Role of logistics in enhancing

competitive advantage
A value chain framework for global
supply chains
Rohit Bhatnagar
Nanyang Business School, Singapore, Singapore and
Singapore-MIT Alliance, Nanyang Technological University,
Singapore, Singapore, and
Chee-Chong Teo
School of Civil and Environmental Engineering,
Nanyang Technological University, Singapore, Singapore
Abstract
Purpose The purpose of this paper is to describe the issues, tradeoffs, and models relating to two
important sets of problems that arise in supply chain management complexities in extended supply
chains and network coordination in globally dispersed supply chains. This paper highlights the role of
logistics in enhancing the competitiveness of rms that operate a global supply chain.
Design/methodology/approach The methodology used in this paper encompasses conceptual
research and detailed literature review of key issues.
Findings This review indicates that the key challenges faced by supply chain managers due to
extended supply chains are non-stationary demand, variability propagation, and inventory
imbalances. For network coordination managers must determine the role of facilities in a global
network, identify the optimal location and capacity of facilities as well as role of consolidation hubs.
For the above challenges, the tradeoffs in terms of four key drivers of supply chain performance
transportation, inventory, information, and facilities and relate these to key measures of supply chain
performance are described. Important directions for future research are also identied.
Research limitations/implications Test cases are needed to validate and rene the framework
presented. Developing case studies that gather appropriate data to test out the models described would
be important.
Practical implications Companies with a global supply chain as well as third party logistics
companies will nd the framework presented in this paper very useful.
Originality/value A new integrated framework that incorporates key decision issues like
complexities of extended supply chains and network coordination into the rms decision making has
been presented. This has not been reported in previous research.
Keywords Value chain, Competitive advantage, Supply chain management
Paper type Conceptual paper
1. Introduction
Faced with relentless competitive pressures in an increasingly global marketplace,
rms have responded with a variety of business strategies aimed at enhancing
customer value. These strategies include, among others, offering a broader product
mix to customers to fulll the product variety needs, global sourcing of parts and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0960-0035.htm
IJPDLM
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Received 25 August 2008
Accepted 15 January 2009
International Journal of Physical
Distribution & Logistics Management
Vol. 39 No. 3, 2009
pp. 202-226
qEmerald Group Publishing Limited
0960-0035
DOI 10.1108/09600030910951700
components and global distribution to ensure cost effectiveness through economies of
scale, and time based competition to enhance responsiveness to customer needs. It has
been estimated that out of roughly 850 cars manufactured every day at the Audis
Ingolstadt factory in Germany, only 1.5 cars per year leave the factory with the exact
same options. This underlines the importance of product variety in Audis business
strategy. The enormous number of product variants that must be built as a result of
this strategy, creates complex material requirements and the need for an efcient
distribution system to synchronize deliveries and the production schedules.
At Volkswagens dealerships in North America and Europe, one popular
salesperson joke is that the car has already covered 10,000 km with no mileage on
the clock. This joke corroborates the vast spread of Volkswagens global supply
chain; the total distance traversed by components traveling from supplier plants to the
companys assembly plants in Mexico and the assembled cars being delivered to fulll
customer demand in the built-to-stock North American market and the built-to-order
European market approximates reasonably to 10,000 km (Berlit et al., 2008).
These strategies broader product mix, global sourcing and distribution, time-based
competition are fundamentally impacting the decision problems that confront
managers of rms with global supply chains. First, managers must incorporate specic
complexities associated with an extended supply chain into their decision-making
framework. Extended supply chains encompass interactions between multiple entities
that are located geographically far apart. This leads to long product replenishment times
across the supply chain, information distortion, and inventory imbalance across
different entities. Second, managers must achieve a high degree of network coordination
among globally dispersed supply chain entities. For example, managers must ensure
that the overall supply chain network conguration corresponds to the rms
competitive strategy, determine optimal location of production and distribution
facilities, and select optimal consolidation points in the supply chain to take advantage
of economies of scale in transportation. Taken together, these two broad set of problems
encompass the four drivers of supply chain performance inventory, transportation,
information, and facilities. These problems pose signicant challenges to managers of
rms with global supply chains in their quest for sustainable competitive advantage and
are the focus of this paper.
The need to successfully implement the above strategies has also been highlighted
in the strategic management literature, most notably by Porter (1985) who is regarded
as one of the most inuential authorities on the generic competitive strategies used by
rms to position themselves in the marketplace and in the principles of competitive
advantage. Porter (1985) dened the value chain concept as a crucial tool for analyzing
the sources of competitive advantage. Value chain analysis comprises disaggregation
of the rm into its strategically relevant activities in order to understand the behavior
of costs and the existing and potential sources of differentiation. A rm gains
competitive advantage by performing these strategically important activities more
cheaply or better than its competitors. Porter identied ve primary elements of the
value chain inbound logistics, operations, outbound logistics, marketing and sales,
and service, as well as four support activities procurement, technology development,
human resource development, and rm infrastructure. As stated earlier, in this paper,
we focus on the role of inbound and outbound logistics management, in enhancing a
rms competitive position. Logistics management or supply chain management has
Enhancing
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203
often been described as the next frontier of competition[1]. Simchi-Levi et al. (2003)
have suggested that in industries such as retailing and computer and printer
manufacturing, supply chain management is perhaps the most important factor in
determining the success of the rm. The successful implementation of supply chain
strategies in technology, apparel, and retail industries by rms like Wal-Mart, Zara,
Hewlett-Packard, and Dell Computers has attracted the attention of managers on the
crucial role that logistics management plays in business strategy. Incorporating the
full impact of logistics into the rms strategy is therefore a crucial imperative for rms
and can lead to superior and sustainable performance. While substantial research is
reported in literature on different aspects of logistics performance, this has been
relatively scattered and there is a lack of a framework linking the four drivers of the
logistics function to the rms competitiveness. Specically, there is no integrated
framework that incorporates key decision issues like complexities of extended supply
chains and network coordination into the rms decision making. As described earlier,
these issues will become more critical as globalization intensies and results in an even
more dispersed global supply chain.
This paper seeks to ll this important gap in literature by providing a unied
framework that incorporates these signicant decision making issues. We present a
review of generic models and highlight the key tradeoffs between important decision
variables in these models, especially those related to the four supply chain drivers.
Such a framework will be valuable both from an academic as well as a practitioner
point of view. From an academic perspective, our framework will help identify
promising directions for future research; for practitioners, the framework will help
identify promising directions for improving the rms performance and
competitiveness. The rest of this paper is organized as follows. In Section 2, we
present a brief overview of Porters value chain analysis. This is followed by a review
of models that focus on issues and tradeoffs in managing extended supply chains in
Section 3. Specically, we highlight the impact of longer lead times and multiple
supply chain entities on supply chain performance and the tactics that can be utilized
to reduce this impact. In Section 4, we discuss models that deal with network
coordination in dispersed supply chains. Section 5 describes an integrated framework
that links these decision issues to the rms competitiveness. Finally, Section 6
provides concluding comments and directions for future work.
2. Value chain framework
As described earlier, value chain analysis comprises disaggregation of the rm into its
strategically relevant activities in order to understand the behavior of costs and the
existing and potential sources of differentiation. Porter (1985) identied several ways in
which key activities within the rms value chain could yield competitive advantage to a
rm vis-a` -vis its competitors. The author suggested several important characteristics
that might be used to identify candidate activities, which must be subsequently
separated and studied in depth. Based on this framework, candidate activities were
likely to share distinct economics, have high potential impact of differentiation and
account for a signicant or growing proportion of cost. The author also highlighted the
role of linkages between activities within the value chain. He denes linkages as
relationships between the way one value activity is performed and the cost or
