Definition of Logistics

Definition by Council of Logistics

“Logistics is that part of supply chain process that plans, implements and controls the
efficient, effective flow and storage of goods, services, and related information from the
point of origin to the point of consumption in order to meet customer’s requirements.”

What is Supply Chain Management?

Supply Chain Management may define as:

"Design, planning, execution, control, and monitoring of supply chain activities with the
objective of creating net value, building a competitive infrastructure, leveraging worldwide
logistics, synchronizing supply with demand and measuring performance globally."

The Basic of Supply Chain

The most basic of supply chain process is where a company purchased raw materials from
vendors and transformed it into a finished product in a single step. The company then sells it
to the end users or customers. Let’s take a basic example, a boy who wants to sell
lemonades. He gets all his materials from his parents. He makes the raw material into
lemonades and sells it directly to customers. But, in a realistic business world, supply chains
have multiple end products with many vendors supplying different parts of items,
components and services that end up with a complete product that is ready to be shipped
out or distribute. The flow of materials is also not usually in a linear network but sometimes
along multiple networks.

Development of Supply Chain Management

 The 1990s was a decade of great change and also a period during which the importance
of logistics and supply chain management reached the board rooms of major
corporations worldwide.
 The accelerated rate of change in our economy was driven by a number of macro level
forces, namely: An empowered consumer; a shift in economic power toward the end of
the supply chain; deregulation of key industries; globalization; and technology. All of
these forces of change elevated the importance of supply chain management as a
strategic weapon for competitive advantage.

 The conceptual basis of the supply chain is not new. In actuality, we have gone through
several evolutionary stages starting with physical distribution management in the 1970s,
which evolved into logistics management in the 1980s and then supply chain
management in the 1990s.

Why so much attention to Supply Chain Management?

 To gain efficiencies from procurement, distribution and logistics
 To make outsourcing more efficient
 To reduce transportation costs of inventories
 To meet competitive pressures from shorter development times, more new
products, and demand for more customization
 To meet the challenge of globalization and longer supply chains
 To meet the new challenges from e-commerce
 To manage the complexities of supply chains
 To manage the inventories needed across the supply chain
This figure elaborates the Importance of SCM by comparison of Average Throughput Time of
Dry Grocery Chain before and after ECR Implementation
(ECR - Effective Customer Response)

What Forces Are Driving the Rate of Change?

We know that supply chain management (SCM) became a part of the vocabularies of CEOs,
CFOs, COOs, and CIOs during the 1990s. The dynamics of the global environment changed
dramatically during that decade, and organizations had to adapt to these changes or perish.

Five major external forces appear to be driving the rate of change and shaping our
Economic and political landscape:
 Globalization
 Technology
 Organizational Consolidation
 The Empowered Consumer
 Government Policy and Regulation

The impact of these factors varies from sector to sector, but they are all important.
Additional external forces may also influence some organizations, particularly in the public
and nonprofit sectors.

1. Globalization
Arguably, globalization is the most frequently cited change factor by business leaders, and it
has replaced the post–World War II Cold War as the dominant driving force in world
economics. The concept of the global marketplace or the global economy has taken on new
meaning for all enterprises (profit and nonprofit; small, medium, and large; products or
services) and for individual consumers during the last two decades.

2. Technology
Technology has had a major impact on supply chains as a facilitator of change as companies
have transformed their processes. However, it is also a major force in changing the dynamics
of the marketplace. Individuals and organizations are connected 24/7 and have access to
information on the same basis via the Internet. Search engines such as Google have made it
possible to gather timely information quickly. We have become what some individuals
describe as the “click here” generation. We no longer have to wait for information to be
“pushed” to us via the media on their schedule; we can “pull” information as we need it. Vast
stores of data and information are virtually at our fingertips. Social networks such as
Facebook and Twitter are playing an ever increasing role in business organizations and will
influence supply chains because of their impact on customer demand and the speed of
information transfers. Many companies see opportunities to “data mine” the tweets to
uncover demand-related information for improved forecasting.

3. Organizational Consolidation and Power Shifts

After World War II, product manufacturers became the driving force in supply chains. They
developed, designed, produced, promoted, and distributed their products. Frequently, they
were the largest organizations in the supply chain in terms of sales volume, employees,
buying power, locations, and other factors. They typically exerted their influence throughout
the supply chain to their specific economic advantage, especially in the distribution of their
products.
During the 1980s and especially the 1990s, a significant change occurred in the relative
economic power in a growing number of supply chains as mass retailers became
increasingly larger. Retail giants such as Walmart, Sears, Kmart, Home Depot, Target, Kroger,
and McDonald’s became powerful market leaders and engines for change. Walmart, for
example, was number one on the Fortune 500 list by the middle of the first decade of the
twenty-first century. It had surpassed Ford, General Motors, and ExxonMobil with more than
$500 billion of annual sales and was the number one employer in many states.

