Logistics is a flow process management system that expands the scope of the methodological tools of logistics in the direction of cross-functional integration and optimization of an expedient set of types of production and economic activities in their interconnection and interdependence, starting with individual operations and ending with end-to-end management of flow processes.
Integrated logistics ensures the undoubted appearance of a product in a certain place, at the right time, in the appropriate quantity and form, provided that each of the organizations that takes part in such an end-to-end process takes actions to increase the value of the product for consumers.
The essence of integrated logistics is defined as follows:
1. The main role of the application of the concept of integrated logistics by the enterprise is assigned to the achievement and maintenance of competitive advantages in the long term.
2. Enterprises direct their activities to increase customer value products or services, using integrated logistics for this purpose, which justifies the costs.
3. Enterprises acquire a new, higher organizational and managerial level, creating strategic integrated structures with partners to achieve a competitive advantage.
The primary tasks of integrated logistics are:
■ defining the goals and objectives of logistics and, accordingly, its importance in the formation and development of the enterprise;
■ integration of the achievements of related and related areas of modern general theoretical, technical and economic sciences into new system knowledge for the purpose of its application in the process of formation and development of the scientific base of logistics, increasing its significance for applied use;
■ formation of integrated types of industrial and commercial activities in correctly defined temporal and spatial parameters of the environment as a system object of logistics management;
■ development of scenarios for the design of logistics systems focused on a market economy, as well as the transformation of "the structure of their management;
■ research and modeling of the patterns of creation and progressive development of logistics systems, based on the characteristics and real conditions formation of production and economic relations;
■ development of methodological approaches and algorithms for planning and managing integrated types of production processes in combination with their organizational and managerial integrators tuned to logistics.
The integration mission of logistics is due to the manifestation of cause-and-effect relationships of logistics and production, logistics and marketing, logistics and management, and the like. Enterprises consciously outsource a wide range of functions, including development and design, manufacturing, distribution, etc., to other organizations. This gives them the opportunity to focus on the effective performance of more necessary functions for themselves (that is, to effectively implement their core competencies).
At the "integration of logistics" stage, the issues of planning, controlling the management of key business processes are solved, starting from the end user and covering all suppliers of goods, services and information that provide value to consumers.
The integration effect of logistics management (as opposed to traditional management, which should ensure a minimum of costs in each individual process link) can be viewed as an attempt by an enterprise to ensure the maximum cost reduction for the entire set of processes in production and circulation. This can be represented as follows:
where - respectively, the costs in each link of the process.
The main stages of the formation and development of logistics as a modern tool for enterprise management are determined by the formation and implementation of appropriate logistics concepts, which are the initial basis for the development of flexible models for managing flow processes in various areas of production and economic activity of enterprises.
The integrating function of logistics in the management process is implemented through a system of forms and methods of economic activity, which include:
■ integration of functions for the formation of economic relations with the functions of determining the needs for products and their delivery to the consumer;
■ coordination of logistics management of suppliers in the course of transportation;
■ cooperation in the integrated use of warehouses and terminals owned by various business entities;
■ optimization of total costs when moving products based on the economic compromise of enterprises included in the integrated chain.
- Integration (from lat. integration- recovery; integer- whole) - a concept meaning the state of interconnectedness of individual differentiated parts and functions of the system as a whole, as well as the process leading to such a state; the process of convergence and connection of sciences that occurs next to their differentiation.
- Method (from the Greek. Tethodos- the path of research, theory, teaching) - a way to achieve a goal, solve a specific problem; a set of techniques or operations of practical or theoretical knowledge (mastering) of reality.
Concepts applied in integrated logistics TQM, JIT, KANBAN, LP, SCM and etc.
TQM (Total Quality Management)- total quality management - a concept that continuously develops over time, defining competitive quality in the absence of limits to its improvement. TQM integrates both the technical side of quality, provided by ISO-9000 standards, and integration with all logistics partners and, above all, with consumers.
JIT (just in time)- the concept (technology) of building a logistics system or organizing a logistics process in a separate functional area that ensures delivery material resources, work in progress, finished products in the right quantity to the right place and exactly on time. The use of the concept of "just in time" allows you to reduce inventory, reduce production and storage space, improve the quality of products, reduce production time, use equipment efficiently, and reduce the number of non-production operations.
System JIT originated in Japan in the mid-1970s. in Toyota and is currently being used with great success in many economically developed countries.
The essence of the system JIT reduced to the rejection of the production of products in large batches. Instead, a continuous-flow object production is being created. At the same time, the supply of production shops and sites is carried out in such small batches that it essentially turns into a piece. This system considers the presence of inventories as a fact that makes it difficult to solve many problems. Requiring significant maintenance costs, large inventories adversely affect the lack of financial resources, flexibility and competitiveness of the enterprise. From a practical point of view, the main goal of the system JIT are the destruction of any unnecessary costs and the effective use of the production potential of the enterprise.
The main provisions of the philosophy of technology "just in time":
- 1) any remnants of inventories are evil, since they are mortified (practically useless), they need additional costs for their warehousing and storage;
- 2) breakdowns and downtime of production equipment should be kept to a minimum;
- 3) production must be stopped if a defect or lack of components is detected.
System JIT more demand-driven than the traditional throw-to-market method. Under this system, the principle is to produce products only when they are needed, and only in such quantities as the buyer requires. Demand accompanies products through the entire production process. Each operation produces only what is required for the next. The production process does not start until a signal is received from the site of the subsequent operation to start production. Parts, assemblies and materials are delivered only at the time of their use in the production process.
System JIT involves reducing the size of processed batches, the practical elimination of work in progress, minimizing the volume of inventories and the fulfillment of production orders not by months and weeks, but by days and even hours. It also simplifies the system production accounting, since it becomes possible to account for materials and production costs on one combined account. At the same time, the use of a separate account to control the stock of materials loses its relevance.
Application of principles JIT results in better manufacturing quality, better service and better cost estimating.
Thus, it can be concluded that the potential benefits of the system//D are numerous. The main ones include the following.
First, its application leads to a decrease in the level of stocks, which means less investment capital into inventories. Since this system requires a minimum amount of materials to be available for immediate use, the overall stock level is significantly reduced.
Secondly, under the conditions of application of the system JIT there is a reduction in the order fulfillment cycle and an increase in the reliability of its execution. This, in turn, contributes to a significant reduction in the need for a reserve stock, which is an additional commodity item of stock, stored in order to avoid a possible shortage. The production schedule within the planning production perspective is also reduced. This allows you to buy the time needed to respond to changing market conditions. Producing products in small batches also contributes to greater flexibility.
Thirdly, when applying this system, there is an improvement in the quality of production. When the quantity ordered is small, the source of the quality problem is easily identified and corrective action is taken immediately. Under these conditions, workers in many firms have a greater understanding of the importance of quality, which leads to improved quality of production in the workplace.
To other advantages of the system JIT include: reduction of capital costs for the maintenance of storage facilities for stocks of materials and finished products; reducing the risk of inventory obsolescence; reduction of losses from marriage and reduction of costs for alteration; reduction in the volume of documentation.
The use of the considered model in domestic organizations to meet the needs of managers in the adoption of effective management decisions on the type, price, cost, composition and ways of marketing products contributes to the further improvement of the production and commercial activities of the organization.
