Supply Chain Management and Cost of Production

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Supply Chain Management and Cost of Production Nexus - An

Empirical Analysis

Md. Entazul Huque*

Md. Anwarul Islam

**

Abstract: It is only in the recent past that business organizations have

come to recognize the vital impact that logistics/ supply chain management

can have in the achievement of competitive advantage. There are important

five generic competitive strategies to achieve competitive advantage. The

vital one is low-cost. Logistics / supply chain management has the

potential to assist the organization in the achievement of cost / productivity

advantage and a value advantage. The productivity advantage gives a

lower cost profile and value advantage gives the product or offering a

differential plus over competitive offerings. Logistics costs represent a

significant proportion of total costs. As the logistics/ supply chain process

strategically manage the procurement, movement and storage of materials,

parts, and finished inventory ( and related information flows) thorough the

organization and its marketing channels in such a way that current and

future profitability are maximized through the cost-effective fulfillment of

orders, so the scope of taking advantage of lowering unit cost is very

significant. Further that Logistics/ supply chain management increaseefficiency. Productivity plays an important role in this respect. The higher

productivity is, the lower costs are in producing goods and services, the

lower prices can be. Therefore, logistics/ supply chain management has the

scope of planning, implementing and controlling the efficient and effective

flow and storage of goods, services, and related information from the point

of origin to the point of consumption in order to meet customers

requirements. To survive in the present context of globalizing the business,

increase in competitors and explosion of production technology as well as

information technology compelled the business firms to think effective &

efficient logistics/ supply chain management. It is a fact of priority that

will contribute significantly to achieve competitive advantage by lowering

unit cost.

Key words:Logistics, supply chain, productivity, efficiency, logistics/ supply chainmanagement, competitiveness, and competitive advantage.

*Professor & Chairman, Dept. of Business Administration, Bangladesh University

**Professor, Department of Marketing, Dhaka University


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D. U. Journal of Marketing, Vol. No. 10, June 2007 2

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INTRODUCTION

Despite advancement of management theory and information system,

logistics management/ supply chain management has evolved in scope

and influence in the private sector since mid to late 1940s. In 1950s and

60s, the military was the only organization using the term logistics

(Edward H. Frazelle, 2004). There was no true concept of logistics in the

private industry at that time. In the 1960s, material handling,

warehousing, and traffic were grouped together to become known as

physical distribution: procurement, marketing, and customer service

were grouped together to become known as business logistics.

Even today in many academic institutions, logistics is still divided along

these lines; where logistics is taught in the business school, it is taught as

business logistics and in the engineering schools as physical distribution

(Edward H. Frazelle, 2004). Throughout the history of mankind wars

have been won and lost through logistics strengths and capabilitiesor

the lack of them. It has been argued that the defeat of the British in the

American war of independence can largely be attributed to logistics

failure (Martin Christopher, 2005). An organization capable of supplying

the army was not developed until 1781 and by then it was too late . In

the Second World War logistics also played a major role. The allied

Forces invasion of Europe was a highly skilled exercise in logistics. In

the early part of 1991 the world was given a dramatic example of the

importance of logistics.

In the late 1960s and early 1970s, cost was the primary concern, a hold-

over from the philosophy of the 1950s that manufacturings only

objective was to minimize production costs. However, as more and more

companies began to produce low-cost products, the need became

apparent to develop other ways to differentiate themselves from their

competitors. The priority thus shifted to quality. Companies at this time

obtained a competitive advantage by producing high quality products,


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Supply Chain Management and Cost of Production Nexus - An Empirical Analysis 3

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which allow them to change morealthough price still was a factor in

the consumers buying decision. However, competition again soon

caught up, and everyone was offering high-quality products thatreasonably priced. Companies, in looking to obtain competitive

advantage in the market place turned to speed of delivery as a means of

differentiation themselves from the rest of the competitors (Aquilano,

Chase, Davis: Fundamental of operation management, second edition).

George Stalk, a leading management guru has identified speed as one

of the major factor of competitive advantage1(a)

. Eventually, the

competition again caught up and the more aggressive firms looked for

still another means to obtain a competitive advantage. This time the

flexibility was selected as manifested by the ability of the firms to

produce customize products. In 1993, the companies have taken into

consideration service as another item for competitive advantage. As the

rules for operation strategy shifted from that of primary reducing

manufacturing costs to that of including quality, speed of delivery,

flexibility, and service the paradigm for logistics / Supply chain

management functions has also came in picture of considering

maximizing value along with the cost minimizing of products(Aquilano,

Chase, Davis: Fundamental of operation management, second edition).

Supply chain is about creating valuevalue for customers and suppliers

of the firm, and value for the firms stakeholders. Value in logistics/

supply chain is primarily expressed in terms of time and place. Product

and services have no value unless they are in the possession of the

customers when (time) and where (place) they wish to consume them.

The mission of logistics/supply chain management is to plan and

coordinate all those activities necessary to achieve desired levels of

delivered service and quality at lowest possible costs (Martin

Christopher, 2005). Logistics/ supply chain management must therefore

be seen as the link between the market place and the operating activities

of the business. Logistics management, from this system viewpoint, is


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the means whereby the needs of customers are satisfied through the

coordination of the materials and information flows that extend from the

marketplace, through the firm and its operations and beyond that to

suppliers.