4. The Empowered Consumer

Understanding consumer behavior has been a focus of marketing analysis and strategy
development for many years. Typically, such analyses examine consumers in total or in
major groupings or segments to understand their needs and to respond to them with
appropriate products and services. Such analyses have implications for logistics and supply
chain management, but they have been viewed in the past by logisticians as having
somewhat indirect impacts. Today, the impact of the consumer is much more direct for
supply chains because the consumer has placed increased demands at the retail level for an
expanded variety of products and services.

Today’s consumers are more enlightened and educated, and they are empowered more than
ever by the information that they have at their disposal from the Internet and other sources.
Their access to supply sources has expanded dramatically beyond their immediate locale by
virtue of catalogs, the Internet, and other media. They have the opportunity to compare
prices, quality, and service. Consequently, they demand competitive prices, high quality,
tailored or customized products, convenience, flexibility, and responsiveness. They tend to
have a low tolerance level for poor quality in products and services.

5. Government Policy and Regulation

The fifth external change factor is the various levels of government (federal, state, and local)
that establish and administer policies, regulations, and taxes that impact individual
businesses and their supply chains. The deregulation of several important sectors of our
economy that occurred in the 1980s and 1990s is a good example. These deregulated
sectors include transportation, communications, and financial institutions, which are
cornerstones of the infrastructure for most organizations.
Supply Chain Integration
Most OEMs no longer compete solely as autonomous corporations. They also compete as
participants in integrated supply chains. This revolution, which is changing the ways
products are designed, produced, and delivered, has the potential to alter the manufacturing
landscape as dramatically as the industrial revolution or the advent of mass production. This
chapter describes the changing nature of supply chains and efforts to optimize their
performance.

In the past, OEMs typically drove down the cost of purchased materials through aggressive
negotiations, imposing terms and conditions that minimized supplier profitability and often
left suppliers in a weakened condition. More recently, OEMs have begun to adopt a strategic
partnership approach, which recognizes that increased, sustainable benefits can accrue from
long-term relationships between participants in the supply chain (a win-win situation). This
approach considers total life-cycle costs over multiple iterations of a product, with the goal
of increasing mutual benefits for all participants in the long run.

SUPPLY CHAIN MANAGEMENT

In this era of competition among supply chains, the success of a corporation is increasingly
dependent on management's ability to integrate the company's networks of business
relationships. Supply chain management (see Figure 3-1) has been defined as the integration
of key business processes, from raw-material suppliers through end users, that

Supply chain management makes use of a growing body of tools, techniques, and skills for
coordinating and optimizing key processes, functions, and relationships, both within the
OEM and among its suppliers and customers, to enable and capture opportunities for
synergy. An OEM's competitive advantage is highly dependent on this integrated
management function. Supply chain management attempts to combine the best of both
worlds, the scale and coordination of large companies with the low costs, flexibility, and
creativity of small companies.

The focus of supply chain management must evolve in response to changing business
environments and evolving product life cycles. Different interactions among participants are
required during each phase of the product life cycle, from inception through recycling. The
supply chains for products in new markets must be flexible to respond to wide fluctuations
in demand (both in quantity and product mix). Products in mature, stable markets require
supply chains that can reliably deliver products at low cost. Thus, effective supply chain
management must be responsive to these changing conditions to ensure that the supply
chain evolves accordingly.

For example, marketing excellence used to be the primary source of Procter & Gamble's
(P&G's) dominance of the consumer products industry. However, as P&G expanded its
product and service offerings in response to market opportunities, the increased complexity
of these offerings created difficulties in meeting the needs of retail partners and customers.
Traditional marketing strategies involving in-store sales and price promotions created great
variations in product demand. To meet heavy short-term marketing-induced peaks in
demand, P&G invested in huge manufacturing capacities, inventories, warehouses, and
logistics capabilities.

