Wednesday, October 31, 2007

Future Strategy for Integrated Logistics Supply Chain Management


A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. It is an integrating concept, concerned with planning, sourcing, making and delivering goods and services from the initial supplier to the end customer. As the external environment is changing rapidly companies have daunting task to maintain sustainable competitive advantage over a long run period.

The logistics cost forms a major chunk of GDP and has to improve a lot in developing nation mostly. For e.g. there is an immense potential for cost savings for India if it can bring down its logistics costs from the current level of 13% of GDP to a level similar to that of the US – 8.7% of GDP. The savings would be around $20 billion resulting in a potential 4.3% cut in prices of Indian goods globally, making them more competitive

As the competition is getting stiffer the improved service and reduced costs can only be achieved through better management of flow of goods from plant to user. To capitalize on this opportunity, the focus should be on following:

Thinking of physical distribution process as a system in which all the components and functions must be properly balanced.

Taking a fresh look at the responsibilities, capabilities, and organizational positions of executives in traffic, warehouse management, inventory control and other functions which make up the overall system.

Re-examining the company’s physical plant and distribution procedures in the light of technical advances in such areas as transportation, data processing and materials handling.

In this paper I shall first examine the pressing need for improved management of companies ILSCM and then discuss the future of integrated logistic supply management across the industry, which will depend on huge transformation and what companies should follow. An effective and efficient ILSCM is the key to success as it helps in developing sustainable competitive advantage and strategic fit among process for any organization.

Need of Integrated LSCM (Logistics & Supply Chain Management)

SCM remains a high priority for manufacturers as a way to improve margins, retain & increase market share. Early supply chain management success included improved relationships between warehousing and transportation within companies resulting in reduced inventory and better response times to customer requests for products and services.

SCM then entered a logistics stage where other functional areas within companies joined forces to incorporate manufacturing, procurement, transportation, distribution, and marketing to more effectively compete in the marketplace. This stage was aided by the use of telecommunications, electronic data interface, and other technological advances that made the transfer of information more transparent across the functional areas between companies.

The future Strategy for ILSCM – Matching Supply Chains with Products

The first step in devising an effective supply chain strategy is to consider the nature of the demand for the products one’s company supplies. Many aspects are important – for example, product life cycle, demand predictability, product variety, and market standards for lead time and service (the percentage of demand filled from in-stock goods). The products on the basis of their demand patterns, falls into one of the two categories: they are either primarily functional or primarily innovative. And each kind category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chain is a mismatch between the type of product and type of supply chain.

Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which don’t change much over time, they have stable, predictable demand and long life cycle (usually more than 2 years). But their stability invites competition, which often leads to low profit margins of around 5% to 20% only.

To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their offerings. Although innovation can enable a company to achieve higher profit margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short- usually just a few months- because as imitators erode the competitive advantage that innovative products enjoy, companies are forced to introduce a steady stream of newer innovations. The short life cycle and the great variety typical of these products further increase unpredictability.

With their high profit margins (usually 20% to 60%) and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products do. To understand the difference one should recognize that a supply chain performs two distinct types of functions: a physical functions and a market mediation function. A supply chain’s physical functions is readily apparent and includes converting raw materials into parts, component, and eventually finished goods, and transporting all of them from one point in the supply chain to the next. Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy.

Each of the two functions incurs distinct costs. Physical costs are the cost of production, transportation and inventory storage. Market mediation costs arise when supply exceeds demand and a product has to be market down and sold at a loss or when supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers.

Right Supply-Chain Strategy

Fig1. Matching supply chains with products
The above matrix shows the matching of supply chain with products. The Efficient supply chain is the process where the supply of predictable demand is met efficiently at the lowest possible cost. The manufacturers focus on maintaining high average utilization rate and they focus on shortening lead time as long as it doesn’t increase cost. The Responsive supply chain process is for responding quickly to unpredictable demand in order to minimize stock outs, forced markdowns, and obsolete inventory. Manufacturers deploy excess buffer capacity in this regard.
For companies to be sure that they are taking the right approach, they first must determine whether their products are functional or innovative. The next step is for managers to decide whether their company’s supply chain is physically efficient or responsive to the market. Having determined the nature of their products and their supply chain’s priorities, manager can employ a matrix to formulate the ideal supply-chain strategy. The four cells of the matrix represent the four possible combinations of products and priorities.

Managers at many companies continue to lament that although they know their supply chains are riddled with waste and generate great dissatisfaction among customers, they don’t know what to do about the problem. The root cause could very well be a misalignment of their supply and product strategies. Realigning the two is hardly easy. But the reward- a remarkable competitive advantage that generates high growth in sales and profit – make the effort worth it.

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