- Logistics and Supply Chains
- Development of Logistics
- Logistics Strategy
- Implementing the Strategy
- Integrated Supply Chains
- Global Logistics
- Locating Facilities
- Capacity Management
- Controlling the Flow of Materials
- Inventory Management
- Warehousing and Material Handling
- Measuring and Improving Performance
- Supply Chain Risk
Each example ends with a question. These are meant to get readers thinking about the example, rather than skating over them as interesting sidelines. For instance, the first example is from Tesco. This is one of the world’s leading retailers but it is easy to forget that its success comes from its efficient use of logistics. Obviously, there is no right or wrong answer to the questions, but they can give a starting point for discussions.
Tesco is a huge international retailer whose core business is to buy goods from suppliers and sell them on to customers. This simple statement covers the complex supply chains that link thousands of suppliers, delivering hundreds of thousands of different products, through thousands of stores and on to millions of customers. The potential problems with this kind of operation are obvious – as the whole process relies on each of its millions of daily transactions going without a hitch. If anything happens to even a single transaction, the consequences can be at least ‘serious’.
Tesco’s Website and publicity material show what its logistics achieves. Some common aims for retail logistics are to:
- Keep a wide range of products to allow customer choice
- Keep items on the shelves so that they are available to buy
- Do not keep too much in stock as this increases costs
- Do not keep products in stock for long, as things go out of date
- Have efficient logistics that minimise costs and keep the stores competitive
- Have fast reliable deliveries with short lead time
- Reduce waste and packaging
- And a whole series of other aims
Listerine is a fairly simple product and its supply chain seems straightforward. There are essentially of three merging streams of raw materials that are collected from around the world at processing plants, and then the finished products are distributed around the world. Although the principles seem simple, the reality is a complex logistics problem involving major movements of materials through many organisations and over long distances. Although no supply chain can be described as ‘typical’ Listerine’s has features that are common to many products.
If we wanted to do a more detailed analysis of the supply chain we would certainly need more details. For this we would have to look at the detailed journeys of the materials involved.
It may seem extravagant to mention two retailers in the first chapter, but these are major users of logistics - and it is easy to imagine the type of operations they perform. In this case, Wal-Mart is the world’s largest retailer, and it achieved this position very quickly by delivering things that people want – and giving a classic example of efficient logistics. The raw figures suggest the scale of operations at Wal-Mart. If each of its customers buys only a small basket of goods (and if you go to any of their stores you can see that they generally buy much more than this) the company has to faultless collect, process and deliver several billion items a week. Many companies are in complex supply chains, but Wal-Mart must have one of the world’s biggest and most challenging logistics operations.
The purpose of this example is to describe some of the activities in a supply chain and suggest the times involved. Here it takes 365 days to move from fibres in a cotton field to products delivered to customers, and of this only 48 days seems to be taken by manufacturing stages, and 317 days by logistics. In reality, even this view is rather optimistic. To take a single element, ‘sewing components to form garments’ is described as taking 14 days – but the actual work involved is likely to take only a few minutes. The rest of the time, materials spend waiting around for something to happen (described as ‘work in progress’). This is a common finding, and most materials spend far too much time in their supply chains. When logistics managers look for greater efficiency, removing these stocks should be a high priority.
In this company two areas of logistics, warehousing and transport, contributed 19% of the cost of sales. If we add other elements of logistics, the result might be considerably more than this. As you would expect from a wholesaler, the logistics costs are probably a bit higher than ‘usual’ but certainly not out of the ordinary. A rule of thumb suggests a figure of logistics costing for 20% of the cost of sales.
The reason this is rarely known with accuracy is simply that prevailing accounting conventions use different categories for costs. Then costs of, say, work in progress are rarely identified as logistics, but might be assigned to part of processing, an investment, an overhead, an asset, part of purchasing, or some other classification.
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This mentions some work that has been done to identify the main concerns of logistics managers. A lot of work has been done in this area, and you can find similar surveys. The results quoted here do not mention aspects of customer service, which is probably because of the way the survey was run. The concerns mentioned are not a surprise, and we could easily compile a list of expected concerns. However, an interesting point is the hint that little progress is actually being made to overcome the concerns. For instance, integration is considered important, but there is actually far less integration of supply chains than you might expect (as discussed n chapter 5). This suggests that a lot of progress has been made in logistics, but there is still a lot more to do.