Many researchers point out that the concept JIT is aimed at synchronizing the work of all elements of the price, at early identification of the requirements for the shipment of goods on orders, ensuring the strictest discipline of contractual relations. To prevent the accumulation of excessive stocks, on the one hand, and to optimize the overall logistics costs, on the other hand, the task of finding cargo consolidation is given priority. Instead of delivering small batches from different suppliers at exact times, orders from different suppliers should be bundled into one shipment. To apply technology JIT it is necessary to create the closest relationship between the buyer and the supplier in terms of information exchange and coordination of plans; the requirements for the quality of supplying materials and components are also increasing.
Rice. 4.3.
Modern management practice is characterized by an intensive transition from managing individual logistics functions or operations to managing business processes, more adequate objects of the concept of integrated logistics. A logistics business process is understood as an interconnected set of operations and functions that transform the company's resources into a result determined by accompanying flows. This outcome is usually determined by key logistics factors such as total cost, lead time, customer service quality, etc.
To improve the efficiency of functioning, the company should be considered not just as an established structure, but as a system of interrelated business processes aimed at achieving strategic, tactical or operational business goals.
The main problem in the concept under consideration is the definition of the client's needs for logistics services and the inclusion in the logistics process of only those operations / functions that really ensure the fulfillment of these needs with minimal resources. This raises the problem of determining the basic level of customer service. Key consumers may be offered a level of service slightly higher than the basic one. At the same time, the logistics service above the basic level is called "value-added logistics". This service is unique in definition and is provided to VIP customers in addition to the company's basic service programs.
An integrated approach in logistics requires the integration of various functional areas and their participants within a single LAN in order to optimize it. This approach extends both to the microeconomic level of the firm itself and to the business platform (B2B or B2C). It is important that, when solving the problems of optimizing management at the micro level, within the enterprise - the "owner" of the logistics process, managers proceed from the task of optimizing drugs as a whole. The desire to combine supply, production and distribution is the only possible prospect in addressing the issues of achieving goals within the framework of the LS. This approach allows you to get accurate information about the status and location of the product / service at any time - from the "input" at the source of raw materials to the "output" - the receipt of goods by the end user, information about the production complex and the entire distribution network. The following arguments point to the advantages of an integrated approach:
¦ separation of distribution, production management and supply issues can lead to disagreements between functional areas and relevant departments, which hinders the optimization of the system as a whole;
There are numerous contradictions between production and marketing. Combining into a system is the most adequate way to resolve them;
¦ the requirements for the information system and for the organization of management are of the same nature and apply to all types of logistics operations. The task of coordination is to optimally link at the operational level the various requirements that arise in the LAN.
An integrated approach creates a real opportunity to combine the functional areas of logistics by coordinating the actions performed by independent links of the LS, sharing a common responsibility within the target function.
As mentioned above, at present, the concept of integrated logistics in Western business has been transformed into the business concept of Supply Chain Management - SCM - "Supply Chain Management".
Organizational information integration of counterparties of the logistics system
The idea of integrated logistics is based on the fact that enterprises that are part of the supply chain are increasingly understanding the need to follow the same goal - working towards a common end result associated with satisfying an identified need. To do this, they must mobilize their efforts and direct them towards coordination of actions.
In the theory of integrated logistics, there are two levels or two approaches to integration. The first is the integration of logistics functions at the enterprise level or in-house integrated logistics. The second is integration across the entire supply chain or intercompany integrated logistics. Their commonality is determined by cross-functional integration.
Departure from the idea of integrated logistics at the level of a particular enterprise leads to the following negative consequences:
* the enterprise has different, often conflicting goals;
* there is duplication of effort and a decrease in productivity;
* communication deteriorates and the flow of information between individual structural divisions of the enterprise is impeded, which, in turn, hinders coordination between them and leads to lower
efficiency, higher costs and ultimately worse customer service;
* the degree of uncertainty in the functioning of supply chains increases and the duration of delays increases;
* unnecessary stocks of buffer, insurance purposes appear between individual elements, such as, for example, stocks of work in progress;
* important information, such as total logistics costs, becomes unavailable;
* logistics as a whole receives a lower status in the enterprise.
Obviously, the main way to avoid these consequences is to consider logistics not as a set of functional activities, but as a single integrated function. Intra-company integrated logistics is the provision at the enterprise level of the interconnection of supply logistics, intra-production and distribution logistics, which are carried out in the form of a single end-to-end function that implements the functional cycle of logistics.
In practice, it is quite difficult to integrate all logistics within an enterprise. In the intra-company supply chain, there are many different activities, all kinds of operations, using different systems and widely dispersed geographically. The solution may be a gradual integration that builds up over time. For example, one department may gradually take over all aspects of placing orders and receiving raw materials and products. Another department is to take care of all issues related to the delivery of finished products to customers. Some enterprises choose to stop the integration process when they reach this level, and therefore they work by performing two functions:
* material management (materials management) - a site docked with production and responsible for the flow of incoming raw materials and the movement of materials from one operation to another. The controlled movement of the material flow in the integrated system "supply - production" is determined by the concept of "material and technical support of production";
* physical distribution (physical distribution) - a site docked with marketing and responsible for the outgoing flow of finished products.
Despite the existing signs of integration with production, and they are characteristic not only of physical distribution, but also of material management, in general, this approach retains the separation of the supply and marketing functions, which can be overcome in only one way - by combining two functions into one responsible for all movements. materials at the enterprise level.
Despite the obvious benefits of intra-company integrated logistics, when trying to implement this approach, as a rule, there are some difficulties. They stem from the fact that managers in the field of logistics and other related areas, such as marketing, must solve a rather difficult task - to overcome the "parochial" thinking that is characteristic of relatively isolated functional divisions of enterprises. They must learn new ways of working and establish new relationships with each other, creating a culture based on team approach and cooperation, rather than achieving their own goals and conflicts with each other. Top managers in this situation should play the role of cross-functional coordinators.
Internal integration should be facilitated by the development of the practice of accounting and analysis of general logistics costs. In the traditional approach, each of the cost elements was considered separately from the others, and therefore it was believed that a reduction in costs for one of the accounting items should automatically lead to a decrease in total costs. But in the 60s. of the last century, enterprises began to systematically approach logistics and analyze the interdependencies between certain types activities. It became clear that reducing costs in one of the logistics processes sometimes leads to an increase in costs in another, in the same way, overall logistics costs can be reduced, while costs can increase in individual processes. It is known, for example, that air transport is significantly more expensive than rail transport, but faster delivery eliminates the need for inventory and warehouse maintenance, resulting in greater savings.
An important advantage of integration is access to information and common management systems. To do this, managers need to have a well-functioning technology for collecting, storing, analyzing, distributing and presenting information for a variety of purposes: from operational to strategic. Many large enterprises find a solution to this problem in the creation of corporate networks such as intranets, although recently the Internet has been increasingly used for the effective transmission of logistics information. Information must be fed into the control system, which assesses the current circumstances, makes the necessary decisions and receives the appropriate results. For example, an information system can show, for example, that stocks are running out slowly, and a control system can use this information to place orders with suppliers in a timely manner.
Practice has confirmed that if each enterprise closes only on the performance of its own operations, then inconsistencies arise in external interactions, including in the form of a mismatch in logistics capacities, which hinder the progress of material flow and increase costs. Cross-company integrated logistics help eliminate bottlenecks and improve the entire supply chain.
