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‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية‬
‫اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic
University
College of Administrative and Financial Sciences
Assignment 2
Deadline: 16/04/2022 @ 23:59
Course Name: Logistics Management
Student’s Name:
Course Code:MGT322
Student’s ID Number:
Semester: II
CRN: 24850
Academic Year: 1443/1444 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
Level of Marks:
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
• Submissions without this cover page will NOT be accepted.
Assignment: 2
Submission Date by students: Before the end of Week- 11th
Place of Submission: Students Grade Centre
Weight:
10 Marks
Learning Outcome:
1. Demonstrate an understanding of how global competitive environments are changing supply chain
management and logistics practice.
2. Apply essential elements of core logistic and supply chain management principles.
3. Analyze and identify challenges and issues pertaining to logistical processes.
Assignment Workload:
This assignment is an individual assignment.
Critical Thinking
Outsourcing and offshoring initiatives can help an organization fine-tune its business model to
become more resilient and profitable. At the same time, these initiatives present challenges.
In today’s highly competitive, extremely variable, and dynamic environment, many firms are
seeking solutions. Supply chain management becomes more sophisticated and the difference
between what firms want to achieve and what they can do in-house continues to grow,
firms begin to realize that doing the right thing becomes more interesting than doing everything.
Accordingly, they are becoming better focused and more specialized by outsourcing and
offshoring activities that are far from their core businesses. In many cases firms decide to
outsource this function in whole or in part to agents or third-party logistics firms.
Using this concept of offshoring and outsourcing answer the following questions by taking any
Saudi Local company or any Multinational company.
Questions: Each Question Carrying 2 Marks.
1. Define Third party logistics firms? Discuss its working procedure? (400-500 Words)
2. Explain the motivational factors for going internationally? (400-500 Words)
3. On what ground companies choose developing country’s location for offshoring? Use
examples. (Mention the country and decisive factors). (400-500 Words)
4. Why do companies outsource? (Use example of any Saudi company along its objective and
scope for outsource). (400-500 Words)
5. Assess the reasons for using third party logistics service in Saudi Arabia? Using examples,
Explanation regarding their logistics performance and priorities. (400-500 Words)
The Answer must follow the Key word/ outline points below:

Outsourcing ,offshoring ,Third Party logistics

Their Main functions

Motivational Factors /Drivers

Any local example

Reasons with suitable Examples

Reference
Note: You can support your answer by reading chapter 4 of your book.
You can use secondary source available on internet. Please use APA-style referencing.
Answer 1.
Answer 2.
Answer 3.
Answer 4.
Answer 5.
Saudi Electronic University
Logistics
Management
Chapter 1
Chapter 1: Logistics and the Supply Chain
Chapter 1: Logistics and the Supply Chain
• What is the supply chain, and
how is it structured?
• What is the purpose of a
supply chain?
Chapter 1: Logistics and the Supply Chain
Competitiveness needs to be considered at
two levels:
• The level of the focal firm
• The level of the supply chain
We need to clarify the managerial and strategic
perspectives of the logistics challenge:
• Managerial: supervising day-to-day logistics
processes in terms of their time, cost and
quality objectives
• Strategic: formulating and implementing the
guiding principles, driving forces and
ingrained attitudes that are shared by
partners across a supply network
Chapter 1: Logistics and the Supply Chain
We need to create clarity in logistics terms.
• Supply chain
• SCM
• Logistics
• Material flow
• Supply networks
Note that we will use “chain” and “network”
interchangeably. Chain will generally be used
to describe simple links between organisations
and network for more complex linkages.
Chapter 1: Logistics and the Supply Chain
Tesco Case Study 1.1
• Illustrates aspects of the logistics challenge
facing a major retailer.
• 20,000 products planned and controlled
• 2.1 billion cases per year to be ordered,
shipped, sorted by store, and put on display
• 3 different temperature regimes
• 10 UK regional distribution centers
• Over 2,300 stores
• Rapid turnover of stocks for fast movers
• Methods include day 1 for day 2
• Pick to zero
• Store deliveries in four “waves” daily
Chapter 1: Logistics and the Supply Chain
The core purpose of Tesco is to “create
value or customers to earn their lifetime
loyalty.”
To achieve loyalty, they have to understand
customer needs and how they can be
served.
Products should be recognized by
customers as outstanding value for the
money.
Chapter 1: Logistics and the Supply Chain
Logistics is the task of planning and controlling the
purchase and distribution of the product range
from suppliers to stores.
It is concerned with managing two key flows:


material flow of the physical goods from
suppliers through the distribution centres to
stores;
information flow of demand data from the endcustomer back to purchasing and to suppliers,
and supply data from suppliers to the retailer,
so that material flow can be accurately planned
and controlled.
Chapter 1: Logistics and the Supply Chain
The logistics task of managing material flow
and information flow is a key part of the
overall task of supply chain management.
Supply chain management is concerned with
managing the entire chain of processes,
including raw material supply, manufacture,
packaging and distribution to the endcustomer.
Chapter 1: Logistics and the Supply Chain
The Tesco UK supply chain structure comprises three
main functions:
• distribution: the operations and support task of
managing Tesco’s distribution centres (DCs), and the
distribution of products from the DCs to the
associated stores;
• network and capacity planning: the task of planning
and implementing sufficient capacity in the supply
chain to ensure that the right products can be procured in the right quantities now and in the future;
• supply chain development: the task of improving
Tesco’s supply chain so that its processes are stable
and in control, that it is efficient, and that it is
correctly structured to meet the logistics needs of
material flow and information flow.
Chapter 1: Logistics and the Supply Chain
Definitions:
A supply chain is a network of partners who
collectively convert a basic commodity
(upstream) into a finished product
(downstream) that is valued by endcustomers, and who manage returns at each
stage.
Transforms inputs in the form of materials
and information into outputs in the form of
goods and services.
Chapter 1: Logistics and the Supply Chain
SCM encompasses the planning and controlling of all
processes involved in procurement, conversion,
transportation and distribution across a supply chain.
SCM includes coordination and collaboration
between partners, which can be suppliers,
intermediaries, third party service providers, and
customers.
SCM integrates supply and demand management
within and between companies in order to serve the
needs of the end-customer.
It is the buying behaviour of the
end-customer that causes
materials to flow through the
supply chain.
Chapter 1: Logistics and the Supply Chain
SCM encompasses the planning and controlling of all
processes involved in procurement, conversion,
transportation and distribution across a supply chain.
SCM includes coordination and collaboration
between partners, which can be suppliers,
intermediaries, third party service providers, and
customers.
SCM integrates supply and demand management
within and between companies in order to serve the
needs of the end-customer.
Logistics has both strategic (long-term planning) and
managerial (short- and medium-term planning and
control) aspects.
Chapter 1: Logistics and the Supply Chain
1.1.2 Supply chain: structure and tiering
The concept of a supply chain suggests a
series of processes linked together to form
a chain. A typical Tesco supply chain is
formed from five such links.
Figure 1.1
Chapter 1: Logistics and the Supply Chain
The additional complexity prompts many authors to
refer to supply networks rather than supply chains,
a point we return to shortly. Logistics today is also
concerned with what happens after a product has
been sold. Two major concerns are:


Reverse logistics: the return of unwanted goods
and packaging in the opposite direction
Waste: the discarding of product at any stage in
the supply chain due to quality problems – for
example, the disposal of out-of-date or
damaged stock by a retailer or by an endcustomer.
Chapter 1: Logistics and the Supply Chain
Figure 1.2
Chapter 1: Logistics and the Supply Chain
Other terms that are used to describe aspects
of managing the supply chain are:
• Purchasing and supply deals with a focal
firm’s immediate suppliers (upstream).
• Physical distribution deals with the task of
distributing products to tier 1 customers
(downstream).
Chapter 1: Logistics and the Supply Chain
• Logistics refers to management of
materials and information.
• Inbound logistics deals with links between
the focal firm and its upstream suppliers.
• Outbound logistics refers to the links
between the focal firm and its
downstream customers.
• Internal logistics deals with planning and
control of material flow within the
boundaries of the focal firm.
Chapter 1: Logistics and the Supply Chain
The essential points of supply chain
management were summarised long ago by
Oliver and Webber (1982):
• Supply chain management views the
supply chain as a single entity.
• It demands strategic decision making.
• It views balancing inventories as a last
resort.
• It demands system integration.
Chapter 1: Logistics and the Supply Chain
Supply chains should be views as
networks of organizations.
Figure 1.3
Chapter 1: Logistics and the Supply Chain
Figure 1.4
Flow measures the quantity of material (measured in
input terms such as numbers of components, tonnes and
litres) that passes through a given network per unit of
time.
Chapter 1: Logistics and the Supply Chain
Figure 1.5 Example of a confectionery network map
(Source: After Zheng et al., 1998)
What is the relationship between
material flow and information
flow?
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
Material flow should be synchronous.
It is important to keep materials flowing
from source to end-customer in a
supply chain.
To keep unnecessary build-ups of
inventory, flow must be orchestrated so
that parts movement is coordinated.
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
The goal is continuous, synchronous
flow. Continuous means no
interruptions, no dropping the ball, no
unnecessary accumulations of
inventory. And synchronous means that
it all runs like a ballet. Parts and
components are delivered on time, in
the proper sequence, exactly to the
point they’re needed.
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
Traditionally, sales were focused as stocked
developed.
Xerox realized that they should only make the stock
when they needed it, then ship it to the customer.
Three types of delivery were needed:
• Deliver JIT: Off the shelf commodity products
• Finish JIT: Middle-range products with 5-day
window
• Build JIT: Larger products planned months in
advance
Chapter 1: Logistics and the Supply Chain
Figure 1.6
Xerox: the impact on inventories
How did inventory reduction in
the supply chain lead to
improved competitiveness at
Xerox?
Chapter 1: Logistics and the Supply Chain
1.2 Material Flow and Information Flow
Information flow
Customer demand signals the trigger for the
supply chain to respond
Demand information is shared across the
supply chain by creating a demand chain to
enhance customer value.
IT is used to integrate demand and supply
data to keep the entire chain informed
Chapter 1: Logistics and the Supply Chain
Figure 1.7
Integrating demand and supply chains
How do products win orders in
the marketplace? How does
logistics contribute to
competitive advantage?
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Within a given supply chain, it is
important that each organisation
understands how each group of
products competes in the marketplace,
and that it aligns its capabilities with
those of its partners.
Product = physical product +
accompanying service
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Key advantage provided by logistics is:
• Availability of conforming product in
the marketplace at low cost
Logistics supports competitiveness of
the supply chain by:
• Meeting end-customer demand
through supplying what is needed in
the form it is needed, when it is
needed, at a competitive cost.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Logistics advantage means setting goals that
are:
• Clear
• Measurable
• Quantifiable
Hard objectives for creating logistical
advantage
• Quality
• Time
• Cost
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Hard Objectives
• Quality – the most visible aspect of supply
chain performance
• Time – measures how long a customer has
to wait in order to receive a given product
or service
• Cost – is important for all supply chain
processes because they translate into price
advantages
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Supportive capabilities are three more ways
for creating logistical advantage with regards
to hard objectives:
• Controlling variability in logistics processes
• Dealing with uncertainty
• Sustainability
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Supportive Capabilities
• Controlling variability in logistics
processes – Variability refers to real and
identifiable differences within a population
• Dealing with uncertainty – uncertainty
refers to our lack of knowledge and having
to deal with unpredictable events
• Sustainability – addresses the
improvement of social and environmental
issues in the design of logistics systems.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Controlling variability
Variability undermines the dependability with which
a product or service meets target.
Dependability is used to monitor a supplier’s
performance in such terms as:
• On-time – percentage of orders delivered on-time
and the variability against the target
• In-full – percentage of orders delivered complete
and the variability against the target
• On-quality – percentage of defects and the
variability against the target.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Dealing with Uncertainty
Dealing with uncertainty means responding rapidly to
unknown problems that affect logistics processes. The
implication of uncertainty for supply chain processes
is that they need to be flexible.
Flexibility comes in two basic forms:
• Proactive – to create the capability in advance to
handle uncertainty
• Reactive – to cope with uncertainty in a focal firms
internal or external environment
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Sustainability
Sustainability is defined as the development that
meets the needs of the present without
compromising future generations.
The three sustainability values are:
Environmental – a focal firm is concerned with
reducing consumption of non-renewable energy and
materials.
Social – ensuring that goods are manufactured in
socially responsible conditions
Economic – the net value that a firm generates after
social and environmental values have been taken into
account.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Case Study 1.3: Measuring schedule
variability
Scheduled demand = S
Call-off quantity = A
Difference = D
D=S–A
• Produced to schedule S > A and supplier will
overproduce and end up with excess stock
• If S < A, the effects could be a reduction in stuck by
the supplier or a shortfall (S – A) of parts from the
supplier
Both conditions have different logistical implications.
Chapter 1: Logistics and the Supply Chain
Distribution of differences between scheduled and actual demand for
WestCo
Figure 1.8
Chapter 1: Logistics and the Supply Chain
Distribution of differences between scheduled and actual demand
for EastCo
Figure 1.9
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Case Study 1.4: Nokia deals with uncertainty
• The key differences between Nokia
and Ericsson was that while Nokia
was transparent with their problems,
Ericsson was not.
• Once Nokia realized the problem,
they threw great resources to resolve
the supply problems.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Case Study 1.5: Plan A at Marks and Spencer




