Case study: managing for total quality of logistics services in the supply chain

Patrick Fung and Alfred Wong

Introduction
The logistics services of a rm are concerned with how integrated materials management activities can maximise the time and place utilities of the goods to the customers. Taking the rm as a value-added entity in a business system, logistics services aim to integrate with purchasing, operations and marketing management in creating customer success in the supply chain (Fawcett and Fawcett,1995). In the knowledge-rich and turbulent business environments of today, marketing organisations increasingly outsource their logistics services while ensuring their effective performance. Accordingly, independent logistics service providers must strive to develop a coherent mix of strategy, structure and tasks that best link the upstream and downstream supply chain customers. This paper documents the total quality management (TQM) system of a logistics service provider in Hong Kong, which offers a wide range of services tailor-made to individual customers needs. Based on a descriptive framework derived from the literature of TQM, logistics and supply chain management, in-depth analysis is made with respect to ways service goals are established and pursued cost-effectively for different customers. The marketing and time-based competitive strategies of customers are achievable, vis--vis a complex web of activities and relationships in the supply chain. Analytical generalisation is made on TQM and supply chain management interface. Future research directions and opportunities are also suggested.

The authors Patrick Fung is Assistant Professor in the Department of Management, The Hong Kong Polytechnic University, Kowloon, Hong Kong. Alfred Wong is Assistant Professor in the Department of Management, Lingnam College, Tuen Mun, New Territories, Hong Kong. Abstract Presents an analysis of the total quality management (TQM) system of a logistics service provider operating in a supply chain context. The company can achieve on-going improvement in its services cost-effectively through efcient use of information system and teamwork. Following the strategy of case study research, analytical generalisation is made with respect to the multiple roles of the logistics service provider in determining its relationships with internal and external customers and in setting service goals; the intensive use of information in facilitating and monitoring logistics service operations, which in turn determines the competitive advantage of the service provider; essence of people-based management and how that promotes interactions in teamwork, trust building and exibility in meeting changing goals and process requirements; and alliance leadership and its potential to empower teams to innovate and upgrade total quality service in turbulent environments.

Logistics services in a supply chain context

Within the last decade, logistics and supply chain management has been much researched with respect to their scope of activities and contribution to business success (Cooper et al., 1997). Extending from studies of interorganisational relationships and physical distribution management in marketing channel, logistics and supply chain management is concerned with integrated materials management activities, both at intra-organisational and inter-organisational levels, that may lead to the satisfaction of the end customers (Bechtel and Jayaram, 1997).

Logistics Information Management Volume 11 Number 5 1998 pp. 324329 MCB University Press ISSN 0957-6053

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Case study: managing for total quality of logistics services

Logistics Information Management Volume 11 Number 5 1998 324329

Patrick Fung and Alfred Wong

Stemming from the viewpoints of a marketing organisation, logistics and supply chain management has as a basic unit of analysis protable customer relationships through its logistics services. In operation, logistics services are integrated with purchasing, operations and marketing with the end customer its prime focus in a business system, as shown in Figure 1.

Figure 2 A normative business model for an independent logistics service provider

Manufacturers or wholesalers marketing strategy

Role and function of logistics service provider

Retailers customer service requirements

A business model for logistics service management

Logistics services entail a wide range of specialist tasks in warehousing, information processing and distribution control for effective supply chain management. In the age of diversity with rapid changes in economic and technological environments organisations increasingly capitalise on their core business and outsourcing of some specialist (non-core) commercial services becomes popular. The contracting for logistics services is associated with economic justications of costs and benets, as well as strategic issues surrounding service strategy and competitive responsiveness (Daugherty et al., 1996; McGinnis et al., 1995). Accordingly, thirdparty logistics service providers must strive to develop a coherent mix of strategy, structure and tasks to give value-added services. In essence, a logistics service provider aims to effectively align suppliers and customers marketing objectives through its technological resources and organisational structure, as illustrated by a normative business model in Figure 2. This model species the normal unidirectional linkage of resources, tasks and objectives in organisation.

