We switch our emphasis away from the more abstract concept of channels, towards more practical issues that were, until recently, undeveloped aspects of marketing and corporate strategy; namely, the physical flows of products, services and information into, through and out of the organization to its customers. Physical distribution and logistics are part of the ‘place’ element of the marketing mix and these have had a major impact on channel strategy and design. Effective management of physical distribution and logistics has a substantial impact on a company and its customers’ costs, efficiency and effectiveness. If these are well planned and implemented, they are competitive tools that can build sustainable competitive advantage. A total systems approach to physical distribution i.e. the science of moving items from production to consumption in a timely, economical manner, is referred to as logistics.
Reasons for increased attention to this function are the result of a continued search for cost savings in distribution and stockholding. Much research for cost savings has centred on the production area. Labour-saving technology, replacement raw materials and effective production planning have accounted for considerable effort being made to reduce costs and improve output. This has meant that increasingly the potential for further cost savings in these areas has become limited. If management is going to continue to look for cost savings it has to look elsewhere.
Lancaster3 suggests that distribution and stockholding costs can add 25 per cent to direct materials costs. Unsurprisingly, in the search for further cost efficiencies in companies, physical distribution and logistics have figured highly. It has become increasingly clear that not only is there substantial potential for improving efficiency and reaping cost savings, but more importantly for the marketer, this area offers substantial potential for developing sustainable competitive advantage. Part of the explanation for neglecting research in this area lies in the fact that conventionally individual elements of physical distribution and logistics have been dealt with in a fragmented manner, with separate parts of the business incurring what appeared to be relatively small costs of distribution. As a consequence, information on total costs has not been available or has ‘disappeared’ in the accounting system.
Some of the major costs of physical distribution have accelerated. A major element of cost is transport, which is increasingly expensive as road, sea and air networks have become increasingly congested. Similarly, increases in fuel prices have contributed to increased transportation costs. The emergence of a total systems (logistics) view of distribution is based on analogies and ideas drawn from the military. It became recognized that effective distribution depended on logistics, or an integrated approach to elements which help move products and services to the right place, in the right quantity and at the right time. It was recognized that ‘optimizing’ one part of the system, e.g. inventories of stocks and work-in-progress, might have a detrimental knock-on effect on other parts of the distribution system, thereby reducing the effectiveness of the system as a whole. Such systems thinking is an essential component of modern logistical management.
Systems thinking applied to distribution has proved a powerful impetus to the importance of this area. Alongside the development of the total systems approach to distribution has gone the development of more sophisticated and powerful tools of analysis. The notion of interrelationships in the total system of distribution makes the problems of managing it difficult and complex. Developments in modelling, allied to more powerful computer power, have enabled this complexity to be managed. We now have the tools to handle logistics through IT.
The main reason for the growth in importance and interest in physical distribution and logistics is the fact that the logistics system offers substantial potential for achieving a competitive edge and winning and keeping customers. Particularly in industrial markets, where products may be relatively undifferentiated and margins are slender, companies find they can gain a competitive edge by using their logistical system to improve customer service levels and this might be critical in terms of customer choice. This may allow a company to increase volumes of sales and/or increase prices. Because of this, identifying appropriate levels and types of customer service to be achieved by the logistics management system is a key aspect of planning in this area.
Developments and trends in manufacturing and purchasing have heightened the importance attached to the service elements of the logistics systems of suppliers. This was discussed in Chapter 2 when we considered organizational buyer behaviour. With modern continuous flow and large batch manufacturing systems a stock-out situation of a minor and inexpensive component may incur substantial costs in down time. This problem is heightened where a firm’s customers have moved towards the implementation of ‘lean manufacturing’ purchasing and production. These developments in manufacturing and purchasing are so important that they need to be considered in more detail.
Perspectives on what constitutes an effective production process in a company have undergone considerable changes, which have been as a result of increased competition and more demanding customers. One of the major implications of these factors has been the recognition that production needs to be built around flexibility, while at the same time achieving cost efficiencies and consistent quality of output.
Lancaster4 suggests this flexibility of the production process is essential because: It transforms production operations enabling one machine to produce a wide variety of models and products – it provides the corporate capability to produce more varieties and choices even down to offering each individual customer the chance to design and implement the ‘programme’ that will yield the precise produce, service or variety that is right. Amongst others Womack5 termed these new production processes ‘lean production’ – fundamentally different from traditional mass production processes developed by Ford in 1913. Bolwijn and Kumpe suggested that this new production was part of an overall change in world manufacturing during the 1990s. They describe a number of manufacturing developments over the past 40 years.