performance of another activity. Linkages reect tradeoffs among activities to achieve
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the same overall result. Supply chain managers must constantly resolve the tradeoff
between the supply chain drivers, for example, the tradeoff between investment in
inventory and the level of premium transport mode usage in order to achieve the
appropriate level of customer responsiveness. According to Porter (1985), linkages could
yield competitive advantage in two ways optimization and coordination. A rm may
coordinate and optimize the linkages reecting its strategies in order to achieve
competitive advantage. A rm competing on cost could improve its cost position by
working with suppliers and channels to exploit possibilities for all parties to gain
through the coordination and joint optimization of their respective value chains to
reduce the nal cost of the product. A rm using a differentiation strategy could
recongure its value chain to create real or perceived value for its buyers. For example,
Wal-Mart has positioned itself as a low-cost retailer of medium quality goods while
ensuring high accessibility and availability. Wal-Marts strategy calls for an efcient
distribution system which features short response times and low inventory levels. As
outlined in Anupindi et al. (2006), Wal-Mart has created a unique logistics management
system encompassing company owned transportation eet and communication
network to connect its stores, for achieving these seemingly contradictory objectives. To
ensure fast replenishment of depleted stocks, the company shares its point of sales data
with suppliers through its proprietary information system called Retail Link. Low
pipeline inventories are achieved through cross docking distribution centers which
ensure that inventory is always kept in motion. The overall result of this strategy is
impressive. Wal-Mart has signicantly higher dollar sales per square foot,
market-share, growth, and protability as compared to its competitors. Another
example of a rm exploiting its value chain to its advantage is Zara. Zara is a designer,
manufacturer, distributor, and retailer of fashion clothing that aims to distinguish itself
in the eyes of the consumer by providing timely fashion for the masses. To achieve this
objective, Zara designs more than 11,000 new styles per year and puts them in stores
within three weeks fromconcept start. This has enabled Zara to optimize and exploit the
critical linkage between the customer service it aspires for and product design. The
effectiveness of the strategy followed by Zara is reected in its impressive nancial
performance 39 percent return on capital employed, 24 percent revenue growth, and
16 percent earning before interest and taxes (Van Mieghem, 2008). Similarly, National
Semiconductors, one of worlds largest chipmakers, whose products are used in fax
machines, cellular phones, computers, and cars reduced its distribution costs by 2.5
percent, decreased delivery time by 47 percent, and increased sales by 36 percent over a
period of two years. National Semiconductor has a globally distributed supply chain
encompassing facilities in North America, Europe, and Asia-Pacic. Since it competes
on short customer lead times, it must have the critical capability to deliver orders within
tight time windows. By switching froma decentralized distribution systemwith several
warehouses around the globe to a centralized system with a new distribution center in
Singapore, National Semiconductor was able to achieve a better coordination betweenits
inventory, backorder, and air-freight costs (Simchi-Levi et al., 2003). The interested
reader is also referred to Walters and Rainbird (2007) for a detailed description of a
number of value chain applications and the key drivers of success for these applications.
As evidenced by the above examples, a vital ingredient to exploit the linkages among
value activities is the use of information and information ows that allow optimization
or coordination to take place (Porter, 1985).
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The above discussion highlights several key points about how supply chain
managers can utilize the value chain framework to their advantage. First, exploitation
of linkages between various activities in supply chain is a crucial determinant of a
rms competitive advantage. Second, the target activities whose linkages managers
must seek to exploit exhibit several characteristics distinct economics and
signicant potential impact from a cost or a differentiation perspective. Third,
managers can exploit linkages between activities by optimization and coordination.
This involves identifying the dependencies and resolving the tradeoffs between
activities so that better results are obtained as compared to improving each activity
individually. Finally, information ows play a crucial role in coordination.
In the next two sections, we will describe how the value chain framework can be
used to explore the two key problems that increasingly confront managers of global
supply chains. As stated earlier, these problems are:
(1) decision making complexities in extended supply chains; and
(2) network coordination in dispersed supply chains.
The issues, tradeoffs and models in managing extended supply chains and network
coordination in dispersed supply chains are described in Sections 3 and 4, respectively.
3. Issues and tradeoffs in managing extended supply chains
While globalization has yielded many economic benets, it has also increased
complexities encountered by supply chain managers due to the fact that decision
making must encompass multiple players located in different geographical locations.
One key reason for these complexities is the considerable distance that products must
traverse between different supply chain entities. Most products in global supply chains
are transported via the slow ocean mode. For instance, the seaborne container volume
from Asia to the USA increased at the rate of 12.1 percent in 2006 over the previous
year (Clarkson Research Services, Shipping Review Database, spring 2007). The sea
mode translates into longer transportation lead times, which has signicant
consequences for supply chain management. Further, to reduce transportation cost,
multiple consolidation centers are often used in the global logistics pipeline to achieve
economies of scale. This ensures that goods produced in a number of different locations
can be batched together for transportation to a common market. These consolidation
centers increase the delays in transporting the goods, since products must spend some
idle time awaiting completion of the batch.
In this section, we utilize the results frommanagement science literature to gain insights
for our studyof global supplychains. Our intent is not topresent a comprehensive reviewof
the literature. Rather, our objective is to illustrate the type of decisions and the linkages
between the supply chain drivers. We focus primarily on three out of the four logistics
drivers identied earlier transportation, inventory, and information; the fourth driver, i.e.
facilities is discussed in greater detail in Section 4. Fromthe perspective of the value chain
framework, these drivers are characterized by distinct economics and have high potential
impact of differentiation or cost control. The tradeoffs between these drivers have been
well-documented in the management science literature; however little work has been done
to relate these models to the important issues in extended supply chains. As described
earlier, extended supply chains encompass interactions between multiple entities that are
located geographically far apart. This leads to non-stationary demand due to long
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replenishment times, information distortion and inventory imbalance across different
entities. These issues are discussed in greater detail in the remaining part of this section.
3.1 Non-stationary demand
Ahigh degree of demanduncertainty impacts supply chainprotabilityadversely, since
a higher level of safety stock and/or a longer safety lead times are needed to protect
against the uncertainties. As product life cycles get increasingly compressed, demand
for many products becomes more uncertain and exhibits non-stationarity over shorter
periods of time. Ademand process is non-stationary if it experiences seasonality or trend
over a given time frame, in addition to randomuctuations. Alonger supply lead time in
a global supply chain amplify the uncertainty of the non-stationary demand, since the
demand would be allowed to demonstrate greater extent of trend or seasonality over the
longer lead time. For instance, many raw materials and components in the electronics
industry are sourced by North American manufacturers from Asian suppliers. Since
these items are sent by ocean freight, they commonly have replenishment lead times in
excess of 50-60 days, and this pipeline time is sufciently long for short life cycle
products to exhibit non-stationarity, resulting in high demand uncertainties.
Graves (1999) highlights the effect of a longer replenishment lead time on the safety
stock inventory level for products with non-stationary demand. The author considers a
single item inventory system with non-stationary demand process and models the
demand process as an autoregressive integrated moving average (ARIMA) process:
d
1
m 1
1
;
d
t
d
t21
21 2a1
t21
1
t
;
where d
t
is the observed demand in period t, a, and m are known parameters, and {1
t
}
is a time series of independent and identically distributed (i.i.d.) random variables. The
variable 1
t
is assumed to be a zero-mean normally distributed random noise with
variance Var[1
t
] s
2
. A range of demand processes are modeled by varying a When
a 0, the demand follows a stationary i.i.d. process with mean m and variance s
2
. For
0 , a # 1, the demand process is a non-stationary process, in which larger values of
a result in a less stable or greater non-stationarity. Using the exponential moving
average which provides an unbiased forecast for this class of non-stationary demand
process, the author characterizes the inventory random variable and nds the safety
stock requirements for the system. By assuming an adaptive base stock policy, he nds
that given replenishment lead time L, the standard deviation of the inventory random
variable x
t
denoted by Std[x
t
] is given by:
Stdx
1
s

