which encompasses all functional areas of the business, has the strongest synergy with logistic operations, as logistics is an information-based activity for inventory movement across the supply chain. The success of logistics strategy implementation greatly depends on the sharing of information with internal and external customers and maybe sometimes with logistics partners. The transparency at the transaction level at both ends (buyer and seller) helps build an element of trust and thereby adds value to the customer delivery chain, thus making the strategy implementation task easier and successful.

To understand the strategic dimensions of logistics, we have a few generic logistics strategies successfully implemented by leading corporations across the world.

Cost Leadership

The basic approach to this strategy domination is through logistics cost reduction. The road map to achieve this is:

• Reduction in inventory and inventory-related cost through JIT, cross-docking or postponement
• Freight consolidation, mode and route selection for reduction in transportation cost
• Scale economics in warehouse operations
• Reduction in transaction cost through IT support
• Reduction in vendor base and co-partnership with suppliers
• System approach with IT as the backbone (reducing the human element) for error-free logistics operation

Differentiation

Differentiation through superior service quality that is beyond the reach of competitors, such as:

• Committed/guaranteed delivery time: DEL Computers deliver customized PCs at the doorstep of customers anywhere in the United States, within 48 hours of order placement.
• Customized logistics solution: Radhakrihna Foodland, a 3PL service supplier, manages the complete inbound logistics operations of McDonalds in India through their cold chain network across the country, which is customized for processed food products.
• Consignment tracking: Leading 3PL service suppliers, such as AFL, FedEx and Blue Dart are offering Web-based consignment tracking and tracing facility to their customers.
• Penalty for defaults: Offering guaranteed delivery on time and accepting penalty for deviations.

Value Addition

3PL suppliers are providing some extra services to clients in addition to the usual logistics services so as to add value to their service offerings such as:

• Cobbling: To avoid wasteful practices in transportation and storage, TCI is cobbling together the backhaul arrangements between different MNCs (Nestle, J&J, and HL) in India for distribution in Uttaranchal. In the United States, General Mills’ ‘Yogurt’ and Land O’ Lakes’ ‘Butter’ are transported in the same trucks on their way to the same supermarkets, with the advantage that both the companies have lower distribution cost and higher customer satisfaction.
• Payment collection: Gati now offers the service of payment collection from the consignee against delivery of material.
• Customs clearance: Logistics service suppliers provide this service to their customers for import and export consignments. This service is offered since a majority of exporters and importers do not have expertise in this area of logistics operations. It is especially useful for those who are not conversant with government rules and regulations.
• Packaging and labelling: 3PL operators provide this service to the customer who does not want to maintain a packaging material inventory and/or who lacks the facility or resources to pack the manufactured material or break-bulk imported material. In addition, the service of fixing labels and price tags is undertaken.
• Vendor-managed inventory: To reduce inventory-related cost of critical input in the client’s product, suppliers offer the service of managing the inventory of that item at the client’s place. The inventory ownership lies with the supplier, who bills the customer for the inventory consumed or that has exchanged hands. The supplier maintains minimum inventory at the small place allocated to him in the client’s manufacturing premises. Truck tyre manufacturers in India adopt this strategy for their original equipment manufacturer (OEM) clients (truck manufacturers).

Outsourcing

Manufacturing firms opt for the strategy of alliance with experts in logistics to reduce cost and simultaneously bring efficiency and effectiveness into their logistics operations. The desired results are achieved by outsourcing these operations to logistics service providers who have expertise in the relevant functional areas. Telco, Pune (India), has completely outsourced inbound and outbound logistics to Dynamic Logistics—a 3PL firm. As a result, the logistics cost of Telco has come down to half, without any compromise on efficiency and effectiveness in their operations.

After liberalization of the Indian economy in 1991, to bring competitiveness in the business operations, a majority of leading firms began outsourcing non-core but critical activities such as logistics to 3PL partners so as to focus on their core business. With outsourcing, they have access to best practices and technology in the outsourced functional area and their assets are released for more productive activities.

Diversification

Manufacturing firms that have voluminous logistic operations adopt the strategy of diversification in the logistics operations. Their objective is better ’cost and operational’ control, as well as to provide superior customer service. Such firms start with a separate division to gain the expertise and then spin off into an independent logistics firm to serve other customers. The Tata Group of Industries, for instance, is reportedly planning to set up a separate logistics company to undertake logistics operations for other groups of companies so as to enable them to provide superior service to their customers.

17.5 STRATEGY IMPLEMENTATION

Besides the formulation of strategy, its implementation is equally important. The firm should properly evolve the framework for successful implementation of the logistics strategy. The elements of strategy implementation framework are controls, organization structure, organization culture and the human resource skills (see Figure 17.3).

The financial dimensions of the controls focus on the monetary bottom line, which is net income, return on equity, net profits, costs and so forth. The non-financial control parameters are service quality, customer satisfaction and on-time delivery. The behavioural controls are self-imposed by the employees and are an outcome of the organizational culture and employee motivational programmes implemented by the organization. Invariably, the higher motivational level with good self-imposed controls in the workforce is observed in organizations with an open culture. Some examples are IBM, Microsoft and Motorola.

The lean structure with minimum decision-making levels and a wider span of control for individuals shows a higher motivational level among employees to perform well. In such organizations, the success rate of strategy implementation is higher. The another critical factor for successful strategy implementation is the skills of the individuals involved in implementing the strategy in a dynamic business environment. These normally depend on experience and educational background, ability to analyze a situation and take risks.

SUMMARY

Firms formulate their strategies in response to the environmental pressure. Logistics is a key element of those strategies. During the past decade, three forces have shaped the perspective of logistics: globalization, emergence of the supply chain concept and business process outsourcing. Even in e-commerce business, the importance of logistics for physical movement of the product across the supply chain of the firm cannot be ignored. The field of logistics has progressively become broader and pervasive and is influencing all functional areas of the management. Logistics activates the physical flow of material with information support, and optimizes the cost for the desired service level. The operational process of logistics today covers the conceptualization, purchasing, processing, distribution, after-sales service and customer satisfaction. The new competitive framework of logistics as a service function includes responsiveness, reliability, relationship and rationalization. The apparent trend is from logistics strategy approach to strategic logistics. Logistics is being used as a source of sustainable competitive advantage, rather than a tool for developing competitiveness. The strategic logistics process primarily consists of such steps as environmental analysis, SWOT analysis, goals and objective setting, strategy formulation, resource allocations and strategy implementation. Logistics strategies are evolved around cost leadership, service differentiation, value addition, outsourcing and diversification. The success of strategy implementation greatly depends on the framework in which the key variables are control tools such as organizational culture and structure, and the skills of the human elements involved in the process.

REVIEW QUESTIONS

1. What types of differentiation-based and cost-based logistics strategies would you adopt for the following products?
   1. Iodized salt,
   2. truck tyres and
   3. lifestyle products.
2. How do logistics strategies vary across the different stages of the product life cycle?
3. Discuss the various types of logistics strategies being used across the industry.
4. Explain the process of strategic logistics planning.
5. Discuss the key factors influencing the success of strategy implementation.

INTERNET EXERCISES

1. Log on to http://www.stormingmedia.us/22/2255/A225504.html and study the complexities in the army strategic logistics planning process.
2. Maersk Logistics is one of the leading logistics solution providers to a variety of industries across the world. Visit http://www.maersklogistics.com/sw17858.asp and find out how Maersk is helping their clients to differentiate in their logistics supply chain and achieve operational excellence.

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Wanke, Peter F. 2003. Strategic Logistics Decision Making, www.centrodelogistica.org/new/wanke.pdf