Logistics / supply chain management functions integration are shown in

a flow diagram-1:

Materials flow

Supplier Procurement Operations

Distribution Customers

Information flow

Diagram: 1

From the diagram-1, we can draw the definition of logistics in a simplest

way as Logistics is the flow of material, information, and money

between consumers and suppliers (Martin Christopher, 2005).

Supply Chain Management is relatively a new field of integrated

management in comparison with the traditional fields of finance,

marketing, and production. Logistics is the part of supply chain process.

Supply Chain Management is a term that has emerged in recent years

that captures the essence of integrated logistics and even goes beyond it.

Supply chain management emphasizes the logistics interactions that take

place among the functions of marketing, logistics, and production within

a firm and those interactions that take place between legally separate

firms within the product flow channel. Therefore, supply chain

management can be defined as the systematic, strategic coordination of

the traditional business functions and the tactics across these business

functions within a particular company and across business within supply


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chain, for the purpose of improving the long-term performance of the

individual companies and the supply as a whole (Benjamin S. Blanchard,

2005, 2006).

Over the years, several studies have been conducted to determine the

costs of logistics for the whole economy and for the individual firm.

These are widely varying estimates of the cost levels. According to the

International Monetary Fund (IMF), logistics costs average about 12% of

the worlds gross domestic product. For the firm, logistics costs have

ranged fro 4% to over 30% of sales. Value is added by maximizing the

logistics costs and by passing the benefits on to customers and to the

firms shareholders. It is the point of empirical analysis of the researcher

that the firm must deeply exercise their knowledge and skill in logistics

/supply chain management to understand as well as to apply it in the

manufacturing process so that firm can be benefited to reduce costs. The

results from a cost survey of individual firms are shown in Table-1

below:

Table-1 Average Physical Distribution cost

Cost Category Cost in terms of % of

Sales

Transportation 3.34%

Warehousing 2.02%

Customer service/order entry 0.43%

Administration 0.41%

Inventory carrying cost @18%/ year 1.72%

Total distribution cost 7.65%

Source:Herbert W. Davis and William H. Drumm,Logistic costs and service

Database2002, Annual Conference proceedings), (San Francisco,

CA: Council of Logistic management, 2002) atwww.cclml.org.)
http://www.cclml.org/http://www.cclml.org/http://www.cclml.org/http://www.cclml.org/


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OBJECTIVE OF THE RESEARCH

1. To address the subject of logistics/ supply chain management ingeneral, to include some terms and definitions, and to describe

the importance /need for logistics in the context of current

competitive global environment.

2. Introduces the concept of logistics/ supply chain managementwith a brief review of its evolution and adoption within industry

3. To introduce new and evolving concept for greater application inthe industry and to achieve benefit in terms of increasing

efficiency and productivity.

4. To develop clear understanding about the way of cost reductionby application of logistic / supply chain management so that firm

can significantly play role in the competitive environment to get

competitive advantage.

5. It is an academic based empirical analysis that will help theprofessionals to explore further knowledge in order to fine tuning

as well as to deliver knowledge to academic pursuits.

METHODOLOGY

For making the research success relevant knowledge and information

were collected from two sources, viz. from text books and fro different

journal. It is worthwhile to say that remarkable research or publication

on this issue has not been found. So, information & knowledge, used in

this study, has been collected from text book, internet source and journal

/ conference discussion records. Ideas have been developed from the

requirement and necessity of this aspect in the industry for precise

application to become benefited in the competitive global business

environment. Moreover, the researcher feels the enduring use of logistic/

supply chain management knowledge to impart to educational institution

through seminars and workshops.


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Literature related to this aspect has been studies to provide references

with confident. Theories of logistic and supply chain management,

Logistic engineering, supply chain strategy, marketing, production &operation, strategic management and economics have been studied from

the text books and knowledge of these theories has been exercised

precisely to clear the issue of research article.

The experience of the researcher in the field of logistic and supply chain

management helps to analyze and develop concrete idea as well concept.

Graphical representation and other tools and techniques have been used

to analyze the operational definition of variables, system, and outcome to

draw concluding rational findings.

RESEARCH DESIGN

The research design for the current study includes analytical framework,

application of theory and practices, and empirical knowledge.

In order to attain the objectives of the study we have identified some

factors or attributes which are expected to have crucial relationship with

ensuring access to cost reduction and increase of efficiency and

productivity. Empirical analysis are then developed to identify factors

relating to access to reach cost reduction in production, procurement,

information flow, and distribution level and factors explaining the need

for cost reduction and attaining efficiency as well as productivity. In

order to examine the determinants of accessibility and magnitude of cost

reduction, during empirical the researcher used a number of explanatory

variables identified in literature review to observe their potential impact

to cost reduction and to increase efficiency and productivity of a firm.

The essence of theories of logistics and supply chain management,

marketing, production & operation, strategic management and


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economics has been used from the concerned text books for empirical

analysis. The concept of application of productivity advantage, value

advantage, customer service, elements of logistics, logistics information,

the evolution of logistics, logistics framework, universal system of

manufacturing/ service organization (inputtransformationoutput),

value chain system have been actively considered during empirical

analysis of the research article.