In response to these problems, P&G modified its supply chain focus and remade itself
through a series of innovative initiatives. Working both internally and with suppliers and
customers, the company created a heralded partnership with Wal-Mart, virtually eliminated
price promotions, and streamlined its logistics and continuous replenishment programs.
These initiatives reduced variations and uncertainties in demand, thereby reducing the need
for surge production capacities and large inventories. Thus, by evolving their primary
supply chain focus from marketing to production, inventories, and logistics in response to
changing business requirements, P&G was able to reduce costs, meet customer demand, and
build strong, coordinated relationships with retail partners and customers.

CONCEPT OF INTEGRATION
An integrated supply chain can be defined as an association of customers and suppliers who,
using management techniques, work together to optimize their collective performance in
the creation, distribution, and support of an end product. It may be helpful to think of the
participants as the divisions of a large, vertically integrated corporation, although the
independent companies in the chain are bound together only by trust, shared objectives, and
contracts entered into on a voluntary basis. Unlike captive suppliers (divisions of a large
corporation that typically serve primarily the parent corporation), independent suppliers
are often faced with the conflicting demands of multiple customers.

All supply chains are integrated to some extent. One objective of increasing integration is
focusing and coordinating the relevant resources of each participant on the needs of the
supply chain to optimize the overall performance of the chain. The integration process
requires the disciplined application of management skills, processes, and technologies to
couple key functions and capabilities of the chain and take advantage of the available
business opportunities. Goals typically include higher profits and reduced risks for all
participants.

Traditional unmanaged (or minimally managed) supply chains are characterized by (1)
adversarial relationships between customers and suppliers, including win-lose negotiations;
(2) little regard for sharing benefits and risks; (3) short-term focus, with little concern for
mutual long-term success; (4) primary emphasis on cost and delivery, with little concern for
added value; (5) limited communications; and (6) little interaction between the OEM and
suppliers more than one or two tiers away.

Integrated supply chains tend to recognize that all parties should benefit from the
relationship on a sustainable, long-term basis and are characterized by partnerships with
extensive and open communications. A well integrated system of independent participants
can be visualized as a flock of redwing black birds flying over a marsh. Without any apparent
signal, every bird in the flock climbs, dives, or turns at virtually the same instant. That is an
integrated system! Supply chain members, in a similar manner, must react coherently to
changes in the business environment to remain competitive.

Supply chain integration is a continuous process that can be optimized only when OEMs,
customers, and suppliers work together to improve their relationships and when all
participants are aware of key activities at all levels in the chain. First-tier suppliers can play
a key role in promoting integration by guiding and assisting lower tier suppliers. In an
example of multi-tier integration, Wal-Mart thoroughly integrated P&G's Pampers product
line into its supply chain. P&G, in turn, worked with 3M to integrate its production of
adhesive strips with Pampers manufacturing facilities.

Forces Driving Increased Integration

The following worldwide trends and forces are driving supply chains toward increased
integration:
Increased cost competitiveness. Having substantially improved the efficiencies of internal
operations, OEMs are seeking further cost reductions by improving efficiency and synergy
within their supply chains.

Shorter product life cycles. The Model-T Ford, for example, was competitive for many years.
A personal computer (PC) is state of the art for less than a year, and the trend toward
shorter product life cycles continues.

Faster product development cycles. Companies must reduce the development cycle times of
their products to remain competitive. Early introduction of a new product is often rewarded
with a large market share and sufficient unit volumes to drive costs down rapidly.

Globalization and customization of product offerings. Customers the world over can
increasingly afford and are demanding a greater variety of products that address their
specific needs. Mass customization has become the new marketing mantra.

Higher overall quality. Increasing customer affluence and tougher competition to supply
their needs have led to demands for higher overall quality.

These increased demands on OEMs for improvements in product design, manufacturing,

cost, distribution, and support are being imposed, in turn, on their supply chains.

Case Study: Dell Computer and Fujitsu America

Dell Computer Corporation's success in the past few years and its growth relative to the rest
of the PC industry made daily headlines throughout the 1990s. Based on the premise that
bypassing resellers, building products to order, and reducing inventories would result in a
lower cost, more responsive business, Dell has grown into one of the largest forces in the
industry. Nevertheless, it is squeezed into such a narrow business niche that, from some
perspectives, its very survival seems tenuous. Dell competes with many capable and, in
some cases, lower cost competitors, has virtually no proprietary technology, and must deal
with exceedingly robust suppliers, including Intel and Microsoft.

