Logistics Handbook

SECTION I

Perspectives on Logistics Management

Bernard J. La Londe Section Editor

The practice of logistics as a formal business management discipline is only a few decades old. Yet, even in this short time there has been a maturing process in the discipline, and this maturing process promises to continue and perhaps accelerate into the twenty-first century. This section reviews the evolution of this process and speculates about the changes that are likely in the twenty-first century.

In Chapter 1, Bernard J. La Londe broadly traces the evolution of the logistics concept. Starting with the concept of physical distribution and identifying some of the key change factors, he traces the evolution through to the logistics concept and beyond.

In Chapter 2, James M. Masters and Terrance L. Pohlen identify the transformation processes that led to a new management profession, the logistics professional. The logistics profession is divided into three broad phases in this chapter: (1) functional management of physical distributions (1960s-1970s), (2) internal integration of logistics functions (1980s), and (3) external integration of logistics between firms (1990s).

In Chapter 3, Martha C. Cooper identifies those trends and issues that will affect logistics management in the 1990s and beyond. The impact of these factors on the practice of logistics is evaluated and a potential range of management response from new organizational formats to technology integration is considered. The chapter provides a perspective on change and the impact of change on the logistics profession.

CHAPTER 1

Evolution of the Integrated Logistics Concept

Bernard J. La Londe

One of the challenges in writing on the subject of evolution of the integrated logistics concept is trying to decide where to begin. To be sure, logistics was an integral part of warfare dating from the dawn of recorded history. The ability to move people, machines, arms, and supplies was an important determinant of the winner and loser in early conflicts and remains so today. In a book on the Gulf War, it is noted on the first page that U.S. forces planned, moved, and served 122 million meals during the brief engagement—a task comparable to feeding all the residents of Wyoming and Vermont three meals a day for forty days.¹ There is a long and illustrious history of logistics as an element of both ancient and modern warfare. One view of the derivation of logistics is that it comes from logistique, the title given to an officer in Napoleon’s army responsible for quartering the troops and finding forage for the horses and other animals.

The importance of transporting products from their point of production to their point of consumption is also well documented in historical files. Applied logistics probably began when early cultures found that, because of a refined expertise, one community produced excess quantities of certain goods such as arrowheads and another community downstream could make better goods of another sort, such as pottery, because of access to better materials. Thus, applied logistics began with the inception of trade. In a more contemporary context, the industrial revolution and the advent of the mass production and mass consumption economy heralded the beginning of mass distribution in the industrialized countries of the world. As early as 1915, the two functions of marketing were identified as demand creation and physical supply.² With urbanization and scale economies in the factory, the buyer and the seller grew further apart and it was necessary to bring the goods to the buyer. Specialized middlemen and transportation services emerged to serve this growing need. The task of the seller was not only to make and sell the product but also to deliver it to the buyer. In the early days of the United States, this often meant serving a buyer at a great distance without the benefit of roads or regular delivery services or agents.

The purpose of this introduction is to present a view of the evolution of the logistics concept. As noted in the earlier discussion, distribution—or logistics—was recognized as a vital business process from an early time.³ However, during the past three decades, logistics has evolved considerably. This introductory chapter traces that evolution by addressing three questions:

• What is integrated logistics management?

• Why did the issue of integrated logistics (distribution) become important?

• How has integrated logistics evolved over the past three decades?

Executives and managers should be familiar with the history of integrated logistics management, for the history is enlightening and useful in today’s business environment. Integrated logistics management did not develop by accident; the fundamental reasons for its evolution are as valid today as they were at its outset and can provide lessons and frameworks for tackling new challenges.

Integrated Logistics Management

The very definition of integrated logistics management is difficult and complicated by the fact that there has been a broad-based shift in business terminology during the past decade. When management first became interested in the potential of material flow to reduce cost or increase service, the term commonly used was physical distribution.⁴ The use of this terminology began in the 1920s and was adopted by post—World War II business management. In 1948, the American Marketing Association defined physical distribution management as The movement and handling of goods from the point of production to the point of consumption or use.⁵

Figure 1-1 identifies the distinction between various approaches to integration in the materials flow process.⁶ These distinctions were presented early in the development of physical distribution management theory to show the three basic approaches. The first approach, physical distribution, focuses on the flow of outbound finished goods. The second approach, materials management, is best described by Dean Ammer:

That aspect of the industrial management concerned with the activities involved in the acquisition and use of all materials employed in the production of the finished product. These activities may include production and inventory control, purchasing, traffic, materials handling and receiving.⁷

Figure 1-1Alternative Approaches to Integrated Logistics Management Source: Prof. Bernard J. La Londe, The Ohio State University. Adapted from Bernard J. La Londe, Integrated Distribution Management—The American Perspective, Journal of the Society for Long Range Planning (London), no. 1 (December 1969): 61-71. © 1969 Bernard J. La Londe. Revision © 1993 by Bernard J. La Londe.

The third approach, business logistics, encompasses the total material flow process from raw material through finished goods inventory. Here is an early definition of this approach:

A total approach to the management of all activities involved in physically acquiring, moving and storing raw materials, in-process inventory, and finished goods inventory from point of origin to the point of use or consumption.⁸

In the relatively few short years since the logistics concept was accepted by major firms, department names for the function have quickly changed.⁹ Each year The Ohio State University conducts a study on logistics career patterns. The study indicates, as shown in Figure 1-2, that the commonly accepted distribution or marketing titles are giving way to reflect the new emphasis on logistics, which now accounts for almost one-third of logistics-related department names.

Over the past two decades there has been a broadening of executive responsibility for total material flow. Executive scope has been expanded to control functions that had previously been fragmented among separate departments, with little operational integration and even less attention from senior executives. Now, some firms regard logistics as a strategic function on a par with other major departments such as production, finance, product development, and marketing. Figure 1-3 shows the level of logistics responsibility by functional activity. The broadening of scope is demonstrated well by the changes in functional responsibility for international distribution. In the first Career Patterns study in 1972, international distribution management received a 9% response, whereas in the 1992 survey, 65% of logistics-related departments had international responsibility.

Figure 1-2Department Names for Logistics-Related Functions Source: Adapted from the annual Ohio State University Survey of Career Patterns in Logistics studies by permission of the Council of Logistics Management. 1992 study.