The firm has embedded sustainability into the
company’s culture.
Note trade-offs between economic risk of €300m
and potential social and environmental gains
which are hard to quantify in financial terms.
Many Plan A goals are unquantifiable, but the
impact of perceived goodwill appears to offset it.
By integrating corporate responsibility with
finance, the company has ensured sustainability
will be a part of the company’s growth strategy.
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Soft Objectives
There are other ways in which logistics
advantage may be gained.
Examples of soft objectives are:
• Confidence – queries answered promptly,
courteously, and efficiently
• Security – customer’s information and
property treated in a confidential and
secure manner
Chapter 1: Logistics and the Supply Chain
1.3 Competing through logistics
Order Winners and Qualifiers
Order winners are factors that directly and
significantly help products to win orders in
the marketplace.
Order qualifiers are factors that are regarded
by the market as an ‘entry ticket’. Unless the
product or service meets basic performance
standards, it will not be taken seriously.
Order winners and qualifiers are specific to
individual segments.
Chapter 1: Logistics and the Supply Chain
Table 1.1
Different product ranges have different logistics performance objectives
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Defining Strategy
• Strategy is about planning as distinct from
doing.
Hayes and Wheelwright (1984):
• Logistics strategy is the set of guiding
principles, driving forces and ingrained
attitudes that help to coordinate goals,
plans and policies, and which are
reinforced through conscious and
subconscious behaviour within and
between partners across a network.
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Defining Strategy
Whittington (2000) proposes four approaches to
setting strategy.
He starts by suggesting different motivations for
setting strategy:
• How deliberate are the processes of strategy
setting? These can range from clearly and carefully
planned to a series of ad hoc decisions taken on a
day-to-day basis.
• What are the goals of strategy setting? These can
range from a focus on maximising profit to
allowing other business priorities such as sales
growth to be included.
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Defining Strategy
What are the implications for the way in which supply
chain strategy is approached in different
organisations? Following is a brief description of
Whittington’s four options:
• Evolve. ‘Strategy’ is not something that is formally
undertaken at all. ‘Our strategy is not to have a
strategy’ is a typical viewpoint. Operating decisions
are taken in relation to the needs of the moment,
with financial goals as the main guiding principle.
• Classical. While financial goals are again the main
guiding principle, these are achieved through a
formal planning process. This is called ‘classical’
because it is the oldest and most influential option.
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Defining Strategy
• Accommodate. Here, decisions are back to the dayto-day mode, but financial objectives are no longer
the primary concern. Strategy is accommodated
instead to the realities of the focal firm and the
markets in which it operates.
• Systemic. This option for strategy setting sees no
conflict between the ends and means of realising
business goals. While goal setting takes place across
all major aspects of the business (including human
resources, marketing and manufacturing policies),
these are linked to the means by which they will be
achieved in practice.
Chapter 1: Logistics and the Supply Chain
Figure 1.10
Four options for crafting strategy
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Aligning Strategies



If different links in the supply chain are directed
towards different competitive priorities, then the
chain will not be able to serve the end-customer
as well as a supply chain in which the links are
directed towards the same priorities.
That is the basic argument for alignment in the
supply chain (Cousins, 2005).
Where the links are directed by a common and
consistent set of competitive criteria, then that
supply chain will compete better in the
marketplace than one in which the links have
different, conflicting priorities. This is the concept
of ‘focus’, the view that you cannot be good at
everything.
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Case Study 1.6: Talleres Auto
Talleres Auto (TA) is an SME based in Barcelona. TA
attends to broken-down vehicles, providing a
roadside repair and recovery service.
• Two of the parts that TA frequently uses are
starters and alternators, which were obtained
from a local distributor.
• In turn, the local distributor ordered parts from a
prime distributor. Starters and alternators were
obtained from a remanufacturer, who replaced the
windings and tested the products using parts
bought from a component supplier.
• A diagram of this part of the supply chain is shown
in Figure 1.11.
Chapter 1: Logistics and the Supply Chain
Figure 1.11
The Talleres Auto supply chain
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Differentiating Strategies
What makes a successful strategy? Five principles of
strategic positioning, related to logistics strategy:
• A unique value proposition: determining what
makes the product/service different from its
competitors.
• A tailored supply chain: governed by consistent
order winning and qualifying criteria.
• Identify the trade-offs: by choosing not just the
priorities but also what not to do. A responsive
supply chain is not compatible with an efficient
supply chain (Fisher, 1997).
• Align logistics processes: so that processes are
mutually reinforcing.
• Continuity: logistics processes are continually and
consistently improved over time.
Chapter 1: Logistics and the Supply Chain
1.4 Logistics Strategy
Trade-offs in Logistics
To reinforce the issue of differentiating
strategies, let us look at two commonly used
strategies:
• Cost: a high-volume product for which
demand is relatively stable throughout the
year.
• Time: a high variety product, which is
designed for a given season and which is
completely redesigned for the next season.
Saudi Electronic University
Logistics
Management
Chapter 2
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
2.1 The marketing perspective
‘Marketing’ has traditionally been associated with
anticipating, identifying and satisfying customer
requirements profitably. A more current definition
emphasises value in the context of the broader supply
chain – and that includes partners rather than just
customers:
Marketing is the activity, set of institutions, and
processes for creating, communicating, delivering,
and exchanging offerings that have value for
customers, partners, and society at large.
Chapter 2: Putting the end customer first
2.1 The marketing perspective
Harnessing customer power:
The basic assumption that customers choose – that
they know best what they want – means that they
have become the centre of the retailer’s universe. In
the best businesses, their decisions drive everything.
These choices are also judgements. They pick the
winners and losers in retail and in manufacturing. This
is not theoretical: they regularly pass verdicts, moving
from product to product and store to store. These
judgements send strong feedback – shocks might be a
better word – forcing change.
Chapter 2: Putting the end customer first
2.1 The marketing perspective
In Chapter 1, we referred to ‘tier 1 customers’ with
whom a focal firm deals directly, and to ‘endcustomers’ who are the individuals or businesses that
buy the finished ‘product’ at the downstream end of
the supply network. It is therefore usual to refer to two
types of customer:
• business customers: who represent the focal firm’s
immediate trading environment
• end-customers: who represent the ultimate
customer for the network as a whole
Chapter 2: Putting the end customer first
2.1 The marketing perspective
We also need to distinguish here between
customers and consumers. Webster (2000) defines
them thus:
• consumers are people who use or consume the
product;
• customers are individuals or businesses who
buy the product, meaning that they acquire it
and pay for it.
Chapter 2: Putting the end customer first
2.1 The marketing perspective
Rising customer expectations
Expectations have risen among customers in line with a
general increase in the wealth of developed countries
over the last half century. This increase in expectations
has many causes, including:
• better levels of general education;
• better ability to discern between alternative
products;
• exposure to more lifestyle issues in the media.
Chapter 2: Putting the end customer first
2.1 The marketing perspective
Rising customer expectations
The explosion in applications of internet
technology continues to have sweeping effects on
the way that business is transacted today.
Applications that have sprung from the world wide
web have impacted both B2C and business to
business B2B relationships.
• Business to consumer (B2C)
• Business to business (B2B)
• Supply chain implications
Chapter 2: Putting the end customer first
2.2 Segmentation
Segmentation describes how a given market might
be broken up into different groups of customers
with similar needs.
Profiles of the segments and evaluation of their
relative attractiveness to a focal firm can then be
developed.
There are many possible ways in which markets can
be segmented, including:
• Demographic
• Geographic
• Technical
• Behaviorial
Chapter 2: Putting the end customer first
2.2 Segmentation
The important characteristics of segments
(McGoldrick, 2002) are that they must be:
measurable: variables that can be easily identified
and measured;
• economically viable: capable of producing the
contribution that justifies the effort and cost of
marketing;
• accessible: geographically or in terms of media
communications;
• actionable: can be attracted and served
effectively.
Chapter 2: Putting the end customer first
2.2 Segmentation
The marketing mix is the set of marketing decisions that
is made to implement positioning strategy and to achieve
the associated marketing and financial goals. The
marketing mix has been popularly termed the ‘4 Ps’:
• product: range, sizes, presentation and packaging,
design and performance;
• price: list price, discounts, geographical pricing,
payment terms;
• promotion: sales force, advertising, consumer
promotion, trade promotion, direct marketing;
• place: channel selection, market coverage,
distribution systems, dealer support.
Chapter 2: Putting the end customer first
Segmentation principles can also be applied to industrial marketing. But ‘there
are distinct differences between the marketing of industrial products and
consumer goods’ (Millier and Palmer, 2000: 60), as summarised in Table 2.2.
Chapter 2: Putting the end customer first
2.3 Demand Profiling
• Marketing people want to forecast demand in
order to plan broad goals such as allocating the
salesforce, setting sales goals, promotions
planning and advertising campaigns.
• Logistics people need to know how many to
deliver, where and when to do so, for each sku
in the product range and for each channel – not
just for the range as a whole. This leads to a
common perception of the two functions –
marketing dealing in the abstract and logistics
dealing in the day-today realities.
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
2.3 Demand Profiling
In practice, the MAD may be exponentially
weighted to give higher weightings to the most
recent demand data.
The sidebar on Figure 2.3 shows how the total
(aggregate) demand for this product can be broken
down into four components:
• Base
• Trend
• Seasonality
• Uncertainty
Chapter 2: Putting the end customer first
2.3 Demand Profiling
Base and trend demands can be found by linear
regression analysis, and a seasonality index can be found
by dividing the original data by the trend for each period.
Uncertainty is usually allowed for by increasing the
forecast to provide a safety margin to make it unlikely
that there are missed sales opportunities.
Forecast demand for a future period n is then calculated
from;
So forecast demand for year 4 was based on projecting
historical data for these four components into the future
Chapter 2: Putting the end customer first
2.4 Quality of Service



