Harrisons logistics management and strategy, competing through the supply chain (3rd edition) 1

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Contents
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Forew ord

>V

Preface
Au thor's acknowledgements
Publisher's acknowl edge ments

xvii
xix

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How to use this book

xxili

Plan of t he book

xxv

Part One COMPETING THROUGH LOGISTICS

, Logistics and the supply chain
Introdu ct ion

1.1

1.2

1.3

1.4

log istics and the sup ply cha in
1.1.1

Definitions and concepts

1.1 .2

Supply chain; struc tu re and tiering

Material flow and inform ation flow
1.2.1 Material flow
1.2.2 Information flow
Competing t hrough logistics

1.3.1
1.3.2
1.3.3

Hard objectives
Support ive capab ilities
Soft o bjectives

1.3.4

O rder w inners and qu alifiers

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l ogistics strategy
'.4. 1 Defining 'strategy'

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, .4.2
1.4. 3

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Align ing st rategies
Different iatin g st rategi es

Summary
Discussion questions
References

Suggested further read ing

2 Putting the end-customer first
Int rodu ct ion
2.1 The market ing perspecti ve
2.1.1 Rising customer expec tations
2.1.2 The information revo lut ion
2.2 Segment ation
2.3 Quality o f service
2.3.1 Custo mer loyalty

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Contents
2.3.2 Val ue disciplines
2.3 .3 Custome r relationsh ip management (CRM)
2.3.4 Measuring service quality
2.4 Setting priorities for logistics strategy
2.4. 1 Step 1: Diagnose current app roach to market seg mentation
2.4.2 Step 2a: Understand buying be haviour
2.4.3 Step 2b: Customer value analysis
2.4.4 Step 3: Measure logistics strategy driver
2.4.5 Step 4: Spec ify future approach to ma rket segmentation
Summary
Discussion questions
References
Suggested furthe r read ing

3 Value and logistics costs
Introduction
3.1 Where does value come from?
3.1 .1 Return on investment (ROJ)
3.1 .2 Financial ratios and ROI drivers
3.2 How can logistics costs be re presented?

3.2.1 Fixed/variable
3.2.2 Direct/ind irect
3.2.3 Engineered/discretionary
3.3 Activity-based costing (ABC)
3.3.1 ABC example
3.3.2 Cost-time profile (CTP)
3.4 A balanced measurem ent portfolio
3.4.1 Ba lanced measures
3.4.2 Supply chain management and the balanced scorecard
3.4.3 Supply chain financial model
3.5 Supply chain operations reference model (SCOR)
Summary
Discussion qu estions
References

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Part Two LEVERAGING LOGISTICS OPERATIONS

4 Managing logistics internationally
Introduction
4.1 Drivers and log istics implications of internat ionalisation
4.1.1 l ogistical implications of internationalisation
4.1.2 Time-to-ma rket
4.1.3 Global consolidation
4.1 .4 Risk in international log istics

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Contents
4.2

The tendency toward s internationalisation
4.2.1 Focused factories: from geog raphical to produ ct
segmentation
4.2.2 Centralised inventories
4.3 The challenges of international logistics and location
4.3.1 Exte nded lead time of supp ly
4 .3.2 Extended and unrelia ble transit times
4.3.3 Multiple consolidation and break points
4. 3.4 Multiple freight mod es and cost option s
4. 3.5 Location analysis
4.4 Orga nising for internation al log istics
4.4.1 Layering and tiering
4.4.2 The evolvi ng role of individual plants
4.4.3 Reconfiguration processes
4.5 Reverse logistics
4.6 Managing for risk readiness
4.6. 1 Immediate risk read iness
4 .6.2 Structural risk readines s
4.7 Corporate social responsibility in the supp ly chain

Summary
Discussion questions
References
Suggeste d furthe r reading

5 Managing the lead-time frontier
Introduction
5.1 The role of time in compet itive advantage
5.1. 1 Time-based compet ition: definition and concepts
5.1.2 Time-based initiatives
5.1.3 Time-based op portun ities to add value
5.1.4 Time-based opportunities to reduce cost
5.1.5 Lim itations to time-based approaches
5.2 P:D ratios and differences
5.2. 1 Using time as a performance measure
5.2.2 Using time to measure supply pipeline performance
5.2.3 Consequences when Pctlrne is greater than Dctime
5.3 Time-based process mappi ng
5.3.1 Stage 1: Create a task force
5.3.2 Stage 2: Select the p rocess to map
5.3.3 Stage 3: Collect data
5.3.4 Stage 4: Flow chart the process
5.3.5 Stage 5: Distinguish between value-addin q and
no n-value-addinq time
5.3.6 Stage 6: Construct th e time-based process map
5.3.7 Stage 7: Solution ge ne ration

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5.4

Managing timeli ness in the logistics pipeline
5.4.1 Strategies to cope when p-urne is greater tha n D ctirn e
5.4.2 Practices to cope when P-time is greater than D-time
5.5 A met hod for implement ing time-based practices
5.5.1 Step 1: Understand your need to change
5.5.2 Step 2: Understand your processes
5.5.3 Step 3: Identify un necessary process steps and large
amounts of wasted time
5.5.4 Step 4: Understand the causes of waste
5.5.5 Step 5: Change the process
5.5. 6 Step 6: Review changes
5.5.7 Results
5.6 When, where and how?