Figure 1-3Logistics Department Responsibility for Material Flow Activities Source: Adapted from the annual Ohio State University Survey of Career Patterns in Logistics studies by permission of the Council of Logistics Management. 1992 study.

Thus, structural changes in business organization and a new focus on bringing value to the customer have created a range of adaptive behavior on the part of business firms. For forward-looking companies, integrated logistics management as a dominant material flow strategy emerged during the last half of the 1980s and the first half of the 1990s. Neither a single prototype organization nor a single set of performance metrics characterizes firms that have adopted integrated material flow solutions. Rather, in the early stages of change, the firms that have adopted integrated logistics management choose continuous innovation and improvement as their path to change.

Development of Integrated Distribution

Integrated distribution systems developed during the 1950s and 1960s. Four primary factors shaped the development of distribution thinking during this period: scientific management, data processing technology, a customer focus, and profit leverage.¹⁰

Scientific Management

By the end of World War II, large gains had been made in production technology that, in turn, renewed interest in scientific management of the business enterprise. In the post—World War II period, particularly during the late 1950s and the 1960s, there was increasing emphasis on the marketing function. During this period, the amount spent on advertising in the American economy quadrupled and the number of new products launched increased almost geometrically. Thus, by the mid-1950s, businesspeople were in a situation where production technology was well advanced and marketing costs were steadily increasing. To reduce costs and remain competitive in the increasingly crowded marketplace, it was necessary to look to one of the few areas that was relatively untouched, the distribution costs of the firm.

In most firms, the cost of distribution represents from 10% to 30% of total costs. These costs, however, are diffused throughout the company. Some of the costs are incurred in inventory, some in materials handling, some in transportation, others in warehousing and storage, and so on. It is logical that this focus on efficiency in distribution was an outgrowth of the American business environment, for distribution was one of the last remaining frontiers for significant operational cost savings. The principal method of securing such cost reduction opportunity was to view distribution as an integrated task rather than as the many traditional fragmented tasks taking place in many parts of the firm.

Data Processing Technology

Another major precipitator of the distribution revolution was the advent of new technology in data processing. As computer technology became increasingly powerful, less costly, and more accessible, the possibility of automated inventory control procedures was realized. Distribution data generally require high-input, low-calculation, and high-output processing—the type of processing that both management and workers prefer to automate, as it is time-intensive and tedious. The new technology contributed to the technical capability of handling large amounts of order and shipment data in a rapid and efficient manner. Computers allowed data to be entered once and reused for various purposes including order tracking, production scheduling, shipping, invoicing, and analysis. Data processing technologies reduced repetitive, error-prone manual data recording and manipulation work.

A side effect of the computer was its impact on total integration of management within the firm. Data processing caused some breakdown in the traditional departmentalization within firms and paved the way for integrated distribution management, which, of course, cuts across departmental lines just as data do. Undoubtedly, increasing levels of computer technology will continue to contribute to expanding information system applications in logistics problem-solving and operations.

Customer Focus

The 1950s and 1960s brought increased management attention to logistics, for logistics was recognized as important in providing customer satisfaction. Management finally began to realize that selling a product is really only half the job. Getting the product to the customer at the right time in the right quantity and with the right logistical support (parts and service) is the other equally important half. There was increased recognition that marketing management could not have a successful sales and marketing program unless the logistics system provided adequate support.

Customer satisfaction and logistical support of sales were of particular importance for those companies selling relatively homogeneous products like chemicals, paper, and dairy foods. Such companies often competed on the basis of efficiency in logistics, and their profits, in large measure, were determined by their success in effecting a sound logistics system. Of course, companies selling differentiated products like automobiles, pharmaceuticals, and clothing also found customer satisfaction and logistical support to be important, especially those in premium niches requiring great attention to detail.

Profit Leverage

Management also realized that there was significant profit leverage available from reduced logistics costs. As markets constantly expanded during the 1950s and 1960s, emphasis was on increased sales. As the tempo of domestic and international competition increased, a profit squeeze was reflected in the financial statements of many American firms. This prompted many firms to look for cost reduction opportunities along with market expansion opportunities in the previously untouched logistics area.

Evolution of Integrated Logistics Management

There are many factors that impact how a firm uses its resources to focus on strategic opportunities in the marketplace. Among them are external issues such as technology, globalization, and competition. There are also internal factors, which include management style, culture, human resources, and facilities. A firm must place its available resources against the more uncertain external resources in effecting strategy. Strategy, in turn, must leverage certain advantages that the firm has or feels it can achieve in the marketplace. Many firms have chosen to allocate resources to logistics as a strategy to gain advantage.

Those firms choosing to be in the forefront of the logistics concept development did not simply stumble upon logistics or distribution as a strategy. Rather, they reviewed alternative ways of bringing value to their customers and then decided that logistics offered more opportunity to impact value at the customer level than other business processes. Companies have pursued three general stages in their evolution into integrated logistics management: physical distribution focus, internal linkages, and external linkages.¹¹

Many firms do not even get to the first stage; or even if they do, they can be stalled for many years, depending on the combination of internal and external factors that play on decision-making processes of the firm. Thus, an explanation of evolution must not be viewed as a biological phenomenon that companies will naturally and automatically pass through, but rather as a characterization of change in the thinking of leading companies over the past three decades.

Underlying the stages of evolution philosophy is the concept that all manufacturing firms typically have three internal material flow loops. Figure 1-4 shows the internal loops as procurement, operations, and physical distribution. Procurement is the material flow loop that extends from the point of vendor location to the point of first manufacture (or perhaps reprocessing or simply repackaging). Operations is the material flow loop that extends from the point of first manufacture to a completed finished good. Accountants refer to material in this loop as work-in-process (WIP). Physical distribution is the material flow loop that extends from finished goods to the ultimate consumer.

Evolution of integrated logistics management is best framed in terms of inventory, because inventory represents 35% to 50% of current assets for an average company. This level of investment demands the attention of a firm’s most senior executives and advisers. In a typical company, 30% of total inventory is in the procurement loop, 30% is in the operations loop, and 40% is in the physical distribution loop. Inventory was used as a buffer between the three internal material flow loops and indeed was used as a buffer between the internal operations and the two flanking external material flow loops—between the vendor and procurement on the inbound side and between physical distribution and the customer on the outbound side. The net result of this multiple inventory buffering was inventory turns (total unit flow ÷ average unit level) far below what could have been achieved if common inventory theory had been used.