Most supply chains that involve physical products end
with service processes such as retailing (grocery or
apparel), healthcare (pharmaceutical and other
medical goods) and distribution (motor cars).
Service processes mean that the customer is present
in some way, although distribution through webbased shopping, telephone and mail order mean that
customers do not have to be physically present.
Performance of service processes often differs
between employees, between customers and from
one hour to the next.
Chapter 2: Putting the end customer first
2.4 Quality of Service
• Quality of service takes place during service
delivery, which is the interaction between the
customer (B2B or B2C) and the service process.
• ‘Gaps’ can emerge between what the service is
supposed to be, what the customer expects it to
be, and how the customer perceives it when it is
delivered.
Chapter 2: Putting the end customer first
2.4 Quality of Service
• Gap 1 refers to differences between customer
expectations and how these have been developed
into a service specification by the supplier.
• Gap 2 refers to differences between how the
specification was drawn up and how it was
delivered.
• Gap 3 refers to differences between what the
customer expected and what he or she perceived
was delivered.
• Gap 4 refers to differences between how supplier
and customer perceived the service delivery.
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
2.4 Quality of Service
Customer loyalty
While plugging gaps in service quality helps to
improve customer satisfaction, this is a ‘qualifier’ for
long-term customer loyalty. The two concepts are not
the same. Piercy (2009) distinguishes them as
follows:
• Customer Satisfaction
• Customer Loyalty
Chapter 2: Putting the end customer first
2.4 Quality of Service
Customer loyalty
The benefits of customer loyalty are potentially huge.
The loyal customer should be viewed in terms of
lifetime spending potential. Loyal customers:
• generate long-term revenue streams (high lifetime
values);
• tend to buy more than new customers;
• tend to increase spending over time;
• may be willing to pay premium prices;
• provide cost savings compared with attracting
new customers.
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
2.4 Quality of Service
Value Disciplines
Perceived value is a development of the service quality–
product quality–price model is that of value disciplines.
Instead of competing on all of these fronts equally, Treacy
and Wiersema (1997) argue that companies taking
leadership positions do so by narrowing their competitive
focus, not by broadening it. They propose three
strategies, or ‘generic value disciplines’ that can be
followed:
• Operational excellence
• Product leadership
• Customer intimacy
Chapter 2: Putting the end customer first
2.4 Quality of Service
Relationship marketing and customer relationship
management (CRM)
A development of customer intimacy is relationship
marketing. Here, the aim is to develop long-term,
loyal customers through ‘bonding’ with them.
This development can take place at three levels:
• Financial incentives
• Social and financial bonds
• Structural bonds
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
2.4 Quality of Service
Measuring service quality
• Going back to the start of this section, it is helpful
to have in place measures of performance of
service processes.
• These can be used to monitor performance over
time and to compare (‘benchmark’) the processes
with others.
Chapter 2: Putting the end customer first
2.5 Setting priorities for logistics strategy
Setting priorities to assure quality of service leads to
establishment of performance measures. Priorities
should be used to help ensure that:
• partners in a supply network focus on providing endcustomer value;
• partners in that network can see how well the
network as a whole is performing against this
yardstick.
In this way they can judge whether performance is
improving or declining, and assess the effect that changes
to the system may have on quality of service.
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
Chapter 2: Putting the end customer first
Saudi Electronic University
Logistics
Management
Chapter 3
Chapter 3: Value and Logistics Costs
Chapter 3: Value and Logistics Costs
• How can shareholder value be
defined?
• What is economic value
added, and how does it help
in this definition?
Chapter 3: Value and Logistics Costs
Return on investment (ROI)
Return on investment (ROI) is measured as profit
(in €) before interest and tax as a percentage of
capital employed (also in €):
ROI can also be seen as the outcome of
profitability and asset utilisation:
Chapter 3: Value and Logistics Costs
Figure 3.1
The make-up of return on capital employed (investment)
(Source: Courtesy of Sri Srikanthan)
Chapter 3: Value and Logistics Costs
Return on investment (ROI)