LITERATURE REVIEW

Logistics and logistics management:

The word Logistics has originated from the Greek word logistikos and

from the Latin word logisticus, meaning science of computing and

calculating.

Logistics is that part of supply chain process that plans, implements, and

controls the efficient, effective flow and storage of goods, service, and

related information from the point of origin to the point of consumption

in order to meet the customers requirement (Ronald H. Ballau, 2005) .

Logistics is also referred to as physical distribution. Philip Kotler defines

logistics as planning, implementing, and controlling the physical flows

of materials and finished goods from the point of origin to the point of

use to meet the customers need at a profit.

Logistics Management is basically an integrative process that optimizes

the flow of materials and supplies through the organization and its

operations to the customer.

Martin Christopher says that logistics is essentially a planning process

and an information based activity.


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Supply chain and supply chain management

According to Ronald H Ballou in his book- Business logistics / supply

chain management (page-5) supply chain is the networks of facilities,vehicles, and logistics information systems. Supply chain encompasses

all activities associated with the flow and transportation of goods from

the raw materials stage (extraction), through to the end user, as well as

the associated information flows. Supply chain management is the

integration of these activities, through improved supply chain

relationship, to achieve a sustainable competitive advantage.

Relationship of Logistics and supply chain

There is a lot of confusion surrounding the terms logistics and supply

chain. Edward H. Frazelle in his book supply chain management

(Page-8) has distinguished the two by explaining that the supply chain is

the network of facilities (warehouse, factories, terminals, ports, stores

and homes), vehicles ( trucks, trains, planes, and ocean vessels), and

logistics information systems (LIS) connected by an enterprises

suppliers suppliers and its customers customers. Logistics is what

happens in the supply chain. Logistics activities (customer response,

inventory management, supply, transportation, and warehousing)

connect and activate the objects in the supply chain.

The Evolution of Logistics and Supply Chain Management

There was no true concept of logistics in private industry up to late

1940s. Its application started in military operations in 1950s and 1960s.

The development of logistics in industry starts very slowly in the five

phases namely, i) Workplace logistics, ii) Facility logistics, iii) Corporate

logistics, iv) supply chain logistics , and v) Global logistics. This

development is shown in the diagram-2:


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Scope

&I

nfluence

Workplacelogistics

FacilityLogistics

CorporateLogistics

SupplyChain

Logistics

GlobalLogistics

1950s 1960s 1970s 1980s 1990s

Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published

by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi

110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301).

Diagram-2

Workplace logistics: Workplace logistics is the flow of materials at

single workstations. The objective of the workplace logistics is to

streamline the movement of an individual working at a machine or along

an assembly line. Ergonomics is the example of workplace logistics.

Facility logistics: Facility logistics is the flow of material between

workstations within the four walls of a facility. The facility could be a

factory, terminal, warehouse or distribution center. Facility logistics can

be termed as material handling. In 1960s, material handling,

warehousing, and traffic were grouped together to become known as

physical distribution; procurement, marketing and customer service were

grouped together to become known as business logistics.

Corporate logistics: Corporate logistics is the flow of material and

information between facilities and processes of a corporation. In 1970s,

the first application of true logistics within a corporation starts by


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assimilating and synthesizing departments (material handling,

warehousing and so on) into functions (physical distribution and

business logistics). The objective is to develop and maintain a profitablecustomer service policy while maintaining and reducing total logistics

costs.

Supply chain logistics: Supply chain logistics is the flow of material,

information, and money between corporations (interworkstation,

interfaculty, inter-corporate, and intra-chain).

Global logistics: Global logistics is the flow of material, information,

and money between countries. Global logistics flows have increased

dramatically during the last several years due to globalization in the

world economy, expanding use of trading blocs, and global access to

Web sites for buying and selling merchandise. Global logistics is much

more complex than domestic logistics, due to the multiciplicity of

handoffs, players, languages, documents, currencies, time zone, and

cultures that are inherent to international business.

Gaining competitive advantage through logistics

To gain competitive advantage over its rivals, a firm must deliver value

to its customers through performing value chain activities. Value chain

activities have been categorized in two groupsprimary activities

(inbound logistics, operations, outbound logistics, marketing, and sales

& service) and support activities (general administration, human

resource management, technology development, and research). This is

depicted in diagram-3 below:


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The Value Chain

Diagram

PurchasedSupplies &

Inboundlogistics

OperationsOutboundlogistics

Sales &marketing

serviceProfitmargin

Primaryactivities

and cost

Human resource management

Product R&D, Technology, and System development

General Administration

SupportActivities& cost

1 2 3 4 5 6

Diagram-3

Logistics deliver s value to the customers through three logistical

processes.

Inbound logistics: Operation preceding manufacturing. This includes: i)

Movement of raw materials, ii) Components for processing from raw

materials.

Process logistics: Operations directly related to processing. This

includes:-i) Storage & movement of raw materials and components

within the manufacturing premises as per manufacturing schedule

ii)The inventory management of stored material and in-process goods is

part of process logistics.

