Global Logistics

1
Global Logistics

• From Logistics and Supply Chain Management by
  Martin Christopher,
• FinancialTimes/PrenticeHall, 1998.

2
Outline

• Globalisation and its implications
• Challenges for global logistics
• How the leading-edge companies manage logistics
• The new organisational paradigm
• Managing the supply chain of the future

3
Globalisation Trends

• Worldwide cross-border trade is estimated to
  increase from US5.9 trillion in 1999 to US8.4
  trillion in 2005.
• Trade barriers diminishing
• Global brands now dominate most markets
• Coca- cola, IBM, Toyota, etc.
• These companies seek to extend its markets
  worldwide whilst seeking cost-reductions through
  scale economies by sourcing globally
• What is a global business?
• More than just a company that exports
• source materials and components from more than
  one country
• geographically dispersed manufacturing/assembly
  locations
• market products worldwide

4
Challenges facing global businesses

• local variations in markets (consumer
  preferences)
• e.g. left-hand drive and right-hand drive cars
• e.g. voltage and socket variations by country
• production process complications
• complex logistics of global supply chains
• co-ordination of production and transportation
• cross-docking, merge-in-transit
• economies of scale -- global cost competition

5
Nike the logistics challenge of global business

• Nike re-created the sport shoe as high-tech,
  high-performance products that is an icon of
  youth subculture, with a price to match!
• Core business
• state-of-the-art RD capabilities
• ruthless low-cost manufacturing
• Air Max Penny basketball shoe designed in
  Oregon and Tennessee, manufactured in South Korea
  and Indonesia from 52 components sourced from
  Japan, South Korea, Taiwan, Indonesia and USA.
• Nike markets over 300 new shoe design each year,
  leading to costly overstocks if sales forecasts
  not achieved.
• Distribution in USA is outsourced to third-party
  logistics providers with IT linkage to Nikes
  global sales and customer support systems,
  enabling sales/inventory information to be
  accesible to all decision makers concerned.
• When the supply chain is global and the products
  are fashion-oriented, the management of logistics
  becomes a key determinant of business success or
  failure.

6
Key Issues in Global Logistics Strategy

• Appropriate degree of centralisation?
• Management
• Manufacturing
• Distribution
• How can the needs of local markets be met while
  gaining economies of scale through
  standardisation?

7
Focussed Factories

• Limit the range and mix of products manufactured
  at a single location to achieve economies of
  scale
• Instead of local-for-local production, each
  location produces a few items for the world
  market
• e.g. Heinz makes all the ketchup for Europe in
  only 3 plants and switches production depending
  on local costs, demand, and currency fluctuations
• Is using the global lowest-cost producer always
  the best strategy?

8
Focussed Factories Concerns

• Effect on transportation costs?
• Especially on low-value, low-margin
• Effect on delivery lead times?
• More local safety-stock needed
• For high-tech products, usually labour
• Local variations in product requirements
• Customers order a variety of products from the
  same producer on a single order but product now
  produced in focussed factories in diverse
  locations
• Product flexibility? Variety? Responsiveness?

9
Centralisation of Inventories

• Pooling of inventories reduces cycle stock
  (square-root rule!)
• Pooling of inventories also reduces safety stock
• Philips reduced consumer electronics products
  warehouses in Europe from 22 to 4
• Drawbacks
• higher transport costs
• longer delivery lead times

10
Virtual Inventory Consolidation

• Locating inventory near the customer, but
  managing and controlling it centrally
• Requires an information system that can provide
  complete visibility of demand from one end of the
  supply chain to the other in as close to
  real-time as possible
• To be response, transport costs may also increase
  (e.g use of couriers for speedy delivery)

11
Postponement and Localisation

• Significant local difference in customer and
  consumer requirements
• Postponement
• design products to use common platforms,
  components and modules
• delay final assembly/customisation as much as
  possible until final market destination and
  customer requirements known

12
Advantages and concerns of Postponement

• Generic inventory - fewer stock-keeping variants
• flexibility and variety in products
• forecasting is easier at the aggregate generic
  level than at individual SKU level
• Mass-customisation
• design for localisation
• maximise variety using fewest basic components
• final customisation out-sourced to local
  distribution centres

13
Challenges of Global Logistics

• Extended lead times of supply
• Extended and unreliable transit times
• Multiple consolidation and break-bulk options
• Multiple freight mode and cost options