First Great Western
Managers in general spend a lot of time saying that their main concern is customer satisfaction. However, these are often hollow statements that are they are expected to repeat, rather than actuality. Many organisations actually treat their customers very badly, as you can see with UK water companies, local government in general, and many other companies. This example is based on First Great Western, whose publicity material says how much they value their customers, while the reality is somewhat different. This is also the company who were getting so many customer complaints a few years ago, that they controlled the number by reducing the time that their complaints offices worked. Unfortunately, it is easy to find organisations who seem to give little concern for customers.
This is a classic example of a company that has succeeded by responding to its customer needs. Its operations are designed to respond quickly to changing customer requirements, so it emphasise its agility. However, it makes the point that leanness and agility are not mutually exclusive, and most organisations need a mix of the two. Here standard items are largely met by lean operations, while those with shorter shelf life are supplied with more agility. Many other organisations use similar principles, but Zara is one of the most successful large companies.
Pharmaceutical supply chains
Business process re-engineering grew largely from the recognition that IT was automating existing processes, but it was rarely redesigning them. Then inefficient operations suddenly had new information flows, but they remained essentially inefficient. Re-engineering said that managers should grasp the opportunity to use technology to redesign operations and make major improvements. This illustration shows an example of this, where health services have spent billions of pounds improving their information systems, but they have kept the same operations. With more imagination they could have replaced outdated practices with efficient new ones.
Formats for online grocery shopping
For many years e-business has been growing dramatically, and people have been forecasting the demise of traditional businesses. To some extent this is actually happening, as traditional book shops, music stores, banks, cinemas, insurance companies and travel agents have been affected. However, this movement has not always been smooth. Many firms thought that home delivery services would soon reduce shopping in supermarkets, but early companies did not get the right format and soon went out of business. The most successful company is Tesco which organises its home delivery service alongside its existing supermarket operations.
Deutsche Post World Net
This example shows how a company that started as a traditional state-owned postal service has transformed itself in recent years. It has grasped the opportunities to expand from delivering mail, to move into express parcels, logistics and then into related banking. And its operations are still developing to become global and increasingly based on the flow of information. This is a company that has clearly evolved over time, in contrast to some others that are not taking the opportunity to change.
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Logistics is changing quickly everywhere, but in central and eastern Europe there have been even more significant changes since 1990 when economies started to move from central planning and government control towards market economy models. In most countries transport was run by the government, and is still emerging in its new form. This brings both challenges (of overcoming historical thinking and introducing completely new operations) and benefits (of not following mistaken paths and starting from scratch with the latest methods).
Here the company has clearly defined strategies, only a small part of which are mentioned. Clearly this is a logistics company so their strategies emphasise logistics. You would expect other types of companies to emphasise other types of operations, but acknowledge the contribution and strategic role of logistics.
The Emirates Group
A logistics mission serves the same purpose for logistics as a corporate mission serves for the whole organisation – it gives the overall direction, purpose, business philosophy, and so on. However, for a variety of reasons, logistics missions are far less common. This example shows the aim of logistics in one organisation. It gives a simple statement that says exactly what the supply chain sets out to achieve.
There are no rigid procedures for designing strategies but many analyses can give useful information, especially the universal SWOT analysis. This example outlines the attempt of one organisation to align its operations with customer requirements. There is very limited information from part of an environmental scan, which suggests that the proposed strategy (very fast delivery) would not match the main customer requirement (next day delivery). Of course, the company could argue that its policy of exceeding customer expectations will be successful, but they would need more evidence to support the extra expenditure.
The Schenker Group
Schenker is a major international company that offers integrated logistics services. Like all companies, it recognises that it cannot simply say, ‘we will do everything well’ so it focuses on certain aspects of operations. In particular, it concentrates on customer satisfaction. Its decisions reflect this emphasis. For instance, you can imagine a choice between opening new facilities to meet increasing demand or using transport from existing facilities – and Schenkers choice will depend on their customers’ preferences. Other logistics companies have other foci.
Aluminium drinks’ cans
This is a classic example from Womack et al in their support for leanness. However, follow-up work suggests that it a standard pattern, and most supply chains consist of short bursts of activity within a general context of materials sitting and waiting for something to happen. Some of this time cannot easily be reduced – such as the time spent in a shop waiting for customers to buy. But other time can be saved and a lot of effort has been put into moving materials more quickly through chains – such as the progress in ECR, time compression, parallel processing, etc.