Figure 1-4 Evolution of the Integrated Logistics Concept

Stage 1: Physical Distribution

Not surprisingly, the first stage, physical distribution, occurring in the 1950s and 1960s, focused on the 40% of inventory investment in finished goods. In this stage firms attempted to integrate finished goods transportation, warehousing, inventory management, customer service, and other functions directly related to delivering product to the customer. The focus of physical distribution management was to manage finished goods distribution in a way that met customer expectations at the lowest possible cost. So the firm’s basic approach was to find the appropriate balance between costs and service (optimize the cost-service trade-off curve) with respect to customer requirements and the firm’s resources. At that time, the National Council of Physical Distribution Management was active and carried both the title and focus that characterized this approach.

There were three reasons why the integration process started with finished goods. These reasons are still valid today for firms seeking to begin a logistics evolution. First, finished goods is the largest single segment of inventory to be managed. Second, because of its proximity, visibility, and frequent contact with customers, finished goods distribution most directly impacts customer service expectations and performance. Third, management of finished goods allows intervention in an important process without venturing into production processes or other powerful cost centers of the firm. That is, altering physical distribution management is a low-risk, high-gain endeavor relative to altering other functions.

The disadvantage of the physical distribution stage is identical to its primary advantage; it soon became obvious that managing finished goods dealt with only 40% of the total inventory commitment. Even if finished goods are efficiently managed, all the good work can be financially counterbalanced by poor management of either WIP or raw materials.

Although today’s logistics concepts and practices are advanced beyond those of the physical distribution stage, managers must remain cognizant of the fundamentals that brought about the stage: focus on high-impact finished goods distribution inventories and operations, and careful monitoring and control of the cost-service trade-off.

Stage 2: Internal Linkages

The focus of the concepts in stage two, internal linkages, was an attempt to join two or all three of the internal material flow loops so that 60% to 100% of the firm’s total inventory could be better managed. Logistics did not necessarily reflect an organizational change within the firm, but rather a change in the way the firm thought about value linkages across the three internal material flow loops. Developing internal linkages frequently entailed the elimination of buffer inventories between loops. The concept of inventory velocity was developed and embraced by practitioners of this business process. Thus, inventory flow was thought to be a process that involved horizontal movement of inventory and measurement of inventory from the time the raw material was delivered until an accounts receivable was recorded by the firm (a sale made and the product shipped). Prior to this time, most inventory thinking really involved level rather than flow of inventory. Pure economic-order-quantity (EOQ) thinking was supplemented by inventory velocity philosophies for many firms. At about the time this movement toward integrated logistics management began, around 1985, the National Council of Physical Distribution Management changed its name to Council of Logistics Management to reflect logistics rather than physical distribution thinking on the part of members. Most similar professional associations around the world did the same.

Stage 3: External Linkages

External linkages, stage three of the evolution, shifted the logistics concept to include externally focused change. Firms began to think out of the box and searched for efficiencies in relationships with vendors, customers, and third parties. In many cases, external relationships began with one link, such as supplier-customer, and migrated to multiple links, such as vendor-supplier-customer. The extended view of enterprise offered firms an opportunity to think in new ways about bringing value to the customer. It also allowed firms to use new and/or improving technologies to manage the relational interface between themselves, vendors, third-party logistics support agencies, and customers.

The development of Electronic Data Interchange (EDI), Just-in-Time processes (JIT), Distribution Requirements Planning (DRP), and other elements of the logistics parlance appeared. Today, aggressive firms are able to reduce inventory and improve value by expanding their concept of logistics efficiency and effectiveness to include elements outside the firm. For example, reducing inventory held at the inbound external linkage reduces a firm’s costs because vendors reduce extra holding and handling expenses that ultimately get built into the price of raw materials.

Future Directions

There is ample evidence of two current trends that will significantly impact the practice of logistics management. The first trend is cycle-time-to-market and the second is supply chain management. Both will change the focus of what is now termed logistics management and increase corporate management’s expectations of the logistics function.

Cycle-Time-to-Market

Cycle-time-to-market is variously interpreted in different industries and in different channels by different acronyms and titles. For example, it is becoming increasingly common to see considerations of JIT, Quick Response (QR), process reengineering, and other initiatives, some of which are even copyrighted such as JIT II.¹² Although these different words usually have different meanings as they are applied in the marketplace, a thread of commonality runs through all: the removal of time as a competitive factor. For example, time might be removed by reducing the design-build-ship cycle. The major difference in the terms for time reduction initiatives usually has to do with the segment of the total order cycle that is covered. For example, some approaches to cycle-time reductions involve virtually all processes and linkages including the vendor, the design process, the manufacturing process, and the distribution process. However, other approaches simply focus on a single element such as transit time from the end of the production line to the customer or vendor lead times.

Organizational structures among leading-edge firms are being redefined to focus on cycle-time reductions and process step eliminations. Many business firms are attempting to promote cycle-time approaches to developing competitive advantages and bring new values to customers. These firms must integrate and manage this extended process, both internally and between themselves and their customers. To capitalize on these opportunities the logistics manager must stand ready to build a boundary spanning consensus across the traditional functional stovepipe alignments of the firm. The elements required for success are new skill sets, new organizations, new information systems, and new sets of corporate performance measurement metrics within the firms and at the firms’ interfaces with suppliers, third parties, and customers.

Supply Chain Management

The second and related trend will also impact the practice of logistics management during the last half of the 1990s and on into the twenty-first century. A growing number of companies are using the term supply chain to describe a process whereby both internal and external units are forged together to bring low-cost and high-value performance to the consumer. The supply chain concept is related to the cycle-time concept in that the firms that develop a continuous flow inventory system frequently do so with a limited number of primary accounts, often using third-party logistics support agencies.

Thus, implementation of a cycle-time-to-market strategy may result in a focused implementation of a supply chain management strategy. The movement toward more responsive inventory systems, especially for primary accounts, will lead many firms to reorganize according to supply chain management. An increasing number of Fortune 500 firms have managers with supply chain in their official title. Usually, these managers design, develop, and maintain a set of relationships both within and outside the firm (between the firm and vendors, third parties, and customers) capable of executing the overall corporate strategy. As organizational restructuring continues, traditional logistics organizations will evolve into organizations that design and manage internal and external supply chains.