Information technology and resource utilisation

Decisions and tasks

Organisational structure and human resource development

Profitability and performance

TQM system for logistics service provider

Global competition, product proliferation and multi-location operations demand for a continuously improving logistics service system. TQM as a system that promotes continuous improvement of individuals, groups and organisations has been studied widely in different industry contexts. For a logistics service provider, a business excellence model can be built based on TQM system components derived from TQM principles that govern organisational success. Such TQM principles as delight the customer, management by fact, people-based management and continuous improvement (Kanji, 1994) can be applied to logistics service management. The issues related to the above are: customer service a logistics service provider has to offer a wide range of warehousing and distribution services to different upstream and downstream customers. The service requirements, whether they be activity-based or performance-based, are to be negotiated in a tripartite context. To the logistics service provider, customer services are to be achieved at minimum total cost per throughput; information technology (IT) system communication in the supply chain comprising suppliers/manufacturers, logistics service provider and customers/retailers are facilitated through customised IT systems. System logic, data linkage and performance reporting must be designed to regulate the operations in meeting objectives of efciency, 325

Figure 1 Role of logistics services of a rm in a business system

The firm Purchasing & operations management Marketing & logistics services Customer satisfaction & success

Input and in-process management which build from utilities of goods

Distribution strategy and integrated materials management activities which add to time, place and possession of utilities of goods

Satisfied and successful customers in the supply chain which sustain competitiveness of the firm

Case study: managing for total quality of logistics services

Logistics Information Management Volume 11 Number 5 1998 324329

Patrick Fung and Alfred Wong

product/process tracing and cost-effectiveness; organisation and personnel internal and external teams are organised around tasks from determination of service pledge to operational planning and control. Organised teamwork supported by committed interactions must also have the exibility to respond to non-routine problems or unexpected opportunities; continuous improvement incremental service improvement in terms of quality, speed, exibility and cost should result in win-win transactions, which sustain trading relationships among members in the supply chain. Logistical superiority is achieved through alliance leadership geared to lean supply. The normative business model (Figure 2 refers) can be modied to reect the interactions among the TQM system components of objectives, system and organisation, as shown in Figure 3. The following case study gives an analysis of how TQM principles are applied in a logistics service provider in Hong Kong in: maximising customer satisfaction with a service strategy; managing by fact with a customised IT system; energising teamwork through organisation structure and empowerment; and striving for continuous improvement through alliance leadership.

Case study of a logistics service provider

The company and its environments The core business activity of the company is the provision of professional logistics services to multinational clients such as Unilever and
Figure 3 TQM system model for a logistics service provider
Delight the customers: interactively determined customer service

Continuous improvement: incremental service quality improvement Management by fact: customised information technology system People-based management organised teamwork

Kimberly Clark in the distribution of consumer goods. Annual income from logistics service provision amounts to about US$18 million. This company has been in operation for seven years. It is now one of the largest service providers of its kind in Hong Kong and the logistic partner for many multinational companies. The company is fully equipped to import/export, pack/re-pack, warehouse, invoice, physically distribute and administrate, or in short, manage the supply chain on behalf of its clients. The company employs 350 logistics staff and operates a distribution centre with direct drive access for container and delivery vehicles. The centre has a storage space of 400,000 square feet (25,000-pallet space). It also has various temperature controlled zones which offer air-conditioned, chilled and frozen storage. The companys own transportation eet, which includes temperaturecontrolled vehicles and other vehicles of various sizes, ensures prompt product delivery in optimal condition and with proof of delivery to clients. Its packaging division, which is also located in the distribution centre, offers services such as labeling, expiry-date/batch ink-jetting, shrink-wrapping, on-packing and reconditioning. It has distribution-focused business systems and a tight document handling system via barcoded tracking. Its clients access its systems on-line to view the status of their business. The functions of labeling/relabeling, packaging/re-packaging and product/ process tracing are especially important in the distribution of consumer goods. The business environment for logistics service management is competitive. The company has to maintain its quality of service and ensure the value added by the service is worth the cost it charges its clients; otherwise, the clients may switch to other service providers or provide the service themselves. Business with most of its customers has been established for more than two years except for one new customer which has just been established approximately six months ago. Business with its oldest customers has been established for seven years. Thus far, the company has not lost any of its customers to its competitors. 326

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Patrick Fung and Alfred Wong

