Global Supply Chain Management Logistics A378 Spring 2004

Logistics in the Organization Chapter #2 Logistics in the Organization

The Logistics System 11/17/2018

Overview Marketing strategy requires the implementation of distribution channels Links the organization and its customers The organization’s logistics system is designed to support the marketing strategy Chapters examines the relationship between marketing channels and logistics Must systematically manage the logistics to support marketing's channel objectives 11/17/2018

Marketing/Logistics Partnership Marketing must develop a strategy Marketing must determine: What products/services customers want When they want it Where they want it And what level of customer service is desired Marketing’s goal is to maintain a customer focus and ensure that the organization meets the customer’s requirements 11/17/2018

Marketing/Logistics Partnership With a marketing strategy in hand, the organization must implement it Four key elements Product (or Service) Price Promotion (communications) Place 11/17/2018

The Marketing Mix 11/17/2018

Alternative Channel Structures Domestic International 11/17/2018 Source: Jain, Subhash C., International Marketing Management, Wadsworth, In 1993, p. 564

Marketing and Logistics Channels Once marketing develops a strategy, we must decide how to get the goods to the customers Requires that we design a distribution channel system (network) Channels can be very simple Producer sells directly to the customer Or very complex Multi-level global distribution networks 11/17/2018

Marketing and Logistics Channels A little bit of history When you live in a cabin and pursue a subsistence life style, you don’t need to worry about distribution If someone else has something I need and can not make for myself, I trade them something I have for it …barter 11/17/2018

Marketing and Logistics Channels With urbanization and specialization, barter is replaced by formalized trade We became dependent on others for basics at first, e.g. food and fuel Later we became dependent of others for “luxuries”, e.g. a television “Middlemen” (i.e., someone between the producer and the consumer) were required to support distribution logistics 11/17/2018

Marketing and Logistics Channels Another way to view a distribution channel is as a pipeline Money, information and returned Product V e n d o r M a u f c t W h l s D i b R C m Products and Customer Service 11/17/2018

Marketing and Logistics Channels Channel design is not a new endeavor Only recently, however, have we begun to address it as part of overall system design Environmental Issues Global economy Deregulation Corporate reconfiguration Technological innovation Total quality management/customer service 11/17/2018

Environmental Issues Global economy Hard to be “just” a domestic company today Specialization in manufacturing Foreign markets, suppliers and raw materials Fragmented distribution systems on a global scale Cultural preferences Formal and implied etiquette of each nation’s business culture 11/17/2018

Environmental Issues Government regulatory environment Deregulation has led to an environment in which the rules of channel management are constantly changing US and other western countries led the way New phenomenon for many countries International initiatives also affect channel design, e.g. NAFTA and the European Union Management must design flexible systems and must emphasize adaptability while maintaining focus on customer service 11/17/2018

Environmental Issues Corporate reconfiguration forces continuous realignment of channels Mergers, acquisitions and spin-offs Competitors become family members Formers suppliers are purchased by competitors Former internal partners become suppliers and/or competitors Such issues require we constantly reevaluate our distribution channel system and adapt as necessary 11/17/2018

Environmental Issues Technological Innovation Big changes in the past two decades Satellite communications GPS/on-line tracking of vehicles Automated handling systems Bar coding, EDI, XLM the internet, RFID tags, etc. Most significantly, the use of technology as a competitive advantage FedEx, UPS, DHL, etc. 11/17/2018

Environmental Issues Total quality management continues to be a significant driver in business Through the 80’s into the 90’s it was an issue we focused on through design and manufacturing improvement Today it is a critical concern of channel design The distribution channel provides a major step in delivering customer quality 11/17/2018

Marketing and Logistics Channels Marketing Issues Must decide what type of distribution best supports the marketing strategy Must maintain focus on customer service Extremely complex problem for global companies But…must define the channel that will meet our constraints while minimizing overall system cost and thus maximizing system (channel) profit 11/17/2018