David Hamilton Pharmaceuticals
The aim of pharmaceutical wholesalers is to have goods available when customers want them – so their strategy is based on a mixture of stock availability, fast delivery, no mistakes and generally high customer service. The implication is that they are less concerned with costs, economies of scale, productivity, etc. However, the logistics aims have to be seen in the context of general commercial operations, where the company want to be profitable, make a reasonable return for shareholders, remain competitive, and so on.
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Implementing a strategy means translating the principles it describes into jobs that are done. This example introduces this idea of implementing a strategy in a car rental business. A simplified view has car rental companies following the example of airlines (and Porter’s advice) and either adopting a full service approach and emphasising their service, or an economy option that gives a lower cost basic service. The company looked for a middle ground. Although this seems sensible, experience suggests that it is difficult to turn this into a success. The problem is that customers see it as offering ordinary products at ordinary prices, and they are tempted away for the more attractive products or prices.
To implement their strategy, the company would have to do all the things needed for a car rental business. They would find locations for offices (based on their approach of compromising service and costs), buy cars (likely to be mid-range), advertise their services (in appropriate ways), and so on.
Implementing the strategy – or performing operations in general – is inevitably difficult. If it were easy then more organisations would be able to work well. This example gives some of the difficulties identified by one successful supermarket. Every other company could do a similar study and list its most pressing difficulties.
When you start looking at a supply chain it inevitably becomes longer and more complex than you imagine. For instance, most of us imagine shoes being made in a factory, and sold in a shop; but the reality is more complicated. This example suggests this complexity without going into the details. In reality the distribution chain in ShoeRight is neither particularly long nor complicated.
Ralston Energy Systems
There is no single ‘right’ strategy or implementation of it. And conditions are constantly changing, so that even a good strategy has to be monitored and updated. The example shows one step in the evolution of a supply chain at Ralston. Logistics had worked well, but weaknesses were becoming more apparent as the company developed its operations and its business environment changed (remembering that the Czech Republic went through major economic changes after 1990 when it changed from a centrally planned to free market economy). The weaknesses of logistics in Ralston became too severe and managers made changes that gave considerable improvements. Of course, they could have made other changes that brought benefits. However, the key point is that even the new operations are only temporary, as things will continue to evolve – and managers will soon have to adjust the strategy and its implementation.
This example shows how one company was working with a successful distribution system, but as circumstances evolved it needed to update operations. Its new practices brought considerable benefits. This does not mean that the previous logistics were a mistake, it only means that things had changed. At some point in the future, the new arrangements will have to be adjusted again.
Accounts payable at Ford
This is one of the classic examples of successful re-engineering described by Hammer and Champy. A radical redesign of operations increased productivity by 400%. When firms have not updated operations for some time they inevitably get dated, and then such major realignments are useful. However, they come with risks and many organisations have had bad experiences. In particular, BPR got a bad reputation for being the label used when companies decided to sack large numbers of people.
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A fundamental idea behind integration is that the best overall result does not come when each separate activity is done well. There is always some give and take, which means that some activities are done less-well than possible to allow greater benefits elsewhere. This example shows how this might occur. Here the requirements of three functions are summarised, and they are clearly contradictory. Improving, say, marketing’s performance would inevitably give problems for production and finance. The only way to solve such problems is to have the separate parts working together, to consider the broad picture.
Supply chain management software
If logistics is to be considered a single function, then a key requirement is that it works with a single IT system. There is a huge amount of software available for logistics, and as always it is of variable quality. This example lists some of the features that come with logistics software, but it is easy to find variations on this by searching through the Websites of software suppliers.
This example outlines a simple problem met when two trading companies work with distinct logistics. A very simple adjustment saved a lot of time and money. Unfortunately, this is a common picture, and most companies continue to work separately rather than discuss logistics with their trading partners. There are many reasons for this. A common one has the people who are aware of the possible benefits have neither the authority nor incentives for making changes.
Having said that external integration gives benefits, it is useful to see one company that has moved in this direction confirming that these benefits actually appear. Of course, circumstances are not the same in every organisation, and the benefits are not inevitable. In practice, some firms may find that relations become strained when they get too close and they are better with an arm’s length relationships.
Again this example shows how a company’s experience supports the ideas developed. Here a large oil company developed a policy of forming partnerships with its major trading partners, and this shows how they set about choosing suitable partners. Before formalising these arrangements the company did a lot of preparation to see the processes used in other firms. This meant that their onw moves were relatively trouble free.