Summary
Discussion questions
References
Suggested further read ing

6 Supply chain planning and control
Int roduction
6.1 The supply chain 'game plan'
6.1.1 Planning and control within the focal firm
6.1.2 Managing inventory in the su pply chain
6.1.3 Inter-firm plann ing and control
6.2 Just-in-time (lIT)
6.2.1 The just-in-time system
6.2.2 liT and ma terial requirements planning (MRP)
6.3 lean thinking
6.3.1 The seven wastes
6.3.2 Application of lean thinking to business processes
6.3.3 Role of lean practices
6.3.4 Design strategies
6.3.5 lean product design
6.3.6 l ea n faci lity design
6.3.7 l ea n thinking summa ry
Summary
Discussion questions
References
Sugges ted further reading

7 The agile supply chain
Int roduction
7.1 The concept of agility

7.1.1 Demand characteristics and supply capabilities
7.1.2 Classifying operating environments

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Contents xi
7.1.3 Preconditions for su ccessful agile pract ice
7.1.4 Summary
7.2 Agile drivers and practices
7.2.1 Joint decision making to improve external network
integration
7.2.2 Developing measures to put the end-c ustome r first
7.2. 3 Shared goals t o improve virtua l int egrat ion
7.2.4 Boundary-spanning SOP to improve process integration
Summary
Discussion questions

References
Suggested fu rt her reading

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Part Three WORKING TOGETHER
8 Integrating the su ppl y cha in
Introduction
8.1 Integrati on in t he supply cha in
8.1 .1 Internal integrat ion: f unction to funct ion
8.1 .2 Inter-company int egrat ion: a manual approach
8.1 .3 Elect ronic integration
8.2 Efficient consumer response (ECR)
8.2.1 Category management
8.2.2 Cont inuous replenishment
8.2. 3 Enab ling technolog ies
8.3 Collabo rative planning, forecasting and replenish ment (CPFR)
8. 3.1 Benefits of electro nic collaboration
8.4 Vendor -m anaged inventory (VM I)
8.4 .1 How VM I work s

8.4.2 Potential benefits
8.4.3 Potential problems in setting up a VM I system
8.5 Quick response (QR)
8.5. 1 JITI QR relationship
8.5.2 Role of enabling technologies
8.6 Managing supply chain relatio nships
8.6 .1 Creat ing closer relatio nships
8.6. 2 Facto rs in forming supply chain relat ionship s
Su m mary
Discussion questions
References
Suggested further reading

9 Purchasing and supply relationships
Introduct ion

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Contents
9.1
9.2

Choosing the right supp ly relationships
Pa rtnerships in the supply chain
9.2.1 Economic justificatio n for partnerships
9.2.2 Advantages of partnerships
9.2.3 Disadvantages of partn erships
9.3 Supply base rationalisation
9.3.1 Supplier management

9.3.2 lead suppliers
9.4 Supplier networks
9.4.1 Supplier association s
9.4.2 Japanese keiretsu
9.4.3 Italian districts
9.S Supplier development
9.5.1 Integ rated processes
9.5.2 Synch ronous production
9.6 Implementing strategic partnerships
Summary
Discussion questions
References
Suggested further reading

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Part Four CHANGING THE FUTURE
10 Logistics future challenges and opportunities
Introduction
10.1 Internal alignment
10.2 Selecting collaborative oppo rtunities upstream and downstrea m
10.3 Managing wi th cost-to-serve to support growth and profitability
10.4 The supply chain manager of the future
Summary
Discussion questions
References
Suggested further reading

Index

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Supporting resources
Visit www.pearsoned.co.uk/harrison to find valuable o nline resources

For instructors
• Comp lete, downloadable Instructo r's Manual, containing teaching notes,
notes on case studies and teach ing tips, objectives and discussion points for
each chapter
• Downloadable PowerPoint slides of all figures from th e book
For more information please co ntact your local Pearson Education sales

representative or visit www.pearsoned.co.uk/harrison


Plan of the book

Part One COMPETING THROU GH LOGISTICS

I
Chap t er 1
logistics and the supply chain

I

Chapter 2
Putt ing the end-customer first

Chapter 3
Value and log istics costs

Part Two LEVERAGIN G LOGI STICS OPERATIONS

Managing logistics internationally

Chapter 4

Chapter 5
Manag ing t he lead-ti me front ier

Chapter 6
Supply chain planning and control

The agile supply chain

Chapter 7

Part Three WORKING TOGETHER

Chapter 8
Integrating the rupply chain

:

Chapter 9
Purchasing and supply relationships

Part Four CHANGING THE FUTURE

Chapter 10
logistics futu re chlil lenge s lind opportunities

i


COMPETING THROUGH
LOGISTICS
Our model of logi stics structures the supply network around th ree main factors: the
flow of materia ls, the flow of information and the time taken to respond to demand

from source of supply. The scope of the network extends from t he 'focal f irm ' in

darke r red at the ce ntre across sup plier and customer interfaces, and the refore typically stretches across functions, org anisations and borde rs. The network is best seen
as a system of interde pe nde nt processes, where actions in one part affect those of all
oth ers. The key 'initiator' of the network is e nd-custo mer demand on the right: only
the end-customer is free to make up their mind w hen to place an order. After that,

the system takes over.
Chapter 1 expla ins how networks are structu red. the di fferent ways in w hich they may
choose to compete, and how thei r capabi lities have to be aligned w ith the needs of
t he end -customer. Chapter 2 places the end -customer f irst in log istics thinking, and
develops the theme of aligning logi st ics strategy w ith marketing strategy. Chapter 3
considers how value is created in a supply network, how logistics costs can be managed, and how a balanced measurement portfolio can be designed.

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Time

Logistics and the supply chain

The intended objectives of this chapter are to:

• ide nt ify and explain log istics definitions and concepts that are relevant to
managing the supply chai n;
• iden t ify how supply chains compete in terms of time, cost and quality;
• show how d iffere nt supply chains may adopt different and distinctive
strategies for competing in the marketplace.
By the end of this chapter you should be able to understand:

• how supply chains are structured;
• different ways in which supply chains may choose to compete in the

ma rketplace;
• the need to align supply chain capabilities with the needs of the e nd customer.