The heart of Dell's success is its integrated supply chain, which has enabled rapid product
design, fabrication, and assembly, as well as direct shipment to customers. Inventories have
been dramatically reduced through extensive sharing of information, a prudent choice given
the risk of technological obsolescence and reductions in the cost of materials that can exceed
50 percent a month. Even with reduced inventories, Dell's strategic use of information has
made possible a dramatic reduction in the elapsed time from order to delivery, giving Dell a
significant competitive advantage.

Component inventories are monitored weekly throughout the supply chain and, when there
are deviations from plan, the sales force steers customers, by means of discounts, if
necessary, toward configurations for which there are adequate supplies. Thus, abundant,
timely information is used to work the front and back ends of the supply chain
simultaneously.

Speed is a critical factor in the computer industry, especially in the area of inventory. In the
late 1980s, Dell measured component inventories in weeks. In 1998, they were measured in
days. They may soon be further reduced through real-time deliveries so that, as components
are used, they are automatically and immediately replaced. The reduction in inventory not
only lowers requirements for capital, it also enables rapid changeovers to new product
configurations because no old parts must be used up. Faster time to market for new
products translates into increased revenues and profits. The change in emphasis from
inventory levels to inventory velocity throughout the supply chain has been made possible,
in part, by the Internet.

In Dell's new virtual corporation, inventories are reduced by use of timely information;
emphasis on physical assets is being replaced by emphasis on intellectual capabilities; and
proprietary business knowledge is being increasingly shared in open, collaborative
relationships. This extensive integration of the supply chain can be viewed as a shift from
vertical corporate integration to a virtually integrated corporation (Magretta, 1998). Vertical
integration was essential in the early years of computer manufacturing when the supplier
base was not well established and assemblers had little choice but to design and build
components and assemble the entire end product in house. Proprietary component
technologies were a main source of competitive advantage, although in some cases they had
little to do with creating value for the customer. As the industry matured, multitudes of
component suppliers became eager to invest and compete in terms of price and innovation.
Leveraging investments by these suppliers has freed Dell to focus on delivering complete
solutions to its customers. However, because these components are available to all PC
assemblers, it has become harder to compete in terms of end-product differentiation. Thus, a
high premium has been placed on speed and process efficiency, blurring the traditional
boundaries between supplier, manufacturer, and customer. For instance, peripherals, such
as monitors, keyboards, speakers, and mice, need not be gathered in one location prior to
shipment to the customer. Manufactured by separate suppliers and labeled with the Dell
logo, shippers gather them from all over North America, match them overnight (merge-in-
transit), and deliver them as complete hardware sets to customers as if they had come from
the same location.

Dell's virtual integration has the following characteristics:

use of rapid, seamless communication to build direct relationships between customers,

OEM, and suppliers a clear definition of what Dell does best (i.e., core competencies,
including branding, marketing, and selling through direct channels), with partnerships for
the rest (capital-intensive and labor-intensive component fabrication processes and
services). This enables Dell to be highly selective in its capital investments and to focus on
activities that create the most value for customers and shareholders

selection of partners who are best in their respective fields, inviting them to become
intimate parts of the business, and holding them to the same exacting quality and
performance standards as in-house segments of the business

use of a minimum number of suppliers, to whom Dell is highly loyal as long as they maintain
their leadership in technology, quality, cost, and delivery

use of the Internet, not just as an add-on to the business, but as an integral part of a strategy
to eliminate boundaries between companies and promote effective integration

less emphasis on guarding intellectual assets and more emphasis on using assets rapidly
before they become technologically obsolete

By using a highly integrated supply chain, Dell has enjoyed many of the advantages of
vertical integration while simultaneously benefiting from the investments, innovation,
efficiencies, and specialization of highly focused suppliers. Although the Dell model does not
fit every situation, the lessons of Dell's experience can be extracted and adapted to many
other supply chain situations, even for SMEs.

By 1998, the success of the Dell model, as might be expected, was causing problems for
competitors, including Fujitsu America, which had large inventories and high shipping costs
(Washington Post, May 2, 1999). Customers had to wait 10 days for laptops, while
competitors were delivering in five. In response, Fujitsu moved its distribution center from
Portland, Oregon, to Memphis, Tennessee, and turned distribution over to FedEx
Corporation, the parent company of Federal Express. In direct response to orders, FedEx
coordinates the shipment of components from worldwide suppliers, oversees the assembly
of PCs, and ships them out, all in three or four days. By early 1999, the cycle time on the
ground was eight to twelve hours, and the goal was to reduce it to four hours. Fujitsu has
essentially eliminated geographic proximity as an issue and has made maximum use of the
benefits of globalization, including low cost. Even with the premium price of express
shipping, this modification of the Fujitsu supply chain saved the company millions of dollars,
slashed inventories by about 90 percent, and increased profits by 25 percent. Most
important, these changes have enabled Fujitsu to compete effectively with Dell for Internet
sales directly to consumers. However, as is evident from these examples, these innovations
in supply chain integration can also impose large burdens on suppliers in terms of
responsiveness, inventories, and management of their own supply chains.

