|
Introduction
Logistics
is about operations and execution, and that makes it a people business.
The raw talent is there. One of the next big challenges will be in
ensuring that
logistics
professionals already in the field and those entering from other
disciplines or from the education system have the right skill sets to
survive and thrive. That will be no small challenge given the pace of
change.
The need to go beneath surface
logistics is particularly
important for international network organizations. Similar surface
operations in different countries may belie very different goals and
motivations among the network’s organizational nodes in their respective
countries.
Despite all the talk about
reducing inventories and improving distribution networks, manufacturers
are paying more to move and handle their goods. The
cost
of the global business
logistics
system swelled to hundreds of billions in amount in the past years.
There is therefore a need to develop and implement cost reduction
strategies in overall logistics systems in global businesses. The
challenges to keep goods moving fast, efficiently, and at a reasonable
cost
seem to be mounting from every direction, but the tools to deal with those
challenges are readily available and just needs to developed and
implemented by various companies dealing with logistics.
Context
Value activities within any
organization are divided into two general categories, primary and
secondary activities. Primary activities are grouped into five specific
categories: (1) inbound logistics, (2) operations, (3) outbound logistics,
(4) marketing and sales, and (5) service. Inbound logistics are those
activities concerned with receiving, storing and disseminating inputs of
the product. Operations are responsible for converting inputs into
finished products. Outbound logistics are those activities associated with
collecting, storing and distributing the product to customers. Marketing
and sales concern those activities connected with providing the means by
which customers buy the product and are persuaded to do so. Finally,
service involves those activities that enhance or maintain the value of
the product (Anderson, et al, 1993).
Secondary, or support
activities, support the primary activities and each other. These
activities include procurement, technology development, human-resource
management and the development of the firm’s infrastructure. ‘Procurement’
refers to the purchase of inputs not directly associated with the product.
They may be purchased anywhere in a firm’s value chain. Technology
development activities are concerned generally with the improvement of the
product. Human-resource management involves the hiring, training and
motivation of personnel. Finally, ‘firm infrastructure’ refers to those
activities (such as the accounting and legal activities) that might be
considered as overheads (Anderson, et al, 1993).
Some or all of the primary and
support activities may apply to a particular firm, depending on the
complexity of the firm and its industry. Nevertheless, all of a firm’s
activities are assigned a place within the value chain with regard to
their economic impact on cost, and potential benefit to differentiation.
In other words, the categorizing of activities is in accordance with their
contribution to a firm’s competitive advantage. This systematic and
integrative approach to value-chain analysis allows all possible sources
of competitive advantage to be revealed (Anderson, et al, 1993).
Within the context of a company’s value
chains, inbound logistics include activities which may or may not be a
source of competitive advantage. To the extent that they are, suppliers
are found to be a positive competitive force, but as existing rivals
apparently benefit equally from their influence, this essentially
nullifies any potential differentiation effect from inbound logistics
(Elkin, 1998).
Outbound logistics—that is,
activities which occur between the time the product is produced and
subsequently received by the buyer—though important in general, are not
significant as a source of differentiation. Because buyers have
substantial bargaining leverage, they simply require these companies to
provide the products requested, to a desired specification on demand. This
is also expected to imply prompt and reliable delivery (Elkin, 1998).
Of particular importance and
that which is the subject of this paper is the rising cost of logistics,
or the movement and distribution of a company’s finished goods and
products. There is lately an increasing problem of the rising costs of
logistics in global businesses.
One school of thought views
logistics as the umbrella strategy for many of the concepts we are
discussing here - they are all relegated to implementation alternatives.
Certainly the definition of logistics is: ‘organizing, moving and
supplying’ and as such could encompass supply as well as demand. However,
at a strategic level, the view is taken that logistics deals mostly with
the micro activities (such as transportation) that take place after the
production of a good or service (the demand side) in order to provide
value in customer service. As such, it is a subclass of the supply network
strategy, and sometimes even subsumed in supply chain strategy. However,
if the demand side of a supply network assumes strategic importance for an
organization (in e-commerce for example), a logistics operations strategy
can be developed. It will concentrate upon distribution facility elements
of supply rather than the whole (as in the wider supply chain strategy or
supply network strategy) (Lowson, 2002). Logistics has adopted a more
strategic role with increasing globalization and the trend for geographic
dispersal of firms.
One of the things that has
been a driving force in the increasing costs, not only in logistics, but
virtually in everything is the advancement of technology. It is perhaps
the number one thing that drives the costs to increase. The technology
development activities have, for the most part, been generated within
organizations. Technology development to a commercial stage, meeting or
exceeding competitive product specifications, cost reduction
efforts--these are all efforts that can, for the most part, be developed
and defined within the organization and applied generally as part of the
total product strategy.
Customer service for specific product
problems is usually a considerably smaller component of the overall
technology development effort. Basically, it involves development work
focused on problems a customer is experiencing in using the product. While
directed toward service for a particular customer, the effort can often
lead to increased volume and/or new applications. Even though short-term
and specific, the capability of providing this type of technology
development can be a key factor in marketing success (Watkins, 1998).
It is undoubtedly an
overworked cliché to state that manufacturing cost reduction programs,
combined with effective utilization of available resources, will
contribute significantly to the success of any entrepreneurial venture.
Like many clichés, however, it is, first of all, true, and secondly,
sometimes neglected to the detriment of the overall business effort.
This is particularly true in situations
where the product is an innovative, high-tech creation that appears to
overshadow other products directed toward the same market segment.
Sometimes the technical "glamour" of the product can overshadow such
mundane considerations as manufacturing cost, energy and labor
utilization, and laboratory effort. Nevertheless, the planning and
formulation of a technology development program without careful
consideration of cost reduction opportunities can have a serious impact on
the proverbial bottom line (Watkins, 1998).