Intercompany integrated logistics is understood as providing a supply chain-wide interconnection of all types of logistics activities between participants that are performed in a coordinated manner in the form of a single end-to-end function until the final need is met.
Intercompany integrated logistics embodies two essential rules:
* for maximum satisfaction of the end consumer, enterprises operating within the same supply chain should cooperate;
* enterprises in the same supply chain should not compete with each other, but with enterprises operating in other supply chains.
The main advantages of intercompany integrated logistics are manifested in the following:
* the ability to exchange information and resources between enterprises;
* lower costs due to balance of operations, lower inventories, fewer forwardings, economies of scale, elimination of activities that waste time or do not add value;
* improved performance through more accurate forecasts, better planning, more productive use of resources, better prioritization;
* improvement of the material flow, as the integration allows you to move it faster and more reliably;
* better customer service associated with reduced lead times, faster delivery, and better tailored to individual customer needs;
* higher flexibility, allowing enterprises to respond faster to changing conditions;
* the possibility of achieving compatibility in the use of standardized procedures, which eliminates duplication of efforts, information transmitted and operations performed during planning;
* the stability of product quality indicators and a smaller number of its inspections as a result of the implementation of integrated quality management programs.
The benefits of inter-company integrated logistics seem obvious, however, as in the case of the development of intra-company integrated logistics, enterprises face a number of difficulties, and relatively large ones. Thus, many of them have a distrust of others in the supply chain and therefore share information with caution. But even with a sufficient level of trust, problems can arise due to differences in development priorities, the use of incompatible information systems, different levels of staff training, a special approach to security issues, etc.
The most difficult problem that arises in the organization of intercompany integrated logistics is to overcome the traditional view of other enterprises as competitors. When a business pays money to its suppliers, managers assume that they can only win at the expense of the other party. In other words, if a company does good deal, in their opinion, this automatically means that the supplier loses something; and vice versa, if the supplier makes a good profit, this is a clear sign that the enterprise is paying too much. Building relationships on the principles of categorical “either-or” does not have long-term prospects for business development. For example, if vendors set strict conditions and do not receive guarantees of repeat business, then they do not see the need for cooperation and try to make as much profit as possible in the course of making a one-time sale. In turn, customers do not feel loyalty to such suppliers and try to find the best option transactions by constantly reminding suppliers of their competitors. Under such circumstances, each side pursues its own autonomous line of conduct, is guided only by its own interests, and solves only its own tasks. As a result, changes in the terms of the transaction sometimes occur promptly and unilaterally, while the other party receives a corresponding notification at the last moment. There is uncertainty about the number of orders and their volumes, suppliers and customers are constantly changing, the types of products and conditions for working with them are changing, the time between orders becomes unstable, there are no guarantees of repeat orders, the costs for the same orders can vary significantly.
It is possible to avoid such problems if the management of enterprises realizes that it makes sense in their own long-term interests to replace conflict relations with agreements. This requires a massive transformation in business culture based on the understanding that intercompany integrated logistics brings benefits to all participants in the supply chain.
There are several main ways of cooperation between enterprises for the organization of intercompany integrated logistics. The simplest of these is the management joint business. In this regard, the experience of Japanese firms that create the so-called "keiretsu" (keiretsu) - groups of enterprises working together, but without formal partnership, is of interest.
Today, "keiretsu" are the largest financial, industrial and commercial conglomerates that are of decisive importance for the Japanese economy. Their formation proceeded along the lines of the concentration of commercial and industrial groups (“sogo shisha”) around the banks of Fue, Daiichi, Sanwa and the Bank of Tokyo by implementing a strategy of consolidation within the groups and expanding mutual participation in capital while increasing the volume of transactions between group firms. Analysts argue that “the concentration of production, capital and modern technology in functionally integrated keiretsu conglomerates helps reduce costs by increasing labor productivity and extracting economies of scale; there is intense competition between groups (“excessive competition”) in all areas, which stimulates the desire to penetrate new markets.”
Informal agreements provide the parties with certain advantages due to their flexibility and lack of obligation to take any action. However, this also leads to a disadvantage, which consists in the fact that each of the parties can terminate cooperation without warning the other party, and at a time that suits only it to the greatest extent. That is why many enterprises prefer to enter into more formal agreements with written contracts that establish the scope of obligations of each of the parties. Such formal agreements have the advantage that they fix the basic parameters of cooperation, and therefore each party knows with certainty what it must do. At the same time, there are also disadvantages - the loss of flexibility and the need to act in more stringent conditions. The most common types of formal agreements are: alliances, joint ventures etc. In agreements providing for cross ownership of shares, intercompany integrated logistics is provided by financial integration, which creates prerequisites for its convergence with intracompany integrated logistics. A complete transformation occurs in cases of mergers and acquisitions.
The basis of cooperation in the implementation managerial functions determines the presence of general information. Without active participation in the exchange of information, and not limited to the enterprise, but covering all links in the supply chains, cooperation in these chains will be incomplete or even cease. The exchange of information is a fundamental building block that characterizes strong relationships in supply chains.
Along with the exchange of information, an effective factor of cooperation is the managerial staff, which must work together in an atmosphere of trust, mobilizing common knowledge. An example of active interaction between the parties is the use of the JIT-P concept, which provides for the placement of supplier employees in the customer's offices. This technique creates a higher level of trust between the parties, since everyday personal contacts help to eliminate any hidden inconsistencies and remove artificial privacy barriers. It also helps the supplier and customer to respond more quickly to problems and opportunities.
The best performance of supply chains is achieved when enterprises direct cooperation towards the use of modern technologies and thus contribute to the development of integrated logistics on an innovative basis.
The main purpose of the integrated logistics concept is the end-to-end management of the main and accompanying flows in the integrated business structure: "design - purchase - production - distribution - sales - service". The concept of integrated logistics involves the unification of functional areas and their participants within a single logistics system in order to optimize it. In integrated logistics, the concepts and technologies of TQM, JIT, LP, VMI, SCM, TBL, VAD, etc., ERP, CSRP systems are used.
TQM (total quality management) - total quality management is a concept that continuously develops over time, aimed at creating competitive quality in the absence of limits to its improvement. TQM combines the technical side of quality, provided by quality standards, and a quality management philosophy based on the broad participation of all company personnel in all aspects of this process, as well as integration with all logistics partners and, above all, with consumers.
JIT (just-in-time) the concept (technology) of building a logistics system or organizing a logistics process in a separate functional area, which makes it possible to ensure the supply of material resources, work in progress, finished products in the right quantity, at the right place and exactly on time.
The JIT concept was used as early as the 1920s. at the factories of Henry Ford, but did not become widespread until the 1960s and 1970s, when it was successfully implemented in a number of Japanese enterprises.
Just-in-time technology makes it possible to reduce production time, reduce consumer stocks and, accordingly, reduce production and storage areas, improve product quality, use equipment efficiently and, at the same time, reduce the number of non-production operations.
Comparison of the concept of "just in time" and the traditional form of organization of logistics processes is carried out according to different criteria. In table. 4.3 summarizes a comparison of the traditional management approach and the JIT concept in terms of the most significant parameters.