Outbound logistics: Operations following the production process. This

includes:- i) Warehousing, ii) Transportation, iii) Inventory management

of finished products.


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Interdepended logistics activities

The definition of logistics and supply chain management speaks itself the

interdependent activities of customer response, inventory planning andmanagement, supply, transportation, and warehousing. The

interdepended activities are summarized below in diagram-4:

Interdependent logistics activities

warehousing

Customer

response

Logistics

Inventory

management

supply

transp

ort

atio

n

-customer service policy

-customer satisfaction-order entry

-order processing-inventory & collection

-forecasting-order quantity engineering

-fill rate planning-control policy

-deployment

-Supplier service policy

-sourcing-supplier integration-purchase order processing-buying and payment-

-network design

-shipment management-fleet container management

-carrier management-freight management

-receiving-put away

-storage-order picking-shipping

Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published


110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)

Diagram-4


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Logistics Master Planning (LMP)4:

LMP three steps LMP Methodology

implement

innovateinvestigate

LMP

-Profile currentlogistics activity

-Measure currentlogistics performance

-Benchmark performanceand practices versusworld- class standards.

-Simplify (eliminateAnd combine activities-Optimize (apply decisionSupport tools todetermine Optimalresource Requirements)-Apply world-classpractices

-systematize (develop and document detailed procedures)-Automate (justify, select, and implement appropriate systems)-Humanize (design, populate, and develop organization plansfor human resource

processes

Custo

merresp

onse

Inventorym

anagemen

t

Supp

ly

Transportatio

n

wareho

using

investigateinnovate

implement

LogisticInformationsystem

Mea

sure

s

&goal

Logisti

cs

org

aniz

ati

on

Master planning Logistics

This methodology can and has been used in aWide variety of industries, countries, any otheroperating situation.

Source: Strategic management, Pearce & Robinson, sixth edition. Logistics and supply

chain management, Martin Christopher, second edition

Diagram-5

Logistic master planning is a planning process that develops short-and

long-term metrics, process definitions, information system requirements,

and organizational requirements for logistics as a whole and for logistics

activities like customer response, inventory management, supply,

transportation, and warehousing separately. There are three steps in

logistics master planning namely, i) investigate, ii) innovate, and iii)

implement. The LMP methodology and its three steps are shown

separately in diagram-5:

Competitive advantage

The transition of volume-based growth to value based growth will

require ensuring much greater focus on the core processes of the

business. As the competitive model in the contemporary competitive


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business environment rely on process rather than product, the question of

determining factors of competitive advantage has come in the frontline.

The factors on which competitive advantage depend on are describedbelow in a statement in the mathematical form:

Competitive advantage5= product excellence x process excellence

Process excellence is related to logistics/supply chain. The key issues of

process excellence are responsiveness, reliability, and relationships.

Responsiveness refers to shorter lead time, flexibility and quick solution

to the problem of customers. In other words the customers desire an

environment of agility. Agility implies the ability to move quickly and to

meet customer demand sooner. A key to improving reliability in logistics

process is enhanced pipeline visibility. Buyer/ supplies relationships

development is trend towards fulfillment of demanddriven marketplace.

Supply chain management by definition is about the management of

relationship across complex networks of companies. Therefore, the three

themes of responsiveness, reliability and relationships provide the basis

for successful logistics and supply chain management which in tern

support competitive advantage.

An inputoutput perspective on logistics productivity7:

Logistics / supply chain management recognize the amount of logistics

resources consumed in providing in target customer service levels.

Hence a fair set of performance indicators will include measures of

logistics resource utilization and productivity. Those measures describe

utilization and productivity for the logistics workforce, transportation

capacity, logistics facilities, and inventory. The perspective on logistics

productivity in an inputoutput diagram-6 is shown below:

Diagram-6

Logistics processesCustomer responseInventory managementSupplyTransportation

Warehousing

Logistics OutPerfect ordersStorage capaci

Information

Logistics requirements:

WorkforceSpace

InventoryTransport systemsLogistics information system

Sal e

s


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1.11 Financial measures of Logistics performance: Diagram-7Logistics Financial Measures

Corporate FinancialMeasures with notation

Logistics FinancialMeasures with notation

Description ofLogistics expenses items

Revenue-R

Expense-E

Profit-P=R- E

Asset Value-AV

Asset Turnover-AT=R/AV

Asset carrying rate-ACR

Corporate capital charge-CCC

Total corporate cost-TCC=E+CCC

Cost sales ratio-CRS=(E+CCC)/R

Return on assets-ROA+P/AV

Economic value added-EVA=P- (AV x ACR)

Logistics expenses-LE

Logistics asset value-LAV

Logistics assets turnover-LAT=R/LAV

Logistics capital charges-LCC=LAV x ACR

Total logistics cost-TLC=LE+LCC

Logistics cost sales ratio-LCSR=TLC/R

Return on logistics assets-ROLA=LP/ LAV

Logistics value added-LVA=P- ( LAV x ACR)

Telecommunications, inbound & outboundfreight, fuel, fees to third parties and

leased or rented space.

Inventory, logistics facilities, transportationFleets, material handling system, logistic

Information system.