Introduction
A car ta kes on ly 20 hours or so to assemble. and a couple m ore days are needed
to sh ip it to the custo me r via th e dealers. So why does it ta ke more than a month
for a manufacturer to ma ke and deliver the car I want? And why are the products
I want to bu y so often un availabl e o n th e shelf at the local superma rket? These
are questions t ha t go to the heart of logistics management and strategy. Sup ply
chai ns today are slow and cost ly compared with what they will be like in a few
years' time . But let us start at the begin ning, by think ing about logistics and th e
sup ply chain in terms of wh at they a re trying to do . It is easy to get bogged down
in the complexities of how a supply chain actually works (and very few people
actually kn ow how a whole supply chain wo rksl). We sha ll add ress m any of th ose
details later in this book. Plrst, let us focus on how a supply chain compet es, an d

on wh at the implications are for logistics man agem ent a nd stra tegy.
The overall aim of th is chapter is to provide an introduction to logistics, an d
to set th e scen e for t he bo ok as a wh ole. The n eed is to look ou tside the indi vidual organi satio n and to consider how it aligns with other organisations in a given
supply ch ain . This is both a strategic and a managerial task: strategic, because it
brin gs in long-term decisions about how log istics will be structured an d the sys-


4 Chapter 1 • Logistics and the supply chain

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terns it will use; managerial, because it encompasses decisions about so u rcin g,
making and delivering products and services within an overall 'ga m e p lan'.
This chapter addresses four key issues:
1 l ogist ics an d the supply chain: def initions, stru ct ure, tiering.
2 Material flow and in fo rm at io n flow: the supply chain a nd the d emand chain.
3 Competing t h ro ug h logistics: competitive criteria in the market place.
4 l ogistics strategies : a ligning capabilities across the supply chain.

1.1 Logistics and the supply chain
Key issues: What is the supply chain, and how is it structured? What is the pur-

pose of a supply chain?
Logistics is a big wo rd for a big challe nge. Let us beg in by giv ing an exam p le o f
t hat challenge in pract ice, because t ha t is where lo gistics sta rts and en ds.

Tesco
Iesc o is the UK's largest food retailer, with a sales turnover of more than € 67.5 bill ion.
While it has some 638 stores in central Europe, and some 636 in the Far East, most are
in the United Kingdom and Northern Ireland, where it has nearly 1,800. This number

has increased rapidly as rescc entered the convenience sto re market with deals such as
the Tesco Express alliance with Esso to run grocery shops at petrol stations. The product range held by the stores has g rown rapidly in recent years, and currently stand s at
65,000 stock-keeping units (skus) depending on the size of the store as resco broadens
its presence in the 'non-food' market for electrical goods, stationery, clothing and the
like. This massive range is supported by 3,000 suppliers, who are expected to provide
service levels (correct time and quantities) of at least 98.5 per cent by delivering to
Tesco within half-hour time 'wind ows'. Volumes are equ ally impressive. In a year, some
2.5 billion cases of prod uct are shipped from suppliers to the stores.
Tesco states that its core purpose is 'to create value for custo mers to earn their lifetime loyalty'. Wide prod uct range and hig h on-shelf availabil ity across that range are
key ena blers of that core purpose. So how do you maintain high availability of so many
skus in so many stores? This question goes to the heart of logistics management for
such a vast organisation . logistics is about material flow, and about information flow.
let us look at how Tesco deals with each of these in turn .
An early reform for supermarket operation was to have supp liers deliver to a d istribution centre rathe r than to every store. During the 1980s, distribut ion to reta il stores
was handled by 26 depots. These operated on a si ng le-temperat ure basis, and were
small and relatively inefficient. Delivery volumes to each store were also relatively low,
and it was not economic to deliver to all stores each day. Goods that required ternperewre-controned environments had to be carried on separate vehicles. Each product
group had different ordering systems. The network of depots simply cou ld not hand le

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Logistics and the supply chain

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the growth in volume and the increasingly high standards of temperature control. A
new distribution strategy was needed .
Unde r the 'composite' d istributio n system, many small depots with limited te mperatu re con trol facilit ies were replaced by composite d istrib ution centres (called regiona l
d istribution centres, RDCs), which can handle many products at several temperatu re

ranges. The oppo rtunity is to provide a cost-ettectfve daily delivery service to all stores.
Typically, a composite distribution centre can hand le over 60 million cases per year on
a t s -acre site. The wa rehouse build ing comprises 25.000 square metres divided into
th ree temperature zones: frozen (-2Ye), + 2°C (chilled) and + 12°C (semi-ambient).
Each distribution centre (DC) serves a group of between 100 and 140 retail stores.
Delivery vehicles fo r composite depots can use insulated trailers divided into chambers
by means of movable bulkheads $0 they can opera te at different temperatures.
Deliveries are made at agreed. scheduled times. Ambient qocds such 03$ cans and clothing are delivered through a separate grocery distribution network. which relies on a
stocked environment where o rders are picked by store. Thi$ operation is complemented
by a streteqlcany located trunking station which operates a pick to zero ope ration for
fest -movinq grocery on merchandise units that can be placed directly on the shop floor.
So much for the method of transportrnq qoods from supplier through to the stores,
but how much should be sent to each store? With such a huge product range today, it
i$ impossible fo r the individual store to reorder across the whole range (store-based
ordering). instead, sales of each product line are tracked continuously through the till
by means of electronic point of sale (EPOS) systems. As a customer's purchases are
scanned th rough the bar code reader at the ti ll, the sale is auto matically recor ded for
each sku. Cumulative sales are upd ated every fou r ho urs on jescc Info rmation
Exchange (TIE). This Is a system based on Internet Protocol that allows Tesco and its
suppuers to com municate tradi ng information. The aim of im proved co mmunication Is
to reduce response um es from m anufactu rer to stores and to ensure prod uct availability
on the shelt. Amon g other things, TIE aim s to improve processes for introd ucing new
products and promotions, and to monitor service levels.
Based on the cum ulative sales, 'resco places orders w it h its suppliers by means of electr onic data interchange (EDI). As volumes and produ ct ranges increased d uring the
1990s, food retailers such as 'tesco aim ed to destock their distribution centres by ordering only wh at w as needed to meet tomorrow's fo recast sales. For fast-m oving products
such as ty pes of cheese and washing powders, the aim is day 1 for day 2: th at is, to
orde r today what is needed for tom orr ow. For fast-moving products, th e aim is to pick
to zero in the di stribu tion cent re: no stoc k is left after sto re orders have been fulfilled
and deliveries to sto res are mad e as soon as th e produ ct is picked, wh ich increases the
stoc k availability for th e custome r. The flow of the prod uct into the d istribution centre

is broken into four w aves and specific products are delivered in diffe rent cycles th rough
the day. This means that th e same space in th e d istrib ution centre can be used several
ti mes over.
Questions
1 Describe the key log ist ics processes at

resco.

