Logistics and Competitive Advantage

Logistics and
Competitive strategy
Chapter Eleven
By Martin Christopher
Unit 1 Strategic Logistics Management 2
Dimensions of Logistics:
Introduction
Logistics has come a long way since the
1960s.
The big challenge is to manage the whole
logistics system in such a way that order
fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the
individual firms logistics system but also
recognizing that no logistics system
operates in a vacuum.
What is Logistics?
Popular logistics terms:
Logistics Management
Business Logistics Management
Integrated Logistics Management
Materials Management
Physical Distribution Management
Marketing Logistics
Industrial Logistics
Distribution
Definition of Logistics:
Council of Logistics Management
(CLM, 1985)

Logistics is the process of planning,
implementing and controlling the
efficient, effective flow and storage of
raw materials, in-process inventory,
finished goods and related
information from point of origin to
point of consumption for the purpose
of conforming to customer
requirements.
Logistics - Definition
Logistics is the process of strategically
managing the procurement, movement
and storage of materials, parts and
finished inventory (and the related
information flows) through the
organisation and its marketing channels
in such a way that current and future
profitability are maximised through the
cost-effective fulfilment of orders.
Martin Christopher
Logistics and Supply Chain Management
Supply Chain Management
The management of upstream and
downstream relationships with
suppliers and customers in order to
deliver superior customer value at
least cost to the supply chain as a
whole.
What is Logistics?:
21
st
Century View of Logistics (4
subdivisions)
1. Business Logistics supply chain
process that plans, implements, and
controls the efficient, effective flow of
goods, services, and related information
from the point of origin to the point of
use or consumption in order to meet
customer requirements.
2. Military Logistics design and
integration of all aspects of support for
the operational capacity of the military
forces, and their equipment to ensure
readiness, reliability, and efficiency.
What is Logistics?:
21
st
Century View of
Logistics
3. Event Logistics network of activities,
facilities, and personnel required to
organize, schedule, and deploy the
resources for an event to take place and to
efficiently withdraw after the event.
4. Service Logistics acquisition, scheduling,
and management of the facilities/assets,
personnel, and materials to support and
sustain a service operation or business.
3 major dimensions of
Logistics

1. The macro environment of Logistics:
Economy Perspective
2. The micro environment of Logistics:
Firm dimension
3. The logistics components and its
internal relationship
1. Logistics in the Economy:
A Macro Perspective
As indicated in Figure 2-2, logistics
costs as a percentage of GDP have
declined from 16 percent in 1980, to
under 10 percent in 1999.
Early to mid-1970s saw the figure
closer to 20 percent.
This reflects a serious improvement
in the efficiency of logistics systems.
Figure 2-3 shows a further
breakdown of logistics costs for
1999.

Figure 2-2: Logistics Costs as a
Percentage of GDP
15.7
12.3
11.4
10.4
10.3
10.1
9.9
0 5 10 15 20
1980
1985
1990
1995
1996
1998
1999

Figure 2-3:
Total Logistics Costs --- 1999

Logistic cost as a percentage of GDP across
the world is shown in the following table
Country Logistic cost as a percentage
of GDP
Korea 16 (GDP 1.12 tn $)
China 15 (GDP 7.32 tn $)
Japan 14 (GDP 5.86 tn $)
India 13 (GDP 1.82 tn $)
France 12 (GDP 2.74 tn $)
UK 11 (GDP 2.45 tn $)
USA 10 (GDP 15 tn$)

A Macro Perspective
The two largest cost categories in
logistics systems are transportation
and inventory.
While we will look at this later, motor
carriers share of total freight
expenditures is $450 billion versus
$99 billion for all other carriers.
The most frequent trade-off in
logistics is between transportation
and inventory cost.
A Macro Perspective
As indicated in Figure 2-4, the
Federal Reserve measure of
inventory to sales ratios from 1991
to 1999 clearly indicate that
companies are getting better at
managing inventory.
Companies have been supporting
larger amounts of sales with
decreasing amounts of inventory.
Figure 2-4:
Inventory Sales Ratio
A Macro Perspective
Contributing to this decline
Improvement in transportation cost
Better inventory management
Turnover has had a very positive impact
upon the return on investment for
companies
The role of Logistics in
Macro economic

(i) Value added role
(ii) Economic impact
(i) Add values to product/services:
4 principal VAs of economic utility
1. Form utility- (what) -
production
2. Place utility- (where) -
logistic
3. Time utility- (when) -
logistic
4. Possession utility- (why) -
marketing
Also referred to as the seven Rs --- Right
product, Right quantity, Right condition, Right
place, Right time, Right customer, and Right
cost.