14
Extended lead times and transit times

• Long manufacturing lead-times are sometimes
  artificial
• Mind-set change from make-to-stock to
  make-to-order
• Intermediate inventory needed to buffer against
  unreliable transit times
• sea freight from Rotterdam to Japan takes 5 weeks
  (a lot of inventory tied up at sea!)
• air-freight options may be attractive if total
  costs considered
• As variability increases, local managers tend to
  compensate by over-ordering, double-buffering and
  requesting more allocation
• Instead, should explore transportation options
  and examine supply chain to reduce variability,
  increase shipment visibility and tracking

15
Complex Supply Network

• Shipment options
• direct ship from each source to final market in
  full containers
• consolidate in the supply region for final market
  in full containers
• Consolidate from each source for each consumer
  region with break-bulk/intermediate inventory in
  region
• Consolidate in the supply region and also
  break-bulk in the consumer region

16
Multiple freight mode and costs options

• Variety of shipping services available
• Air vs sea freight
• air freight transport cost expensive, but may be
  worthwhile when inventory holding costs,
  potential lost revenue and market flexibility
  taken into account
• Need for end-to-end pipeline management
• co-ordinate export dept, shipping dept, freight
  forwarder
• Integrators provide door-to-door service
• DHL, FedEx, UPS, TNT
• shorter and more reliable transit times
• swifter and less complicated procedures, e.g.
  customs clearance
• worldwide tracking and tracing capability

17
Organising for global logistics

• Global vs local decision making
• Local decision making preferable in sales,
  promotion and marketing
• Key principles
• Strategic structure and control of logistics
  flows centralised for worldwide cost optimisation
  
• Customer service localised for competitive
  advantage
• Global co-ordination is key, especially if many
  functions out-sourced
• Global logistics information system is the
  pre-requisite for achieving local service needs
  and global cost optimisation

18
Logistics Structure and Control

• If the potential trade-offs in rationalising
  sourcing, production and distribution across
  national boundaries are to be achieved, then it
  is essential that a central decision-making
  structure for logistics is established. - Martin
  Christopher
• Location decisions
• fundamentally affects the supply chain operations
• long-range impact investments in fixed assets
  and equipment
• exchange rate and different regional costs
• must consider total cost (Activity-Based Costing)

19
Customer service management

• Local markets have their own specific
  characteristics and needs
• opportunities for tailoring service against local
  customer requirements
• Monitoring of service needs and performance
• management of entire order-fulfillment process

20
Out-sourcing and partnerships

• Trend towards out-sourcing, not only for
  materials and components, but also for services
• Focus on core competencies
• Logistics provision of warehousing, inventory
  control (VMI) and transportation is increasingly
  out-sourced
• Co-ordination and liaison with strategic partners
  is crucial

21
Logistics Information Systems

• Only with updated and accessible information can
  the complex flows of goods be co-ordinated to
  achieve cost-effective service
• Substitute Information for inventory
• Look down the pipeline into end-user markets

22
Global co-ordination vs. Local Management

• Global functions
• Network structure for production and
  transportation optimisation
• Information systems development and control
• Inventory positioning
• Sourcing decisions
• International transport mode and sourcing
  decisions
• Trade-off analysis and supply chain cost control

• Local functions
• Customer service management
• Gathering market intelligence
• Warehouse management and local delivery
• Customer profitability analyses
• Liaison with local sales and marketing management
• Human resource management

23
Characteristics of Companies at the Leading Edge
of Logistics

• Survey by Council of Logistics Management in
  North America
• Exhibit an over-riding commitment to customers
• Emphasise planning
• Encompass a significant span of functional
  control
• Commit to external alliances with service
  providers
• Have a highly-formalised logistical process
• Place a premium on operational flexibility
• Employ comprehensive performance measurement
• Invest in state-of-the-art information technology

24
Concerning organisational structure, leading
edge firms

• Have had formal logistics organisations longer
• Tend to have logistics headed by an officer-level
  executive
• Adopt more fluid approach to logistics
  organisation encourage frequent re-organisation
  to take advantage of opportunities
• Favour centralised control
• Becoming more centralised as they adapt
  organisational structure to corporate mission
• More apt to execute boundary-spanning or
  externally-oriented logistics functions
• Tend to manage more beyond or extended functional
  responsibilities not traditionally considered
  part of logistics

25
Concerning strategic posture, leading edge firms

• Have a greater tendency to manage logistics as a
  value-added process
• Reflect a stronger commitment to achieving and
  maintaining customer satisfaction
• Place a premium on flexibility, particularly in
  accommodating special or non-routine requests
• Are better positioned to handle unexpected events
• Are more willing to use outside service providers
• Place a premium on how well the service company
  performs in managing itself and its service to
  clients
• Are more apt to view service-provider
  relationships as strategic alliances
• Anticipate greater use of outside services in the
  future

26
Concerning managerial behaviour, leading edge
firms

• Expend more effort on formal logistics planning
• Are more apt to publicise their performance
  commitments and standards by issuing specific
  mission statements
• Are more apt to have chief logistics officers
  involved in business unit strategic planning
• Respond effectively to non-planned events
• Regularly use a wider range of performance
  measures, including asset management, costs,
  customer service, productivity and quality
• Are more significant users of information
  processing technology and enjoy a higher quality
  of information systems (IS) support
• Typically have more state-of-the-art computer
  applications and are planning more updates and
  expansions
• Are more involved in new technology such as
  electronic data interchange (EDI), artificial
  intelligence (AI), etc.