Product of the investment in logistics assets,And the asset carrying rate.

Customer response, inventory planning &

Management, supply, transportation, andWarehousing.

Customer response: cost of labor, space forOrder processing, telecommunication.Inventory management: inventory carrying cost,

Cost of personnel, system cost.Supply: cost of labor, space, system, andTelecommunication for performing activities.

Transportation cost: Inbound & outbound cost.Ware housing cost: Cost of labor, space,

material handling system, and information hand-Ling system

Logistics is playing an increasingly important role in value creation,

revenue enhancement, capital consumption, and expense control. As a

result, logistics financial performance is playing a bigger role in

corporate financial performance. Like our corporate financial measures

we have similar logistics financial measures. To sharpen focus of our

Costs


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vision in respect to logistics financial measures and logistics

performance measures it is necessary to produce two matrix namely i)

Logistics financial measures matrix, and ii) Logistics performancemeasures matrix wherein the aspects like logistics activities, logistics

financial measures with notation, corporate financial measures with

notation, logistics productivity indicators, quality indicators, and

response tome indicators are shown. The cost items involved against

logistics expense, logistics asset value, and logistic capital charges are

shown, in brief, under the description of logistics expenses column in

diagram-7.

(Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-3, published


110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)

Total logistics cost (TLC)

Total logistics costs are defined to include expense and capital costs in

the five logistics processes: customer response, inventory planning andmanagement, supply, transportation, and warehousing. The total logistics

costs are made up of the costs namely i) Total customer response costs

(CRC), Total inventory costs (TIC), Total supply costs (TSC), Total

transportation costs (TTC), and Total Ware housing costs (TWC).

Therefore, the total logistic costs can be written in a mathematical

formula as:

Total Logistics Costs, TLC = TRC + TIC + TSC + TTC + TWC.

Analysis of important aspects related to subject of the article

The researcher has outlined and explained, in the literature review, the

theories and practices of logistics/ supply chain management. The

purpose is to reach a conclusion that cost reduction of the product/

service is achieved significantly through logistics/ supply chain


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management. Therefore, a systematic analysis is presented to provide an

understanding as well as in-depth knowledge about logistics and the need

of its application in the present global business environment.

Competitive advantage through productivity & value advantage

Traditionally, it has the wide spread opinion that the main route to cost

reduction was by gaining greater sale volume and there can be no doubt

about the close linkage between relative market share and relative costs.

However, it must also be recognized that logistics management can

contribute significantly to reduce costs. In other words, it is central

theme that effective logistics management can provide a major source of

competitive advantage in other words a position of enduring

superiority over competitors in terms of customer preference may be

achieved through logistics. Competitive advantage can be achieved

through productivity advantage and value advantage or combination of

two. The productivity advantage provides a lower cost profile and value

advantage provide the differential product offerings and customer

service. Service is as a means of gaining a competitive edge. Service in

this context relates to the process of developing relationships with

customers through the provision of augmented offer in the form of

delivery service, after-sales services, financial packages, technical

support and so forth. Firms can able to reach cost and service leader

position in the industry based upon both a productivity advantage and a

value advantage as shown in matrix (a). Indeed the challenge to

management is to identify appropriate logistics strategies to take the

organization to the right hand corner of the matrix (b).


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Logistics and competitive Marketing logisticsadvantage matrix strategic goal

Serviceleader

Cost andService leader

Commoditymarket

Costleader

Productivity advantage(a)

Valueadvantage

LO HI

LO

HI

HI LO

HI

LO

Relative delivered costs(b)

Relativedifferentiation

Matrix-1(a) and Matrix-1(b)

Competitive advantage & value chain: Competitive advantage through

logistics is another important issue in the competitive business

environment. In this respect the contribution of Michael Porter,

Professor, Harvard Business School has been recorded in his research

and writing8,9

. One concept, in particular, that Michael Porter has

brought is the value chain


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A Model of supply Chain Management

SupplyChainFlows

The supply Chain

The global environment

Intercorporate coordination

( Functional shifting, third-party providers,relationship management, supply chain structures.

Customer

Satisfaction/Value/

Profitability/Competitiveadvantage

Products

Services

Information

FinancialResources

Demand

Forecasts

Marketing

Sales

Trust Research & Development

Commitment Forecasting

Risk Production

Dependence

Behaviors

Purchasing

Logistics

Information system

Finance

Customer service

InterfunctionalCoordination

Suppliers supplier supplier Focal firm Customer Customers customer

Source: Mentzer et al; Defining supply chain management, Journal of Business Logistics, Vol.22, No. 2 (2001), p. 19) Table-3

Value chain activities, categorized into two pats, are integrated functions

(shown in the diagram of value chain). Competitive activities are derived

from the way in which firms organize and perform these discrete

activities within the value chain. Therefore, to gain competitive advantage

over its rivals, a firm must deliver value to its customers throughperforming these activities more efficiently than its competitors or by

performing the activities in a unique way that creates greater

differentiation. Another consideration is the supply chain networks that

are involved through upstream and downstream linkages in the different

processes and activities that produce value in the form of products and

service. In the past it was simply considered as relationship with the

suppliers and customers. It is the case today for judgment of cost


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reduction or profit improvement at the expense of their supply chain

partners. Companies should realize that simply transferring costs,

upstream and downstream, may not make them more competitive. So,supply chain management is essentially required to combat the cost

reduction or profit maximization situation. To ensure such situation

companies shall consider a model of supply chain management model in

Table-3.