Sales
Costs
Working capital
Inventory
Cash and debtors
Creditors
Fixed Assets
Chapter 3: Value and Logistics Costs
Financial ratios and ROI drivers
ROI is an important measure for
assessing shareholder value and is
underpinned by two main drivers:
• increased profitability;
• increased asset utilisation
Chapter 3: Value and Logistics Costs
Financial ratios and ROI drivers
Financial ratios have a number of advantages
for an organisation:
• a benchmark for comparing one
organisation with another;
• used as a comparator for a particular
industrial sector;
• used to track past performance;
• a motivator for setting performance
targets;
• an early warning indicator if the
organisation’s performance starts to
decline.
Chapter 3: Value and Logistics Costs
Financial ratios and ROI drivers
The use of financial ratios in relation to time is
key to monitoring working capital and the ‘cash
to cash’ cycle. Key time-related ratios include:
• average inventory turnover: the number of
times inventory is turned over in relation to
the cost of good sold;
• average settlement period for debtors: the
time taken for customers to pay their
invoices;
• average settlement period for creditors: the
time taken for an organisation to pay its
creditors.
How can logistics costs be
represented?
Key issues: What are the various
ways of cutting up the total cost
‘cake’, and what are the relative
merits of each?
Chapter 3: Value and Logistics Costs
Fixed or Variable Costs
Costs tend to respond differently as
the volume changes:
• fixed costs tend to stay the same as
volume of activity changes, or at
least within a given volume range;
• variable costs change as the
volume of activity changes.
Chapter 3: Value and Logistics Costs
Direct / Indirect
Another way to cut up the total cost
‘cube’ is to analyse costs in terms of
whether or not they can be directly
allocated to a given product. Two
further categories emerge:
• Direct costs
• Indirect costs
Chapter 3: Value and Logistics Costs
Engineered / discretionary
A third way of analysing costs is to
consider the ease of allocating them.
• Engineered costs: have a clear
input-output relationship
• Discretionary costs: do not have a
clear input-output relationship
Chapter 3: Value and Logistics Costs
Engineered / discretionary
A classic example of converting discretionary
costs into engineered costs has been the
conversion of ‘quality’ as a discretionary
concept into engineered ‘quality costs’ (Dale
and Plunkett, 1995).
This was achieved by breaking down the
concept of quality into three cost drivers:
• Prevention
• Appraisal
• Internal and external failure
Chapter 3: Value and Logistics Costs
Activity-based Costing (ABC)
Refer to Cooper and Kaplan (1988)
explanation about the two pen factories. (p.
90 and previous slide)
ABC principles would help the management
of Complex to make more informed product
decisions. The management of Simple has
no need for another costing system;
the current one works well for them.
Chapter 3: Value and Logistics Costs
Cost-time profile
The cost–time profile (CTP) (Bicheno, 2005) is a
graph, which plots cumulative time against
cumulative cost for a set of discrete activities that
together form a process or a supply chain.
The CTP utilises outputs from two sources:
• activity times: from the time-based process
mapping (TBPM) process time recording system
(see Chapter 5);
• activity costs: from a process costing system
that is underpinned by activitybased costing.
Chapter 3: Value and Logistics Costs
Cost-to-Serve
Cost to serve (CTS) is defined (Guerreiro et
al., 2008) as:
the cost of the administrative, commercial
and logistics activities related to customer
service delivery, as measured through ABC
methodology.
Chapter 3: Value and Logistics Costs
Cost-to-Serve
Identical manufactured products may be
distributed in many different ways.
Examples of factors that may influence CTS are:
• Distribution channel used (for example,
wholesalers, supermarkets, hypermarkets).
• Delivery frequency (for routinely planned
replenishment deliveries – daily,
• weekly, etc.).
• Customised deliveries (requiring special
planning).
• Promotional activity
• Contractual terms used (for example, pricing by
full truck loads, full pallet loads, pallet layers).
Who are the key stakeholders in a
business, and what needs to be achieved in
order to satisfy them?
How can a balanced set of measures of
performance be developed in order to
address stakeholder satisfaction and
stakeholder contribution?
Chapter 3: Value and Logistics Costs
A balanced measurement portfolio
The challenge for the directors of a firm is
to balance the diverse interests of the
groups of stakeholders.
It is important to review the interests of
each group:
• Shareholders
• Employees
• Customers
• Suppliers
• Local community
• Government
Balanced Measures
Chapter 3: Value and Logistics Costs
Supply Chain Management and the
Balanced Scorecard
Extending the balanced scorecard into the
context of the supply chain, Brewer and Speh
(2000) consider that performance
measurement systems must be aligned to
supply chain practices:
If firms talk about the importance of supply
chain concepts, but continue to evaluate
employees using performance measures that
are . . . unaffected by supply chain
improvements, then they will fail in their
supply chain endeavours.
Chapter 3: Value and Logistics Costs
Supply Chain Management and the
Balanced Scorecard
As a general rule, effective cross-supply chain
measures should have the following
characteristics (Derocher and Kilpatrick,
2000):
• simple to understand;
• no more than ten in total number;
• representative of a significant causal
relationship;
• have an associated target;
• capable of being shared across the supply
chain
Chapter 3: Value and Logistics Costs
Supply Chain Management and the
Balanced Scorecard
The following are eight such measures,
which can be adapted to focus on specific
sectors:
• on time in full, outbound
• on time in full, inbound
• internal defect rates
• new product introduction rate
• cost reduction
• stock turns
• order to delivery lead time
• financial flexibility
Supply Chain Operations
Reference Model (SCOR)
Saudi Electronic University
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Chapter 4
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Figure 4.1
Decision framework for international logistics
• What are the trade-offs
between responsiveness to
local markets and economies
of scale?
Chapter 4: Managing Logistics Internationally
Table 4.1
The fourth-generation global shift in Europe
Chapter 4: Managing Logistics Internationally
Table 4.2
Dimensions of different internationalism strategies
(Source: Based on Yip, 1989, and Bartlett and Ghoshal, 1989)
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Logistical implications of
internationalization
Internationalising logistics
networks holds consequences for:
• Inventory
• Handling
• Transport
Chapter 4: Managing Logistics Internationally
Time-to-Market
Time-to-market has particular significance for the
management of the global logistics pipeline. We
will discuss the following issues here:
• Product obsolescence – The extended lead
time inherent in international logistics
pipelines means that products run the risk of
becoming obsolete during their time in transit.
• Inventory-holding costs – Lead time spent in
the logistics pipeline increases the holding
cost of inventory.
Chapter 4: Managing Logistics Internationally
Global Consolidation
The types of resource acquired in this way
include all inputs to the end-product, such as raw
materials and components, and also labour and
knowledge.
Familiar features of global consolidation include:
• sourcing of commodity items from low-wage
economies
• concentration at specific sites
• bulk transportation
Chapter 4: Managing Logistics Internationally
Sourcing commodity items from low-wage
economies
Two sourcing issues are used by internationally
operating organisations:
• consolidation of purchasing of all company
divisions and companies;
• sourcing in low-wage economies.
Chapter 4: Managing Logistics Internationally
Concentration at specific sites
Consolidation of purchasing applies not only to
commodity goods but also to high-value or
scarce resources.
• Research and development skills are both
high value and scarce.
• Therefore there is an incentive to locate at
certain sites to tap into specific pools of
such skills.
Bulk transportation
One of the more obvious advantages of
operating a company in a global manner is the
cost advantage of consolidated transportation.
Chapter 4: Managing Logistics Internationally
Risk in International Logistics
Companies are adapting to the new supply
chain reality of expecting the unexpected.
Companies are developing new risk
management approaches based upon the
realisation that decades of globalising supply
chains has come at a price: a heightened and
different risk profile. Considerations:


Geopolitical threats
Transportation breakdowns
• How can we picture the tradeoffs between costs, inventories
and lead times in international
logistics?
Chapter 4: Managing Logistics Internationally
The tendency towards internationalisation
There is a need to lower costs while enhancing
the service they provide to customers. They use
the following approaches:
• Focused factories
• Centralised inventories
Chapter 4: Managing Logistics Internationally
Figure 4.4
Inventory centralisation against logistics costs and service dimensions
Chapter 4: Managing Logistics Internationally
Figure 4.5
Delivery strategies in a global network
Table 4.4
Three different delivery strategies
Chapter 4: Managing Logistics Internationally
• What are the risks in
international logistics in terms
of time and inventories, and
how can they be addressed?
Chapter 4: Managing Logistics Internationally
The Challenges of International Logistics and Location
International logistics is complex, and different from localised
logistics pipelines.
The main differences that need to be
taken into consideration are:
• extended lead time of supply;
• extended and unreliable transit
times;
• multiple consolidation and break
points;
• multiple freight modes and cost
options;
• price and currency fluctuations.
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Organising for International Logistics
There are at least three elements in
organising for international logistics. These
are:
• layering and tiering
• the evolving role of individual plants
• reconfiguration processes
These will be outlined in the following
subsections
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Stages in the implementation of
postponed manufacturing: local starting
point
Figure 4.11
Stages in the implementation of
postponed manufacturing: global
starting point
Figure 4.12
(Source: van Hoek, 1998)
(Source: van Hoek, 1998)
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Chapter 4: Managing Logistics Internationally
Reverse Logistics
Reverse logistics deals with the flow of goods that go
back up the supply chain for a number of reasons,
including: product returns, repairs, maintenance and
endof-life returns for recycling or dismantling.
Chapter 4: Managing Logistics Internationally
Reverse Logistics
Reasons why reverse logistics is often only partially
incorporated into international network design include:
• no infrastructure: companies often try to use the same
outbound distribution system to handle returns without
considering whether it is fit for purpose;
• reverse logistics is often a ‘corner-of-the-desk concern’, and
does not receive sufficient resources;
• much attention on the subject is driven by legislation, not
yet by recognised business value;
• focal firms see reverse logistics as a cost of doing business;
• the subject is intuitively not popular: it means something
has gone wrong, so people are tempted to ignore it or hide
it;
• it is hard to forecast the reverse flow and composition –
what is going to come back.
Chapter 4: Managing Logistics Internationally
Reverse Logistics
Opinions indicate that there are operational shortcomings such
as using the same infrastructure for the return flow, and the
difficulty of forecasting reverse flow. These might be explained
by a lack of management attention, and by lack of appreciation
of the full costs of reverse logistics. On the other hand, potential
downsides of a reactive approach include image risks, service
shortfalls and being a nuisance to customers.
Suggested ways forward include considering the full impact of
reverse logistics and approaching it as a business:
• consider reverse logistics for its full cost and negative potential
market impact;
• seek green as a business (‘green is green’);
• design for disassembly and recycling;
• outsource reversed operations to a specialist 3PL;
• create dedicated (parts of) operations
Chapter 4: Managing Logistics Internationally
Managing for Risk Readiness
Supply chain disruptions such as transportation
breakdowns and geopolitical risks can have
many impacts: empty distribution channels,
stores and goods stuck upstream leading to lost
sales, revenue and customers.
There are at least two levels at which
companies are responding to risk in
international logistics:
• Preparing for immediate response to risks
• Structurally preparing for risk in international
supply chains
Chapter 4: Managing Logistics Internationally
Immediate Risk Readiness
Recent events have shown that immediate
responses to risks can include four things:
• raised inventory levels to assure a
cushion for supply disruptions of key
parts and supplies
• redrawing transportation scenarios in
the light of the possible logistics
meltdown of global trade routes
• supplier hedges are put into place
• global sourcing and supplier
rationalisation efforts are being
reconsidered actively
Chapter 4: Managing Logistics Internationally
Structural Risk Readiness
Because risk needs to be an ongoing focus,
companies are increasingly devoting
dedicated teams to risk management in the
supply chain. These teams can do several
things:
• develop contingency plans and risk
protocols;
• audit preparedness;
• train plant management and staff;
• report to senior management on risk
profiles and preparedness.
Chapter 4: Managing Logistics Internationally
Corporate Social Responsibility in the Supply
Chain