COSTS OF INTEGRATION

The costs, complexities, and risks of fully integrating and managing a highly integrated
supply chain can be as substantial as the costs of integrating and operating a corporation of
comparable size. Thus, most supply chain integration efforts to date have been very limited
in scope. Some of the major costs are listed below:

time devoted to managing, training, and support

effort devoted to becoming a better customer

investment in supply chain integration software and compatible information systems

throughout the chain

Opportunity costs (i.e., investments in supply chain integration may necessitate foregoing
other business opportunities)

risks of production stoppages

Because the extent of interconnectedness and interdependency makes highly integrated

chains increasingly vulnerable to disruptions, the risk of production stoppages should not be
overlooked. A highly integrated, interdependent supply chain that consists primarily of sole-
source suppliers practicing just-in-time manufacturing with minimal inventories is highly
reliant on the timely delivery of quality components and services. Failure by one participant
to deliver can rapidly bring other parts of the chain to a halt. This happens, on occasion, even
to the best suppliers and logistics providers.

Automakers, for example, who are under constant pressure to reduce costs, have tightened
their supply chains to the point that they typically have less than a one-day supply of parts at
final assembly facilities. Thus, a breakdown anywhere in the supply chain has the potential
of bringing production to a halt (e.g., strikes at two GM parts plants in 1998 resulted in the
shutdown of virtually all assembly operations within days, and flooding in 1999 at a single
supplier in North Carolina reduced operations at seven DaimlerChrysler and three GM
assembly plants to half-shifts due to shortages of a single part).

Potential threats, including storms, power outages, terrorism, computer hackers,

disruptions in communications, and equipment breakdowns, can be very difficult to predict
and costly to prepare for. In another example, the earthquake that shook Taiwan in
September 1999 showed how a power supply disruption in one country can have worldwide
reverberations through an entire industry. Damage to two electric power substations was
the primary cause of a shutdown of Taiwan's computer-chip industry, which resulted in
shortages of components and higher costs in the supply chains of OEMs around the world.

Supply chain participants must individually and collectively assess the probability of
production-stopping events and their tolerance for risk, which must be balanced against the
savings from increased sole-sourcing, tighter integration with remaining suppliers, and
reduced inventories and production capacities. Thus, although good communications and
resource sharing can be helpful in preparing for and responding to disruptions, supply
chain, participants must be careful to avoid unacceptable levels of risk in their zeal for
integration.

Recommendation. Small and medium-sized manufacturing enterprises should develop

operating strategies based on an appropriate balance between supply chain performance
and risk; assess the probability and effects of potential threats to their supply chains; and
maintain sufficient (though sometimes expensive) slack, redundancy, and flexibility to keep
the potential threats at manageable levels.

BENEFITS OF INTEGRATION
The most sought-after benefit, or return on investment, in supply chain integration is the
cost savings that result from reductions in inventory. Inventories can be reduced by
increasing the speed at which materials move through the supply chain and by reducing
safety stocks. For example, if the costs of maintaining inventory are approximately 1 percent
per month and if an integrated supply chain can reduce inventory levels by 30 percent, the
savings, shared among the participants, can be substantial.

Another common benefit of supply chain integration is a reduction in transaction costs. If

information sharing can reduce the number of transactions and if electronic systems can
reduce the cost of each transaction from the $150 cost of a traditional transaction, each
participant can realize substantial savings (LaLonde, 1997).

Reductions in supplier redundancy can reduce product costs by increasing production levels
at remaining suppliers and reducing the costs of managing the supply chain. Although this
can also increase investment and management burdens on suppliers, the delegation of
responsibility and authority to entities closer to the action can result in improved decision
making, as long as good communications are maintained throughout the chain.

Other potential benefits of supply chain integration are listed below:

reduced friction, fewer barriers, and less waste of resources on procedures that do not add
value

increased functional and procedural synergy between participants

faster response to changing market demands

lower cost manufacturing operations

lower capital investment in excess manufacturing capacity

shorter product realization cycles and lower product development costs

increased competitiveness and profitability