Ellis and Everard
Many organisations outsource transport, and this company is a major supplier of third party logistics for the chemical industry. Third party agreements usually involve some kind of contract, and this easily develops into more formal alliances. This example shows what the transport company gains from such alliances.
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The European Union has grown dramatically from its original six members to include 27 countries by 2008. This union is based on a common market, within which products move freely to final customers with no national barriers.
Historically, each country built barriers which controlled trade, and companies responded by having national operations linked by export/import facilities. As these barriers fall, firms can improve their efficiency by considering Europe as a single market. Obvious signs of this have smaller national warehouses replaced by larger European ones, transport companies moving around a single market rather than having transfers at national borders, and s on.
In practice, there are still some barriers that include national import restrictions and different currencies, but these continue to decline.
In earlier chapters we emphasised that supply chains are often long and complicated. This example outlines some of the logistics behind a complex product. The A380 Airbus is generally viewed as a high technology product that is made in Europe and sold to major airlines around the world. In reality, each plane is assembled from parts and materials that come from a huge number of sources, and many have already travelled around the world before they end-up in the final assembly plant in Toulouse. Taking one example, the wings start their journey as ore in Australian bauxite mines and they take months to reach the assembly plant. As with all supply chains, there is doubtless room for improvement.
When a company decided to enter a new market it can do this in many ways. We can characterise two extremes as either moving in forcefully to quickly make a strong impact, or slowly developing operations over time. This example shows how one company adopts a slow approach that builds-up over time. The benefits of this are aligned with kaizen in preference to re-engineering, and are based on low risk and learning from experiences before moving on to the next stage.
Most of us pay little attention to fasteners – the products like screws, rivets, plastic clips, etc that hold components together. But this is a huge an important industry. When you look inside, say, a computer, you see the usual components, but they are all held together by fasteners – maybe hundreds in a single piece of equipment.
Trifast started work as a national company, and this example outlines its growth to become international and then global in outlook. It has moved from a factory in Uckfield, to become a company trading globally – and it continues to expand in this direction.
There are many closed borders in the world, where one country does not allow any traffic to cross to a neighbouring one. Other borders are not closed, but are still difficult to cross. For instance, the border between North Korea and South Korea has been closed for many years; on the other hand the border between the former Soviet Union and Western Europe was rarely closed, but administrative difficulties meant that it took several days for a lorry to cross. Although there are clear benefits to international trade, many governments feel that these come at too high a price. This view is generally becoming less common, but it is still common in diverse areas.
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This is probably one of the best known location decisions, and it shares many features with the problems faced by ordinary companies. It involves a lot of money, the result is important, a mistake can be very damaging, it is a complex decision, there are subjective as well as objective factors to consider, and so on.
In this case, there is a well-known, formal procedure for making the decision. This example reviews the process for awarding the 2012 games to London. With a total expenditure probably around £10 billion, this decision certainly involves high costs. But it is not unique, and in relative terms many organisations face problems of similar importance.
Millicra Electronic Components
This example suggests the importance of making the correct location decisions, after analysing long term conditions. Millicra worked near its main customers, but had high operating costs. They followed the fashionable route of moving manufacturing to a low cost country – even though the processes were automated and likely to be largely unaffected by, say, prevailing wage rates. The company found its move more difficult that expected (a very common finding) and by the time they had sorted out their problems, their main US customers had switched to other local competitors. Millicra could not overcome its problems in time and went out of business.
McDonald’s is a huge global organisation that probably has more experience of working globally than any other company. It is often held up as an emblem of globalisation – and yet it still hits problems. Most of these are practical problems that the company finds ways around – such as the availability of adequate local produce. Some are more intractable, such as the attitude of some people to American businesses.
Warehouse locations in the USA
Geometric arguments can be used to find to find the centre of demand, and if we assume that demand is proportional to some part of the population we can develop general models to suggest good locations. For instance, the centre of population in the UK is somewhere around Birmingham; in the USA it is near to Bloomington, in Canada it is near to Toronto, and so on. This example shows the best locations in continental USA. It is interesting that adding a fifth facility reduces average service time, but beyond this the improvements are less noticeable.
Intel in Costa Rica
High technology companies often choose sites that are near to other high technology companies, as they attract a pool of skilled people – and can transfer expertise between companies and use the skills available. This is the reason for Silicon Valley to grow in the USA and science parks to be built in most industrialised countries.