CSR in the supply chain deals with the social
and environmental consequences of supply
chain operations.
Making a global supply chain environmentally
sustainable and socially considerate is harder
than just doing so for a focal firm. This is due
to global reach and the fact that multiple
companies are involved.
As a result, it is harder to assess and improve
operating policies across the entire supply
chain.
Chapter 4: Managing Logistics Internationally
Figure 4.15
CSR practices in the supply chain
Saudi Electronic University
Logistics
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Chapter 5
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Competing on time is the principle of taking timely completion of supply
chain tasks to a higher level: that of compressing cycle times for supply chain
operations for internal and external benefits.
External benefits include:
• lowering overall cycle time and providing services faster;
• outrunning competition.
Internal benefits include:
• shorter cash-to-cash cycles, thereby releasing working capital and
reducing asset intensity of the supply chain;
• lowering inventories in the pipeline and storage by speeding up turnover
times for work in progress and inventory.
These benefits are especially important within lean or waste elimination
approaches.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
A working definition of competing on time is:
The timely response to customer needs
Traditionally, people often have the opinion that
you cannot have low cost and high quality, or
low cost and fast delivery, or fast delivery and
high quality.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
The trade-off between cost and quality can be
altered by preventing defects from happening in
the first place through such measures as:
• designing the process so that defects cannot
occur (error proofing);
• designing products so that they are easy to
make and distribute;
• training personnel so that they understand the
process and its limitations.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based competition: definition and concepts
Understanding trade-off relationships lies at the heart of a focal
firm’s ability to achieve competitive advantage. Relationships
that need to be understood and harnessed include recognising
that:
• costs do not have to increase in order to improve quality,
they can reduce;
• costs do not have to increase when lead times are reduced. It
may be possible to reduce both in some processes (see
Figure 3.10);
• costs do not have to go up as product variety increases and
times reduce, they can also reduce.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Variety and complexity
One of the first challenges we have in describing logistics systems
is to understand the terms variety and complexity.
Thus Galbraith (1977) defines complexity as the difference
between the information needed to perform a task and the
information actually possessed.
A more helpful definition for logistics purposes (Edmunds, 1999) is:
A system is complex when it is difficult to formulate its overall
behavior, even when given almost complete information about
its components and their relationships
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Variety and complexity
Mercedes offers 3.3 × 1024 possible variations on its E class model, which is ‘far more
than the company could ever sell in its entire existence’ (Pil and Holweg, 2004). Only
17,000 of these variations are said to matter to the end-customer, a situation which
appears to be making the logistics challenge unnecessarily complex. Here, the
complexity of the E class is being driven by variety, and it is useful to distinguish two
types of variety:
• External variety: is the choice offered to the end-customer, or potential finished
product skus. Choice soon builds up – an automotive example would be:
o 2 body styles × 15 power train combinations × 19 painted body colours × 15 trim
colours × 70 factory fitted options ≈600,000 variations
• Internal variety: converts external variety into the internal requirements placed onto
the supply chain. Holweg and Pil (2004) measured internal variety at three levels in the
product structure (for an example of a product structure, see Case study 6.1): the basic
product (models and body styles), intermediate (such as power trains, wiring harnesses
and body colours), and peripheral (number and variety of components used).
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Variety and complexity
These authors have used variety as a measure of complexity. Complexity makes it
progressively more challenging to plan and control the supply chain. Cooper and Griffiths
(1994) state that ‘issues of variety and complexity are strongly linked’, and list three rules
for managing complexity:
• Increased variety tends to add to the complexity of logistics operations, and so
increases both direct and indirect costs (section 3.2.2).
• Variety should only be increased when it contributes to added value. Heineken, the
Dutch beer manufacturer, has 10 skus today compared with 2,500 across Europe a few
years ago. The ‘right’ level of product variety starts with consumer research (Mahler
and Bahulkar, 2009) rather than ‘tail cutting’ (Activity 2.1).
• System redesign can enhance added value through reducing the cost impact of an
increase in variety. The antidote to complexity is simplicity, so auto manufacturers have
implemented several ways to offer external variety without making internal operations
too complex (see Case study 8.3).
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Initiatives
When a company attacks time directly, the first benefits
to show up are usually shorter cycle times and faster
inventory turns.
Lower overhead costs usually follow, as the costs of
dealing with breakdowns and delays begin to disappear
from the system.
By seeking time reduction, both time reduction and cost
reduction are often the rewards.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Opportunities to Add Value
There are several ways in which a company can use time
to help meet customer needs better and therefore add
more value.
The most common examples of this are:
• increased responsiveness to customer needs;
• managing increased variety;
• increased product innovation;
• improved return on new products;
• reducing risk by relying less on forecasts.
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Time-based Opportunities to Reduce Costs
The second key element of time-based competition is to
reduce cost and therefore improve productivity through the
elimination of non-value-added time in processes. This
means that wasted lead time and unnecessary tasks that are
not actually adding any value in the customers’ eyes should
be identified and eliminated. Stopping unnecessary tasks and
removing wasted time from those that remain lowers cost by:
• reducing the need for working capital;
• reducing the need for plant and equipment capital;
• reducing development costs;
• reducing quality costs.
Chapter 5: Managing the Lead-Time Frontier – Part I
The role of time in competitive advantage
Limitations to time-based approaches
Two basic limitations to the need for time-based
logistics management are the need for speed and
the degree of speed required.
•Not all operating environments require speed.
•Not all customers value speed as they may be
able to order well in advance of delivery.
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
P:D ratios and differences
Using time as a performance measure
Cost is a more subjective measure that is open to interpretation.
For quality measures to be useful they often require a statistical
approach that can easily be misunderstood.
Deming’s famous Monte Carlo experiments with a funnel and glass
marble (Deming, 1986: 327) illustrate the perils of interfering with
a stable process:
If anyone adjusts a stable process to try to compensate for a
result that is undesirable, or for a result that is extra good, the
output that follows will be worse than if he had left the process
alone.
Chapter 5: Managing the Lead-Time Frontier – Part I
P:D ratios and differences
Using time as a performance measure
Frequent interference in a stable process increases the variability of its
output! Time, on the other hand, is a measure that everyone
understands. Using this measure anyone can answer the key question:
• Do we meet the target the customer has set for us?
By comparing this measure with one taken for the performance of
competitors, we can easily answer the next key question:
• How good are we compared with the competition?
If we take a reason for measuring performance as being to understand
the effect of making changes to a process, we can more easily answer
the question:
• Is our performance getting better or worse?
Chapter 5: Managing the Lead-Time Frontier – Part I
P:D ratios and differences
Using time to measure supply pipeline performance
In the same way that time can be used to
measure the performance of a process within a
company so it can be used to measure the supply
pipeline.
Two measures are presented below that are key
to understanding supply pipeline performance:
• P-time
• D-time.
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Time-based process mapping
The following sections give an overview of the key stages
involved in the time-based mapping process:
Stage 1: Create a task force
Stage 2: Select the process to map
Stage 3: Collect data
Stage 4: Flow chart the process
Stage 5: Distinguish between value-adding and nonvalue-adding time
Stage 6: Construct the time-based process map
Stage 7: Solution generation
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Two basic strategies for managing timeliness in
the logistics pipeline are make to stock (MTS) and
make to order (MTO). In between, we have
assemble to order (ATO). We begin with a brief
description of each:
• Make to stock (MTS)
• Assemble to order (ATO)
• Make to order (MTO)
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Strategies to cope when P-time is greater than D-time
• When faced with a D-time shorter than the
corresponding P-time, a company has a number of
options. In the short term it can attempt to make to
order, or it can forecast demand and supply from stock
(MTS).
• The more common solution is to forecast customer
demand, make products to stock and supply from
there.
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Strategies to cope when P-time is greater than D-time
Both make to order and make to stock have
associated costs and risks, so a company should look
at ways to reduce these costs and risks in the longer
term.
Reducing risks can be grouped into three inter-linked
areas. These are:
• marketing
• product development
• process improvement
Chapter 5: Managing the Lead-Time Frontier – Part I
Managing timeliness in the logistics pipeline
Practices to cope when P-time is greater than D-time
There are a number of ways to reduce P-time. These can be
summarised as follows:
• Control by optimising throughput and improving process
capability.
• Simplify by untangling process flows and reducing product
complexity.
• Compress by straightening process flows and reducing batch
sizes.
• Integrate by improving communications and implementing
teams.
• Coordinate by adding customer-specific parts as late as
possible.
• Automate with robots and IT systems
Chapter 5: Managing the Lead-Time Frontier – Part I
A method for implementing time-based
practices
Chapter 5: Managing the Lead-Time Frontier – Part I
Chapter 5: Managing the Lead-Time Frontier – Part I
When, where and how?
There are several tactical considerations to be
made when planning a time-based strategy.
These have been grouped in the form of three
questions to be asked:
• When?
• Where?
• How?
Saudi Electronic University
Logistics
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Chapter 6
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.1 Planning and control within manufacturing
The purpose of a manufacturing planning and
control (MPC) system is to meet customer
requirements by enabling managers to make the
right decisions.
Three time horizons are involved:
• Long-term
• Medium-term
• Short-term
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.2 Managing inventory in the supply chain





