In the past, the primary means of achieving competitive advantage were often summarized as the ‘four Ps’ – product, price, promotion and place. These should now be augmented with the ‘four Rs’ – reliability, responsiveness, resilience and relationships – and logistics strategies need to be formulated with these as the objectives. Let us briefly examine each in turn.
In most markets and commercial environments today, customers are seeking to reduce their inventory holdings. Just-in-time practices can be found in industries as diverse as car assembly and retailing. In such situations it is essential that suppliers can guarantee complete order-fill delivered at agreed times. Hence a prime objective of any logistics strategy must be reliability.
Making logistics systems more reliable means that greater emphasis must be placed upon process design and process control. The processes that are particularly germane to logistics are those to do with order fulfilment and supply chain management. Because traditionally these processes have been managed on a fragmented, functional basis they tend to have a higher susceptibility to variability. These processes are typified by multiple ‘hand-offs’ from one area of functional responsibility to another and by bottlenecks at the interfaces between stages in the chain. One of the benefits of taking a process view of the business is that it often reveals opportunities for simplification and the elimination of non-value-adding activities so that reliability inevitably improves.
One of the main causes of unreliability in supply chain processes is performance variability. Recently, the use of so-called ‘Six Sigma’ methodologies has been adopted to reduce that variability. Six Sigma is the umbrella term applied to a range of tools that are designed to identify the sources of variability in processes and to reduce and control that variability.
Very closely linked to the customers’ demands for reliability is the need for responsiveness. Essentially this means the ability to respond in ever-shorter lead times with the greatest possible flexibility. Quick response, as we have seen, is a concept and a technology that is spreading rapidly across industries. For the foreseeable future, speed will be a prime competitive variable in most markets. The emphasis in logistics strategy will be upon developing the means to ship smaller quantities, more rapidly, direct to the point of use or consumption.
The key to time compression in the logistics pipeline is through the elimination or reduction of time spent on non-value-adding activities. Hence, contrary to a common misconception, time compression is not about performing activities faster, but rather performing fewer of them. The old cliché ‘Work smarter, not harder’ is particularly relevant in this context.
As Hammer and Champy (Hammer, 1990; Hammer and Champy, 1993) have pointed out, many of the processes used in our organizations were designed for a different era. They tend to be paper-based, with many – often redundant – manual stages. They are sequential and batch-oriented rather than parallel and capable of changing quickly from one task to another. Even though eliminating or reducing such activities may increase cost, the end result will often be more cost-effective. For example, shipping direct from factories to end customers may be more expensive in terms of the unit cost of transport compared to shipping via a regional distribution centre, but time spent in the distribution centre is usually non-value-adding time.
Today’s supply chains are more complex and vulnerable to disruption than ever before. In many cases, as a result of outsourcing and the increasingly global nature of supply chains, the likelihood of interruption to product and information flows has increased significantly.
Identifying, mitigating and managing supply chain risk is now a critical requirement to ensure business continuity. The idea of resilience in the context of supply chain management is that supply chains need to be able to absorb shocks and to continue to function even in the face of unexpected disruption.
The paradox is that in many cases, because companies have adopted ‘lean’ strategies and reduced inventories and, often, capacity, there is little ‘slack’ left in their systems. Resilient supply chains will typically incorporate strategic buffers at the critical nodes and links in their networks. These buffers could be in the form of inventory or capacity, possibly shared with competitors.
As uncertainty in the business environment continues to increase, organizations need to adopt a more systematic and structured approach to supply chain risk management. One way in which this can be achieved is by creating a supply chain continuity team whose job is to audit risk across the supply chain and to develop and implement strategies for the mitigation of any identified risk.
The trend towards customers seeking to reduce their supplier base has already been commented upon. The concept of ‘strategic sourcing’ is now receiving widespread support. Strategic sourcing is based on the careful selection of suppliers whom the customer wishes to partner. The benefits of such an approach include improved quality, innovation sharing, reduced costs and the integrated scheduling of production and deliveries. Underlying all of this is the idea that buyer–supplier relationships should be based upon partnership. More and more companies are discovering the advantages that can be gained by seeking out mutually beneficial, long-term relationships with suppliers. From the suppliers’ point of view, such partnerships can prove formidable barriers to entry to competitors. Once again, companies are finding that logistics provides a powerful route to the creation of partnerships in the marketing channel. Logistics management should be viewed as the thread that connects the inbound and outbound flows of channel partners.
A good example of logistics partnership is the growing use of ‘vendor-managed inventory’ (VMI). The underlying principle of VMI is that the supplier rather than the customer assumes responsibility for the flow of product into the customer’s operations. Thus instead of the customer placing orders on the vendor – often at short notice – the vendor can directly access information relating to the rate of usage or sale of the product by the customer. With this information the supplier can better plan the replenishment of the product with less need to carry safety stock. In effect, VMI enables the substitution of information for inventory in the supply chain.
The challenge to marketing and strategic planning in any business is to construct a corporate strategy that specifically builds upon logistics as a means to achieving competitive advantage through a much stronger focus on the four Rs. It is still the case that many organizations have not fully understood the strategic importance of logistics and hence have not explicitly tailored logistics into their corporate strategies and their marketing plans.