L
p

1 aL 21
a
2
L 212L 21
6
_
:
In the case of stationary demand (a 0):
Stdx
1
a

L
p
:
Since {1
t
} is a time series of normally distributed i.i.d. random variables, x
t
is also
normally distributed. The safety stock level is z Std[x
t
], which ensures that the
probability of not stocking out in each period is F(z), where F is the cumulative
distribution function for the standard normal random variable. Figure 1 depicts Std[x
t
]
as a function of supply lead time L for s 1 and various values of a.
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The main observation is that a higher safety stock level is required when demand is
non-stationary (0 , a # 1) as compared with the case of stationary demand (a 0).
Another key observation is that the relationship between lead time and safety stock
becomes convex for non-stationary demand; that is, after some point, the required safety
stock increases at an increasing rate with L, which implies that the safety stock levels of
products with non-stationary demand are more sensitive to the replenishment lead time.
We can draw some insights from the ndings in Graves (1999) with regard to the
context of global supply chain. The non-stationary demand highlights the importance of
the linkage between the transportation and inventory drivers. Supply chain managers of
products with non-stationary demand may improve total logistics cost by paying a
premiumfor shorter transportation lead time, as this would possibly result in more than
proportionate reduction in safety stock holding cost. The situation is relatively
straightforward if the product has a high value-to-weight ratio (e.g. electronics
components), since it would imply a lower premium transportation rates (due to its low
weight) as compared to savings in inventory holding cost (because of lower capital tied
to inventory). In these situations, the supply chain managers can adopt a transportation
service that provides a shorter transportation lead time (e.g. air shipment); in addition,
the shorter transportation lead time would translate into lower in-transit inventory level.
However, if the product has a lowvalue-to-weight ratio, the supplychainmanager would
reduce cost by employing a cheaper transport service of longer lead time but would
simultaneously hold more safety stock to compensate for the longer lead time. The
difcult scenario arises if the product of non-stationary demand is of medium
value-to-weight ratio. One such example is the liquid crystal display (LCD) monitors
which are often sourced from manufacturers in Asia to the Europe and North America
markets; LCD monitors have relatively short product life cycles of a year or less.
Figure 1.
Std[x
t
] as a function of lead
time L
0
10
20
30
40
50
60
0 5 10 15 20
L
S
t
d

[
x
t
]
a = 0
a = 0.2
a = 0.4
a = 0.6
a = 0.8
a = 1.0
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In such cases, the supply chain manager has to perform careful analysis on the various
characteristics of the product with regard to the transportation-inventory tradeoff; this
includes the length of the product life cycle, historical forecast accuracy, competitors
actions, lost sales costs as well as physical characteristics, e.g. weight, volume, hazard
level which affects transportation rates.
3.2 Bullwhip effect
Bullwhip effect is the phenomenon of distortion of information ows along the supply
chain leading to highly variable demand signals at upstream entities, even for products
with a stationary customer demand. Lee et al. (1997a, b) identied the long replenishment
lead time as an important cause of the bullwhip effect. The bullwhip effect has an even
more pronounced effect in global supply chains due to the longer replenishment lead time.
Chen et al. (2000) quanties the impact of replenishment lead times on the extent of
the bullwhip effect. They assume that the retailer faces a demand process of the form:
D
t
m r D
t21
1
t
;
where m is a non-negative constant, r is a correlation parameter jrj , 1 and 1
t
are
zero-mean i.i.d. error terms with variance s
2
. They assume a simple order-up-to
inventory policy in which the order-up-to point y
t
is updated with observed demand:
y
t

^
D
L
t
z ^ s
L
et
;
where L is the xed replenishment lead time, ^ s
L
et
is an estimate of the mean lead time
demand, ^ s
L
et
is an estimate of the standard deviation of the L period forecast error and z
is a constant to meet a desired service level. They further assume that the retailer uses
a simple moving average to estimate
^
D
L
t
and ^ s
L
et
based on the demand observations
from the previous p periods:
^
D
L
t
L

p
i1
D
t2i
p
_ _
;
and
^ s
L
et
C

p
i1
D
t2i
2
^
D
1
t2i
_ _
2
p

_
;
where D
t
2
^
D
L
t
is the forecast error for period t and C is a constant function of L, r,
and p. Thus, in every period t,
^
D
L
t
and ^ s
L
et
are updated based on p, most recent demand
observations, and the values are used to revise the order-up-to level.
Chen et al. (2000) assume that the retailer places order to a manufacturer. They
quantify the variability faced by the manufacturer and compare it to the variability
faced by the retailer. Denoting the variance of the orders placed to the manufacturer
by Var(Q) and the variance seen by the retailer by Var(D), they nd the lower bound of
the ratio of variability as:
VarQ
VarD
$ 1
2L
p