The first stage of development was based on the notion of the efficient firm where cost and price was all important. The emphasis was on producing competitively priced products on a mass-production scale. As a result of increasing competition, the end of the 1960s saw the need for the quality firm which was the next development in the evolution of production and where quality specifications were strictly applied in the manufacturing process. The third development was the transition to the flexible firm. This phase involved a distinct change in the production process with flow production and small batch runs of a wide assortment of products operated by teams of multi-skilled employees.
Increasingly, companies have turned to this new form of flexible lean production based on flexible cells and working arrangements Accompanying this growth of lean manufacturing has been the introduction of ‘Just in Time’ (JIT) systems of manufacturing and purchasing. First used extensively in Japan, JIT took time to make inroads into the West. As the term implies, in the context of manufacturing and purchasing, JIT is based on a company securing supplies of raw materials and components needed for the manufacturing process at the precise point in time when they are required to enter this process. Dion et al.7 defined JIT as:
An inventory control system which delivers input to its production or distribution site only at the rate and time it is needed. Thus it reduces inventories whether it is used within the firm or as a mechanism regulating the flow of products between adjacent firms in the distribution system channel.
The JIT approach contrasts with the more conventional approach to stockholding delivery and manufacturing which was based essentially on the just in case principle. Oliver8 provides a comparison between Just in Case and Just in Time approaches. Implications of the introduction of JIT/lean manufacturing systems for the marketer have been wide reaching. In the context of logistics, successful servicing of customers using a JIT system fundamentally alters the design and operation of the logistical process.
For example, to be successful needs precise synchronization from supplier right through to production units to retailers to consumers. In turn, this synchronization requires a complete exchange of information, so the supplier is fully aware of raw material deliveries and the need for component deliveries to manufacturers. Manufacturers need to know that they will receive deliveries at the right time. Lynch,9 using the Dell case analogy, has shown how JIT systems require close contact between suppliers and customers. Increasingly, this contact and the exchanges of information involved utilize computer linkages.
Womack et al.10 have shown that at a consumer level this system can work through retailers who provide information to manufacturers in two forms: firm orders and tentative orders. Working through retailers in this way and ascribing more importance to firm orders, means the company can respond closely to customer needs and changes in the market. Thus, in the volume car market in Japan, nearly all cars are made to orders taken in the distributor’s showroom and lead times are as low as ten days. A study by Frazier et al.11 suggests that in fact some distributors have realized that sharing strategic information with suppliers can be a powerful competitive weapon helping to reduce supply uncertainties and reduce risks
Just in Case versus Just in Time
These trends towards lean manufacturing are indicative of the recognition of cost savings associated with elements of logistical processes including stocks of raw materials, work-in-progress, stock-outs and problems of defective components. The result of these factors is that effective supply and the logistical systems on which this is based – logistics – are now key factors in supplier choice in industrial markets.taken from a study by Perreault and Russ12 and discussed in Hutt and Speh.13 They found that when a stock-out notice for a product was received, purchasing managers switched to another supplier 32 per cent of the time. Over a 2-year period, 50 per cent of purchasing managers stopped using a supplier because of slow or inconsistent service. They investigated what happens if a rush order is not acted upon by the supplier and found that after one such inaction 42 per cent of purchasing managers would change suppliers. If this problem persisted, 54 per cent would change suppliers.
This study indicated that logistics was big on the list of supplier evaluation criteria, ranking second only to quality. Another implication is the need for closer working partnerships between suppliers and customer (Manna14). In a study based on the automotive supply industry, Jayaram et al.15 suggest that building close relationships with key supply chain partners is essential in order to be competitive.
A company at the forefront of developing Just-in-Time techniques in its relationship with suppliers is the Toyota Motor Company. Toyota has over the years built up close relationships with its component suppliers, many of whom are, as a result of these close relationships, actually sited next to the Toyota production units that they supply. Toyota was one of the first companies to recognize that effective supply chain management could be a key factor underpinning competitive success.
Importance of logistics in how purchasing managers evaluate suppliers
The nature of physical distribution and logistics
At its simplest, the subject of physical distribution and logistics can be defined as having the right quantity of an item, in the right place, at the right time.
This description of physical distribution and logistics belies the complexity of decisions and planning in achieving these objectives. Defining this business activity in this way does not provide guidance as to how to manage it. As we have seen from the importance attached to logistics, physical distribution and logistics are not passive tools. They can be important demand creators (as well as customer losers). Product availability, prompt delivery and efficient and accurate order processing help to capture and keep customers. Determination of the nature and level of physical distribution service elements is crucial to effective planning of this area if it is to be used as a demand-generating tool. According to Ballou16 physical distribution and logistics can be considered in the same way as product, price and promotional elements of the mix .