Logistic environment and pressing current issues: As the competitive

context of business continues to change, bringing with it new

complexities and global concerns for management in reality, it is the

time to be recognized that the impact of these changes on logistics can

not be overlooked rather it is a time for giving due attention to logistics /

supply chain management. Indeed, of many strategic issues that confront

the business organization today, perhaps the most challenging are in the

area of logistics. The researcher at this stage would like to highlight, in a

brief diagrammatic form diagram-8, about the most pressing issues

considered currently:

The customer

Serviceexplosion

Changing Logistics Environment Due To Pressing Current Issues

1

Time compression2

Globalization

Of industry3

Organizationalintegration

4

Current issues Description of current issues

The customer in todays marketplace is more demanding, not just of productquality, but also of service. The companies that have achieved recognitionfor service excellence, and thus have been able to establish a differential

advantage over their competition are those companies where logistics

management is a high priority. Xerox, BMW, Dell Computers are example.

One of the most visible features of recent years has been the way in which

time has become a critical issue in management. The concept of logistics lead

time is one of prominent issue. From the moment when decisions are takenon the sourcing and procurement of materials and components through themanufacturing sub assembly process to final distribution and after-market

support, there is a true scope of logistics lead-time management.

The third issue that provide a challenge for logistics management is the trend

towards globalization. In the global business materials and components are

sourced worldwide, manufactured offshore and sold in many different

countries along with local customization. The global company seeks toachieve competitive advantage by identifying world markets exercising effortthrough logistics management.

The challenges that face the business organization in todays environment are

quite different to those of the past in respect of many issues and out of those -organizational integration is another important one. Now we need broad-

based integration with Production, marketplace, service delivery system, andinbound as well as outbound logistics.


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(This diagrammatic form is designed and developed by the researcher from the

knowledge gained from text book. Source: Logistic and supply chain management;

Strategies for reducing cost and improving service, Second edition, written by Martin

Christopher.)

Diagram-8

Alignment of organization structure: The transition to the 21st

century

seems to have been accompanied by ever-higher levels of turbulence in

the organizational structure in the business environment. Traditional

organization has grown heavy with layer upon layer of management and

bureaucracy. Such companies have little chance of remainingcompetitive in the new market place. Experienced observers and

commentators of the logistic management process have general

agreement that the major barrier to the implementation of the logistics

concept is traditional organizational structure. Moreover, the companies

do not recognize the need for organizational change, and still have poor

knowledge about logistics /supply change management and its effect on

production cost and profit maximization. Therefore, most of the

organization maintain and manage the activities on a functional basis

(production, marketing, HRM, finance & accounting, R & D,

engineering etc.). It may be mentioned here that the process of satisfying

customer demand begins with inbound supply and continues through

manufacturing or assembly operations and onwards by way of

distribution to the customers. To manage this process it is required a

complete system involving the logistics / supply chain management. By

doing this the organization can achieve a smooth- flowing logistics

pipeline that facilitates end-to-end process management. The cost

reduction by way of this process management can effectively be

managed which ultimately give rise to profit. As markets, technologies

and competitive forces change at ever-increasing rates and the trend

towards globalization of industry is a future-oriented avenue so the

imperative for organizational structure change is required considering

logistics as driving force. The importance of logistics / supply chain


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incorporation in the traditional organizational structure is a must to avoid

problem and at the same time to make alignment of organization without

separating the logistics management from the functional activities. Thegradual approach of evolutionary steps to an aligned logistics

organization is outlined hereunder in Diagram-9:

Evolutionary steps to an aligned logistics organization

Evolutionary steps to an aligned logistics organization

LogisticsCouncil

PerformanceMeasuredefinition

Training&

development

RemunerationBased on

performance

AlignedLogistics

organization

Logistics council comprised of the individuals whose decisions impact the flows of

Materials, information, and money across the organization. It includesrepresentation from inbound and outbound transportation, warehousing,

procurement, inventory planning, customer service, manufacturing, informationTechnology, and finance.

To develop a set of standard of measuring to reach a commonpurpose of satisfying customers at the total lowest logistics costsand maximizing share holder value added concepts by the council

Training & education forthe individuals about theAligned logistics organization

Remuneration on the basis of

Performance to be decided by

The council so that employeesperform effectively & efficiently.

Aligned logistics organization includes process organization,matrix organization, integrated logistics organization, globalLogistics organization, business unit logistics organization,

distributed logistics organization, hybrid model.

Diagram-9

Source: Text Book: supply Chain Strategy; Edward H, Frazelle, Ph.D. TATA McGraw-Hill Edition.

Reshaping of Organizational Structure:

Based on organizations mission and corporate culture the existing

traditional organizational structure is to be reshaped and integrated

organizational structure including logistics/ supply chain management is

arranged in many organizations of the world in order to survive as well

as to take advantage in the competitive global business environment. The


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Distributed logistics organizational model and global logistics

organization model is shown below in Diagram-10 as an example.