2L
2
p
2
_ _
1 2r
p
:
To gain insights for global supply chains with long replenishment lead times, we plot the
lower bound as a function of L for different values of p (with r 0.6) in Figure 2.
Enhancing
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We observe that there is a reduction in variability with bigger p values; bigger p values
result in smoother demand forecasts, which in turn lead to lesser bullwhip effects. More
importantly, fromthe perspectives of global supply chain, we observe that the increase in
the variability of orders from the retailer to the manufacturer increases at an increasing
rate over L. For p 3 and L 20, the variability faced by the manufacturer is about 80
times higher thanthat of the retailer. Althoughwe consider a two-stage supply chain here,
we note that this increase in variability can extend to a multi-stage system where the
amplication propagates towards the upstream direction of the supply chain.
The results in Chen et al. (2000) have signicant implications in our study of global
supply chains. For example, a company sourcing from a distant supplier for low-cost
raw materials would create higher variability of demand for the supplier; the higher
variability in turn leads to increased cost due to higher safety stock requirements and
additional cost to ex its production capacity to meet the varying orders. This
ultimately leads to lower total supply chain protability. As observed earlier, an
important determinant of the length of lead time is the transportation system utilized in
the supply chain. The convex relationship between the bullwhip effect and the
replenishment lead time implies that a rm may benet by opting for more costly
transportation service of shorter lead time.
As transportation costs become more signicant due to globalization of supply
chain operations, a common practice by companies is to enlarge their order lot size to
take advantage of transportation discounts. Order lot size affects the degree of
bullwhip effect; if the order lot size is large, the supplier will observe a large order,
followed by several periods of no orders, followed by another large order, and so on. As
a result, the supplier would observe a highly variable pattern of orders. Thus, in
deciding the order lot size in conjunction with transportation cost, the supply chain
manager must take into account the resulting tradeoff, which has signicant the
impact on the propagation of order variability across the supply chain.
Figure 2.
Lower bound as a function
of L for p 3, 6, and 9
0
10
20
30
40
50
60
70
80
90
0
Note: p = 0.6
5 10 15 20
L
L
o
w
e
r

b
o
u
n
d
p = 3
p = 6
p = 9
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The information logistics is the third logistics driver we had described earlier and it is
often considered an important factor for reducing the bullwhip effect. A frequently used
practice is to centralize demand information, where each stage of the supply chain is
providedwithcomplete informationonthe actual endcustomer demand. As a result, every
stage of supply chain can see the actual customer demand to achieve more accurate
forecast, instead of relying solely on the observed orders from the downstream stage.
Chen et al. (2000) quanties the benets of centralizing information for a multi-stage
supply chain wherein they assume each stage operates in the same manner as their
retailer-manufacturer model that we discussed earlier. By assuming r 0 for the
demand process, they develop the lower bound for variance of orders placed by the kth
stage of the supply chain, Var(q
k
), relative to the variance of the end customer demand,
Var(D), for the centralized system:
Varq
k

VarD
$ 1
2

k
i1
L
i
_ _
p

2

k
i1
L
i
_ _
2
p
2
_
_
_
_
_
_ ;k:
The authors develop a corresponding lower bound for the decentralized system where
the end customer demand is known only by the utmost downstream stage and not
available for the remainder of the supply chain:
Varq
k

VarD
$

k
i1
1
2L
p

2L
2
p
2
_ _
;k:
In contrast to the centralized system where the variance of the order grows in an
additive manner with increase in replenishment lead time, the variance increase is
multiplicative for the decentralized system. The variance amplies as one moves up
the supply chain. This underlines the signicant benets that can be achieved by
centralizing information. When demand is centralized, each stage of the supply chain
can use the actual customer demand data to estimate the average demand. On the other
hand, when demand information is not shared, each stage must use the orders placed
by the previous stage to estimate the average demand; these orders are more variable
than the actual customer demand data, and thus the demand forecast based on these
orders are more variable, leading to more uctuating orders. An alternative to making
the nal customer demand data visible to all entities is to let the manufacturer manage
inventory at all points in the distribution channel. This is the basic concept behind
continuous replenishment program and vendor managed inventory systems.
3.3 Inventory imbalances
In the context of a multiple-facility system that faces stochastic demand, the long
replenishment lead times can result in signicant inventory imbalances between the
facilities. Inventory imbalances are caused by disparity between the quantity of
replenishment order that is placed and the replenishment size that is eventually needed at
the time when the replenishment arrives. The disparity results inimbalance of inventories
among the facilities, where some facilities possess surplus inventories while others have
lower than desired inventory levels. In global supply chains with long replenishment lead
times, it could possibly cause large imbalances due to the greater discrepancy that would
occur between the forecast and actual demand realization over the lead time.
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The key tactics in tackling this problem are well illustrated by Gallien et al. (2008)
for Dell. Dell has increased the number of assembly facilities to serve the
North America market and at the same time, shifted the supply sources for its major
components, e.g. monitors and desktop chassis, to Asia. As a result of the long
transportation lead times by sea from its suppliers in Asia, there are discrepancies
between the destined shipment volumes and the desired replenishment quantities
needed at each assembly plant at the time of shipment arrival; this in turn leads to
inventory imbalances among the assembly plants. The challenge facing Dell is to
balance the inventories to minimize shortages at a minimum costs. Dell employs three
tactics to tackle the problem, which we categorized into inventory allocation,
transshipment, and joint transportation-inventory decisions:
(1) Inventory allocation. Re-allocating the shipments from the sea-port to the
assembly plants. The re-allocation of shipments at the sea port allows Dell
the exibility to postpone the decisions on the allocation of inventories to the
facilities (i.e. risk-pool over the replenishment lead time), thereby reducing
the chances of stock-outs.
(2) Transshipment. Transship stock among assembly plants to re-balance the
inventories.
(3) Joint transportation-inventory decisions. Expediting shipments fromthe sea-port
to the assembly plants that run low in stock. This involves the transportation
decision of using trucks rather than rail to accelerate the freight transport based
on the inventory status of the facilities.
In the rest of this section, we discuss the models related to these three tactics.
Inventory allocation problems determine the optimal allocation of replenishments from
an origin (typically called a depot) to geographically dispersed destinations (commonly
called retailers or customers). We will use the terms depot and retailers for this discussion.
There are essentially two forms of risk-pooling tactics. First, the depot does not hold
inventory (where the depot is known as a transit point or a cross-docking center) and the
supplier rst ships unallocated stock to the depot, where it is then allocated to the retailers,
thereby pooling risk over the replenishment lead time. Dells approach of inventory
allocation belongs to this form of risk-pooling where the sea-port is the transit point.
Second, the depot holds inventory (where depot is known as a distribution warehouse),
which is used between system replenishments to rebalance retailer inventories. Eppen
and Schrage (1981) termed the former tactic as the joint orderingeffect and the latter as the
depot effect. The authors describe the benets of both forms of risk-pooling and
demonstrate that a lower total inventory on-hand plus on-order is needed for the
centralized depot-retailer system, as compared with a decentralized system in which
retailers place and receive orders directly from the outside supplier. They derive a
near-optimal least-cost base-stock policy in allocating the inventory among the retailers.
On the joint ordering effect, there is a number of extensions of Eppen and Schrage (1981)
that permits more generic ordering policies, demand distributions and allows correlated
demand among retailers and over time (Federgruen and Zipkin, 1984; Erkip et al., 1990).
Schwarz (1989) considers the additional supplier-to-retailer lead time in employing the
depot due to the time in re-packing the goods as well as the supplier-to-depot
transportation lead time. He shows that the risk-pooling incentive can be quite large for
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systems with long outside-supplier lead time. His work reafrms the value of inventory
balancing in our context of global supply chains with long replenishment lead times.
In the depot effect, the depot has the additional role in consolidating freight from
suppliers. The depot can hold inventories that can be delivered to the location where
demand is higher than forecast. Furthermore, the distribution warehouse can
temporarily store the purchase quantities that exceed the immediate need of the lower
echelons. The classic work by Eppen (1979) shows the benets of risk-pooling for a
simple centralized system with N identical retailers supplying i.i.d. demand. The
author shows that the expected cost of the decentralized system grows linearly with N,
while the expected cost of the centralized system grows with