Supply chain management presents a whole new range of career options for individuals who select logistics as the foundation of their management careers. The ability to manage between functions will become as important as the ability to manage within a function. The ability to develop a consensus across function groups will become more important than the traditional functional management skills. Also, the ability to manage across national borders may become more important than the ability to manage in the home country.

Whatever the future holds, it is certain that logistics managers will not blindly follow past patterns and restrict themselves to past practices. Rather, firms, executives, and managers who have an understanding of the past can adapt successful strategies to new situations and avoid previous errors. The future will undoubtedly present a range of opportunities, both domestic and global, that will challenge the energy and creativity of even the most progressive firms and the most intrepid logistics executives.

Notes

¹ Lt. General William G. Pagonis (with Jeffrey Curikshank), Moving Mountains, Lessons in Leadership and Logistics from the Gulf War (Cambridge, Mass.: Harvard Business School Press, 1992).

² Arch W. Shaw, Some Problems in Market Distribution (Cambridge, Mass.: Harvard University Press, 1915).

³ Bernard J. La Londe and Leslie M. Dawson, Early Development of Physical Distribution Thought, Readings in Physical Distribution Management, The Logistics of Marketing, chap 2 (Editors:Bowersox,La Londe, andSmykay) (London: Macmillan 1969).

⁴ Peter F. Drucker, Physical Distribution: The Frontier of Modern Management. Speech given at the Annual Meeting of the National Council of Physical Distribution (now the Council of Logistics Management), April 1965.

⁵ 1948 Report of the Definitions Committee of the American Marketing Association, Journal of Marketing, 13 (October 1948): 212.

⁶ Bernard J. La Londe, Integrated Distribution Management—The American Perspective, Journal of the Society for Long Range Planning (London), 2, no. 1 (December 1969): 61-71.

⁷ Dean S. Ammer, Materials Management as a Profit Center, Harvard Business Review 47, no. 1 (January—February 1969): 39-47.

⁸ Bernard J. La Londe, John R. Grabner, and James F. Robeson, Integrated Distribution Management: A Management Perspective, International Journal of Physical Distribution 1, no. 1 (October 1970): 44.

⁹ The Ohio State University Annual Survey of Logistics Executives for 1992. Each year the chief logistics executives of member firms of the Council of Logistics Management are surveyed; the findings are based on approximately two hundred executive responses. The results are presented at each annual CLM conference and published in the proceedings.

¹⁰ La Londe, et al., Integrated Distribution Management: 44.

¹¹ See Chapter 2. Also see Measuring and Improving Productivity in Physical Distribution. National Council of Physical Distribution Management [NCPDM], Oak Brook, Ill., 1984, p. 17, a study prepared by A. T. Kearney, Inc., under contract to NCPDM, now the Council of Logistics Management.

¹² Lance Dixon, JIT II: A New Approach to Supply Management, Center for Quality Management Journal 1, no. 1 (Autumn 1992): 15-18. JIT II was developed by Bose and involves placing vendor representatives in Bose facilities and giving them unprecedented authority usually reserved for internal departments.

CHAPTER 2

Evolution of the Logistics Profession

James M. Masters

Terrance L. Pohlen

The organization of the business logistics function has undergone several transformations since American firms began to embrace the logistics concept following World War II. These transformations resulted from a growing recognition and understanding of how logistics processes affect the firm’s costs, performance, and competitiveness. Each evolving level of understanding has in turn driven major changes in the organization of logistics functions. The role of the logistics executive has undergone similar changes. The scope of the logistician’s responsibilities has expanded beyond narrowly defined functional roles, such as shipping department supervisor, and has broadened to encompass the management and control of the full spectrum of the firm’s logistical processes, as signified by a title like vice president of corporate logistics. This chapter describes the evolution of the logistics organization and the evolving role of the logistics executive. The discussion traces the development of logistics practice from the fragmentary management of logistics functions that occurred during the late 1950s and includes a description of how leading-edge firms have begun positioning their logistics organizations for the 1990s. The chapter also demonstrates how the growth of the logistics executive’s role in the organization has paralleled the growth in the importance of business logistics. It closes with a statistical profile of the contemporary logistician developed through surveys of American corporate logistics executives.

The evolution of the logistics organization has been clearly documented in the many logistics books and articles published over the last four decades. A careful review of this literature provides a foundation for tracing the evolution of the logistics organization and the changing role of the logistics executive. The literature includes many professional journal articles specifically addressing issues confronting logistics managers during these periods. Organizations like the Council of Logistics Management, the American Society of Transportation and Logistics, and various consulting firms have periodically surveyed logistics professionals, and this discussion incorporates selected results from these studies to demonstrate how firms have reorganized and realigned responsibilities of logistics executives in attempts to address changing workplace, marketplace, and environmental forces. The evolution of business logistics can be divided into three phases:

• Functional management (1960s-1970s)

• Internal integration (1980s)

• External integration (1990s)

Functional Management (1960s-1970s)

During the 1960s and 1970s, most firms made a gradual transition from the fragmentary management of individual processes like traffic, purchasing, and warehousing to the integrated management of related functions under the two common headings materials management and physical distribution. The term materials management came to mean the single-manager organization concept embracing the planning, organizing, motivating, and controlling of all those activities and personnel principally concerned with the flow of materials into an organization.¹ Materials management included functions like purchasing, raw materials, work-in-process inventory control, inbound transportation, surplus material, and production scheduling. Physical distribution was envisioned as the broad range of activities concerned with efficient movement of finished products from the end of the production line to the consumers.² Physical distribution thus included functions like freight, warehousing, materials handling, protective packaging, order processing, demand forecasting, inventory control, and customer service.³

Management of these processes prior to 1960 was typically practiced on a narrow, functional basis and often suffered from neglect. Senior management tended to view distribution activities as largely unskilled and unworthy of attention, and the high costs of distribution disappeared in general catchalls such as indirect labor or overhead.⁴ Because businesses usually spread distribution responsibilities across their organizational structure and into different cost centers, it was difficult to understand the true extent of distribution costs and to manage them effectively.