Maximising customer satisfaction with a service strategy In a TQM environment, the job is not done until the customer is satised (Rao, 1996). In this case, the company adopts a slogan of Service beyond Expectations. In practice, it offers a wide range of logistics services to its customers, which may include: pre-transaction consulting on the design of cost-efcient logistics processes; operating logistics management from import/export administration to warehousing/transport in realising reliable logistics standards; provision of logistics resources in stafng, computing and warehousing/transport facilities to help customers reduce their asset base and headcount; and implementing supply chain management through data links with customers to give quick response so as to help them reduce inventory and investment. Different customers needs may vary signicantly from one to another. Some may only require delivery and warehousing services, others may require additional services such as repackaging and relabeling, order processing, invoicing, credit control, money and debt collection etc. The company is able to customise its service to meet the specic needs of its customers and has adopted a responsive service strategy. Service charges have breakdowns in warehousing, transport and administration calculated on percentage of sales, lump sum cost per cubic meter or shipment etc. Typical contracts are of two to three years of duration with annual review and negotiation. Again and again, the company is prepared and willing to entertain customers special requests. For instance, it sometimes operates its packaging line on Sundays and bears part of such overtime expenses at its own cost to align with the promotion programme of its clients. This customised service has gained high customer satisfaction ratings for the company evidenced by various surveys conducted by the principals or clients of the company in the past few years. In fact, the customers rate them higher than their competitors. For performance-based service goals, the company can guarantee same day delivery or within 24 hours delivery for pharmaceutical products. For consumer products, it undertakes

delivery within 48 hours after receipt of orders. For warehousing service performance, although the company is responsible for all stock losses under its control, it has been able to maintain its annual stock discrepancies within 0.01 per cent to 0.5 per cent, which is acceptable to its customers. The company also has to comply with some customers requirements for confectionery and pharmaceutical products by ensuring that packaging, labeling, storage conditions and batch control etc. meet the US Good Manufacturing Practice (GMP) standard. This standard requires hygienic storage conditions and systematic batch control to facilitate FIFO of stocks and batch recall in case of defective products. Managing by fact with customised IT system The effective management of any organisation, whether large or small, depends upon the use of management information. Such information provides evidence of the functioning of the system being managed (Savage 1996). Logistics service providers are especially concerned with information exchanges in the supply chain that affect their responsiveness and hence customers perception of their performance (Stank et al., 1996). In the company, quality service is supported by a customised IT system. The system has been in existence for seven years. Over the years, it has been modied and customised to customers needs and facilitates the daily operation of the company. Orders can be input into the system and after going through credit control, the system will generate order picking lists. Credit control is done by the system automatically. The credit-held order can be released by the client himself via the remote terminal installed at his end. The warehouse staff will pick the goods according to the picking list. Normally, if orders can be received before 3.30 p.m., goods will be delivered the following day. The IT system provides management information used by the company to oversee its performance and by its customers to manage their products. The system provides more than 200 types of reports (daily/weekly/monthly) for internal departments and divisions as well as for clients. Some reports are commonly referred to by clients, e.g. stock status report, sales report by customers and by salesmen, lead time report, and ageing report etc. Many reports are tailor-made to the specic needs of 327

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Patrick Fung and Alfred Wong

individual clients. Customers access the companys IT system through terminals at their end. Energising teamwork through organisation structure and empowerment Bank (1992) posits that a key concept in TQM is teamwork which promotes collaboration, consensus, creative conict and team winning. In logistics service management, competitive advantage may be traced to organised teamwork embedded in an enabling structure that empowers personnel. For a logistics service provider, intra-organisational and inter-organisational teams are frequently employed to make planning and operational control relevant and realistic in line with the demands and constraints of specic circumstances. In the company, some members from the marketing and logistics division make up a team which takes on the sole responsibility of identifying the needs of customers and making proposals to them. In the execution of the logistics service contract, the customers can approach either the marketing division of the group or the company directly for any problems to be solved or any work they want to be done. The two divisions will act as a team to serve their customers. A good working relationship has been built up between the personnel of the customers and the company so that fast communication and efcient service can be maintained. Working committees with representatives from customers and various departments of the company which include warehousing, transport, and packaging hold regular meetings to discuss actual as well as potential problems. The company is structured around major types of products, i.e. household products, consumer products, pharmaceutical products, soft goods and cosmetics. Personnel from warehouse, transport and packaging form specic teams to handle different types of products. Each team leader is empowered to take full charge of the particular type of products under his control. Striving for continuous improvement through alliance leadership Continuous improvement in product and process is the ultimate objective of any TQM system. A logistics service provider plans and controls materials management in the supply chain to improve its performance through customer responsiveness. The tasks often