N
p
. Other work on depot
effect includes, e.g. Zipkin (1984), Jackson and Muckstadt (1989), McGavin et al. (1993),
and McGavin et al. (1997). In general, these papers consider one or more of the
following four decisions:
(1) number of withdrawals from warehouse in each replenishment cycle;
(2) times between successive withdrawals;
(3) quantity of stock for each withdrawal; and
(4) the division of stock among the retailers.
On the tactic of transshipment, Jonsson and Silver (1987) consider a system with no
depot in which transshipments can only be performed at the end of each replenishment
cycle before system replenishment. Their computational study shows that
transshipment can achieve the same service level with signicantly less inventory
investment. Other work on transshipment includes Lee (1987).
The joint transportation-and-inventory problem incorporates transportation
decisions into inventory allocation problems. The transportation decisions takes into
account the inventory status at each location and include the considerations for
assignment of vehicles to routes and/or customers, vehicle-capacity constraints,
sequencing of customers on routes, and customer delivery time-windows. Schwarz et al.
(2004) report a comprehensive review on this topic. More recently, Schwarz et al. (2006)
examine the interactions between routing and inventory-management decisions. They
consider both dynamic routing (i.e. changing the route in each replenishment cycle) and
dynamic allocation (i.e. making allocation sequentially as each retailer is visited). Their
work has much impact on real-life applications due to the current state of technology
available to support both dynamic allocation and dynamic routing. For example,
retailers use radio-frequency identication devices to monitor inventory and trucking
companies already employ technology to route or reroute vehicles.
Although re-balancing of inventories is benecial from the perspective of inventory
management, there are cost tradeoffs in implementing such re-balancing approaches.
In particular, the re-balancing approaches highlight the linkages among the inventory,
facility, transportation, and information drivers. If the transit point for inventory
allocation requires a physical facility, costs for operating the facility would be incurred.
There would also be handling costs incurred at the facility in re-allocating the stocks.
To achieve inventory balance, inventory status of the retailers need to be updated
regularly and hence, investment would probably be needed to set up the necessary
information system. In cases where a physical facility is not required, additional
transportation cost may also be incurred. In Dells case, Dell does not require to operate
Enhancing
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a transit point for the re-allocation, as fully loaded shipping containers are redirected to
the different facilities for inventory balancing. But Dell incurs an extra administration
cost paid to the freight forwarders in changing the information in the bill-of-lading
documents, specically the destinations stated in the documents; Dell also incurs
additional cost in switching from rail transport to trucks if the freight is expedited to
its assembly facilities from the sea-port; Dell incurs a high transportation cost for the
use of trucks in transshipping the components between the facilities. Therefore, it is
important for supply chain managers to recognize these tradeoffs when countering the
problem of inventory imbalance.
In summary, our discussion on managing the complexities in extended supply
chains throws up several crucial issues. First, extended supply chains with multiple
entities located geographically far apart tend to have long replenishment lead times
which in turn leads to non-stationary demand. This necessitates a higher level of safety
stock for meeting the required service level. An implication of non-stationary demand
for the transportation-inventory tradeoff is that for products with high value-weight
ratio, it might be preferable to use premium transport to optimize the overall supply
chain costs. For low value-weight products, the use of non-premium transport and
higher inventory is the preferred strategy. For products that fall in between these two
categories, a more detailed analysis is necessary. Second, long supply chain lead times
and large production/transportation batch sizes result in variability propagation in the
supply chain. Smoothing demand forecasts, using faster transport modes, capturing
the linkage between lot size and inventory, and information sharing across entities are
some of the mechanisms by which variability propagation may be controlled, thereby
reducing supply chain costs. This underlines the important role of the information
driver in improving supply chain performance. Finally, long lead times can result in
serious inventory imbalances between different entities when replenishment arrives.
Inventory rebalancing gives the rm exibility to postpone the allocation of
inventories to entities. This is equivalent to risk pooling over the long replenishment
lead time and optimizes the total supply chain costs. From a value chain perspective,
these are examples of exploiting linkages between activities through different forms of
optimization and coordination. Our discussion in this section has highlighted linkages
relating to three drivers of logistics performance transportation, inventory, and
information. Section 4 focuses on the facilities driver.
4. Network coordination in dispersed supply chains
Given the geographically dispersed location of facilities like factories, warehouses,
distribution centers, retail stores in the supply chain, decisions at one facility impact the
decisions made at other facilities in the supply chain. If each facility makes locally
optimal decisions, the supply chain will be unable to take advantage of the linkages
between different entities; in such a scenario, performance improvement at one facility
may conict with practices at another facility and the overall improvement of the supply
chain is being lost. It is, therefore, critical to exploit the linkages between the processes
performed at the different facilities so that we obtain a globally optimal outcome for the
supply chain as a whole. The network coordination decision includes both the issues of
location of manufacturing, storage, and transportation-related facilities as well as the
allocation of capacity and roles to each facility. These decisions which are referred to as
supply chain network decisions involve answering several inter-related questions: what
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role should each facility play and what are the processes performed at each facility;
where should the facility be located; how much capacity should be allocated to each
facility; what markets should each facility serve and which supply sources should feed
each facility. The network coordination decision is crucially important for the rmsince
it has a profound impact on its future competitiveness. Several external factors often
impose opposing inuences onthe rmandthese inuences may not be readilyapparent
when the initial location decision is made. For example, a rm that sets up a facility in a
developing country to take advantage of lower labor costs may nd that its time based
performance is eroded due to poor infrastructure or non-availability of skilled