When Intel decided to build a new plant in Costa Rica, this was an interesting development. Although the government offered very good location incentives, the country was not a traditional location for high technology companies. Presumably Intel considered many related factors before they finally decided to make such a major investment in a new location.
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The European Union has passed legislation to control aspects of the working environment. The Working Time Directive is one of these, which limits the maximum number of hours that a person can work in a week. There several reasons for introducing this legislation including safety, improvement of working conditions and ensuring common standards across the union. However, some people criticise the legislation, particularly transport operators who claim that their capacity is reduced and their costs rise.
In general, adding more constraints to any part of a supply chain will reduce its capacity. Then organisations have to take actions to remove the new bottlenecks and increase capacity. And increasing capacity usually involves extra costs.
All organisations have to make a hierarchy of plans to show what they will be doing over periods in the future. This example mentions the levels of plans for a train service – and virtually every organisation has a set of similar plans. Sometimes they are less formal, but a firm of any size needs to know what it is going to do at various points in the future. The alternative to such plans is ad hoc actions.
The global car industry
People often assume that the capacity is fixed, but there are really different measures of capacity, these vary, and the figures need interpretation. This example shows how a headline figure for capacity of the world’s car manufacturers seems very bad news. But if you look at the figures more carefully there seems to be a more reasonable match of supply and demand. In this case, commentators were really looking for an eye-catching headline that would attract attention rather than give a balanced assessment of the industry.
Indian road network
This is an illustration of the capacity of a major network – the 4 million kilometres of the Indian road network. As in most countries, the majority of freight is moved by road. Road traffic has increased very quickly, but the infrastructure has not kept pace and is largely working beyond its designed capacity. The government is aware of the problems, and gives road building a high priority because of its role in economic development. But it has limited funds, and increasing the capacity of such a large network is a huge undertaking. This suggests that even when problems with capacity are obvious, this does not necessarily mean that they are easy to overcome.
Port of Guaymas
This example shows several points about capacity management. It describes a port whose development has been limited – and ahs even been in a decline. But it could be in a useful position. It is on a main North-South transport corridor linking Western areas of Mexico, USA and Canada. And it is virtually the same distance away from, say, Tucson as the congested Western US ports of Long Beach and Los Angeles. So for some supply chains the Californian ports will form a limiting bottleneck, and their capacity can be increased by diverting to Guaymas. But the new routes will then have their own bottlenecks, which appear to be facilities at the port of entry. For the route to be useful, this bottleneck should be removed – and then another point will become limiting.
The demand for air travel continues to rise, and this puts pressures on airports to expand. Along with motorways, airports seem to have particular problems with any expansion plans. At Heathrow, the runways, terminals and transport links have all been working at more than planned capacity for many years. One opinion is that the airport must expand, as constraints are simply moving traffic to other airports that are less able to cope – and Heathrow is steadily losing its position as the leading European hub, with consequent effects on the local and national economy. Another opinion is that airports should not expand, but the demand should be limited by increasing the cost of travel.
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Scheduling problems are among the most common met by managers. They are so common that we hardly notice them – but when people catch a bus, watch a television programme, visit a doctor, post a letter, or almost anything else, you see the result of complex scheduling problems. When someone orders a taxi, they might imagine that someone has to design a schedule for the arrival of the car, but the problem is really more complicated that that. This example mentions some of the scheduling problems that are tackled in a taxi company.
The MRP family of methods were originally developed by manufacturers to organise their supplies of raw materials, but they are now much more widely used. For instance, when a university wants to schedule its classes, it uses MRP to schedule the rooms, equipment, teachers, and other facilities needed. This example shows how one service uses MRP to schedule the arrival of materials needed for catering in its planes. This is a major problem and using MRP principles allowed the company to save millions of pounds in operating costs.
SAP is the world’s largest business software company, and is the largest supplier of MRP – and related – systems. Its packages are based on a set of modules that expand information from master schedules, and allow integrated movement of information around an organisation. These systems are widely described as ERP, but most of their customers have only moved towards integration of internal activities. External integration is much more difficult to establish.
Scandinavian Health Products
Most descriptions of JIT look at car assembly plants or other large scale manufacturers who make large numbers of products on assembly lines. But this is not the only use of JIT, as you can see when you order a drink in a bar, or catch a taxi that arrives to meet a train. This example gives a simple illustration of JIT principles. Instead of moving materials from one stage of a process to the next according to a predefined schedule, they are pulled forward when needed.