Materials management and physical distribution management began to replace the fragmented management approach during the early 1960s. Several forces contributed to this transformation in organization and management. A 1956 Harvard Business School study of air freight introduced total cost analysis to distribution management. This study demonstrated how a firm could use the high speed of air freight, despite its high costs, to offset inventory and thus to reduce the sum of its total inventory, warehousing, and transportation costs.⁵ In addition, advances in computerized modeling provided new capability to address questions about the design and operation of the distribution function, such as the number and location of warehouses, the assignment of customers to warehouses, and how best to organize the distribution process.⁶ Analyses could now be conducted in an integrated fashion so that cost trade-offs between functions like transportation and inventory could be deliberately explored and exploited. Finally, the economic climate of the late 1950s and 1960s encouraged many firms to reduce production costs to improve profits. Distribution functions now provided a previously undiscovered opportunity for cost reduction.⁷ The organization of materials management and physical distribution functions that emerged during this period often resulted in distribution executives who were several organizational layers distant from senior management The senior materials manager and the physical distribution manager often reported to different vice presidents.

Major Forces in the 1960s and 1970s

Each phase in the evolution of business logistics had notable changes in the basic operating environment. The first phase had changes that were so dramatic that they are still taking place in organizations today.

APPLICATION OF COMPUTERS

The application of computers to materials management and physical distribution problems led to a tremendous increase in the number and sophistication of tools available to the manager. Computers enabled managers to manipulate large databases and perform complex calculations in short periods of time. The application of computers to distribution problems made many traditional management approaches obsolete. Materials requirements planning (MRP) was a case in point. MRP introduced an alternative to the traditional approaches of managing manufacturing inventory. MRP exploited the dependent demand relationship between the end item produced and all the component parts required for its manufacture.⁸ The ability to synchronize the inbound flow of materials with the production requirement yielded inventory reductions and overcame the demand forecasting problems that had plagued the traditional order point models. The MRP approach was simple and intuitive, but a successful implementation in a large-scale manufacturing system was feasible only on a computer because of the many detailed calculations required. Once sufficiently powerful and economical computer hardware became available, MRP software became a popular approach to materials management.

Firms quickly applied the computer to solving other problems as well. A National Council of Physical Distribution Management (NCPDM) survey found that:

Over 90 percent of the companies indicated that they used the computer in some capacity to handle inventory control. The next most frequently mentioned activities utilizing the computer were order processing, planning and forecasting, and production planning. Over 75 percent of the companies indicated that the computer was utilized in transportation and warehousing. Over 40 percent indicated they used the computer in warehouse selection and customer service.⁹

Computers also provided the means to address one of the most compelling reasons for integrating materials and distribution functions—the dollars involved. The computer made it practical to extract costs frequently buried in manufacturing or selling overhead and thus to determine true distribution costs.¹⁰

CUSTOMER SERVICE AND PRODUCTIVITY

Efforts to reduce transportation and distribution costs often had adverse effects on customer service. Firms attempted to reduce costs by decreasing the number of stocking locations, drawing down inventory, and reducing the breadth of stockage in the distribution system, thus reducing the level of customer service provided."¹¹ However, managers were experiencing pressure to improve customer service while decreasing the costs of distribution operations. Distribution costs accounted for nearly 50% of the cost of many consumer products, yet few firms understood the extent of these costs, how to reduce them, or the impact of the marketing program on distribution costs.¹² Intensive management of distribution functions emerged as a corporate strategy to achieve the goal of increasing customer service while simultaneously decreasing operating costs.

A landmark study in 1976 provided insight into how business defined the concept of customer service and measured the level of customer service provided. The study found no consistent definition of customer service among firms. Instead, firms viewed customer service either as an activity, a performance level, or a management philosophy.¹³ The study offered the following definition:

A customer oriented corporate philosophy which integrates and manages all of the elements of the customer interface within a predetermined optimum cost-service mix.¹⁴

Many firms had no comprehensive or consistent customer service objectives or standards in place. Firms with customer service standards generally used inappropriate measures or did not include the customer’s point of view, which led in turn to increased inventory, transportation, and warehousing costs.¹⁵ The growing attention to customer service issues changed management practice. Firms began to explore the linkages between customer service objectives and their effect on distribution costs. Cost/revenue trade-off models became an accepted approach for establishing appropriate service levels. ABC analysis also provided a useful tool for categorizing customers by profit contribution and for determining the appropriate level of service.

Management also suffered from a lack of productivity standards and measurement. In 1978, an NCPDM-sponsored study identified $40 billion of potential productivity gains in the physical distribution of goods.¹⁶ Only 50% of the surveyed companies had begun programs to improve distribution productivity, and only 20% had reached a meaningful level of measurement to support productivity improvement. Implementation of productivity improvement programs in distribution was expected to produce a 10% improvement in the average firm’s productivity.¹⁷

These customer service and productivity studies clearly demonstrated the benefits of integrated distribution activities that many innovative firms were beginning to achieve. Corporations could achieve improved levels of customer service at lower cost by recognizing available trade-offs. Firms could further improve their profit margins by improving the productivity of their distribution activities. The ability to capture these savings required a manager with sufficient authority to direct the necessary changes.

FORMATION OF MM AND PD ORGANIZATIONS

The integration of materials management and physical distribution functions did not proceed without debate. Consolidation of functions located in manufacturing, marketing, and finance generated controversy and turf battles. The debate became more intense as more firms began to explore the materials management/physical distribution concept. By 1962, 45% of U.S. manufacturing firms had adopted some kind of physical distribution organization, and half again as many had plans to do so.¹⁸ However, a 1971 NCPDM survey found that most corporations had not placed the fully integrated distribution organization into action. Most companies had not yet organized to do a total distribution job.¹⁹

Practitioners strongly advocated integrating existing functions within materials management and physical distribution organizations. The basic theme of their approach was to establish a costing system which would identify all physical distribution costs and enable decision-making which would permit operation of the system at lowest total cost consistent with predetermined standards of customer service.²⁰ They further argued that these functions accounted for a high proportion of total operating costs, and that centralized management of these functions provided the most effective means for controlling these costs.²¹ Opposition to functional integration arose primarily in departments that stood to lose functions to the materials management and physical distribution organizations. Executives argued that they would lose control of essential functions, and that coordination within the existing organizational structure could achieve the same results. Some viewed integration efforts as empire building within the traffic or distribution functions. However, history indicates that the proponents of integration overcame these arguments because of the problems associated with fragmented management.