manpower. Howdo companies exploit the variety of linkages between various activities
carried out in different locations in their global supply chain? Chopra and Meindl (2001)
classify these factors into several categories strategic, technological, infrastructure,
competitive and logistical, and operational.
The rms competitive strategy has a signicant impact on how managers make
decisions for locating facilities within the supply chain. Firms focusing on cost versus
customer responsiveness will therefore approach location decisions very differently.
Ferdows (1997) describes how superior manufacturers gain competitive advantage by
methodically chartingstrategic roles for their foreign factories. The author suggests that
companies that locate plants in foreign countries merely to benet from tariff and trade
concessions, cheap labor, capital subsidies and reduced logistics cost do not tap the full
potential of their foreign factories. Depending on the plant charter, Ferdows (1997)
suggests different roles for facilities in a global supply chain network offshore factory,
source facility, server facility, contributor facility, outpost facility, and lead facility
depending on the kind of activities that are carried out at each manufacturing facility.
Technological factors encompass issues such as economies of scale, exibility of
production technology, and ratio of xed to variable costs. Taken together, these factors
determine whether a rm will have a few high capacity locations versus a relatively
decentralizedstructure havingmanylocal facilities. Macroeconomic factors include tariffs
andtaxincentives, exchange rates, andother economic factors that are external tothe rm.
Similarly, the rm must also consider political stability and state of infrastructure while
making the facility location decision. Firms must also consider the response time
requirements of its customers in making the location decision. If short response times
are desired, the company will have to establish several retail facilities close to customer
locations and this in turn impacts the overall supply chain costs. As the number of
facilities in the supply chain increase, the costs that typically increase are the inventory
costs, outbound logistics cost, and the xed and variable costs of setting up and operating
facilities, while the inbound transportation costs may increase. There is a need to
incorporate these costs into the decisionframeworkso that the rmis able tomake optimal
decisions. Chopra and Meindl (2001) suggest that the rst step in choosing an appropriate
location is to dene a supply chain strategy based on the rms competitive positioning.
This focuses the attention of managers on the set of customer needs they are seeking to
fulll. Next the rmmust dene a regional facility conguration; this involves identifying
the regions where facilities will be set up. Finally, the rmmust select potential sites based
on a subjective weighting of various hard and soft infrastructure requirements followed
by a detailed cost analysis to decide which sites to open and which downstream sites to
allocate to upstream manufacturing and warehousing facilities.
Enhancing
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Given the wide variety and the complexity of factors that need to be considered,
most models reported in literature have addressed a subset of the issues. Bhatnagar
et al. (2003) discussed the shortcomings of these models and used a logistic regression
analysis to predict which strategic location factors are signicant for rms locating in
Singapore in comparison to rms that locate in Malaysia. Data from a large sample
study was used to test the model. The authors considered eight categories of factors
that impact the location decision; these factors were infrastructure, business services,
labor availability, stability of government policies, proximity to markets, proximity to
suppliers, key competitors location, and cost. The results of the research suggest that
rms that emphasize infrastructure and proximity to suppliers are more likely to
locate in Singapore. Firms that emphasize proximity to customers/markets are more
likely to locate in Malaysia. Implications for managerial practice and theory
development are offered. Coughlin and Segev (2000) used a negative binomial model to
examine the pattern of location variables for new foreign owned manufacturing plants
in the USA between 1989 and 1994. Higher levels of economic size, educational
attainment, existing manufacturing base, and transportation infrastructure were
found to be associated with a larger number of foreign owned plants. Overall, we
observe that there is a relative shortage of broad empirical research incorporating
competitive strategy issues and regional facility conguration issues. One reason for
this is that it is difcult to measure the effectiveness of the location decision in terms
of supply chain performance and link it to the factors that were considered at the time
of making the location decision. Typically supply chain performance is an outcome
measure and will take considerable time before it can be accurately measured.
Moreover, the top management team may have undergone several changes during the
interim period. However, this is an important direction for future research and
researchers will need to identify appropriate substitute measurements to identify the
above linkages.
By contrast, there is a substantial body of literature which deals with detailed cost
analysis for choosing the tradeoffs between inventory costs, transportation costs, and
the xed and variable costs of establishing and operating facilities. We present a
generic plant location model due to Chopra and Meindl (2001), and then use the
relationships therein to identify some of the key linkages and how rms can seek to
optimize these linkages. This model considers a supply chain in which suppliers send
materials and components to factories, which in turn supply warehouses that supply
markets. The model proposes answers to both location and allocation decisions for
both the factories and warehouses. Without loss of generality, the model assumes that
units have been appropriately adjusted such that one unit of input from a supply
source produced one unit of the nished product.
The model requires the following parameters:
.
m number of markets or demand points.
.
n number of potential factory locations.
.
l number of suppliers.
.
t number of potential warehouse locations.
.
D
j
annual demand from customer j.
.
K
i
potential annual capacity of factory at site i.
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.
S
h
annual supply capacity at supplier h.
.
W
e
potential annual warehouse capacity at site e.
.
F
i
xed annual cost of locating a plant at site i.
.
f
e
xed annual cost of locating a warehouse at site e.
.
c
hi
cost of shipping one unit from supply source h to factory i.
.
c
ie
cost of producing and shipping one unit from factory i to warehouse e.
.
c
ej
cost of shipping one unit from warehouse e to customer j.
The following decision variables are dened:
.
y
i
1, if factory is located at site i; 0, otherwise.
.
y
e
1, if warehouse is located at site e; 0, otherwsie.
.
x
ej
quantity shipped from warehouse e to market j per year.
.
x
ie
quantity shipped from factory at site i to warehouse e per year.
.
x
hi
quantity shipped from supplier h to factory at site i per year.
The model is formulated as follows:
Minimize