Guy La Rochelle International
There are many anecdotes to describe the success that follows the introduction of JIT. Many of these are based in large-scale manufacturing – although JIT occurs in the full spectrum of organisations. This example shows the effects in a manufacturer of cosmetics and toiletries, which has to react quickly to changing market conditions. Here JIT allowed small batch sizes to be made quickly, and this gave much more responsive operations – so the company became both leaner and more agile.
Probably the two most widely quoted examples of JIT bringing success are Toyota in Japan and Harley Davidson in America. Toyota is largely considered an originator of JIT, doing much of the development work. Over many years this is largely responsible for turning Toyota from a reasonably successful national car manufacturer to the second largest (after GM) and most successful global car company. In the USA, Harley Davidson followed the principles of Japanese motorcycle manufacturers, and moved from the verge of bankruptcy to return to a successful company with expanding sales. Over the years a library has grown of stories abut companies that introduced JIT and turned around their fortunes.
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Although companies may not always have appreciated the importance of procurement, most final customers have – especially those in unusual circumstances. In the early twentieth century people living in the US and Canadian Prairies were a long way from shops, but they still wanted the same products as people living in the cities. Sears Roebuck noticed this, and organised a new way of reaching their customers, through their catalogues. This gave fast, safe and reliable delivery of virtually any products they wanted. In its day this was at least as innovative as the more recent traders through Websites. And again it was not the taking of orders that was more difficult, but the subsequent delivery of acceptable products.
The example suggests the way that procurement evolves in a leading Canadian company. They used to use traditional bidding with each supplier, then they changed to a system with intermediaries who acted as a wholesalers, then they moved to e-procurement. At each stage their operations improved and made considerable savings. An important lesson is that procurement – like every other aspect of logistics – does not remain fixed but continues to evolve over time.
It is important to choose the best supplier for a product in the first place, and then their performance has to be monitored to make sure that it remains at a reasonable level. Supplier rating is the general term that covers the evaluation of suppliers. This example suggests the way that two major companies approach this rating – but the details vary for virtually every firm.
There is a tendency to think of alliances and single sourcing as the way to go, with tenders from a short list as the old-fashioned alternative. But this is not true, and tendering is often the better alternative, while single sourcing considerably increases risks. This example illustrates the point, where a stable relationship based on long-term alliances broke down when a key supplier went out of business. The problems were unrelated to operations at Land Rover, but they put considerable strain on the company.
We are all aware of the continuing growth of B2C business, and the first really successful move in this direction came from Amazon.com. This is the standard example of a company successfully expanding through its Website operations. It moved quickly from one person working in their garage to one of the world’s biggest corporations that stock ‘everything that people want’. Jeff Bezos summarises the success of Amazon as ‘delivery’ as people know they will get exactly what they ordered delivered as quickly as possible.
The choice between tenders from a short list and single sourcing is often complex. This example shows the time needed for some products in each option. The company considers these, and a series of other factors, before making its choices.
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Sometimes the amount of stock held by a firm is pretty clear, as you can see walking around a department store, car showroom, or supermarket. At other times it is largely hidden, such as the raw materials at a manufacturer or oil in tankers. This example mentions the amount of stock held in some companies, and it range from three percent of sales up to 16%. These figures come from annual accounts, so they have to be interpreted carefully (for instance, how do they value the stocks and what stacks are included). Nonetheless, they suggest the scale of stocks, which might be much higher in different conditions. For example, Fort Knox in the USA holds the government’s reserve of gold and its sales are virtually zero.
Montague Electrical Engineering
Despite huge efforts over many years to analyse stocks, most companies do not rely on their there findings but introduce a large element of subjectivity. For instance, managers add safety factors or use special procedures for some types of item. Typically this is because the consequences of shortages can be serious, so managers tend to be judged by the availability of items – and this encourages them to hold some reserves (even beyond a calculated safety stock). This example suggests typical consequences, where stock levels drift upwards. Even a simple calculation suggests that stocks are high. But at the same time many people within the company were pleased that they were having no problems with availability or complicated arrangements.