2 What do you think are the main logistics challenges in running the Tesco operation?

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6

Chapter 1 • l og istics and the supply chain

So why is Tesco gro wing in an intensely com pet itive ma rket ? It de scribes its core
pu rpose as being 'to create value for custo mers to earn t heir lifet ime loyalty'.
Loyalty is an important te rm th at we return to in the next chapter. In order to
achieve loyalty, Tesco has to und erstand custome r needs and ho w th ey can be
served. Its prod ucts must be recogn ised by its customers as represen ting outtim es, day and night. Planni ng and controlling the purchase and distribut io n of
t esco's massive product range from suppliers to sto res is o ne of logistics. Logistics
is the task of ma nag ing two key flows:
• material flow of the physical goo ds from su ppliers through the distribution
centres to sto res;
• informa tion flow of demand data fro m the en d-custome r bac k to purchasing
and to suppliers, and supply data from suppliers to th e retail er, so that material
flow can be accu rately plan ned and controlled.

The logistics task of man agin g material flow and in formation flow is a key part
of th e overall tas k of supply chain managemt.'7lt. Supply chain m an agement is con ce rned wit h managi ng the en tire chai n of processes, including raw material
supply, ma n ufacture, packaging and d istribution to t he end-custo me r. The Tesco
UK supply chain structure comprises th ree main functions:
• distribution : the operations and support task of managing Tesco's d istribution
cen tres, and th e distr ibution of products from the DCs to the associated stores;
• network and capacity plann ing: th e task of plann ing a nd implementi ng sufficient capacity in the supply chain to ensure that the righ t products ca n be procu red in the right quantities now an d in th e fut ure;
• supply chain development: the task of im proving Tesco 's supply chain so that its
processes are stable and in con trol, that it is efficient, and th at it is correctly
structured to meet the logi stics n eeds of material flow an d infor mation flow.

Thus logistics can be seen as part of th e overall supply chai n challenge. While the
term s 'logistics' and 'supply chai n managem en t' a re o ften used in tercha ng eably,
logistics is actually a subset of supply chai n ma nagem en t . It is time for so me defin ition s.

1.1.1 Definitions and concepts
A supply chain as a whole rang es from basic commodities (what is in the ground,
sea or air) to selling the final prod uct to the en d-custo mer to recy cling th e used
product. Mate rial fl ows from a basic com modity (such as a bauxite m in e as' a
source of alu min ium ore) to th e finis hed product (such as a can of cola). The can
is recycled after use. The an alogy to the flow of water in a river is often used to
describe organisations near th e source as upstream , a nd those near the end-ensta mer as downstream . We refer to each firm in a su pply chain as a partner, because
th at is what they are. There is a collect ive as well as a n ind ividual role to play in


logistics and the supply chain

7

the co n version of basic commodity into finish ed product . At each stage of the
co n version , th ere may he returns wh ich could be re ject mat erial fro m the preceding firm, or waste like th e finished ca n that needs to be recycled.
A supply ch a in is a netwo rk of partners who conecuvety convert a ba ste co m m od ity (upstream) into a finished produce (d o wnst rea m) that is valued by e no -custornerc , and who manage returns at each stage.

Each pa rtner in a supply cha in is responsible directly for a process that adds value
to a product . A process:
Tra nsform.. Inputs in the fo rm of ma teria ls and infor mation into O"tp"ts in Ih e
fo rm of goods a nd services.

In th e case of the cola can, pa rt ners carr y o ut processes suc h as mi ni ng, transportat ion , refining a nd hot rolling. The col a can has grc(/ter VIIJlle th an the ba uxite (per kilog ram of aluminium).
Supply chain management invo lves pill/millS and cot/trolling all of th e processes
from raw material product io n to purchase by th e en d-user to recycling of the
used cans. I'lanni ng refers to making a plan that defi nes how much of each product should be bought, made, dlstrtbuted and sold each da y, week o r month.
Co n tro lling means keeping to plan - in spite of the ma ny problem s that ma y get
in the way. The aim is to coordinat e pla nning and control of each process so that
the needs of the end-customer a re met correctly, The definition of supply chain
managemen t used in this book is as follows:
Pla n ni ng a nd controlling all of the b ustness processes - from end-custo mer to raw
material supplie~ - that link together partners in a supply chain in order to serve
Ihe needs of the end-customer,

'Serve the needs o f t he e nd-c us to me r' ha s differe nt im plications in d ifferen t contexts. In no t-for-profit enviro nments such as public health an d local gover nment, serving implies 'cont inuously improving', ' better than ot her
regions/cou nt ries', ' best value' a nd the like, In the com mercial sector, serving
im plies 'better t han competition ', 'be tt er val ue fo r money' and so on. In either
situation, the focus of managing the supply chain as a whole is on integrating th e
processes of supply chain partners, of wh ich the end-customer is the key on e. In
effect , the end-cus tomer starts t he whole process by buying fin ished products. It
is th is be haviour that causes ma terials to fl ow th rough the supply cha in
(Gatto rna, 1998: 2).
The degree to which the end-custo mer is satisfi ed with the finished product

depe n ds cruci ally on the managem ent of material flow and in form ation fl ow
a long the supply chain. If delivery is late, or the product ha s bits missing, the
whole supply chai n is at risk from co mpe tit o rs who can perform the log istics tas k
be tter. Logistics is a vital enabler for suppl y chain managem ent. We use the following definition of logistics in this book:
T he task of coord inati ng materia l flow and information flow a cross the su p ply
chain .