Table 4.3. Comparison of traditional management approach and just-in-time concept
|
Compare parameter |
Traditional approach |
JIT Concept |
|
Quality and costs |
"Acceptable quality" at the lowest cost |
The highest quality, implying the complete absence of defects |
|
Large inventories due to bulk discounts, economies of scale, safety stocks |
Low stock levels with a reliable continuous flow of supply; the stock covers only the current demand; safety stocks are almost non-existent |
|
|
Duration of logistics cycles |
Long cycles, no need to shorten cycles |
Short cycle times, reduced uncertainty, high responsiveness of logistics decisions |
|
Flexibility |
Long lead times, minimal flexibility |
Short lead times, high customer service oriented flexibility |
|
Transportation |
Lowest cost while maintaining an acceptable level of service |
Absolute reliability of all levels of service; striving to provide a full range of services |
|
Relationship with supplier/carrier |
A significant number of suppliers; the desire to avoid dependence on one source; negotiations are carried out in an "antagonistic" form; supporting competition between suppliers; the presence of hidden information |
Partnership, long-term, open relationships; the number of suppliers is small; free exchange of information, joint problem solving |
|
General Approach |
Focus on cost reduction |
Customer service orientation |
The JIT concept allows you to synchronize the work of all participants in the supply chain and is aimed at early identification of the requirements for the shipment of goods on orders, subject to the strictest discipline of contractual relations. To prevent the accumulation of excessive stocks, on the one hand, and to optimize the overall logistics costs, on the other hand, the task of finding a place for consolidating cargo and a supply chain participant who will perform this operation is given priority. Instead of delivering small batches from different suppliers at precisely defined times, orders from different suppliers should be combined into one delivery. To implement JIT technology, it is necessary to create the closest relationships, exchange information and coordinate plans between the consumer and the supplier. This technology also increases the requirements for the quality of supplied materials and components.
The JIT concept has served as an impetus for the development and implementation of such logistics concepts (technologies) as LP and VMI.
LP (lean production) "lean/flat/lean manufacturing". The essence of this concept is to combine the following components: high quality, small production batch sizes, low inventory levels, highly qualified personnel and flexible equipment. Unlike mass production, "slender" production requires less inventory, less time. With a lean approach, there is less waste from scrap and the advantage of mass production - "high volumes - low cost" is retained.
Main idea LP- it is a "struggle" with various types of losses, and above all with excess stocks. Transportation, packaging, space and equipment, time, management are also considered as losses if their use does not lead to the creation of the highest possible value for customers and a reasonable increase in the profit of the enterprise. Thus, overproduction, waiting in queues, transportation, production processes that do not create added value, excess stocks, excess movements, quality-related costs can be attributed to losses.
The principles of Lean Manufacturing are:
- provide consumers with the value they really want;
- determine the value stream for each type of product;
- eliminate waiting between stages and inventory;
- Delivering a value stream is a never ending quest for excellence.
VMI (vendor managed inventory) - a more advanced version of the supplier inventory management system based on new information technologies. Supplier inventory management can be implemented in the following ways:
- the supplier carries out regular deliveries, undertakes to replenish the consumer's stocks and maintain them at the required level specified by the consumer. In essence, this option coincides with the concept of continuous replenishment of stocks;
- the use of a consignment, in which the consumer stores stocks belonging to the supplier in his warehouse space and purchases from the supplier as much as necessary, for example, for the operation of the conveyor during the day;
- the supplier has access to the customer's warehouse database, independently analyzes and decides on the range and size of order lots. This method assumes that instead of placing orders, the consumer (and it can be not only a trading, but also a manufacturing enterprise) exchanges information about demand, sales, product promotion with the supplier;
- the representative of the supplier is constantly present on the territory of the customer, this representative at the right time places the orders of the consumer at his enterprise. This method of supplier inventory management is sometimes referred to as JIT II.
Supplier inventory management has advantages and disadvantages. The positive side of this concept (technology) is an improvement in the level of service, a decrease in the uncertainty of demand, a reduction in delivery times, the cost of maintaining and replenishing stocks, an increase in inventory turnover, and the establishment of long-term partnerships. These advantages of the concept make it possible to consider supplier inventory management beneficial for both parties. However, the concept has a number of weaknesses.
So, as a disadvantage of this concept (technology) for the supplier, one can name an increase in costs and a decrease in capital turnover. The consumer gets the opportunity to reduce costs, but at the same time feels a strong dependence on the supplier, on the quality of the processes performed by him. In addition, the consumer takes a significant risk by transmitting confidential information necessary to form a restocking plan.
SCM (supply chain management) - supply chain management is a term that appeared in the late 1980s, although there are still discussions about what it means, SCM is often identified with the concept of logistics. So, M. Christopher believes that supply chain management serves to establish links and coordination between suppliers, customers and the organization itself. SCM stands for "upstream and downstream supplier and customer relationship management aimed at achieving higher customer value at lower cost throughout the entire supply chain" .
D. Stock and D. Lambert note that supply chain management is "the integration of key business processes starting from the end user and covering all suppliers of goods, services and information that add value to consumers and other stakeholders" .
TBL (time-based logistics) - a logistics technology that optimizes all phases of the product life cycle in time, from research and development to after-sales service.
VAD (value-added logistics) - a concept based on the understanding that each logistics operation adds value to a product or service. In accordance with this concept, the logistics process is presented as a sequence of actions to create value-added benefits in the most efficient way, from the point of view of a particular consumer.
ERP (enterprise resource planning) - an integrated resource planning system that integrates all the activities of an enterprise and includes modules for forecasting demand, managing projects, costs, personnel, financial activities, investments, etc.
ERP concept proposed by the firm Gartner Group. The main task of an ERP system is to optimize in terms of time and resources such business processes as supply chain management (SCM); planning and scheduling (APS); sales automation (SFA); final resource planning (FRP); e-commerce (EU), etc.
CSRP (customer synchronized resource planning) - resource planning system synchronized with the consumer. This system is based on the functionality CSRP -systems, allows you to reorient planning from production to the end consumer, takes into account not only the production and material resources of the enterprise, but also the resources consumed in marketing, commercial, after-sales work with the consumer.
On fig. 4.1 presents the main logistics concepts (technologies) covering different areas of the enterprise's logistics, as well as the relationship of the enterprise with suppliers and consumers. The arrows show the places where certain concepts can be applied in the logistics system.
Rice. 4.1.
SC M supply chain management-; TOM total quality management; MRP I material requirements planning system; MRP II - production resource planning system; DRP - a system for planning shipments and stocks of finished products in distribution channels; ERP - integrated resource planning system; CSRP resource planning system synchronized with the consumer; VM1 supplier inventory management; CR - continuous replenishment of stocks; QR - quick response; LP - lean manufacturing; JIT - just in time
- Corporate logistics. 300 answers to questions from professionals / ed. and scientific ed. prof. V. I. Sergeev. M. : INFRL-M, 2004. S. 77.
- Christopher M. Logistics and penalty management of deliveries: Per. from English. St. Petersburg: Piter, 2004. S. 29.
- Stock J., Lambert D. Strategic logistics management. S. 51.