n
i1
f
i
y
i

t
e1
f
e
y
e

l
h1

n
i1
c
hi
x
hi

n
i1

t
e1
c
ie
x
ie

t
e1

m
j1
c
ej
x
ej
;
Subject to

n
i1
x
hi
# S
h
for h 1; . . . ; l; 1

l
h1
x
hi
2

t
e1
x
ie
# 0 for i 1; . . . ; n 2

t
e1
x
ie
# K
i
y
i
for i 1; . . . ; n; 3

n
i1
x
ie
2

m
j1
x
ej
$ 0 for e 1; . . . ; t; 4

m
j1
x
ej
# W
e
y
e
for e 1; . . . ; t; 5

t
e1
x
ej
D
j
for j 1; . . . ; m; 6
y
i
; y
e
[ 0; 1:
The objective of the above model is to minimize the total xed and variable costs of the
supply chain network. These costs include the xed costs of locating factories and
Enhancing
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warehouses as well as the variable handling plus transportation costs incurred for
moving the goods from the suppliers to the factories and warehouses and nally to the
customers. Constraint (1) species that the total amount shipped from a supplier
cannot exceed the suppliers capacity. Constraint (2) states that the amount shipped out
of a factory cannot exceed the quantity of raw material received. Constraint (3) enforces
that the amount produced in the factory cannot exceed its capacity. Constraint (4)
ensures that the amount shipped out of a warehouse cannot exceed the quantity
received from the factories. Constraint (5) species that the amount shipped through a
warehouse cannot exceed its capacity. Finally, the constraint (6) species that the
amount shipped to a customer must be sufcient to cover the demand. The binary
y variables associated with each factory and warehouse represent the decision
whether these factories are opened or not and ensure that if they are opened, the xed
cost associated with the facility is incurred.
The model outlined above captures the basic tradeoffs related to minimizing the
xed and variable costs associated with facility location within the supply chain. The
interested reader is referred to several important models relating to plant location and
related issues as discussed in Luss (1984), Aikens (1985), Hodder and Jucker (1985),
Thizy, et al. (1985), Brandeau and Chiu (1989), Eppen, et al. (1989), Robinson (1989),
Murphy and Weiss (1990), Revelle and Laporte (1996), Siha and Das (1996) and Owen
and Daskin (1998). However, the above models ignore a number of key linkages
between the different variables. An important issue that needs to be incorporated in
supply chain models is the treatment of inventory cost within the location decision. As
described earlier, the transportation-inventory cost relationship is one of the key
tradeoffs in supply chain analysis. Similarly, economies of scale of production and
transportation have not been captured in the above model and this is a signicant issue
in many situations. Recently, there have been some efforts in this direction. Cheong
et al. (2007) address the issue of logistics network design with supplier consolidation
hubs in the context of third party logistics (3PL) services providers. Designing a
logistics network that maximizes the utilization of the transport and warehouse
capacity in the network with minimal inventory supports the material ows in the
supply chains of multiple clients, and delivers superior performance for each client, is a
key imperative for the success of a 3PL rm. The paper describes how 3PL companies
manage the inbound logistics of raw materials and components from multiple
suppliers to several manufacturing plants. A key challenge for these 3PL rms is to
determine how to coordinate and consolidate the transportation ow, so as to get the
best overall logistics performance. One tactic is to establish consolidation hubs that
collect shipments from several suppliers, consolidate these shipments, and direct
the consolidated shipments to the appropriate manufacturing plant (Figure 3). The
authors consider the network design problem to implement this tactic of deciding the
number, location and operation of consolidation hubs so as to minimize the total
logistics costs for the network. This network design problem is solved by dening
candidate shipping options for each potential hub, for which the shipping quantities
required from each supplier and the shipping costs and inventory holding costs can be
pre-computed. The problem is formulated as an integer linear optimization model and
large instances are solved using Lagrangian relaxation and a sub-gradient
optimization algorithm. The bounds obtained by the above procedure are fairly
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tight and are superior to the bounds obtained from the solution of the linear
programming relaxation.
Another paper by Shen et al. (2003) also explicitly accounts for the inventory
implications of the location decisions. The authors formulate the problem as a
nonlinear integer optimization and show how to translate this into a set-covering model
which is then solved by a column-generation method. The pricing problem for nding
new columns is a nonlinear optimization that can be solved efciently. Computational
results for problems with up to 150 retailers are reported and the linear programming
relaxation to the set-covering problem always yields the optimal solution.
In summary, the above review shows that the complexities of the tradeoff between
inventory holding costs and economies of scale in transportation are not captured in most
models of network coordination, particularly the models relating to global facility location.
Accounting for this tradeoff will enable the rms to exploit this linkage and enhance their
competitive position from a logistics point of view. This linkage will become increasingly
critical as the trendtowards outsourcing logistics services to 3PLproviders intensies in all
regions (see surveyresults inLiebet al., 1993; Dapiranet al., 1996; Kopczak, 1997; Bhatnagar
et al., 1999; and Sohail et al., 2006). An interesting interpretation of exploiting this linkage
within the context of 3PL outsourcing is provided in Bhatnagar and Viswanathan (2000).
The authors presented a case study in supply chain re-engineering and showed how a
logistics alliance between Motorola and UPS enabled the rms to effectively balance the
contradictory needs of globalization and time based competition by integrating the
principles of postponement and consolidation. Acritical future need for future research will
be to integrate the conceptual, issues based research presented in Bhatnagar and
Viswanathan (2000) with the modeling based research presented in Cheong et al. (2007).
Figure 3.
Extended 3PL network
with consolidation hubs to
serve two manufacturers
Suppliers
Consolidation
hub
Dedicated
warehouse /
supply hub
Manufacturer
Frequent
replenishment
Frequent
replenishment
JIT
production
1
1 1 1
1
2
3
4
..
n
2
2
Extended
3PL network
Consolidated
shipping
Short distance
LTL shipping
Source: Cheong et al. (2007)
Enhancing
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219
5. A unied framework for supply chain analysis
We now outline a framework linking the key decision issues identied in this research
complexities of extended supply chains and network coordination in global supply
chains to the four drivers of the logistics function transportation, inventory,
information and facilities, and nally to the rms supply chain competitiveness. We
also seek to encompass in this framework, important aspects of value chain analysis
described earlier. Value chain analysis exploits linkages between distinctive activities
in supply chain by optimization and coordination. This involves identifying the
dependencies and resolving the tradeoffs between activities so that better results are
obtained as compared to improving each activity individually. Utilizing our
discussions in Sections 3 and 4, such a framework is presented in Figure 4.
Managers of extended global supply chains are confronted with long replenishment
lead times requiring them to manage the challenges of non-stationary demand,
variability propagation and inventory imbalances. Similarly in coordinating among
different supply chain entities, managers must dene roles for facilities, optimal
Figure 4.
Unied framework for
supply chain analysis
Extended Supply Chains
Managing longer lead times
Non-Stationary Demand
Variability Propagation
Inventory Imbalances
Network Coordination
Role of facilities in global
network
Facility Location
Capacity at each facility
Role of Consolidation Hubs
Transportation
Extent of premium
transportation usage
Batch Size
Information
Centralization versus
Decentralization
Facilities
Few versus Many
Consolidated versus
Uncoordinated deliveries
Inventory
High versus Low
Safety Stocks