Log istics ha s bot h strategic (long-te rm pla nning) and ,muws".r;" l (sho rt- and
medium-term planni ng an d con tro l) aspects. Tesco has a clear view about the


8

Chapter 1 • Logistics and the supply chain
opportunities he re. A breakdo wn of costs in Tesco's part of the UK supply chai n
is as follows:
• Supplier delivery to Tesco d istribution centre (DC)

18%

• Tesco DC operatio ns and delive r to store

28%

• Store repleni sh ment

46(Jo6

• Supplier repleni sh ment syste ms

8%

Near ly ha lf of supply chain costs are incurred in-store. In orde r to red uce these
in-store costs, Tesco realises tha t t he solutio n is 'to spe nd more ups tream and
do wns trea m to secure via ble tra de-offs fo r in -store replen ish me n t'. If a prod uct is
n ot available on the she lf, the sale is potentially lost. By in tegra ting ext ernal
manufact uring and dist ribution processes with its own, Tesco seeks to serve the
needs of its customers better than its com petitors.

1.1.2 Supply chain: structure and tiering
Th e conce pt of a supply cha in suggests a series of processes lin ked together to
form a chain . A typical Tesco supply chain is formed fro m five such links.
Material flow

!~

.

Dairy cooperative

Figure 1.1

~
Cheese factory

0,,",'1«I 11,1
,11'1",.
Natio nal DC

Information flow

~ ........ ~ ",,-

Retailer DC

!

,I

Retailer store and
end-customer

•

From cow to custom er

Here, mil k is produced by a da iry cooperative and shi pped to a cheese facto ry.
Once made, the cheese is shi pped to the ma n ufacturer's natio nal distr ibu tio n
cen tre (NDC), where it is stored and ma tured for nine months. It can then be
shi pped in response to an order from the retailer, and is transporte d first to the
retailer's regio nal distri bution cent re (ROC). Fro m there, it is shi pped to store.
Looking at the arrows in Figure 1.1, ma terial flow s from left to right. Info rmation
is shared acro ss the cha in : it is demand from the end-c ustome r th at m akes the
whole chain work .
If we loo k more close ly at wh at h appen s in pract ice, the term 'supply chain' is
some wh at misleading in that t he 'c ha in' represe nts a simple series of links
between a basic com modity (m ilk in this case) and a fina l prod uct (cheese). Thus


Logistics and the supply chain 9

the cheese ma n ufacturer will need packaging materials such as fi lm, labels and
cases. Cheese requi res ma teria ls additional to m ilk in the ma nufacturing process.
So the manufacturer deals with suppliers other tha n the m ilk cooperative alon e.
Once ma de, the che ese is dispatched for ma turation to the supplier's NDC, and
then dis patched to man y custome rs in add ition to Tesco. Once at a Tcsco RDC,
the 'chain ' spreads again because up to 100 stores are serve d by a given RDC. The
add itional complexity prompts many auth o rs to refer to supply networks rather
tha n to supply chain s, a poi nt we return to sho rtly.

•Second tier

Downst re am

Upstream
First tier
su pplie rs

su pp liers

First tier
cus tomers

•

Second t ie r
cu sto mers

Focal
firm

•

BUY SIDE

INSIDE
SUPPLY CHAIN MANAGEMENT

•

SELL SIDE

•

•

Figure 1.2 Supply network
(SO urce Afte r Slack et 01., 199 7)

A more realistic representatio n of the supply chain is sh o wn in Fi gure 1.2,
where each lin k can conn ect with several ot he rs. A [oca! firm is shown at the
cent re of man y possi ble co nnections with other supplier a nd cust o mer
co mpan ies.
Th e supp ly chain can be seen in th is diagram as a nu mber of processes that
extend across orga nisati o nal hounda ries. The focal firm is embedded within the
cha in, and its operation al processes ('inside ') must coord inat e with ot hers that
arc part of the same cha in . Materials flow from left (upstream, o r ' buy side ') to
righ t (downs trea m, or 'supply side'). If eve ryt h ing is as order ly as it seem s, then
o nl y the end-custome r (to t he extreme right of the chain) is free to place orders
wh en he o r she likes: after that, the system ta kes over.
Th e supply chain ts tiered in that supply side and dema nd side can be orga nised into groups of par tners wit h which we deal. Thus if we place an assembler

suc h as the Ford plant at Va lenci a as the focal fi rm, bu y side co mprises tie r I suppliers of ma jor pa rts and subassem blies who de liver direct ly to For d, wh ile tier 2
suppliers deliver to the tier Is, etc. On the sell side , Ford su pplies to the natio nal
sales co mpan ies as tier 1 custome rs, w ho in turn su pply to main dealers as tier 2,
a nd so on.


10

Chapter 1 • logistics and the supply chain

Other te rms that are use d to de scribe aspec ts of managing t he supply chain a re:

• Purchasing and supply deals wit h a foca l fi rm 's immediate suppliers (upstream ).
• Physical distribution deals wit h the task of dis tributing products to tier 1 cu stomers (dow ns tream).

• Logistics refers to ma nagement of materials and informatio n . Inbound logistics
dea ls with lin ks between the focal firm and its upstrea m (' bu y side') suppliers,
while outbound logistics refers to the links between the focal firm and its
downstream ('sell side ') custom ers.
Supply chain management thus appears as th e 'end to end' (or 'cow to customer'
as we have ex pressed it in Figure 1.1) management of the network as a whole,
and of the relati onships between the various links. The essential points were
sum marised lo ng ago by Oliver and Webber (1982):
• Supply chain managem ent views th e supply chain as a single entity.
• It deman ds str ategic decision making.

• It views balancing inventories as a last resort.
• It demands system integration.