27
The new organisational paradigm

• Traditionally, organisations are hierarchical,
  vertical and functionally defined
• Current and future business environment
• focus on speed, just-in-time, short product
  life-cycles
• volatile demand
• flexibility in customer requirements
• Challenge how to be a responsive organisation?

28
Distinguishing features of the responsive
organisation

• Focus will shift
• From functions to processes
• From profit to performance
• From products to customers
• From inventory to information
• From transactions to relationships

29
From functions to processes

• Conventional organisations
• organised around functional silos
• inwardly focussed, concentrates on use of
  resources
• Organisations actually compete on capabilities
• product development, order fulfilment, etc.
• through these processes are the customers
  satisfied
• capabilities reflect processes which require
  co-ordination and co-operation horizontally
  across t he organisation

30
From profit to performance

• Profit is the end, but the means important too
• What gets measured gets managed
• Performance drives profitability
• New performance indicators
• customer satisfaction customer retention, brand
  preference, dealer satisfaction, service
  performance
• flexibility commonality of components, reduction
  of process complexity, set-up times
• people commitment employer turnover, suggestions
  submitted and implemented, internal service
  climate and culture, training and development

31
From products to customers

• Move away from focus on products e.g. brand
  managers, product group managers
• Re-focus on customer satisfaction and demand
  management
• Emphasis on customer value
• Need to be supported by accounting systems that
  better identify the cost of servicing the
  customers
• Logistics and marketing need to be managed
  conjointly

32
From inventory to information

• uncertainty is the mother of inventory
• forecasts are never right
• Feedback information on actual usage!
• Substitute information for inventory
• Benetton
• capture information at point-of-sale early in the
  season
• flexibility in production process
• reduce reliance on (highly inaccurate) fashion
  forecasts

33
From transactions to relationships

• Tradition focus on market share and winning
  customers
• Keeping customers important
• the longer customers stay, the more profitable
• customers who drift from one supplier to another
  more difficult to satisfy than loyal and
  committed customers
• Benefits of single sourcing
• improved quality
• innovation sharing
• reduced costs
• integrated scheduling of production and
  deliveries
• barriers to entry of competitors

34
Managing the supply chain of the future

• Since it is through people that change is
  created, attention must be paid to how the
  organisation develops a set of skills and
  competencies that are appropriate to the
  constantly changing external environment.
• - Martin Christopher

35
Managing the supply chain of the future
36
The extended enterprise and the virtual supply
chain

• Boundary-less
• horizontal process management
• across vendors, distributors, customers
• value-added exchange of information between
  partners
• Supply chain becomes a synergistic confederation
  of organisations with agreed common goals, each
  bringing specific strengths to the overall value
  creation
• Example Smart Car

37
Role of information in the virtual supply chain

• Internet and other IT technologies can now link
  the customer directly to the supplier, and allow
  the supplier to react, sometimes in real-time.
• Geographically dispersed network of
  specialists can be joined together to create
  innovative and cost-effective solutions for
  complex designs e.g. Boeing, Airbus, Infosys
• Tescos
• sets up information exchange extranets to
  implement efficient consumer response (ECR) to
  reduce waste and improve product availability
• on average, 5 to 10 of products on promotion
• suppliers can access Tesco sales data and track
  their products
• enables the firm to estimate stock levels to
  fulfil promotions
• specifications for new products can be available
  on-line

38
Making Change happen

• Clear vision of the role of logistics in the
  organisation
• significant organisational change
• new ways of working with upstream and downstream
  partners in the supply chain
• underpinning information systems established
• Effective leadership crucial

39
Summary

• Continuing trend towards globalisation
• global brands, global sourcing, focussed
  factories serving the world market
• Increased complexities longer supply chains,
  more out-sourcing
• Need to balance the varying needs of local
  markets against the economic advantages of
  standardised procedures/products
• Challenge a flexible and agile supply chain yet
  achieves economies of scale/scope
• Requires organisational change within firm and
  with supply change partners
• Integrated logistics planning information
  technologies