Product differentiation and competitive
performance will carry the product through the early phases of the product
cycle, but sooner or later effective manufacturing cost control techniques
will have to be included as objectives of any technology development
program. This is also a driving force for the increasing costs of
logistics. Labor is also regarded as one of the main cost-driver, with
transport costs also being important, and given the technological choice
of ultrasound equipment it was felt that there were few opportunities for
reconfiguring the value chain of a company (Anderson, et al, 1993).
Exceptions in
documentation are one thing that will trigger a response and can slow the
movement of goods. Accurate data collection and effective communication
are tools that will avoid adding time and
cost
to the flow of goods in commerce, and those tools are readily available to
manufacturing and distribution companies at reasonable costs. Further
developments in these tools and better pricing will likely result as the
adoption curve rises.
For
a carrier, a new piece of business may represent a long-standing
relationship between a consignee and its supplier. That's an exception for
the carrier that can be easily resolved by the consignee. More shippers
are looking at their carriers a little more closely as well. One of the
requirements that companies look for in a carrier is affordable logistics.
Alternatives that benefit both
shippers and carriers by reducing costs and optimizing network efficiency
may be expanding, but not as fast as some costs are rising. Insurance
costs have risen as much as 300% for carriers. Some smaller carriers have
elected to "run naked" (uninsured). This can put the shipper
at risk should one of those carriers be
involved in a serious accident (Transportation and Distribution, 2002).
Therefore companies involved in logistics should
come up with strategies that can help cut costs or else their clients will
look for other cheaper alternatives.
Recommendations
First and foremost, to
effectively control costs as well as resources, the company should
consistently pursue cost reduction/efficiency initiatives and should not
delay taking any action if the need arises. The company should target what
they perceived as low entry cost service industries as alternatives to
their own rapidly declining trades. With the presence of competitive
pressure, the owner-manager should sympathize with the notion of defensive
strategy.
For companies, costs should be
split up into fixed and variable costs, and marginal
cost should be calculated. A
capacity output should be recognized. Any owner or manager involved in
logistics should think of himself as following a focus strategy with an
emphasis on cost reduction, rather than
product differentiation (Anderson, et al, 1993).
As mentioned, labor was regarded as the
main cost-driver, with transport costs also being important, and given the
technological choice of ultrasound equipment it was felt that there were
few opportunities for reconfiguring the value chain. The owner or manager
should therefore perceive his firm as a low-cost operation, which aimed to
achieve an operational cost minimum. In pursuing this cost-focus strategy
the owner-manager will be unsympathetic to notions of responding to
attacks on his strategy. On one level he would feel that it was very hard
in any case to discover potential moves. On another level he would also
feel that if the value chain were not susceptible to reconfiguration, and
cost was being tightly controlled, this was the best passive deterrent
(Anderson, et al, 1993).
Management of logistics
operations should use market research of any kind, and the forecasts of
outside bodies like trade associations should also be taken into
consideration. A price reduction by the
management would bring forth a price reduction
by their strongest competitors, irrespective of whether business
conditions were normal, buoyant or depressed, and the same was felt to be
true of price increases.
Consistent with this, management should
not think that the company had a certain amount of ‘elbow room’ in pricing
within which a price change would not bring about a reaction by
competitors. It is important to remember that a number of theoretical
arguments are examined for conjectured demand curves with relatively
inelastic segments about the prevailing average price. They may best be
understood as deriving from switching costs which customers must bear in
changing suppliers.
In one study, one owner-manager confessed
that switching costs of some customers were low, which suggests that a
certain measure of customer ignorance encouraged lack of price
responsiveness, though quality of service might also have played a role
here. The owner-manager reported that changes in costs and changes in
demand were the main reasons for altering selling price. A non-uniform
price tariff was adopted with different prices being charged for large and
small traders. Price rebates were offered in the form of bulk discounting.
Large institutional customers in the
public sector were perceived to be relatively more price sensitive than
other purchasers and seemed to put tight controls on costs. The
owner-manager said, ‘On big orders the odd penny per square foot is
significant’. The sorts of institutions he had in mind were hospitals or
universities, which might make very big orders of several hundred window
blinds at once, but would expect to pay only a very low price (e.g. a few
pounds) per blind. These institutions were very tightly cash-constrained
over the period concerned, as a consequence of budgetary stringency for
most large public-sector institutions.
The account given might well have been
different for institutions like commercial factories in large industrial
estates. There was no such thing as a controlled price (e.g. set by
government or trade association) or a recommended price for this service.
No collective industry action was ever taken. The owner-manager did not
agree with forming coalitions and would not contemplate blocking tactics
against rivals. Advertising was undertaken, promoting the firm’s service
over that of its rivals.
Newspaper advertising had been tried, but
was found to be ineffective. The owner-manager was prepared to increase
advertising in slump conditions but not to reduce it in boom conditions.
Competition was perceived to be generally strong, but weak in some aspects
(Anderson, et al, 1993). Logistics companies would benefit to following
the right choices this company under study has made.
Alternative packaging designs may be the last bit of low-hanging fruit
available to companies who have exhausted most other distribution
cost-reduction
opportunities. While results vary by company, changing the weight, size,
shape, material, and/or handling of a package can yield significant
savings in packaging, transportation, and storage costs (Minahan, 1998).
Conclusion
While costs of the
transportation and distribution of goods and products are increasing, it
is not without a solution. Development and
implementation of cost reduction strategies in overall logistics systems
in global businesses is needed in order to combat increasing costs.
Although the strategies can help, a large factor is also contributed to
the kind of management that is running the company. Without good
management, the best cost-cutting strategies would still be useless. |