A natural extension of this th in king is that supply chain s should rather be viewed

as networks. Figure 1.3 shows how a foca l firm can be seen at the centre of a networ k of upstream and downstream organisations.

figure 1.3

A network of organi sat ions

The terms 'supply chain ' and 'supply network' both attem pt to describe the
way in which buyers an d suppliers are linked together to serve the end-customer.
' Netwo rk' describe s a more co mplex structu re, wh ere orga n isati ons can be crosslin ked and there are two-way exchanges between the m ; 'chain ' describes a simpler, seq uential set of lin ks (Harland et al., 2001 ). We have used the terms
interchangeably in this book, preferring 'chai n' to describe simpler sequences of
a few organisations and ' network ' where there are many o rganisations linked in
a more complex way.
Figu re 1.3 takes a basic view of the ne twork, with a focal fum linked to three
upstream suppliers and three dow ns tream customers. If we then add ma terial fl ow
an d in form atio n flow to this basic model, and place a boundary around the network, Figure 1.4 shows the network in context . Here we have added arrows showing the logistics contribution of ma teria l an d in for matio n flows, togeth er with the


Logistics and the supply chain

11

time dimension . Material flo ws from pr imary manufacture (fo r example farming,
mining o r fo restry ) thro ugh various stages of the network to the end-customer.
Material fl ow represen ts the supply of product th rough the network in respo nse to
demand from the next (succeedi ng) o rgan isation. Inform atio n flow broadcasts
demand from the e nd-customer to preceding o rgan isations in the network. The
time dimension addresses the q uestion 'H ow long does it take to get from primary
source to the end-custome r?' That is, how long does it take to get product through
the variou s stages from o ne end of the supply chain to the o ther? Time is im portant because it measures how quickly a given network can respond to de mand
from the end-customer. In fact, the co nce pt of flocv· is based on time:

Flow measures the quantity of material (measured in input terms such as numbers of
components. tonnes and litrcs}th at passes through a given network per unit of time.

]

•
E

Material flow (supply)

•E

••

~
u

~

E

•
~c

E

•is.•

•E

0

•

• ~•E
,
• .,;

Information flow

•• •

u

~

Figu re 1.4

c

~

~

"
-a
~

• .,;,

c

nm~

~

The network in context

::iii[!D

I

I

wbeet

i-+-

flour

Praline

r

Wate rs

Chocolate

Creamery
(m ilk)

Figure

~

Prin ted
materia ls

t
Confectionery
manufactu rer

COC~

beans

f-

Sugar

Packing

Aluminium

l
""

Vegetable
oil

1.S Example of a confectionery network map

(SOurtt : Atter lheng et 01., 1998 )

I

,

Fibreboard

Multiple
reta ilers

t
whoresejers

End
customers

Others

(hospital, etc.

COC~

butter

lecithin

Emulsifiers,
salt. etc .

12

Chapter 1 • Logistics and the supply chain

Figure 1.5 shows an example network map of a chocolate bar. Draw a network map showing
how your organisation, or one that you know well, links with other organisations. Explain the
upstream and downstream processes as far as you can. We expect you to address at least the
fi rst tiers of demand and supply. You will derive further benefit from researching add itional tiers,
and by develo ping t he linka9f> of rf>lilfin o..hip.. that i.. involved . Expla in how these work in practice, and how materials flow between the different tiers.

An important po int here is that the supply network should be viewed as a system.
All processes withi n th e network need to be understood in terms of how t hey
inte ract with ot her processes. 1'\0 o rgan isation is an island: its inpu ts and outputs
are affected by th e behaviou r of other players in th e networ k. One powe rful, disruptive playe r can make life very di ffi cult for everyone else. For example, several
auto assem blers opti m ise t heir own processes, but disrupt those of up st ream suppliers a nd downstream dist ributors. The effect is to increase tot al system costs ami
reduce responsiveness to en d-cus tomer deman d .

1.2 Material flow and information flow
Kq issue: What is the relationship between material flow and information flow?

As ,..'e have already seen , logistics is about managi ng materia l flow and information flow, In thi s section, we exam ine material fl ow and information flow in
more deta il.

1.2.1 Material flow
The aim wi th in a su pply chain must be to keep materi als flowing from sou rce to
end-custome r. The tim e di me ns ion in Figure 1.4 suggests th at part s arc moved
through t he supply cha in as qu ickly as possible. And in orde r to preven t local
build-u ps of inve nt ory, flow mus t be orc hestrated so that parts move in a coordin ated fash ion . The term often used is synchronous. Cater pillar Inc. makes cornplex earth-moving equ ipment, a nd t here a re literally thousands of componen t

part s and subassemblies th at must come together in the final assembly p rocesses.
The vision is th at par ts and subassemblies should fl ow continuously through the
sup ply chain, all orc hestrated like a ballet (Knill, 1992: 54):
\

TIle goa t ls continuous, synch ronous 110w. Continuous means no tnterruptfons. no
dropping the ball, no unnec e\..\ar)· accumulations of In ventory, And sync h ro nous
means that it a ll runs like a ballet. Parts a nd componen ts a re c euvered on lime, in
the proper sequence , exactly to th e point they're needed.

Often it is difficult to see the 'end to end' nature o f fl ow in a given supply cha in .
The negative effects o f such difficulty include build-u ps of in ven tory a nd sluggish


Material flow and information flow

13

respo ns e to end-cus tomer dema nd. And sheer greed hy the m o st powerful members o f a su p ply chain often means that it is we aker part n ers (notably sma ll to
medium-sized en te rp rises - SMEs) who end up h oldi n g the in ven to ries. So m an agement strategies fo r the su pply ch ain require a more holistic look at t h e link s,
and an u n derstanding that organ isational boundaries eas ily crea te ha rriers to
flow.
Case st udy 1.2 d escri bes how o ne co m pa n y - Xero x in t his case - re-e ngi neered
m aterial flow in it s distribution system.

Xerox
Once the problems of introd ucing 'just-in-time' prod uction systems had been solved at
t he Xerox plant making photocopiers at Venr ay in Holland, attention shifted towards
the finished product inventory. Historically, stocks of finished prod ucts had been ' managed' by trying to turn th e tap of sales on or off as stocks developed . This was characte rised by the familiar 'feast or famine' situations. The objective of the next move for
Xerox became clea r: making only what you need when you need it, then shipping

d irect to th e custo mer. But the key question had to be answered: just-in-time for what?
The answer is - th e end-customer. And custo mer surveys showe d that three types of
de livery were needed:
•
•
•

Com modity products should be delivered 'off th e shelf'.
Middle-ran ge products were required in five days.
Larger products that had to be integ rated into existi ng custo mer processes and systems had to be planned months ah ead : but the quoted delivery date had to be met
100 per cent.