Another important aspect is considered to develop logistics scoreboard

framework to present a set of indicators for aligning logistics

performance towards the unifying goals of reducing logistics costs,

decreasing the logistics labor content per order, increasing total logistics

quality, and decreasing total logistics cycle time.

CEO

Marketing Sales R&D Production Quality Finance

Logistics AnalystLogistics AnalystLogistics AnalystLogistics AnalystLogistics AnalystLogistics Analyst

Distributed Logistics Organization Model

ChiefLogistician

Global Logistics Organization Model

Global Logistics Officer

Regional Logistics ManagerNAFTA

Regional Logistics ManagerEU

Regional Logistics ManagerASIA PACIFIC

Domestic Logistic ManagerUS, Canada, Mexico

Domestic Logistic ManagerNetherlands, UK

Domestic Logistic ManagerJapan, Hong Kong

Diagram-10

Logistics optimization: To create logistics optimization it is essential to

look into the logistic activities that has been described under the heading

Interdependent logistics activities. The activities are customer

response, inventory management and planning, supply, transport, and

warehousing. Brief analysis is focused to understand the effect on cost

reduction.


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The logistics of customer response consists of five interrelated activities

as has been stated in the diagram of interdependent logistics activities.Customer response is optimized when the customer service policy (CSP)

yielding the lowest cost of lost sales, inventory carrying, and distribution

is identified and executed. The inventory planning and management

(IP&M) is the combination of five activities namely, forecasting, order

quantity engineering, service level optimization, replenishment planning,

and inventory deployment.

The objective of supply management is to minimize the total acquisition

cost while meeting the availability, response time, and quality

requirements stipulated in the customer service policy and in the

inventory master plan. The logistics of supply include developing and

maintaining a supplier service policy, sourcing, supplier integration,

purchase order possessing, and buying and payment. The objective of

transportation is to link all pick-up and deliver-to points within the

response time requirements of the customer service policy and the

limitations of the transportation infrastructure at the lowest possible cost.

The logistics of transportation include network design and optimization,

shipment management, fleet and container management, carrier

management, and freight management. The objective of warehousing is

to minimize the cost of labor, space, and equipment in the warehouse

while meeting the cycle time and shipping accuracy requirements of the

customer service policy and the storage capacity requirements of the

inventory play. The logistics of warehousing includes receiving, put

away, storage, order picking, and shipping.

Therefore, to achieve lowest cost effective management of

interdependent logistics activities shall have to be provided attention on

top priority basis. The companies who are considering this fact in reality

are known as the survival of the fittest. Nevertheless, it goes without


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saying that logistics /supply chain management has nexus to unit cost of

production provided an integrated action is matched through alignment

in the traditional organization structure.

Logistics impact on Return on investment (ROI):The impact of margin and asset turn on ROI

Profit/sales(margin)

Sales/ Capital employed(Asset turnover)

20% ROI

15% ROI

10% ROI

It illustrates theopportunities thatexits for boostingROI through eitherachieving betterMargins or higherassets turns or both

Logistics impact on ROI

Sales revenue

costs

Profit

Inventory

Accounts receivable

Cash

Fixed assets

Customerservice

Logisticsefficiency

Assets deployment& utilization Capital

employed

ReturnOn

investment

Source: Logistic and Supply Chain Management, second edition, Martin Christopher,

---

+

+

+

Graph-1 & Diagram-11

The ways in which logistics management can impact on ROI are many

and varied. Return on investment is the ratio between the net profit and

the capital that was employed to produce that profit, thus:

ROI = Profit Capital employed. This ratio can be further expanded:

ROI = Profit Sales Sales Capital employed.

The figure below shown in graph-1 & diagram-11 highlights the major

elements determining ROI and the potential for improvement through

more effective logistics management. The ways in which logistics


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management can impact on ROI are many and varied. Return on

investment is the ratio between the net profit and the capital that was

employed to produce that profit, thus:ROI = Profit Capital employed. This ratio can be further expanded:

ROI = Profit Sales Sales Capital employed.

The figure below shown in graph-1 & diagram-11 highlights the major

elements determining ROI and the potential for improvement through

more effective logistics management.

Addressing logistics/supply chain in general: To address about

logistics/supply chain it is imperative to provide some terms and

definitions, to describe the need for logistics in the current international

and global business environment, outlined logistics elements, and

alignment of the organizational structure. The researcher has described

different aspects in the foregoing paragraphs and diagrams wherein an

integrated logistics approach is emphasized and the need for considering

logistics to reduce cost for attaining competitive advantage in the

business arena is focused.

In the context of Bangladesh, the logistics/supply chain management is a

new thought although the issue is not new in the global business. In our

country logistics/ supply chain management is no more than a

distribution system. The idea is to be changed. As soon as the old

concept is prevailed in the mind of the entrepreneurs and even sustained

in the public/ autonomous office the growth of the organization /

government sector will be under threat in gaining the competitive

advantage. In the sector of agriculture, food management, glossary

shops, departmental stores, healthcare service, and even vegetables

supply logistics management should immediately be thought of so that

sustainable situation of competitive advantage can be attained through

productivity management and value advantage. The price control in the


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market can be effective by efficient integrated logistics/ chain supply

management throughout the country. For creating such situation

knowledgeable professional are to be engaged in the concerned area or

professional can be created through training and development.