Logistics integration
Logistics is defined as one of the competencies of a business enterprise that contributes to the universal process of creating use value. When logistics operations are highly integrated and form a key area of expertise, they serve as a source of strategic advantage. The belief that the integration of the whole system provides much more outstanding results than the separate management of individual functions is the fundamental paradigm of logistics,
In the following, you will learn about the key concepts behind logistics integration, including the planning of this process. First, an overview of the basic operations required to meet the needs of logistics is given. The feasibility of the logistics mission depends on the successful implementation and coordination of specific functions related to physical distribution, production support and supply. Then the scheme of integration of logistics operations and the role that belongs to the management of stocks and information flows are analyzed. It then provides an overview of the operational goals that companies achieve through logistics integration. Next, the definition of the structure of the functional cycle (order execution cycle) is introduced as the main factor for successful integration. It is the sequence of functional cycles that connects the logistics system of a business enterprise with its consumers and suppliers into a single supply chain. It is very important to understand that the organization of the logistics system must be built taking into account the structure and dynamics of the functional cycle, no matter how much effort it requires. The final topic of the chapter is the day-to-day fluctuations of the functional cycle that arise in current activities. Such fluctuations (variability) serve as the main source of uncertainty, the consequences of which are designed to eliminate the proper organization of logistics and its management.
Here it is worth making a few remarks about the formal schemes for organizing human resources in relation to logistics. Managers are keenly interested in the organizational structure, since it directly reflects the distribution of responsibilities, job positions, the level of remuneration and the scope of authority of employees. Many managers believe that the concentration of responsibility for all the operations and functions that make up logistics in one unit automatically leads to effective integration. This view is erroneous, because it implies that the formal structure is more important than management. The organizational structure alone does not guarantee the integration of logistics. Some of the most highly integrated activities lack formal accountability to a single leader. At the same time, some companies with a highly formalized system of subordination and accountability in logistics have also achieved excellent results. At this stage of our study, any generalizations about what the ideal organization of logistics should be like are clearly premature. The organizational structures of logistics vary greatly depending on the specific purpose, type of business and available human resources. The main task is to form a "logistics mindset" so that all managers in the company learn to reason and act in terms of integrated effort and economy. We will postpone more general conclusions about the organization of logistics systems until Chapter 20, when we have already firmly mastered the basics of integration.
How logistics works
Competence in logistics is achieved through the coordination of such activities as (1) the formation of a logistics infrastructure; (2) information exchange; (3) transportation; (4) stock management; (5) warehousing, handling and packaging. Only brought together in a single system, these functional areas are able to meet the needs of logistics. Below we will give a preliminary description of each of the elements of logistics and discuss how the relationship between them develops in a typical business enterprise.
Since we are considering the functioning of logistics from the standpoint of an individual enterprise, it makes sense to make two remarks. First, to complete the logistics process as a whole, most firms need the assistance of many other business enterprises. Such interaction unites firms around common goals, policies and programs. For the overall supply chain, this means increased efficiency by eliminating duplication of operations and waste of time and resources. However, interaction between organizations requires joint planning and management of business relationships. This process of establishing and managing supply chain relationships is discussed in detail in Chapters 4 and 20.
Secondly, in the service sector there are companies that perform logistics operations on behalf of and in the interests of their customers; these are, in particular, transport companies and warehousing enterprises. Such specialized companies complement, and sometimes even replace those employees of client firms who are directly involved in the relevant functions. At the same time, when "external" specialists are used in the client's logistics system, the client must exercise proper management and management of them. Therefore, although the performance of specialized functions can be outsourced, the responsibility for the successful implementation of the necessary work still remains with the management personnel of the firm.
Formation of logistics infrastructure
Classical economics traditionally did not attach due importance to the placement of infrastructure units and the design of the infrastructure network as a whole. In early economic studies of supply and demand, the difference between the cost of locating infrastructure and transportation costs was either taken to be zero or considered the same for all competitors. Meanwhile, the number, size and geographical location of the capacities used in logistics directly affect the level and costs of serving consumers. Designing an infrastructure network is the primary responsibility of logistics managers, because this network ensures the delivery of products and materials to consumers. Typical logistics infrastructure facilities include manufacturing enterprises, warehouses, loading and unloading terminals and retail stores. Determining the required number of objects of each type, their geographical location and economic functions is an essential element of all activities for the formation (design) of the logistics infrastructure. In special cases, the conduct of operations in such enterprises may be outsourced to third-party specialists providing the relevant services. Regardless of who actually does the work, all infra structural units should be considered in the management process as integrated elements of the company's logistics system.
Starting the formation of a logistics infrastructure, it is necessary to determine the number and location of each type of units (objects) needed to perform logistics functions. In addition, you need to establish how much and what kind of inventory to hold at each site and where to place customer purchase orders. The infrastructure forms the framework on which the logistics system and its operation are built. Because of this, the infrastructure network includes information and transport objects. Individual functions such as customer order processing, inventory management or cargo handling are carried out within the logistics infrastructure.
When forming the logistics infrastructure network, one should consider different options for choosing the geographical location of objects. The fact that geographic markets differ in many ways is easy to illustrate. The 50 largest markets by population in the US "metropolis" account for over 55% of sales of all products. Therefore, a business enterprise operating on a national scale must have the appropriate logistical capacity to serve these important markets. The geographic distribution of sources of basic materials and production components is also very uneven. And if the company is involved in international logistics operations, the work of organizing and locating infrastructure becomes even more difficult. A sub-section on how the logistics infrastructure is built at Laura Ashley demonstrates these complexities.
The importance of constantly modifying the logistics infrastructure to accommodate changes in supply and demand cannot be overemphasized. In a dynamic competitive environment, product ranges, delivery terms and production needs are constantly changing. Of course, it is unthinkable to change the location of all logistics infrastructure units at the same time, but there are many opportunities for moving and reorganizing individual objects. All objects should be evaluated from time to time to determine if they are well placed. Choosing the best infrastructure network location for a company can be its first step towards gaining competitive advantage. The efficiency of logistics directly depends on the infrastructure. Further, we will touch upon the problem of the placement of infrastructure units more than once and analyze it from different angles in connection with other issues.
Infrastructure reorganization
Laura Ashley, a UK-based firm, produces women's and children's clothing, decorative and upholstery fabrics, wallpaper, bed linen and interior accessories under a single brand. While maintaining a consistently high level of product design and quality, Laura Ashley also suffered from declining profits due to an overly complicated, costly and inefficient logistics system. The firm found that an excessive number of transportation and production facilities leads to a loss of overall managerial control over operations. To restore such control, the company needed a reorganization of the logistics system. The implementation of the new system began with the transfer of all logistics functions, previously performed by the company itself, to a specialized firm, Business Logistics, a division of Federal Express. The mission of Business Logistics was to reshape and improve the operation and management of every part of the commodity and information flows in the Laura Ashley supply chain.
Prior to the reorganization, Laura Ashley had five major warehousing facilities, eight major transportation facilities and ten unrelated management systems. As a result, it took too long to deliver goods to consumers, the company accumulated a huge amount of inventory, but at the same time there were unforeseen supply interruptions too often. For example, a customer who was waiting for an urgent delivery of goods from a warehouse in Germany the next batch will arrive no sooner than in a few months. At the same time, a surplus of this product was stored in a warehouse in Wales. On average, 16% of the entire range of products produced by the company was not available on the shelves of retail stores.