Role of the Materials Management/Physical Distribution Executive

Integration led to the executive managing a broader range of activities. This increased scope required more highly and broadly educated managers. Executives also began to report to different senior executives at higher organizational levels.

Scope of Management Responsibility. Integration expanded the role of the executive by increasing the scope of responsibility. Fragmented management spread responsibilities across the organization and limited the scope of responsibility to specific areas like transportation, raw materials warehousing, returned goods, or import/export.²² This limited scope prevented the manager from achieving cost reductions across internal organizational boundaries.²³ Many firms saw integration as a means to correct this deficiency. Purchasing’s role expanded to include the management of the inbound flow of material.²⁴ A typical materials manager had responsibility for related functions such as purchasing, production control, inbound traffic, warehousing, MIS control, inventory planning and control, and salvage and scrap disposal.²⁵ Physical distribution managers experienced a comparable growth in their responsibilities. The single distribution manager had responsibility for the efficient, cost-effective flow of outbound material. An integrated distribution operation might include subordinate units like transportation, distribution facilities, inventory and planning control, and sales-order service.²⁶

Education Requirements. The broadened range of responsibility increased educational requirements for materials and physical distribution managers. The restructuring of these functions prompted the distribution executive to learn more about the areas of finance, data processing, and planning skills.²⁷ A 1972 Traffic Management survey found that over 65% of distribution executives holding director or vice presidential positions had undergraduate degrees. However, most executives did not have specific college course work or an academic major field in distribution.²⁸ As a result, many entrants into distribution management positions desired follow-on education and professional development in distribution management. As one reaction to this need:

The National Council of Physical Distribution Management was formed in 1963 to develop the theory and understanding of the process, promote the art and science of managing systems and to foster professional dialogue and development in the field operating exclusively without profit and in cooperation with other organizations and institutions.²⁹

Organizational Level. The stature of the distribution executive improved as firms began to recognize the importance and contribution of the distribution function. The perception of distribution activity shifted from donkey work to that of a key decision maker within the firm at the vice presidential level.³⁰ Surveys revealed upward mobility for distribution executives.³¹³² A 1972 Traffic Management survey found that 45% of its respondents held titles that had not existed in 1962. The report also found a 69% increase in the number of vice presidents and directors within physical distribution organizations.

Impetus for Change

External and internal forces continued to generate change in business organizations and in the role of the distribution executive. Notable forces driving change were the increased cost of performing distribution processes and the deregulation of the transportation industry.

High Cost of Performing Distribution Functions. The cost of operations skyrocketed during the 1970s. Inflation continued at unprecedented rates, and interest rates reached double-digit figures by 1980.³³ As a result, labor, facilities, and capital costs all drove cost increases in distribution. Additionally, fuel costs escalated owing to the OPEC oil embargo.³⁴ These increasing operating costs compelled managers to examine further integration of distribution functions.

Deregulation of the Transportation Industry. Deregulation enabled managers to pursue a new set of options to reduce costs and increase performance.

Deregulation allowed (or perhaps encouraged) a new relationship between the buyer, the seller, and carrier. While part of this relationship came from the new electronic linkages between buyer, seller, and carrier, part of it emerged from the way shippers wanted to do business. There was a fundamental shift away from a day-to-day, transaction-to-transaction relationship to a longer term, contractual relationship. There was the emergence of some form of an interdependence between shipper and carrier over some fixed time horizon. This relationship involved a closer and more frequent interchange on a wide range of topics such as productivity, quality, and technology, to name only a few. It typically involved a wide range of contracts between personnel in the shipper organization and personnel in the carrier organization to solve problems or to initiate changes that were mutually advantageous to all parties in the process.³⁵

By the end of the 1970s, many managers had come to view the materials management and physical distribution activities as an organic whole, and the term logistics became the common way to describe the entire activity.

Internal Integration (1980s)

Logistics organizations had experienced a decided shift in the positioning of distribution and materials management functions by the early 1980s. The Ohio State University Survey of Career Patterns in Logistics detected substantial changes occurring during the last half of the 1970s, with these trends stabilizing by 1981.³⁶ The findings suggested a linkage between the distribution function and pre-production activities (i.e., purchasing, production planning, etc.) and the emergence of a total material flow organization.³⁷ Integrated logistics emerged as the term coined to describe this linkage or internal boundary spanning and integration of logistics functions.

Integrated logistics is the total range of activities concerned with the movement of materials, including information and control systems; logistics constitutes a strand running through all the traditional functional responsibilities—from raw materials procurement to product delivery.³⁸ It encompasses the traditional responsibilities of physical distribution and materials management, as well as several functions previously performed by marketing and manufacturing (i.e., production planning, sales forecasting, raw materials/work in process, and customer service).

Several studies during the 1980s traced the development of the integrated logistics organizational structure. A 1981 A.T. Kearney study found distribution (logistics) departments transitioned through three stages:

Stage One: Management views its mission as controlling finished goods transportation and warehousing. Management has an operational orientation.

Stage Two: Management’s mission is to integrate finished goods distribution and control inbound transportation. The orientation here is managerial, where individual activities are planned and controlled as parts of a total physical distribution process. The manager seeks out opportunities to improve by balancing trade-offs.

Stage Three: Management’s mission is to integrate the total logistics process as part of the total corporate endeavor. Management’s orientation turns to strategic issues like evaluating basic changes in the company’s logistics/operations strategy and pursuing opportunities presented by changes to the external environment.³⁹

The study found a steady expansion in the range of functions managed by logistics organizations during the period from 1973 to 1981, with the trend accelerating in the 1980s.⁴⁰ Firms reporting stage one responsibilities rose from 55% to 70%, stage two increased from 43% to 47%, and stage three increased from no responsibility to 16%.