Global Supply Chains: Key
Challenges
Logistics Drivers - Tradeoffs
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location, and capacity. Addressing these challenges requires managers to deal with the
key tradeoffs among the four key logistics drivers transportation, inventory,
information, and facilities. For transportation, the tradeoff is between high versus low
usage of premium transportation mode as well as the transportation batch size. For
inventory, managers must choose between high and low levels of safety stock. For
information, the key issue is the extent of centralization and information infrastructure,
while for facilities, the number of facilities and the extent of consolidated versus
uncoordinated deliveries is important. The bi-directional arrows between each pair of
logistics drivers signify their linkages.
In resolving the tradeoffs associated with the logistics drivers, the exploitation of
linkages is critical and this can be achieved by using optimization or coordination as
described in the various examples and models discussed in Sections 3 and 4. Appropriate
resolution of tradeoffs leads to improved supply chain performance as indicated by the
nancial, operational and customer satisfaction measures outlined in Figure 5.
This also corresponds to exploitation of linkages as described in the value chain
framework discussed earlier. The bi-directional arrow implies a feedback loop wherein
Figure 5.
Logistics drivers and
supply chain performance
measures
Logistics drivers
tradeoffs
Transportation
Extent of
premium
transport usage
Batch Size
Inventory
High versus
low safety
stocks
Information
Extent of
centralization
Information
infrastructure
Facilities
Extent of
consolidation
and
coordination
Financial
Return on capital
earnings
gross margins
revenue growth
Operational
Inventory turns
transportation costs
inventory costs
warehouse costs
lead times
service level
order fill accuracy
cash to cash cycle
time
labor/equipment
utilization
Customer
Customer satisfaction
customer complaints
inquiry response
time
Competitiveness
measures/indicators
Enhancing
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221
the performance measures on which the rmcompetes determine howthe tradeoffs will
be resolved and the effective resolution of the tradeoffs leads to better performance.
Figure 6 outlines an example of exploitation of linkages between different activities.
Consider an extended supply chain like the one for Dell Computers outlined earlier
in Section 3. As described in Gallien et al. (2008); Dell sources major components like
monitors for its computers from suppliers in Asia. Given the non-stationary demand,
Dell was facing serious component shortages. In order to address this situation and
improve the service level, it had to incur high costs of premium transportation and
transshipment among different facilities. This tradeoff is depicted in the left curve in
Figure 6 where a high cost is incurred in improving the service level from point 1 to
point 2. The tradeoff is resolved using an optimization model to balance the inventory
between different facilities; this involves coordination and information exchange
between entities as well as reducing lead time by choosing premium transportation
modes.
The use of the optimization model shifts the cost-service curve to the right and it can
be observed in the right curve (points 3-4) that exploiting the linkages leads to
improved performance both in terms of better service levels as well as lower costs
being incurred for a given improvement in the service level.
6. Conclusions and future research directions
In this paper, we have used the value chain based framework of Porter (1985) to
highlight the role of logistics in enhancing the competitiveness of rms that operate a
global supply chain. The central element of the value chain framework is to exploit the
linkages between various business activities; given our focus, we have primarily
discussed issues relating to inbound and outbound logistics. The value chain
framework suggests that target activities whose linkages managers should seek to
exploit should have distinct economics and a signicant impact from a cost or a
differentiation perspective. Managers exploit the linkages using optimization and
coordination which involves identifying the dependencies and resolving the tradeoffs
Figure 6.
Example of exploitation of
linkages
Opportunities
- Coordination
- Information
exchange
- Shorter lead time
- Shorter supply chain
Service
Source: Essentials of Logistics and Management, Perret et al. (2007, p. 176)
C
o
s
t
Initial alternatives
1
2
3
4
Improved alternatives
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between different activities so that better results are obtained as compared to
improving each activity individually.
We have described issues, tradeoffs and models relating to two important set of
problems complexities in extended supply chains and network coordination in
globally dispersed supply chains. Given increasing globalization of business activities,
these are problems commonly encountered by supply chain managers. Taken together,
these problems also encompass the four drivers of supply chain performance
inventory, transportation, information, and facilities.
In Section 3 on extended supply chains, we discussed the complexities in decision
making that arise from both interaction between multiple players in supply chains and
facilities located geographically far apart. An important outcome of geographically
dispersed facilities is long replenishment lead time which in turn leads to
non-stationary demand in the supply chain. We linked this demand behavior to the
extent of usage of premium transportation mode. For high value-weight ratio products,
a higher usage of premium transport maybe justied to control overall costs. In
contrast for lower value-weight ratio products, the slow non-premium transport mode
is preferred, while using the inventory lever for controlling total costs. Another
outcome of extended supply chains is variability propagation. Important strategies to
control this impact like information sharing among entities and information
centralization were outlined. Finally, we discussed inventory rebalancing as a
strategy to pool risk over long replenishment lead times. Our discussion in Section 4 on
network coordination identied that one of the shortcomings of the current research
was that the complexities of inventory holding and transport cost economies were not
captured in facility location models. Models that account for this tradeoff will help
improve the logistics performance of the rm. We related this observation to the trend
towards outsourcing of logistics service to 3PL companies and described how these
companies could improve their performance. The importance of maximizing the
utilization of transport and warehouse capacity in logistics networks by using
consolidation hubs was highlighted. In Section 5, we presented a unied framework
linking the key questions in extended supply chains and network coordination to the
logistics performance drivers and nally the key nancial, operational and customer
related measures of supply chain performance.
In conclusion, the issues, tradeoffs and models discussed in this paper will be of
crucial importance for supply chain performance in future as globalization, and
competition intensify. Important directions for future research exist. Test cases are
needed to validate and rene the framework presented. Developing case studies that
gather appropriate data to test out the models described would be important. Another
important direction forward would be to collaborate between academia and industry
players comprising manufacturers as well as 3PL companies. This will provide a
useful opportunity to determine whether the models described can result in better
decisions.
Note
1. In line with Simchi-Levi et al. (2003), we will use the term logistics management and supply
chain management interchangeably to refer to a set of approaches utilized to efciently
integrate suppliers, manufacturers, warehouses and stores, so that merchandise is produced
Enhancing
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223
and distributed at the right quantities, to the right locations, and at the right time, in order to
minimize system-wide costs while satisfying service level requirements.
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Corresponding author
Rohit Bhatnagar can be contacted at: arbhatnagar@ntu.edu.sg
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