Laura Ashley was aware that the existing layout of its facilities needed to be revised. The company was advised to close all warehouses with the exception of one located in the UK, which had to be refocused from exclusively serving the local market to serving international markets. Having storage facilities in only one location, in Newton, ensured proximity to manufacturing facilities located in the UK. The warehouse in Newton has become the world's "processing center", acting as a kind of logistical "clearing house" for Laura Ashley products. Although the concept of a single distribution center obviously comes with higher transportation costs, Laura Ashley's management believed that the increased efficiency would offset the increased costs.
In the past, unpredictable demand has meant that companies need to hold large inventories to cope with such uncertainty and maintain a consistent level of customer service. Laura Ashley believed that with the location of warehouse facilities in one place, its inventory flow would be more predictable than with the scattered location of many small enterprises. Now individual markets, each with their own level and nature of demand, can be merged into a single market area, which allows for a more even distribution of resources between markets with high and low demand. Transportation costs in this case are compensated by the acceleration of inventory turnover. In fact, the experience of Laura Ashley has shown that the use of a single distribution center leads to a reduction in transportation costs due to the partial elimination of counter deliveries. Direct delivery to a retail store from a UK warehouse takes about the same time as before, but the goods are transported only once, and do not move many times from one enterprise to another and, therefore, do not require re-handling.
But the reorganization at Laura Ashley was not limited to cost cutting. The company has now discovered opportunities for greater service levels and operational flexibility, and its businesses are now able to restock stores wherever they are within 24-4-8 hours. Laura Ashley intends to use advanced management and information systems to monitor and control the evolution of inventory levels at its facilities around the world. The global transportation network of Federal Express ensures timely delivery of goods at any distance. In addition, Laura Ashley plans to enter the mail order business with guaranteed delivery to end consumers anywhere in the world within 48 hours. Its current $10 million mail order business is experiencing rapid and steady growth, but so far the company has held it back by not being able to expand its mailing list. Now the modernized network of logistics infrastructure facilities paves the way for further profitable growth.
Sources: Larry Stevens. Back from the Brink // Inbound Logistics.1992. September, P, 20-23; company information published by Federal Express Business Logistics Europe.
Information
Until recently, the role of information in logistics was not singled out and was not considered separately. This lack of attention was due mainly to the lack of user-friendly technologies for collecting and accumulating information. In addition, managers did not fully realize how powerful a tool for improving the efficiency of logistics can be high-speed and high-precision information exchange tools. But these are all things of the past. Modern technologies are able to satisfy the vast majority of information needs. There are opportunities to receive data in real time, if necessary. And managers have learned to use such information technologies and use them to accept new, non-traditional logistics solutions. However, the benefit that can be derived from technology depends entirely on the quality of the information. Poor quality information can create a lot of unpredictable difficulties in work. Usually informational "marriage" is of two types. First, the reported data sometimes misrepresent real trends and developments. Because logistics is so much about future needs, inaccurate estimates and forecasts can lead to shortages or, conversely, overstocking. In particular, an unjustified position with reserves may develop for the company as a result of overly optimistic forecasts. Secondly, the data obtained during the processing of orders sometimes distorts the real needs of customers. Fulfillment of an unreliable order entails all the costs inherent in logistics, but, as a rule, does not end with the sale of goods. In fact, the costs often even increase by the amount required to return the goods, and if the opportunity to sell the goods is still there, then a second attempt to serve the client again increases the costs. In short, any error in the array necessary information potentially fraught with disruptions in the normal operation of the entire supply chain.
A direct benefit of a fast information flow is that it allows for a smooth workflow. It hardly makes sense for any firm to have incoming orders accumulated at the local sales office for a week, then forwarded to the regional office for sequential processing, after which the orders for shipment would be sent to the distribution warehouse, and the goods for timely delivery transported by air. Receiving orders directly from the customer via EDI allows for even faster delivery, using slower ground transport, and at a lower overall cost. The main thing is to maintain a balance between the elements of the logistics system.
The two areas of logistics that rely most heavily on information are forecasting and order management. Forecasting in logistics serves to determine future needs. The forecast is used as a tool for estimating the amount of inventory needed to meet the expected demands of consumers. But logistics managers do not blindly follow every "letter" of forecasts. One of the main reasons they need information to manage their logistics operations effectively is to compensate for inaccurate forecasts by being able to quickly respond to changing needs. Management systems - "just-in-time", "quick response", "continuous replenishment" - are examples of logistics management models, the emergence of which has become possible thanks to modern information technology. The most important task of logistics managers is to build the economic strategies of their firms (their planning and implementation) on the basis of the desired combination of forecasts and operational control. Order management simply means meeting specific customer needs. Execution of the consumer's order is the main operation in logistics. Logistics serves both external and internal consumers. External customers include all end users (buyers) of a product or service, as well as all of the firm's trading partners who purchase products or services for resale. Internal consumers are structural divisions. firms that need logistical support to carry out their functions. Order management encompasses all activities related to customer satisfaction, from actually taking orders to delivering goods, invoicing, and often receiving payment. A firm is only as good at logistics as it is at managing orders.
The more efficient a firm's logistics system, the more sensitive it is to the accuracy of information. Companies with well-established and operational logistics systems do not hold excess stocks as a protective tool against disruptions in current activities; the volume of so-called buffer (insurance) stocks is minimized here. Incorrect information and delays in processing orders can completely undermine the normal operation of logistics. Information flows give dynamism to the logistics system. Therefore, the quality and timeliness of information are key factors in the effectiveness of logistics. In Chapter 6, we will take a closer look at information technology and the information needs of logistics; in particular, consider the special role of information in forecasting and inventory management.
Transportation
Given the infrastructure network and the information capacity of the logistics system, the geographical distribution of the company's stocks is determined by its transport capabilities. Because of the fundamental importance of transportation and the obvious costs associated with it, this area of activity has always attracted the close attention of managers. In almost all companies - both large and small - there are necessarily managers responsible for transport.
Transportation can be arranged in three main ways. First, you can use a private transport fleet. Secondly, it is possible to contract a specialized transport company (and even more than one) on a contract basis. Thirdly, it is possible to combine different types of vehicles that provide different transport services, which can meet the individual needs of customers. These three modes are commonly referred to as "private, contract and general transportation. In logistics, transportation efficiency is determined by three factors: cost, speed and continuity.
Transportation costs (transportation costs) are the sum of the costs of moving goods between geographically dispersed objects and the costs of managing inventory in transit and maintaining them. The logistics system should be organized in such a way that its total costs in the performance of the transport function remain at a minimum level. At the same time, it should be taken into account that the use of the cheapest means of transportation does not always mean lowest cost for cargo transportation. The speed of transportation is the time required for the full implementation of a particular cargo transportation. The speed and cost of transportation are twofold dependent. First, transport companies that are able to transport goods faster than others usually charge higher rates for their services. Secondly, the faster the transportation, the less time the stocks are in transit and unavailable for use. Thus, when choosing the most suitable and desirable methods of transportation, it is most important to strike a balance between speed and costs.
The continuity of transportation characterizes the discrepancies in the time that a particular cargo transportation takes from time to time. The continuity indicator reflects the dependence of the transport function on many factors. For many years, managers responsible for the operation of transport considered continuity as the most important criterion for the quality of transportation. If a particular shipment took two days one day and six days the next, this undesirable variability can create very serious operational problems for the entire logistics system. With insufficient continuity of transportation, it is necessary to create safety stocks to protect against unpredictable service disruptions. The continuity of transportation has a significant impact on the total amount of inventory that both buyers and sellers have to hold and the risk associated with it. With the advent of new information technologies, allowing to control the entire process of cargo delivery and track each stage of it, logistics managers have become more interested in the speed of transport services while maintaining continuity. Time is a very valuable resource, and we will return to the discussion of this issue more than once. In addition, it is important to understand that the quality of transportation plays a decisive role in those activities that are time sensitive. And this quality is determined by a combination of speed and uninterrupted transportation.