The movement towards a stage three, or the integrated logistics firm, continued throughout the 1980s. Subsequent studies performed by A.T. Kearney in 1983, 1985, and 1987 demonstrated a continuing trend. Companies exhibiting only stage one characteristics leveled off near 47%.⁴¹ Companies exhibiting only stage two characteristics decreased as many graduated to stage three, while this category accounted for approximately 35% by 1987.⁴²,⁴³

The integrated logistics organizational structure provided several benefits to implementing firms. A comparison using stage one as a baseline found stage two companies incurred only 84.7% of the logistics costs of stage one companies, and stage three companies incurred only 80.7% of the costs.⁴⁴ Other benefits include a competitive advantage through lower costs and higher profits, enhanced relationships with suppliers and customers, and additional value to the supply chain.⁴⁵

Internal integration of logistical activities became widespread during the mid-1980s. The National Council of Physical Distribution Management encouraged this trend by changing its name to the Council of Logistics Management in 1985. The change enabled the organization to encompass the full range of logistical issues and serve a wider range of logistics professionals. The council’s definition of logistics reflected its broadened scope:

Logistics is the process of planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.⁴⁶

Major Forces Shaping Business Logistics

The pace of change quickened for logistics executives during the 1980s. The postderegulation era expanded the range and combination of services available in the marketplace. Third-party logistics providers exploited the service emphasis and emerged as a major player in providing a full range of logistics services. Communications and information processing applications accelerated, with numerous firms employing electronic data interchange, barcoding, and personal computers. Customer service increased in importance as firms attempted to use logistics to achieve a competitive advantage in the marketplace.

Postderegulation Expansion of Services. Deregulation influenced the logistics organization by changing the relationship between carriers and shippers. The shipping organizations focused their efforts on achieving rate reductions and transportation cost savings. Shippers decreased their carrier base and concentrated their shipments, with fewer carriers to obtain increased negotiating leverage.⁴⁷ As a result, a smaller number of shippers would account for a larger proportion of a carrier’s total business. Carriers had to position themselves to be in the smaller set of carriers selected by specific shippers. Successful carriers accomplished this through superior customer service, value-added services, and reasonable prices.⁴⁸ A wide variety of innovative practices emerged as carriers and shippers attempted to reduce costs and improve services, including automated freight billing and audit, and the use of electronic data interchange to assist in paperless billing, shipment tracing, rate lookup, claims tracking, and freight payment. Many shippers and carriers implemented programs such as guaranteed backhauls, uniform rate and contract formats, or cost-based discounts.⁴⁹ Logistics companies emerged as transportation firms expanded their operations to include the full range of logistics services—other modes of transportation, freight consolidation and forwarding, warehousing, and packaging, to name a few. These firms gained acceptance as shippers attempted to limit their investment in noncore businesses or acquired needed logistics expertise in areas like carrier selection, rate negotiation, or freight payment.⁵⁰

Third-Party Logistics Firms. Third-party or contract logistics firms represent the outgrowth of the movement toward logistics companies. Third-party logistics involves the use of external companies to perform logistics functions previously performed within the organization. The functions can encompass the entire logistics process or a selected subset of those activities.⁵¹ A combination of economic and regulatory forces contributed to their growth and acceptance during the 1980s. Sheffi identified several of these forces, including increased competition from foreign companies, a more demanding marketplace in the form of stockless retailers and just-in-time production lines, the high service levels yet long supply lines experienced in globalized operations, and the restructuring of corporate America to eliminate debt by cutting costs, reducing the asset base, and trimming the labor force.⁵² Many firms found the use of third parties attractive because it allowed them to concentrate on their core competencies, to obtain a streamlined logistics system, to exploit the third party’s economies of scale, to achieve a higher level of specialization, and to reduce financial risk.⁵³

Communications and Information Technology. Logistics organizations developed an insatiable appetite during the 1980s for the ability to rapidly communicate, trace shipments, and exchange data. Information, as indicated in the CLM definition of logistics, had become a key component in providing logistics services and acted as a catalyst for further integrating logistical activities. Firms used information technology to further integrate their logistics functions, compress time, and eliminate cost from the supply chain. Integration resulted from the interconnection of hundreds of steps in the management and control process made possible by the rapid exchange of information.⁵⁴ Compression of the supply chain permitted firms to trade information for inventory. Near real-time access to retailer inventory and sales data enabled manufacturers and wholesalers to more accurately project future requirements and to therefore reduce or eliminate safety stocks used as buffers against uncertainty.

Electronic data interchange (EDI) provided a medium to interconnect internal as well as external logistics functions. EDI is the interorganization exchange of business data in standard, machine-processable form.⁵⁵ It eliminated the rekeying of data and provided a quick and accurate means for electronically exchanging data. EDI proved especially important in supporting the informational requirements for implementing distribution requirements planning or just-in-time inventories and production.

Distribution Resource Planning (DRP). DRP became a popular inventory planning and deployment tool based on exploiting the information and connectivity of integrated systems. The development of DRP enabled managers to effectively plan and efficiently deploy their finished goods inventories throughout the complex, multilevel distribution networks that most large manufacturers have established to move product from plants to customers. A DRP system operates by applying the basic logic of MRP to the control of finished goods distribution inventories. Deploying a DRP system required obtaining field-level sales forecasts from the distribution system for input into the production system’s master production schedule. The integration of demand forecasts into production scheduling resulted in several benefits including reduced inventory investment, reduced transportation costs, increased inventory turnover, and increased inventory availability.⁵⁶ Implementation of DRP had the potential to significantly impact the organization of logistics functions. Traditional marketing and manufacturing activities such as forecasting and production scheduling would become more highly integrated and would most likely merge with distribution. The relatively small number of stage three firms indicates the difficulty of achieving the integration and level of coordination necessary for successful DRP implementation.

Just-in-Time (JIT). JIT production scheduling also achieved greater acceptance owing to the increased organizational integration and new information technology that became available during the 1980s. JIT is an organizational philosophy that strives for excellence and has the aim of eliminating all waste and consistently improving quality.⁵⁷ A JIT approach to purchasing in a manufacturing environment requires the supplier to produce for and deliver to the manufacturer precisely the necessary units in the necessary quantities, at the necessary time, as determined by the manufacturer’s production schedule, with the requirement that products produced by the supplier conform to performance specifications every time.⁵⁸ In comparison with other forms of exchange relationships, JIT exchanges have a longer-term orientation and require closer coordination to achieve specific value-added service.⁵⁹ The establishment of JIT relationships imposes new requirements on logistical organizations. The supplier and manufacturer must jointly perform long-term planning, work together to achieve continuous improvement in key processes and products, interface at multiple points on a continuous basis, and operate in a potentially high-risk, sole-source environment. JIT extends the integration of logistical activities beyond an individual firm’s boundaries to achieve even greater efficiencies and process improvements. JIT takes the firms beyond stage three integration and into supply or value-added chain management.