Figure 2-5 Fundamental
Utility Creation in the
Economy
2. Logistics in the Firm:
The Micro Dimension
a. Logistics Interfaces with
Operations/Manufacturing
b. Logistics Interfaces with
Marketing
c. Logistics Interfaces with
Other Areas
Operations Manufacturing
Examples:
1. Length of production runs
Balance economies of long production
runs against increased costs of high
inventories.
2. Seasonal demand
Acceptance of seasonal
inventory to balance
lead production times.
Operations Manufacturing
3. Supply-side interfaces
Stocking adequate supplies to ensure
uninterrupted production now a logistics
function.
4. Protective packaging
Principal purpose is to protect the
product from damage.
5. Foreign & third party alternatives
Some logistics functions are being
outsourced.
b. Logistics Interfaces with
Marketing

The Marketing Mix Four Ps
(i) Price
(ii) Product
(iii) Promotion
(iv) Place
Logistics in the Firm:
(i) Price
Carrier pricing
Generally, since the larger the shipment, the
cheaper the transportation rate, shipment
sizes should be tailored to the carriers vehicle
capacity where possible.
Matching schedules
Quantity discounts should be tied to carrier
quantity discounts.
Volume relationships
Volumes sold will affect inventory
requirements.
(ii) Product

Consumer packaging
Generally, since the size, shape, weight and
other physical characteristics of the product
impact on its storage, transportation and
handling, the logistics managers should be
included in any decisions regarding these
product traits.
A minor correction in any of the above
could conceivably cost (or save) millions of
dollars in logistical costs.
Logistics costs are not necessarily
paramount, but they need to be considered
in the decision making process.
(iii) Promotion
Push versus pull
The most important factor is that the logistics
division is aware of any changes in demand
patterns so that it can plan for any
consequences.
Pull strategies tend to be more erratic.
Push strategies tend to more predictable.
Channel competition
The more popular a product, the easier it is to
persuade channel members to promote your
product.
(iv) Place
Wholesalers
Generally, since wholesalers are combining
purchases for multiple retailers, the shipment
sizes tend to be larger and the number of
transactions that have to be processed are
fewer, with the result that logistics costs are
smaller.
Retailers
With the exception of very large retailers who
act more like wholesalers, smaller sales are
the norm. These generally cost more for
transportation and order processing.
c. Logistics Interfaces with
Other Areas
Manufacturing and marketing are probably the
two most important internal, functional interfaces
with logistics.
Other important interfaces now include finance
and accounting.
Logistics can have a major impact on return on
assets and return on investment.
Logistics costs reported by cost systems
measure supply chain trade-offs and
performance.
Session 1 Summing Up
End of Session 1
Sources of Competitive
Advantage
Porter's 5 Forces - Elements of Industry Structure (source: Porter, 1985, p.6)

New Entrants
Buyers
Suppliers
Substitutes
Industry
Competitors
Intensity
of Rivalry
Threat of
Substitutes
Threat of
New Entrants
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Determinants of Buyer Power
Bargaining Leverage
Buyer concentration vs.
firm concentration
Buyer volume
Buyer switching costs
relative to firm
switching costs
Buyer information
Ability to backward
integrate
Substitute products
Pull-through
Price Sensitivity
Price/total purchases
Product differences
Brand identity
Impact on quality/
performance
Buyer profits
Decision makers
incentives
Determinants of Substitution Threat
Relative price performance of substitutes
Switching costs
Buyer propensity to substitute
Rivalry Determinants
Industry growth
Fixed (or storage) costs / value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Entry Barriers
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation
Determinants of Supplier Power
Differentiation of inputs
Switching costs of suppliers and firms in the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to threat of
backward integration by firms in the industry
Sources of Competitive
Advantage
new technologies
iPhone, Cloud Computing
new or shifting buyer needs
Apartments vis--vis Bungalows
the emergence of a new industry
segment
Organic Vegetables, Green Industry
shifting input costs or availability
Non-availability of Wood
changes in government regulations
Banning of Sun Control Films in Cars

Logistics Value Proposition
Service Benefits
Availability
Operational Performance
Speed, Consistency, Malfunction and Recovery
Time
Service Reliability
Quality Aspect by standards and monitoring
Manpower, Software, Training, Continuous
Improvement,

Logistics Value Proposition
Cost Minimization
Least Total Cost Concept
Airfreight, Air Travel,
Logistics Value Generation
Commitment

What is logistics
Logistics is the process of strategically
managing the procurement, movement
and storage of materials, parts and
finished inventory (and the related
information flows)
through the organization and its
marketing channels
in such a way that current and future
profitability are maximized through the
cost-effective fulfillment of orders.
Logistics and competitive
advantage
Firms can achieve competitive
advantage through:
1. Differentiation, in the eyes of the
customer, from its competition
And
2. By operating at a lower cost and
hence at greater profit.