The demand-creating role of physical distribution efforts
Some of the elements that comprise physical distribution can be used through service levels to influence demand as shown. There are others. Before examining these elements that contribute to customer service, we need to clarify the distinction and relationships between the terms we have used interchangeably; namely physical distribution and logistics. To explain the business meaning of the latter term, we need to introduce the concept of materials management.
‘Physical distribution’, ‘logistics’ and ‘materials management’ are often used as alternative terms when discussing flows of materials into, through and out of an organization. Although they are interrelated, the scope of each of these terms together with their interrelationships Physical distribution relates primarily to those elements that facilitate the flow of materials from the company to its distributors, retailers, final customers or all three. Materials management is primarily concerned with elements that facilitate the flow of goods and raw materials into and through the organization. Business logistics encompasses all of these in a total systems view of the ‘place’ element of marketing.
The term ‘system’ is used to denote the fact that all elements need to be integrated and planned as a whole to achieve specified objectives. We return to the implications shortly, but we see that the most comprehensive and useful term for planning and co-ordinating the place elements of marketing is business logistics, and we use this term throughout the rest of our discussion. It is important to stress that in addition to the physical flows of materials into, through and out of the organization, a business logistics system includes flows of information and planning and decision-making systems; e.g. sales forecasting is an important information and planning input to the logistics system as are order processing procedures, production scheduling and planning and quality control. We can now define business logistics as follows:
The relationship between materials management, physical distribution and logistics
A total systems approach to the management of all those activities required to acquire, move and store raw materials in process inventory and manufacturing inventory from the point of origin to the point of the end user or consumer.
Implications of the total systems approach
Before considering the design and planning of the business logistics system and its relationship to marketing strategy, we need to consider some of the major implications of the total systems approach to business logistics.
The first and most obvious implication is that the web of interrelationships it introduces poses considerable problems in its planning and management, particularly when trying to optimize the performance of the system. This is a reason why the growth of business logistics has been dependent on the development of appropriate IT tactical planning tools.
Trade-offs between elements
A second implication is that in trying to optimize the performance of the total system we are confronted with trade-offs between the different elements; attempts to optimize performance of one part of the system without regard to the other elements tends to result in lower performance for the system as a whole. We might have to trade off optimum performance in one element of the business logistics system to optimize overall performance, e.g. where we try to minimize the costs of holding raw materials inventory by cutting down the stocks, if we cut these too far, we might find that the effect is to increase costs elsewhere in the system such as losing production through stock-outs and being unable to fulfil customer orders.
Effective co-ordination and organization
Related to complexity and trade-offs is the need in a systems approach for individual elements to be effectively coordinated and planned. Rarely are organizations structured in a way to achieve this. The far-reaching nature of the elements of the business logistics system invariably means it cuts across functional boundaries such as marketing, production, purchasing and finance. Some companies have distribution managers whose responsibilities are limited to duties like route scheduling, fleet purchasing and maintenance. Fewer have a manager in charge of physical distribution activities both into and out of the company and another responsible for materials management. Fewer still have a department responsible for all business logistics. As better logistics systems are developed, this number is likely to grow.
Potential for conflict
The trade-off element and the need for effective co-ordination and organization mean that implementing and managing business logistics can give rise to conflict between different functions in the system. In turn, this means there must be systems and mechanisms for reducing and resolving such conflict. One approach is to install a manager with line authority over functions affecting the overall efficiency and effectiveness of the system. In addition, the system will require the establishment of operating rules and policies to guide decisions in different parts of the system. These should cover aspects like re-order levels, purchasing procedures and customer service levels.
Need to incorporate relationships outside the organization that affect the system
The implication of the systems view of business logistics is that it must be planned and co-ordinated, taking account of relationships outside the organizational system that affect planning and effectiveness. In systems terminology the business logistics system is an ‘open system’. Of particular importance to its design and management are suppliers into the system; intermediaries (i.e. channel members) and at the other end, customers.
The growth in importance of logistics planning, together with the increasing complexity and specialist skills required to develop these plans, has led to the development of specialist logistics companies. An example is Tibbet & Britten, one of the market leaders in logistics planning who plan and execute a complete logistics system for client companies. Increasing numbers of companies, including the major supermarket groups, use outside specialists for their logistics. A company like Tibbet & Britten takes responsibility for all facets of distribution chain management, from planning to delivering products in a fleet of trucks to the customer’s warehouse, and in the case of retail customers from warehouses or depots to individual stores.