Customer Service. Customer service continued as a dominating force in the shaping of the logistics organization throughout the 1980s. Logistics executives consistently ranked customer service as one of the major forces influencing the growth and development of the corporate logistics function.⁶⁰,⁶¹,⁶² Repeated surveys of logistics executives indicated that most considered customer service the second-most important force, while only cost reduction, deregulation, or computer applications received higher rankings. The Council of Logistics Management commissioned a follow-on to the 1976 La Londe and Zinszer study to examine how customer service had evolved over the subsequent ten years. The study redefined customer service to reflect the internal and external integration occurring in logistics organizations:

Customer service is a process for providing significant value-added benefits to the supply chain in a cost effective way.⁶³

The study’s findings also identified specific areas where customer service had shaped the evolution of the logistics organization. Customer service had become an important way of strategically differentiating the product or service for many firms. Firms relied heavily on the processing and release of timely information to achieve efficient, effective customer service. The customer had begun to play an active role in determining the types of services provided by the seller. For example, many buyers required their vendors to install an EDI capability. Contractual relationships had become the dominant mode of customer service relationships. The scope of customer service extended beyond the domestic market to address the issues faced in a global supply chain. Strong pressure had been placed on firms to maintain consistently high levels of customer service, and this trend was expected to continue and intensify over the visible horizon.⁶⁴ During the 1980s, firms truly recognized the capability of logistics to provide a strategic advantage in the marketplace, and the logistics executive’s stature within the organization reflected this recognition.

Role of the Logistics Executive

Logistics executives directly benefited from the emphasis on using logistics as a competitive weapon. The number of senior executive appointments grew significantly, and their management scope had expanded beyond materials management or physical distribution to encompass the entire spectrum of logistics activities. However, the increased responsibilities placed new demands on the logistics executive and changed the skill set and competencies required for success in the discipline.

Scope of Management Responsibility. Integration of materials management, production planning, and physical distribution into one logistics organization greatly increased the logistics executive’s responsibilities. The 1987 A.T. Kearney study demonstrated a 15% increase in the number of stage three, or fully integrated, logistics firms, and the range of logistics responsibilities had widened across virtually all industries.⁶⁵ The study also found a growing population of logistics organizations, with approximately 22% of the survey companies having established a logistics department within the last three years. Globalization also played a major role in expanding the logistics executive’s responsibilities. Logistics executives reporting international responsibilities increased to over 65% by 1987, from 30.5% in 1980 and only 9.5% in 1974.⁶⁶,⁶⁷

Organizational Level. The Ohio State Survey of Career Patterns in Logistics found significant growth in the number of senior logistics executives.⁶⁸ The number of senior-level positions increased at a rate of about 6% per year during the 1980s. Some 56% of the firms established a senior-level logistics position during the 1980s, compared with a total of 25% prior to 1980. Only 19% of the surveyed companies had not yet established a senior position. The increased number of senior executives suggests an even greater logistics input into corporate decision making and planning. A 1992 CLM-sponsored study of strategic planning found an increasing number of logistics personnel participating in the corporate planning process and developing strategic logistics plans during the latter half of the 1980s.⁶⁹

Educational Requirements. The wider range of activities managed demanded a more comprehensive background for most logistics executives. They could no longer rely on a baseline of transportation or purchasing expertise to move into senior positions. Instead, they required a broader background in logistics (e.g., inventory, warehousing, production planning, etc.) and in the firm’s other major departments (e.g., manufacturing, marketing, and particularly finance). The senior logistics executive cultivated an extensive background in logistics and has grown into a position of authority; however, the senior executive also acquired the necessary education to function at a higher corporate level. By 1989, 89% of the surveyed executives had baccalaureate degrees, and 45% had graduate degrees. Some 62% of the baccalaureate degrees and 88% of the graduate degrees were in business. And 12% of the graduate and 8% of the baccalaureate degrees were in logistics.⁷⁰ When questioned regarding which topics the senior executive would specifically choose for future study, the most frequent responses included corporate finance and information technology.

The logistics executive’s broadened scope of responsibilities has also affected the educational requirements sought in new career entrants. Traffic Management’s 1989 survey of 20 top logistics executives found a definite preference for applicants with a logistics-related degree; however, the applicants also must have possessed a familiarity with computer applications and basic business concepts.⁷¹

Impetus for Change

Events occurring toward the end of the 1980s signaled a new direction for the logistics organization and executive. Leveraged buyouts and corporate restructuring forced many firms to downsize their operations. American firms recognized the full potential of international markets as a means to expand existing markets and to source materials. The marketplace also placed increasing demands on firms to expand competitiveness beyond cost to include time and quality. These forces intensified the pressure on logistics to maintain high customer service standards while simultaneously improving productivity and decreasing costs.

Corporate Restructuring. Many firms restructured during the 1980s to gain a competitive advantage and to avoid hostile takeovers. Corporate management restructured to dispose of unsuccessful businesses, de-layer management, match cost generation with debt service, and lean-out the organization.⁷² Restructuring sometimes drastically altered the logistics organization. Many logistics departments faced the prospect of consolidation within another firm’s logistics organization or the formation of a new enterprise that needed to create an entire management infrastructure with a logistics function of its own.⁷³

International Markets. American firms increasingly expanded their international sourcing of raw materials, subassemblies, and other materials to obtain a cost advantage.⁷⁴ The success of this strategy in one firm would cause the practice to spread to the firm’s competitors. International markets presented a growth opportunity for many companies with mature domestic markets. The development of major trading blocks such as the European Community and the opening of eastern Europe provided opportunities for expansion. However, the international market placed new requirements on the logistics department to contain costs while expanding operations in more distant markets.

Time and Quality. A new pattern for obtaining competitive advantage emerged by providing the most value for the lowest cost in the least amount of time. By decreasing time to market, firms increased productivity, decreased costs without penalty, reduced their risk, and increased market share.⁷⁵ The incorporation of quality into the logistics process meant improved customer service, order fulfillment, and logistics processes. These quality gains provided key advantages that the competition often could not easily duplicate: improved on-time delivery, order completeness, invoice accuracy, order-cycle-time reduction, and overall logistics productivity improvements.⁷⁶

The combination of these factors forced senior management to search for even more innovative techniques for improving logistics performance and gaining competitive footholds. However,