Information system of the supply chain management plays a very

important role for quick response to the users/customers as well as other

stakeholders. Mode of delivery, warehousing, transportation ete is to be

arranged (on the basis of logistics activities) in the system design so that

the whole operation can be made cost-effective.

FINDINGS & RECOMMENDATIONS:

The findings after careful analysis on various aspects related to logistics

and supply chain management as well as surrounding field is captured as

under:

3.1 To achieve leadership through logistic/ supply chain managementthe organization must go through a number of fundamental

transformation such as i) from functional to a process orientation,

ii) Performance measurement through indicators of logistics

activities, iii) To switch over from the product management to

customer management, and iv) Need to change from a transaction

mentality to a relationship mentality.

3.2 A responsive supply chain by definition is highly integrated. Theyare internally integrate across functions and externally integrated

with upstream suppliers and downstream customers. A key to

supply chain integration is the open flow of information from one

end of pipeline to another.

3.3 Quick customer response is the broadly considerable aspect tocharacterize logistics strategies which aim to meet the precise

customer requirements in short time frames. Inventory


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management with minimum cost is also important related issue of

quick response.

3.4 Time compression in the pipeline has the potential to speed upresponse times and to reduce logistics/ supply chain cost. These

dual goals are achieved through reduction of non-value adding

timeand particularly time spent as inventory.

3.5 Paradoxically the trend to globalization has increased thecomplexity of logistics/ supply chain. For this reason question of

providing attention to logistics/ supply chain management has

come in the front line to combat the competitive environment.

3.6 Logistics costs can account for a large proportion of total costs inthe business, hence it is critical and attention is required to manage

carefully as otherwise cost reduction can not be possible.

Appropriate cost accounting approach (probably activity-based

costing) in place of tradition approach is important.

3.7 Manager will seek rather explore logistics strategies that developlatent opportunities to increase efficiency and productivity which in

tern deliver significant advances in customer service.

Differentiation through service excellence is an example of a well

thought through strategy for managing the logistics of service

delivery.

3.8 Professional training on logistics / supply chain management isrequired to be enhanced in order to match the knowledge in the

changing business environment. This training will also help build

awareness about impact of cost on logistics/ supply chain.


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3.9 In Bangladesh, the knowledge of logistics is in the primitive stage.Organizations and public bodies should come forward and

incorporate the modern technology and concepts of logistics /

supply chain management in order to have a chance to catch and

reach the competitive avenue both at national, international, and

global level.

3.10 In todays fast-paced and customeroriented business environment,superior logistics/supply chain performance is a prerequisite to

becoming and staying competitive. This can be achieved through

cost reduction and increasing efficiency as well as productivity

based on the logistics / supply chain integrated organizational

structure.

3.11 It is imperative to develop Human-friendly logistics which is basedon the Golden Rule treat people the way you would like to be

treated. Human friendly transportation (driver routes and

schedules that minimize the away from families, on- board

communications, Loading/ unloading facility etc.) and Human-

friendly warehousing (natural light and color coordination, lifting

aids, safety, picking facility etc.) is a factor for the customers.

CONCLUSION

Logistics/ Supply Chain Management are now a new growing concept in

the world. But more interesting aspects of this issue is effective logistics

/ supply chain management is a major source of competitive advantage

and this lead to superiority over competitors in two ways namely, i)

reducing cost, and ii) increasing profit. Success of competitive advantage

depends on product excellence and process excellence.

The trends towards globalization of industry, involving as it does the co-

ordination of complex flows of materials and information from a


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multitude of offshore sourcing and manufacturing plants to a diversity of

markets has sharply highlighted the inappropriateness of existing

structures. It is a fact that logistics/ supply chain is the driving force inthe contemporary competitive business environment for bringing

structural change of the organization.

In todays highly competitive global marketplace, the pressure on

organizations to find new ways to create and deliver value to customers

grows ever stronger. There is a growing recognition that it is through

logistic efficiency and effective management of the supply chain that the

twin goals of cost reduction and service enhancement can be achieved.

Application of logistics/ supply chain management in the organizations

of Bangladesh is still in a fluid condition. It may be pointed out that the

companies who were market leaders a decade ago have in many cases

encountered severe reversals of fortune due to failure of timely

application of logistics/ supply chain management. The industry in

Bangladesh is facing competitive disadvantage in many ways out of

which non integration of logistic/ supply chain. The importance of

logistics/ supply chain management is to understood and necessary steps

are to be taken so that products and service can be marketed with due

consideration of competitive price and customer response.

It is the sincere effort of the researcher to present this article in order to

create sensation to the entrepreneurs/ businessman/ Government

organizations about the logistics/ supply chain management knowledge

and its importance in the global business environment. This research

presentation will provide extraordinary help to the professional for

academic as well as further research purpose.


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Supply Chain Management and Cost of Production

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