require the provider to partner with customers in enhancing resource utilisation to meet their strategic marketing goals. Efforts dedicated to alliance leadership in support of a relationship-oriented, reciprocal and people-based organisation would serve to energise change initiatives for the better. The company in this case has been able to continuously improve its service and cost of operations, in the following areas: investment in specialised hardware facilities in storage and packaging that help to provide customers with a higher quality and cost efcient service; upgrading of computer facilities, e.g. increased hardware capacity that improves response time of the system, develop tailormade solutions that streamline the supply chain process to suit the needs of each individual customer; improving quality of staff by cascading service quality mission, strategy and tasks to employees through a series of training programmes. As a result, attitudes, skills and behavioral standards are developed simultaneously to meet changing quality service goals critical to supporting lean supply.

Discussion and conclusion

Some TQM issues through analytical generalisation The case study examined the management of critical success factors by a successful logistics service provider. The salient issues regarding TQM applications in a logistics service provider originate from its dual role of having to respond to the diverse needs of both internal and external customers. Customisation and exibility seem to be the key factors that underpin the TQM components and energise interactions that bring about ongoing improvements and business excellence. The conclusions that can be made from this case are: the multiple roles of internal and external customers in diagnosing environments and setting service goals, depending on the knowledge and resources shared by the participants; the intensive use of information in facilitating and monitoring logistics service operations, which in turn determines the competitive advantage of the service provider;

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essence of people-based management promoting committed interactions in teamwork, trust building and developing exibility to meet changing goals and process requirements; and alliance leadership which empowers interorganisational teams to innovate and upgrade total quality services in turbulent environments. Future research Future research should be focused on the interactive patterns of the TQM components of a rm operating in a supply chain management context. The presence and effects of moderating variables such as competitive strategy of the rm in cost and niche marketing can be examined (Shef, 1990). There is also a genuine need to extend research directions to the study of a total logistics performance measurement system of a company (Caplice and Shef, 1995), as well as leadership for logistics organisations of the future (Bowersox and Daugherty, 1991).

Bowersox, D.J. and Daugherty, P.J. (1991), "Achieving and maintaining logistics leadership: logistics organisations of the future", Logistics Information Management, Vol. 4 No. 3, pp. 42-7. Caplice, C. and Shef, Y. (1995), Review and evaluation of logistics performance measurement systems, The International Journal of Logistics Management, Vol. 6 No. 1, pp. 61-74. Cooper, M.C., Lambert, D.M. and Pagh, J.D. (1997), "Supply chain management: more than a new name for logistics", The International Journal of Logistics Management, Vol. 8 No. 1, pp. 1-13. Daugherty, P.J., Stank, T.P. and Rogers, D.S. (1996), "Thirdparty logistics service providers: purchasers perception", International Purchasing & Materials Management, Spring, pp. 23-9. Fawcett, S.E. and Fawcett, S.A. (1995), "The rm as a value-added system", The International Journal of Physical Distribution & Logistics Management, Vol. 25 No. 5, pp. 24-42. Kanji, G.K. (1994), "Total quality management and statistical understanding", Total Quality Management, Vol. 5 No. 3, pp. 105-14. McGinnis, M.A., Kochunny, C.M. and Ackerman, K.B. (1995), "Third party logistics choice", The International Journal of Logistics Management, Vol. 6 No. 2, pp. 93-102. Rao, A. (1996), Total Quality Management a Crossfunctional Perspective, John Wiley & Sons, New York, NY. Savage, B.M. (1996), "Managing quality data", Total Quality Management, Vol. 7 No. 6, pp. 667-74. Shef, Y. (1990), "Third party logistics: present and future prospects", Journal of Business Logistics, Vol. 11 No. 2, pp. 27-39. Stank, T.P., Daugherty, P.J. and Ellinger, E. (1996), "Information exchange, responsiveness and logistic provider performance", The International Journal of Logistics Management, Vol. 7 No. 2, pp. 43-57.

References
Bank, J. (1992), The Essence of Total Quality Management, Prentice-Hall, Englewood Cliffs, NJ. Bechtel, C. and Jayaram, J. (1997), "Supply chain management: a strategic perspective", The International Journal of Logistics Management, Vol. 8 No. 1, pp. 15-31.

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