It was envisaged t hat this would lead to a radically d ifferent inventory 'p rofile' in the
supply chain. Figure 1.6 shows a traditional inventory profi le on the left. Most of the
stock was held in local depots waiting for customer orders. If the mix had been incorrectly forecast, too many of the wrong products were in plentiful sup ply, wh ile needed
products were unavailable. Further, a batch of replacement products would take a long
time to fight their way through the pipeline. A new 'just-in-time' strategy was conceived to make the supply chain much more respon sive. This strategy had a profound
effect on t he inventory profile, push ing much of the inventory away from the end -customer (where it has maximum added value and is already committed to a given finished prod uct specification). Instead, inven tory was mostly held furthe r upstream,
where it co uld be finally assembl ed to known orders, and where it had lower value. Of
course, it has since been possible to remove several of the stages of the distribution
process, thereby eliminating some of the sources of inventory altogether.
For commodity products, Xerox coined t he te rm deliver jlT: tha t is, t he product had
to be de livered out of stoc k. Where sales forecasts are traditionally poor, the challenge
was one of flexibility, simplicity and spee d of manufacture. Fo r mid-range products, it
was unrea listic to hold 'just in case' inventories of products tha t are too com plex to be
assem bled quickly. Instead, finish JI T was the term coined to describe the new policy of
building semi-finished products with the minimum of added value, consistent with
being able to complete and deliver the prod uct in the five-day ta rget. Finally, build JIT

14

Chapter 1 • Logistics and the supply chain

was the term used to describe the new philosophy of buildi ng larger prod ucts quickly
within a defined lead time.
Tradi tiona l

Inven to ry loca t ion :

Just -in -tim e

Custome r

Local depot
National depot
International depot

-

WIP at Xerox

-+
Days of
stock

Parts sto res
In tran sit

Days of

WIP at sup plier

stock

Inventory
position

!

Supplier
Inflexible

Flexible

Note: WIP '" wo rk in progress, i.e. products being worked on, but not yet ready for sale.
Shaded areas ind icate day s of stoc k.The w ider the area, the m ore days of stoc k in that pos ition.

Figure 1.6

Xerox : th e impact on inventories

The impact of the new build philosophies on the downstrea m supply chain processes
can be judged from Figure 1.6. Whi le the traditional inventory profile shows a maximum number of days of stock (shown in the shaded area) at finished product level, this
is risky. It always seems that demand is greatest for the very items that are not available!
Postponing the decision on exact specification until as late as possi ble in the process,
when we are more likely to know precisely what the end-customer wants, helps to
create the much flattened inventory profile to the right of the diagram. These are issues
to which we return in Chapters 6 and 7. (A development of this case, tracki ng 'what
happened next', is Case Study 7.12.)

(Soorce After Eggleton, 1990)

Questions

How did inventory reduction in the supply chain lead to improved competitiveness
at Xerox?

1.2.2 Informat ion f low
As asked in the Xerox case study, just-in -tim e for whatl It is all we ll and good to
get mat erials flowing a nd mo vements synchro nised, but the 'supply orc hestr a '
needs to respo nd in unison to a specific 'co nd uctor '. The 'co nd ucto r' in th is a nalogy is actua lly the end-c ustomer, and it is the end-cu stomer's dema nd signa ls
that t rigger the su pp ly chain to respond. By sharing the end-custo mer demand
information across the supply cha in, we create a demand cnain, directed at providing enhanced cus tomer value. Informa tio n tech nology e nables the rapid
sha ring of deman d and supply dat a at in creasing levels of detail and soph isti cation . The aim is to integrate such de ma nd and supply data so that an increasing ly accu rate pict ure is obta ined about th e nature of business processes, markets


Competing through logistics 15

and end-customers. Such integration provides increasing competitive adva ntage,
as we explore further in Chapter 8.
Th e greatest opportunities for meeting demand in th e marketplace with a
max im um of dependabilit y and a minimum of inventory come from imp lementing such integrat ion acro ss the supply chain . A focal firm can not become
'wo rld class' by itself!
Figure 1.7 gives a conceptua l model of how supply chain processes (supply,
source, make , dist ribute and sell) are in tegrated together in order to meet endcustom er de mand (Beech, 1998). Demand signals are shared across the chai n
rat her than being inte rpreted and massaged by the 'sell' process nex t to th e
mar ket. Demand fu lfilment is also envisaged as an integrated process, as
mat erials are moved fro m one process to th e next in a seam less flow. Inform ati on
is th e 'glue' that hinds the supply chain processes together.

I

Demand sign al

Supply

Source

Make

Distribute

Demand response

Sell

•

Demand fulfilment

Figure 1.7

Integ rating deman d and supp ly chains

(Source: Afte r Beech, 1998 )

Activity 1.2
Write a brief (200 words) appraisal of mater ial and information flow in the supply netw ork affecting one of the major products in the response you gave in Activity 1.1 . Perhaps the curren t situation is different from t he above ideals?

1.3 -Competing through logistics

Key issues: How do products w in orders in th e marketplace ? Ho w does logistics

contribute to co m p etit ive advantage?