When designing a logistics system, it is necessary to maintain a delicate balance between transportation costs and the quality of transport services. In some circumstances, low-cost and slow transport is sufficient. In other situations, a high speed of transport services is required to achieve economic goals. Selecting and managing an appropriate combination of modes of transport is the first responsibility of logistics.
There are three considerations related to transportation that managers must take into account when building a logistics infrastructure. Firstly, the specific choice of the location of infrastructure facilities dictates a set of transport needs and at the same time limits the possibility of using alternative modes of transportation. Secondly, transportation costs are not limited to the price of freight. Thirdly, all efforts aimed at integrating transport capacities into the logistics system can be completely fruitless if the delivery of goods is carried out unevenly and intermittently. Chapters 10-12 explore the role of transportation in the logistics value chain.
Inventory Management
The company's inventory needs are determined by the logistics infrastructure and the desired level of service. Theoretically, a company can store an inventory of manufactured goods in warehouses dedicated to serving each customer. But few businesses are able to afford such a luxury, because high risk and high overall costs prevent this. Typically, the goal is to provide the desired level of service with the minimum amount of inventory associated with the lowest overall cost. Excess inventories sometimes compensate for the lack of a well-thought-out plan in the formation of a logistics infrastructure, as well as - to some extent - deficiencies in management. However, such excess stocks used as a "crutch" eventually turn out to be higher than required in the overall costs of logistics.
Any logistics strategy is designed to keep the amount of financial assets "bound" in stocks at the lowest possible level. The main goal of inventory management is to achieve the fastest inventory turnover in the process of satisfying customer requests. An intelligent inventory management policy is based on the selective allocation of resources according to five criteria, which include: segmentation of the consumer market (composition of consumers), the required range of products, the integration of cargo transportation, temporary needs, and competition requirements. Below, we briefly review each of the features underlying this selectivity.
Every business enterprise that sells products to a wide range of consumers is faced with the fact that different transactions have different profitability for it. Some consumer groups bring more profit to the firm and also have growth potential, while others do not. The profitability of the consumer depends on the type of products he purchases; sales volume; yen; required services, the provision of which adds value; additional actions necessary to maintain sustainable business relationships. Highly profitable consumer groups form the main market for the company. The inventory management strategy should be targeted at meeting the needs of each of these key customer groups. The secret of effective segmentation of logistics operations lies in the correct prioritization of inventory management, the meaning of which is the full provision of key consumers.
The experience of most firms shows that the types of products they produce also vary in terms of sales and profitability. In the absence of any contributory factors, a company may find that less than 20% of all products it sells account for more than 80% of total profits. Since this "80/20 rule", or the Pareto rule, is universal, managers can try to avoid unnecessary costs by pursuing an inventory management strategy based on product classification and prioritization. Thus, the key to eliminating unnecessary costs can be a realistic assessment of what low-margin or low-volume products should still be brought to market. Of course, any company would like to ensure the availability and uninterrupted supply of only their most profitable products. However, for complete satisfaction needs of key customers, the supplier sometimes has to supply them with low-margin products in significant volumes. The trap to be wary of in this case is the high level of service in the sale of such low-margin products if they are purchased by fickle or non-key customers. Thus, when developing a selective inventory management policy, the profitability of certain product categories should be taken into account. Many firms prefer to store low-margin or poorly sold products in central distribution warehouses. When receiving an order for such goods, a company can correlate the actual level of service it is willing to provide upon delivery with the relative importance to it of a particular customer. Key customers can be served by fast and reliable air transport, while other less important customers can be served by cheaper ground transportation.
The choice of the range of products that should be stored in a particular warehouse directly affects the conditions of transportation. Most transport tariffs are set based on the volume and size of a specific cargo intended for transportation. Therefore, it would probably be a smart strategy to keep enough goods in stock to be able to pick up large consignments addressed to a specific customer or geographic area. The savings in transportation costs associated with such a strategy can significantly offset the increase in inventory costs.
The need for fast delivery of goods in order to fully meet the needs of consumers is an important driving force in logistics. The real-time sourcing models generated by this need are designed to reduce overall inventory by creating conditions that allow timely and accurate response to emerging production or retail needs. If products and materials are delivered quickly, then it is not necessary to keep stocks at manufacturing plants. Similarly, fast restocking in retail stores requires less insurance or buffer stock at the end of the supply chain. The practice of accumulating and storing such insurance stocks (in case of unforeseen supply failures) is being replaced by the delivery of a precisely defined amount of goods at the right time. Since such time models reduce consumer inventories to an absolute minimum, the resulting savings should offset the costs associated with the sensitivity of the logistics process to the factor of time. For example, the use of temporary models, as a rule, leads to a reduction in the volume of a one-time cargo shipment, which increases the number and frequency of necessary transportation, as well as the cost of transportation. This, in turn, may lead to an increase in transport costs. In order for logistics models to work fruitfully and efficiently, there must be some compromise between the desired level of customer service and the minimum overall cost.
Finally, it must be remembered that inventory management strategies are not developed in a vacuum, but in a competitive environment. Usually partners prefer to deal with those firms that can promise timely and uninterrupted deliveries and are able to fulfill their promise. This sometimes requires the placement and storage in a particular warehouse of such a volume of stocks that would provide a given level of service even when compliance with this condition increases the overall costs. A sound inventory management policy is critical to gaining a competitive advantage in customer service, or at least partially weakening competitors in that area. Stocks of materials and components in logistics are created for other reasons than stocks of finished products. The volume of stocks of each type and the need for them should be assessed against the total costs. It should be well understood that in an integrated logistics system, all decisions regarding the placement of an infrastructure network, transportation and inventory management are closely interconnected, and it is this relationship that forms the basis of integration. The characteristics of a robust and sound inventory management strategy are discussed in detail in Chapters 8 and 9.
Warehousing, cargo handling and packaging
Four functional areas of logistics - infrastructure organization, information exchange, transportation and inventory management - can be combined into a single operating system by many different ways. Each of them has the potential to achieve some level of customer service at a corresponding total cost. Essentially, these four functions combined form an integrated logistics solution system. Other functional areas - warehousing, cargo handling and packaging - are also integrated parts of the system, but they do not occupy such an independent position as the first four. Warehousing, cargo handling and packaging are constituent elements of other areas of logistics. Let's say inventory, intended for sale, during the logistics process must from time to time enter the warehouse and be stored there. Transport operations necessarily need cargo handling for efficient loading and unloading. Finally, individual products are much more manageable when packaged together in shipping containers or other containers.
When logistics requires warehousing, a company has a choice: use the services of specialized companies or rely on its own capabilities. This decision is not limited to a simple procedure of finding a place to store inventory, because many of the actions that are important for logistics in general are carried out just when the goods are in stock. Examples of such actions are cargo sorting, paperwork, order processing, picking (consolidation) of consignments for shipment to one destination, and in some cases even modification and assembly of products.