Planning and controlling factory output is but part
of the challenge of managing material flow in the
supply chain.
Random demand is independent
Dependent demand is fixed by the actions of the
firm
It is important to manage inventories of
independent demand items using order points
Important to optimize trade-offs between inventory
holding costs and changeover or order placing costs
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
In the case of manufacturing batch
sizes, the EBQ is determined by
optimising the trade-off between
changeover cost between one batch
and the next and inventory carrying
cost:
• Changeover cost per unit, Cs.
• Inventory carrying cost, C.
The usage rate z is known and
constant and that the manufactured
cost of the sku c is also known and
constant. A little algebra applied to
these assumptions leads to the socalled Wilson formula:
Chapter 6: Supply chain planning and control
The concept of the economic
order quantity (EOQ) is based on
similar assumptions to the EBQ.
The calculation addresses the
question ‘how many parts will
we order?’ The trade-off this
time is between the cost of
placing an order and inventory
carrying cost, where:
• Cost of placing an order: All
order related costs, including
purchase department costs,
transportation costs from the
supplier, and goods-in
inspection and receiving.
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.2 Managing inventory in the supply chain
Periodic review
A widely used model for inventory control in retailing is periodic review. This
works by placing orders of variable size at regular intervals – the review period.
The quantity ordered is enough to raise stock on hand plus stock on order to a
target level called the target stock level (TSL):
Order quantity = Target stock level – Stock on hand – Stock on order
The TSL is the sum of cycle stock (average daily demand over the review period
and replenishment lead time) and the safety stock. An example of the way the
TSL is calculated is:
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.3 Planning and control in retailing
Retailing is faced with planning and control challenges distinct from
manufacturing:
• A retailer cannot generate sales without stock, and stock that is bought
for sales that do not happen can be very expensive for the retailer.
• The product range that has to be supported on the shelf is
comparatively wide.
• Several stages of the internal supply chain must be coordinated –
depots, back of store and front of store.
• Retail profit margins in grocery are tighter (2–4 per cent) than for large,
branded manufacturers (8–10 per cent).
• Demand can be affected by changes that are difficult to forecast, such
as seasonality, fashion, endorsements, and promotions.
• ‘Best before’ and ‘use by’ dates for fresh produce increase obsolescence
pressures and inventory turns.
• Reverse logistics is more complicated.
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.4 Inter-firm planning and control
There are many other factors that make planning
and execution challenging, resulting from
differences between the partners:




Differences in process technology
Differences in working routines
Priority planning
Inadequacies in MPC systems design
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.1.4 Inter-firm planning and control
There are four major causes of the bullship effect:




Updating of demand forecasts
Order batching
Price fluctuation
Rationing and shortage gaming
It is possible for material movements in supply
chains to descend into chaos.
Chapter 6: Supply chain planning and control
6.2 Overcoming poor coordination in retail supply
chains
6.2.1 Efficient consumer response (ECR)
• ECR is designed to integrate and rationalise product
assortment, promotion, new product development
and replenishment across the supply chain.
• ECR has increased industrial awareness of the
growing problem of non-value-added supply chain
costs.
• The focus of ECR is to integrate supply chain
management with demand management.
• ECR initiatives aim to promote greater collaboration
between manufacturers and retailers
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.2 Collaborative planning, forecasting and
replenishment (CPFR)
• Collaborative planning, forecasting and replenishment
(CPFR) is aimed at improving collaboration between buyer
and supplier so that customer service is improved while
inventory management is made more efficient. The tradeoff between customer service and inventory is thereby
altered.
• The goal of the CPFR movement was to develop a business
model to forecast and replenish inventory collaboratively.
• The CPFR concept can have bottom-line impact on their
businesses.
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.2 Collaborative planning, forecasting and
replenishment (CPFR)
A nine-step business model has been developed that provides
an insight into the effort required by both supplier and
customer. The model is as follows:
1.Develop front-end agreement.
2.Create joint business plans.
3.Create individual sales forecasts.
4.Identify exceptions to sales forecasts.
5.Resolve/collaborate on exception items.
6.Create order forecast.
7.Identify exceptions to order forecast.
8.Resolve/collaborate on exception items.
9.Generate orders.
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.2 Collaborative planning, forecasting and
replenishment (CPFR)
Benefits of electronic collaboration Nestlé UK states that the advantages of collaborative
systems are significant, and lists the following benefits:
• There is improved availability of product to the consumer, and hence more sales.
• Total service is improved, total costs are reduced (including inventory, waste and
resources), and capacities can be reduced owing to the reductions in uncertainty.
• Processes that span two or more companies become far more integrated and hence
simple, standard, speedy and certain.
• Information is communicated quickly, in a more structured way, and is transparent across
the supply chain to all authorised users.
• An audit trail can be provided to say when information was amended.
• Email prompts can update users of variance and progress, and can confirm authorisations.
• The data that are in the system can be used for monitoring and evaluation purposes.
• The process can be completed in a quick timescale, at a lower total cost.
• All trading partners become more committed to the shared plans and objectives. Changes
are made with more care, and are immediately visible to all.
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.3 Vendor-managed inventory (VMI)
Vendor-managed inventory (VMI), is an approach to inventory
and order fulfilment whereby the supplier, not the customer, is
responsible for managing and replenishing inventory.
Automated VMI originated in the late 1980s with department
stores in the US as a solution to manage the difficulties in
predicting demand for seasonal clothing.
Manual VMI had been around for many years.
Potential benefits
The immediate benefit to a supplier engaged in VMI is access to
data on:
• customer sales;
• inventory levels at the customer.
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.3 Vendor-managed inventory (VMI)
Potential Problems in setting up a VMI System
• Unwillingness to share data
• Seasonal products
• Investment and restructuring costs
• Retailer vulnerability
• Lack of standard procedures
• System maintenance
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.4 Quick response (QR)
Quick response (QR) is an approach to meeting customer demand by
supplying the right quantity, variety and quality at the right time to the
right place at the right price.
Understanding overall performance involves mapping the processes
needed to convert raw material into the final product. The performance
of the process is also assessed to determine its effectiveness.
There are two main differences between QR and a time-based approach
to improvement:
• There is an emphasis on using actual customer demand to pull
products through the distribution and manufacturing system.
• There is extensive use of information technology as the preferred way
to achieve pull.
Chapter 6: Supply chain planning and control
6.1 The supply chain ‘game plan’
6.2.4 Quick response (QR)
Role of Enabling Technologies
High variety in clothing markets and in grocery markets
has led these industries to use information technologies
as a means of enabling QR.
These technologies are based around the use of uniform
product codes and electronic data interchange (EDI).
This process has enormous implications for links across
the supply chain.
Chapter 6: Supply chain planning and control
Case Study 6.1
Chapter 6: Supply chain planning and control
Case Study 6.2
Paul Polman
Chapter 6: Supply chain planning and control
Case Study 6.3

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