There are ma ny potentially co nflicting demands on an organisation today. All
th ose unreasonable customers seem to want it yesterday, at no cost , and to be
compensated if it goes wro ng! Within a given supply chain, it is important th at
each organ isat ion u nderstands how each group of pro ducts competes in the marketplace, and th at it aligns its capabilities with t hose of its partners.
A ' product ' is actually a combinat ion of the pllY~ical product (for example, a
200g pack of Camembert cheese ) and its accompany ing service (for example, how
it is merchandised in th e store - easy to find, availability, att ractive presen tation,


16

Chapter 1 • Logistics and the supply chain

lighti ng, tem peratu re). Wh ile the ph ysical product is determ ined by marketi ng
and R&D, service is heavily influen ced by logistics.
It is impossible to be ou tstanding at everyth ing, and supply chain pa rtners
need to give priority to capabilities that give each product grou p its co mpetitive
edge . These are the advantages where supply chain pa rtners 'dig in deep' by
giving priority to investme nt by training and by focusi ng product development
and marketing efforts. They need on ly to ma tch in dus try average performance
on other criteria. Let us now look at the competitive priorities that can be delivered by logistics in th e su pply cha in.
There are var ious ways in wh ich products compete in th e ma rketplace. Perhaps
a given prod uct is some thing th at no one else can match in terms of price. Or
m aybe you offer a product that is tech n ically superior, such as Gillette razor
blades. Wh ile new product develop me nt h as logistics implicati ons, th e key
advan tage provided by logistics - as suggested in th e Tesco example in sectio n 1.1

- is availability of conforming product ill the marketplace at low cost. Logistics supports competitiveness of th e supply ch ain as a whole by:
meeting e nd-c usto mer demand throu gh supplying w hat is needed in t he form it is
needed , when it is n eeded, at a compettnve cost.

Logistics advantage thu s shows up in the form of such co mpetitive factors as
better product availablllty in th e marketplace and low prod uct obsolescence.
Defining logistics advantage means that we need to set goals that a re clear, measurable and quantifiable. We distingui sh three 'ha rd objectives' for creati ng logistics advantage: quality, time and cost. There are two further im po rtant ways of
creating logistics advantage: controlling variability in logistics processes, and dealing with uncertainty. We have called these 'supportive capabilities', and they can
be just as important as ha rd objectives. Finally, there are 'soft objectives', whic h
relate to service aspects such as the confidence customers develop in the way the
logistics operation is performed. Let us loo k at eac h of these ways of creat ing
adva ntage in turn.

1.3.1 Hard objectives
Traditional ways of competing a re to offer t he end-cus to me r advan tages related
to product quality, th e speed with whi ch it is delivered, an d/or the price at which
it is offered. We refer to quality. tim e and cost as ' hard obj ecti ves' becau se th ey
are easy to measure a nd relativ ely obvious to th e end-custo me r.

The quality advantage
The most fundamental objective - in that it is a founda tio n for the others - is to
carry out all processes across the supply chain so that the end product does what
it is supposed to do. Quality is the most visible aspect of supply chain performance . Defects, incorrect quantit ies and wrong items delivered are symptoms of
quality problems in supply cha in processes that are all too ap pa rent to the endcustome r. Such problems negatively in fluence that custome r's loyalty. Robust


Competing through logistics

17

processes are at th e heart of supply chai n pe rfo rman ce. In tern ally, robu st processes hel p to reduce costs by elim ina ting erro rs, and help to increase dependability by ma king processes more certa in.
While conformance Quality in the factory may be contro lled to de fect levels
tha t are below 25 par ts pe r m illion (ppm), a product may end up on the retailer's
shelf with bet wee n 2 an d 5 per cent defects, which is 10,000 to 20,000 pp m. Th is
h uge escalation takes place as the result of cumulative problem s in successive
supply cha in processes. Cases may be squashed whe n sh rin k-wrapped at the
manu fact urer's Nne. In the back of the retail store, cases may be cu t open with
a sha rp kn ife - in spite of instructio ns to the contrary, Th e end-customer sees the
prod uct o n the retail shelf at its wurst state of quality pe rfor ma nce , a nd tha t is
where the buying decision is mad e tha t d rives the su pply chain as a whole.
In many logts tlcs situa tions, q uality of scrvtce is about selecti ng the righ t quantity of the right product in the right seq ue nce in respo ns e to cu stomer o rde rs. Fo r
exam ple, sto re o rders must be picked from a range of thousands of skus (stoc k
keeping unit s) at a I esco RDe. Th is must be carried out accurately (co rrect sku,
correct quantity) against tight de live ry schedules day in day out. Pick accuracy (for
example, 99.5 per cen t correct sku a nd correct q uantity) is wide ly used to
measu re the qu ali ty of this operati o n . And in crea sing req uiremen ts for in-store
efficiencies mean that categories of product (for example, sham poos and toothpas tes) nee d to be pic ked in a set seq ue nce to facilitate di rect-to-shelf delivery at
the store. Lo gistics service providers wh o ca n im plement and maint ain the highest standards of service q uality place them selves at an advantage over those who
cannot.

The time advantage
Time measures how lo ng a custome r has to wait in o rder to rece ive a given prod uct or service. Volkswagen call s this time the Cll5tomer to customer lead time: that
is, the time it ta kes from the moment a customer pla ces an order to the moment
t ha t custome r receives the car he o r sh e spec ified. Suc h lead ti mes ca n va ry from
zero (the product is im med iately availab le, such as goods on a supe rmarket shelf )
to mo n ths o r years (suc h as the co ns truction of a new build ing). Co mpeting on
time is about survival of the fastest!
Time can be used to win orders by co mpa nies who h ave learned that some custo mers do not wan t to wait - and are prepared to pay a premium to get what they
, want q uick ly. An example is Vision Express, which offers prescription spectacles
'in about o ne hour'. Tech nicians machine lenses from blan ks o n th e prem ises,

Staff are give n in centives to ma intain a 9S pe r cen t service level aga inst the o nehour target. Vision Express ha s been successful in the marke tplace by re-engtneertng the supply cha in so that pa rts a nd information can flow rapidly from one
process to the nex t. Co mpare thi s wit h o the r o pticia ns in the high street, who
m ust send customer orders to a cen tral fact o ry. Un de r the ' remo te factory'
system, o rde rs typically take about 10 days to process. An individu al custome r
orde r is first dispatched to the factory. It then h as to join a q ueue wit h orders
fro m all the ot he r high street branc hes arou nd the country. Once t he o rder has
been processed , it must ret urn to the bran ch that raised the o rde r. While this ma y