Until 2007 stocks were controlled by a parent company – effectively giving VMI. This would have weaknesses, particularly as the stocks seemed to be fixed and not related to demand or changing conditions. When inventory management was passed to the local company new systems were introduced that used more flexible models. At first sight this seems to be a good move, and the company should expect some benefits from the more responsive approach. There are usually benefits from having stock controlled by the people most closely involved (a common story for most operations)
BHP and Nalco/Exxon Energy Chemicals
This example shows how an adjustment to the supply chain both simplified material movement, gave more control to those most closely involved, and considerably reduced costs. Although problems of inventory management have been tackled for many years, conditions are constantly changing, and inventory systems need to be continually monitored and controlled.
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This example gives a summary of the main activities within a finished goods warehouse. Essentially it orders and gets deliveries of goods; sorts and stores these until needed; collects customer orders; picks, assembles and packs these; sends the orders out in delivery vans; keeps records of all transactions. With slight variations, this gives the essence of all warehouse operations, wherever they appear in a supply chain.
25 Canadian Forces Supply depot
We usually imagine warehouses holding finished goods just before they are moved to retailers, but warehouses come in many forms and at all points throughout supply chains. This example outlines the operations at a major military base. Apart from the things it stores – and possibly its size – it works in the same was as most other warehouses.
We have said several times that it is difficult to find accurate costs for aspects of logistics. We can repeat the message for warehousing. Warehousing costs are not usually separated, but appear as components in other costs. This example shows some results when a company takes the trouble to separate out its warehousing costs. Here staff costs are high, perhaps pointing the way to future automation if the operations are suitable. In common with all other activities in a supply chain, managers are certainly interested in warehouse operating costs, but they have to balance the costs of facilities with the service that they provide.
Wal-Mart in Cornwall, Ontario
We have already looked at logistics in the world’s biggest retailer, Wal-Mart, and here look at one aspect of its operations. As the company continues to expand it needs more warehousing and logistics. To get economies of scale, it uses a relatively small number of large facilities. This example outlines the operations of one warehouse in central Canada.
This example shows the layout of a warehouse, which follows a standard pattern. Although the storage and movement facilities available in a warehouse and the layout come in a huge variety – with virtually no two warehouses the same – the overall operations in each are broadly similar.
Transport and storage of materials is much easier when they come in standard packages (such as on pallets or in containers). It is also more efficient when the packages are full of products, rather than partly empty or full of packaging. So companies aim at increasing the density of their products. This example illustrates the effect of increasing density with one item supplied by IKEA.
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Transport is often treated harshly, with people commenting on its use of fuel, pollution, emissions, congestion, development of green field sites, etc. However, people often forget that it is an essential part of life, and the only way that we can get hold of any products. The Eddington Report is a formal statement of this, emphasising the role of transport in economic growth and social development. Transport operators can make many improvements to their operations – but we should not forget that underlying any problems they provide an essential service for everyone.
This is an unusual – even bizarre – example of a journey that seems to serve no useful purpose (especially as the conditions could probably be replicated more easily and cheaply in a fixed processing plant). However, it emphasises the point that transport is usually quite cheap and adds a relatively small amount to the final selling price – and that we do not only consider price when buying products, but include a much broader range of factors.
Intermodal journeys are common – and continually growing in importance – usually based on containers to give standard load sizes. These use the most efficient mode of transport for each leg of a journey, with transfers between modes at container terminals. These are usually found at ports or – as in DIRFT – railheads. DIRFT allows very efficient transfer of containers between rail (which is cheaper for longer journeys) and road (which is more flexible for shorter journeys).
Often a particular type of transport is used simply because ‘that’s the way that we do it’. Sometimes, as in this case, when a journey is investigated further there are other – perhaps many other – alternatives. Here the current transport arrangements were good, but investment in more efficient rail journeys could give good returns. Other examples major examples of this type are the ‘land bridges’ across the USA form moving materials between SE Asia and Europe, and electricity cables under the English Channel that reduce the need to move fuel to generators. Many other examples can be found.
Southampton Container Terminal
Container ports are needed for journeys that transfer containers between land and sea modes. Major economies of scale in shipping mean that container ships are getting larger, and this in turn means that they use (and can only get into) a decreasing number of container ports. His has encouraged a system where a few major container ports are used by the largest ships, and then smaller ships and land modes move containers on the next stages of their journeys. Major ports are Singapore, Shanghai, Hong Kong, Rotterdam, New York, San Franscisco, and so on. Its location and facilities mean that Southampton is one of the main ports of entry to the UK, and can act as a transhipment point for continuing journeys.
Because it comes as a largely coherent set of tasks that allow considerable savings from expertise, transport is a very convenient function to outsource. This example gives an illustration of a typical arrangement between a metal packaging business that must maintain good delivery of materials for their just-in-time operations, and the UK’s largest transport operator.