Channel Management Issues Inevitably, one channel member dominates Manufacturer may dominate when customer demand is brand name driven Retailers may be large enough to drive the channel (Wal-Mart) Sometimes a wholesaler or distributor dominates the channel (Numerous small retailers) Channel leader must manage for overall efficiency and mutual benefit...or the channel fails to remain competitive 11/17/2018

Formal and Informal Relationships Channel management is highly dependent on relationship management Can be formalized through contracts Articulate participating members’ rights and obligations Required for complex channel systems 11/17/2018

Formal and Informal Relationships Informal relationships are often the first step More flexibility Chance to get to know each other and build trust Can be the first step toward a formalized relationship Often all that is needed for simple channel systems 11/17/2018

Domestic vs. Global Channels Focus of the channel is the customer Social, cultural, economic and historical conditions force channels to be country specific US, Europe, Japan, India, China, Brazil, etc. In many countries, consumers as we know them in western society, are still evolving 11/17/2018

Domestic vs. Global Channels For global firms, sourcing, production and distribution may involve 10s of alternatives Challenge is to define the system that best focuses on the customer and is most efficient 11/17/2018

Future Trends Supply Chain Management Quick response logistics An extended enterprise model enabled by technology and required by competition Quick response logistics Boeing and spare parts Strategic alliances and partnerships One way to expand into new markets both product/service wise and geographically Third-party logistics providers Providing a variety of functions more efficiently than we can ourselves. 11/17/2018

Managing the Logistics System Logistics systems support the marketing strategy and provide channel realization Once the channel is defined the logistics must be designed Numerous trade-offs are available Fast vs. slow transport Bulk vs. small quantities JIT vs. local/regional warehousing, etc. Focus must always remain on customer service and overall system profit 11/17/2018

The Logistics Mix as a System Customer Service Information Systems Materials Management Inventory Warehouse Transportation 11/17/2018

Trade-Off Analysis Logistics activities must be managed as an integrated system Individual decisions affect the overall cost Total cost view must be adopted by management Impossible to minimize one cost without affecting others Failure to consider the system as a “whole” results in suboptimal decision making 11/17/2018

Trade-Off Analysis Monetary Logistics Costs Total Cost Inventory Costs Monetary Logistics Costs Transport Costs Ordering Costs Computerized Order- Processing Premium Transport Little Inventory Manual Order-Processing Low-cost Transport High Inventory 11/17/2018

Trade-Off Analysis Monetary Logistics Costs Total Cost Inventory Cost Monetary Logistics Costs Transport Costs Ordering Costs Computerized Order- Processing Premium Transport Little Inventory Manual Order-Processing Low-cost Transport High Inventory 11/17/2018

Trade-Off Analysis Monetary Logistics Costs Total Cost Monetary Logistics Costs Inventory Costs Transport Costs Ordering Costs Computerized Order- Processing Premium Transport Little Inventory Manual Order-Processing Low-cost Transport High Inventory 11/17/2018

Trade-Off Analysis Static Analysis of Quantum Chemical (50,000 lbs of production) Plant Logistics Costs System A System B Packaging 500 $ Storage and handling 150 50 Inventory carrying 25 Administrative 75 Fixed Cost 4,300 2,400 Transportation costs To market warehouse To customer 800 100 Warehouse Costs TOTAL COSTS 5,775 5,950 11/17/2018

Trade-Off Analysis Dynamic  changing over time, i.e. the production level may change over time 11/17/2018

Trade-Off Analysis 11/17/2018

Trade-Off Analysis Algebraically…and more accurately Y1 = 4,200 + 0.0135x Y2 = 4,800 + 0.0230x Where Y1 is the total cost of System A, Y2 is the total cost of System B and x is the level of production in pounds, then: Y1 = Y2 defines the Break-even point 4,200 + 0.0135x = 4,800 + 0.0230x 0.085x = 600 x = 70,588 lbs That is, below 70,588 system A is preferred and above that point, system B is bests (lowest TC) 11/17/2018

Summary Logistics decisions can not be made until a marketing strategy is developed Logistics supports the “place” and “price” components of marketing Management must view logistics as a set of interacting activities The goal is overall system efficiency which yields lowest system cost and maximizes profit 11/17/2018