Competitive
advantage and the
3Cs

Needs seeking benefits
At acceptable prices
Assets and
Utilisation
Assets and
Utilisation
CUSTOMER
COMPANY COMPETITOR
VALUE VALUE
Cost differentials

advantage

A position of enduring superiority over
competitors in terms of customer
preference may be achieved through
logistics.
Successful companies either have
productivity advantage or they have
a value advantage or a combination
of the two.
advantage

Productivity
Lower cost
profile
Value
Differential
plus
Productivity advantage
There is substantial evidence to
suggest that big is beautiful when it
comes to cost advantage. This is
partly due:
1. to economies of scale
2. to the impact of the "Experience
Curve".

Productivity advantage

In this regard Logistics management
can provide a multitude of ways to
increase efficiency and productivity
and hence contribute significantly to
reduced unit costs.
Value advantage
Customers dont buy products, they
buy benefits, these benefits may be
intangible (image or reputation)
In other words
Products are purchased for the promise
of what they will deliver.
Value advantage
Adding value through differentiation
is a powerful means of achieving a
defensible advantage in the market.
But How it could be achieved?
1. Value segments approach
2. Services augmented offers
Productivity and Value
advantage
Successful companies will often seek both
productivity and a value advantage.
Available options are:
Productivity and Value
advantage
Marketing logistics strategic goal would be
Gaining competitive
advantage through logistics
Competitive advantage cannot be
understood by looking at a firm as a
whole. It stems from the many discrete
activities a firm performs.

In this regard; we can use the value
chain analysis to disaggregates a firm
in to its strategically relevant activities
Gaining competitive
Margin
Gaining competitive

Competitive advantage grows out of
the way in which firms organize and
perform these discrete activities
within the value chain. (More cheaply
or better than its competitors)
Gaining competitive

Productivity advantage:
Capacity utilization, inventory
reduction, closer integration with
suppliers.

Value advantage:
Superior customer services

Gaining competitive
The mission of logistics
management
It is to plan and co-ordinate all
activities necessary to achieve the
desired levels of delivered service and
quality at lowest possible cost.

Logistics must therefore be seen as the
link between the market place and
the operating activity of the
business.

The fig illustrates total system concept
The mission of logistics
management
The previous fig suggests that the
needs of customers are satisfied
through:
The co-ordination of the materials
and information flows that extend
from the market place, through the
firm and its operations and beyond that
to supplier.
The supply chain and
competitive advantage
The supply chain is the network of
organizations that are involved( through
upstream and downstream linkages) in
the different processes and activities
that produce value (goods or/and
services).
Recall the value system in Ch 5
Supplier VC Firm VC Channel VC
Buyer VC
Supply chain management in this
regard should be after integrating
outside boundaries of the firm to
include both suppliers and
consumers

The main challenge would be:
Integrating and coordinating the flow of
materials from suppliers (often off
shore) and managing the distribution of
final products through multiple
intermediaries.
The difference between logistics and
supply chain management p157
Achieving an integrating supply chain
p158-159 fig 11.9
Scope of supply chain management
fig 11.8 p158
Very important
Fundamentals of supply
chain management
1. Views the supply chain as a single
entity
2. It calls for strategic decision making
because of its impact on overall costs
and market share
3. provides a different perspective on
inventories which are used as a
balancing mechanism of last not first
resort.
4. Requires high level of integration
The changing logistics
environment
The customer service explosion (Services
excellence, appropriate delivery systems,
committed employees)

Time compression (logistics lead time)
ORDER CASH

Globalization of industry (offshore)

Organizational integration (Material,
production, and marketing managers)
The challenge of logistics
management
To achieve the goal of competitive
advantage through both cost reduction
and service enhancement.

Organizations need to accelerate the
movement through the supply chain and
to have more flexible Logistics systems
and this could be achieved through:
The challenge of logistics
management
- Cutting short the pipeline
(Unneeded inventory)
- Improve the pipeline visibility
(Organizational barriers removals,
better coordination)
- Managing logistics as a system
We covered so far
Definition of logistics
Logistics and competitive advantage
(Productivity and Value advantage)
Competitive advantage and value chain
management
The mission of logistics management
The supply chain and competitive
advantage
The changing logistics environment
The challenge of logistics management
Activities
1. Identify the fundamentals of supply
chain management, and how they do
function.
2. Explain the characteristics of the most
challenging factors, in the area of
logistics.
3. How can we use logistics to add value
and obtain competitive advantage

Logistics and Competitive Advantage

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