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This example gives some financial figures for a logistics company, and these seem to be quite reasonable (of course, depending on the assumptions, aims and analyses). However, they make the point that financial figures do not give a complete picture of an organisation. Here the company was not responding to changes in Central and Eastern Europe – and the new opportunities and threats in the environment. More responsive competitors were growing and taking market share, while Keyston-Gunterbach was facing increasing operational difficulties.
Ying-Chia Kow Associates
This gives a small example of how measures give different – and often contradictory – views. For instance, when capacity goes up, we may not be surprised to see that utilisation goes down. This illustrates the point that managers must choose appropriate measure of performance that relate to their aims (rather than using the measures that are most readily available or have always been used).
There is rarely a shortage of potential measures for any aspect of logistics – although actually using the measures may be more difficult. This example illustrates some of the core measures of transport used by one company. Acknowledging that many of these cannot give cardinal data of direct measures (such as ‘management skills’) the company uses surrogate ordinal measures with agreed scales and weights.
Air Cargo World surveys
Air Cargo World do a number of useful surveys that summarise key performance features. They focus on a small number of key issues – but in a fuller survey many other factors could be included.
Delivering frozen food
This example emphasises the point that different people want different performance from logistics. Here the suppliers of frozen foods clearly have different requirements from logistics than retailers. But this is only a start and everyone in the supply chain is likely to have a different view. Often the requirements are similar or can be aligned, as illustrated by the efficiency of transport. However, there can be problems when aims differ or are indirect conflict (such as one member wanting small frequent deliveries while another wants fewer large ones). Then there are the usual methods of negotiating, compromising, paying or somehow reaching agreement that leaves everyone reasonably happy.
Key performance indicators for the food supply chain
Benchmarking of transport operations allows one firm to emulate the performance of industry leaders, but it is difficult to get a broad picture of an entire industry. This survey gives a broad view of transport operations during a specific period, and allows individual firms to see where their logistics are falling behind. It also shows where they might look for improvements – and give reassurance to firms that are already working well. Although the survey focussed on only a few issues, it gives a rare insight into transport operations.
This example reviews the opportunity for improvement in a small logistics company. A straightforward analysis shows the areas that have highest costs and take most time. All things being equal, these are the areas where managers should start looking for savings.
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This is a classic example of how a very small incident in one location has a huge affect on a global business. An almost insignificant fire disrupted to supplies a leading manufacturer, who in turn could not deliver to their own customers – and eventually they left the industry. The incident is normally reported in two parts, because Nokia was also affected by the fire. However, they had procedures in place to switch suppliers and make other arrangements – with the result that their operations were almost unaffected.
Containers lost at sea
The greatest risks are not always the most obvious, and some come as an almost complete surprise. For instance, there is now growing awareness of the risk of piracy to ships at sea – and the rarely mentions risks from lost and floating containers. The 10-20,000 containers lost each year bring risk of loss to the owners, shippers, other shipping and broad environment.
Problems with single sourcing
Almost every development and new idea in logistics seems to increase risk, and managers do not take this fully into account. This illustration shows the effects of one area – single sourcing. All the best practices in logistics point to the benefits of finding the best suppliers and then working (almost) exclusively with them in long-term alliances. However, this causes problems when one of the partners hits problems. Both BA and General Motors followed perceived best practices – and both were badly affected when their sole-suppliers failed to deliver agreed products.
The Millennium Bug
This is an interesting example as it shows how people can react badly to risks, and as they make poor decisions to avoid perceived risks they start doing real damage. Here there was virtually no risk from the millennium bug – as systems designers had always been aware of the potential problem and had taken any necessary steps to make sure that nothing actually happened. Risk management in any organisation should have identified the possible risk, assessed it as extremely unlikely, and taken no further action. However, once the urban myth that all systems would grind to a halt had started, managers made mistakes in assessing the risks as too high, and then made too vigorous a response which caused the damage suggested in the article.
Sudan Red 1
Unlike the millennium bug, the introduction of an illegal food dye into supply chains presented a real danger – not only to health, but the more immediate risk of breaking national laws. In these circumstances, the probability of a risky event is very low, but the possible consequences are high, giving a high expected value that suggests positive action is needed. At first sight, the reaction might seem excessive, but it was the only course open, and the risk was considered to be dealt with well.
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