During the storage of products in the warehouse, cargo handling plays an important role. Goods must be received, placed in the proper place, sorted and assembled as required by the orders of consumers. The wages of key workers and the capital investment in material handling equipment constitute a large element of the overall cost of logistics. Incorrect handling can lead to significant damage to goods. It is quite clear that the less often the cargo is processed, the less likely it is to cause any damage to it and the higher the efficiency of the warehouse economy as a whole. There are many different mechanisms and automatic devices that facilitate cargo handling. In essence, any warehouse with its cargo handling capacity is a miniature logistics system.
To facilitate and increase the productivity of cargo handling, products originally packed in cans, bottles and boxes are assembled into larger cargo units. The primary such unit is the standard packaging module, which has two important properties. Firstly, it protects products from possible damage during loading, transportation, storage and other logistics operations. Secondly, the standard module facilitates cargo handling, since it is, of course, easier to handle one large package than a bunch of small disparate items. For greater productivity in cargo handling and transportation, standard modules are usually combined into even larger cargo units, which include packages formed on standard pallets (pallets) and containers of various types. If warehousing, cargo handling and packaging are effectively integrated into the company's logistics system, they significantly speed up and facilitate the movement of inventory flows. In truth, several firms have even managed to establish a direct supply of a wide range of goods from manufacturing plants in Retail Stores without intermediate processing. Chapters 13-15 are devoted to a more detailed discussion of warehousing, handling and packaging.
Conclusion
From the point of view of the business as a whole, logistics exists to ensure that inventory arrives at the right time to the right place and with the right benefit at the lowest total cost. Inventory by itself is of little value until it is placed where and when it is needed to ensure ownership changes hands or add value. If a company fails to consistently meet this condition of place and time, it will have nothing to sell. In order for logistics to bring maximum strategic benefits, all its functional links must work on the basis of integration. Successes in each of these links only make sense if they contribute to an increase in the efficiency of the integrated logistics system as a whole. In fact, the achievement of the strategic goals of any business enterprise depends on the integration of logistics functions.
Integrated logistics
The conceptual framework for logistics integration is shown in Figure 2.1. Logistics is seen as an area of expertise that links a company to its customers and suppliers. Information flows about (and from) customers into the company in the form of sales data, forecasts, and orders. This information is translated into specific production and purchasing plans. Incoming material resources initiate a flow of stocks, gradually gaining added value, the movement of which ends with the transfer of ownership of finished products to consumers. Thus, in this single process, two components are distinguished: the flow of stocks and the flow of information. A detailed study of each flow should be preceded by two remarks.
First, in order to make sure that all the functions and operations of logistics need to be integrated, it is useful to consider the "internal" activities (indicated in the shaded area of Fig. 2.1) separately. But such integration, although a necessary prerequisite for successful operation, is not sufficient in itself to achieve the goals of a business enterprise. In today's competitive environment, a firm can only be truly effective if it succeeds in getting its customers and suppliers involved in the integration. This external integration, referred to as supply chain management, is the topic of Chapter 4.
Second, the basic process shown in Figure 2.1 is not limited to businesses, nor is it exclusive to manufacturing companies. The need for integration is inherent in all types of business enterprises (in all industries), as well as in public sector organizations. For example, retailers and wholesalers typically play the role of link between the physical distribution and purchasing stages beyond traditional manufacturing. And in any case, retailers and wholesalers must complete the logistics process of creating added value. The same is true for government organizations engaged in the production or provision of services.
Rice. 2.1. Logistics integration
stock flow
Operational logistics management regulates the movement and storage of stocks of materials and finished products. Logistics operations begin with the receipt of material resources or production components from the supplier and end with the delivery of the manufactured product to the consumer.
Once materials and components are purchased, value is added to the logistics process as inventory moves to the right time and place. When done right, materials take on additional value at each step of their transformation into a finished product. In other words, the value of an individual part increases when the latter becomes part of the machine. And in the same way the machine acquires great cost upon delivery to the buyer.
The task of production logistics is to move the stock of semi-finished products (work in progress) to where it is needed for final assembly and processing. The price of each component and its movement form the basis of the value-added process. But this process is completed and the value is finally formed only if the finished product becomes the property of the consumer at a certain time in a certain place.
For a large manufacturer, logistics operations sometimes consist of thousands of such movements, which in the end come down to a single result: the delivery of a product to one user, retailer, wholesaler, dealer or other consumer. At a large retailer, logistics covers a wide range of activities from purchasing goods for resale to finding and attracting new customers and delivering purchases to customers. In a typical hospital, logistics starts with supply necessary resources, and ends with the full provision of surgical procedures and postoperative treatment of patients. The main thing is that in any business, regardless of size and type, logistics plays an important role and requires the unremitting attention of managers. This simple idea becomes even clearer if we break logistics operations into three components: physical distribution, logistics of production and supply, which are presented in Figure 2.1 as operational units of the firm's logistics system.
physical distribution. Physical distribution deals with the promotion of finished products to consumers. In terms of physical distribution, the consumer is the end point of the marketing channel. The most important task of each participant in such a channel is to ensure the availability of the product. Even the manufacturer's sales agents, who usually do not create their own reserves, depend on the availability of stocks to perform their functions. If the right range of products is not delivered on time to the right place, then all marketing efforts are wasted. It is physical distribution that transforms the time and place of customer service into an integral element of marketing.
So, physical distribution links marketing channels to consumers. A variety of physical distribution systems are used to support the myriad marketing systems operating in developed markets. But they all have one common property: unite manufacturers, wholesalers and retailers into a single marketing channel ensuring product availability. It is an integral part of all marketing activities.
Logistics support of production. Logistics support of production is the management of inventories of work in progress (semi-finished products) as you move from stage to stage of the production process. The main task of logistics in production is participation in scheduling (scheduling) of production and organizing the timely receipt of materials, components and semi-finished products. Therefore, production assurance is concerned not so much with how the production process is conducted, but with what, when and where is produced. Providing production as a function of logistics has one significant difference from physical distribution. Physical distribution serves to meet the needs and demands of consumers and, therefore, is forced to adapt to the uncertainty of market demand (from both end consumers and industries). The material and technical support of production satisfies its own "managed" needs of the manufacturing enterprise. Uncertainty, generated by random orders of consumers and fluctuations in demand, is not characteristic of most manufacturing operations. In general business planning, a division is made between the logistics of production and the logistics of "output" (physical distribution) and "input" (supply). This opens up opportunities for specialization and efficiency gains.
Supply. Procurement includes purchasing and arranging external deliveries of materials, manufacturing components and/or finished products from a supplier to manufacturing or assembly plants, warehouses or retail stores. Depending on the situation, the acquisition of resources is denoted by different names. AT production activities this acquisition process is commonly referred to as procurement. In the public sector, the term procurement is traditionally used. AT retail and warehousing is the most widely used term of purchase. Often the same process is defined as "inbound" or "internal" logistics. Although there are indeed some differences in the conditions for the acquisition of resources, here we will use the concept of supply in relation to all types of purchases. The term "mother" here refers to stocks coming to the enterprise from the outside, regardless of the degree of their readiness for resale. The term products is applied to stocks that are ready and available for purchase by consumers. In other words, materials contribute to the creation of added value in the production process, while products are intended and fit for consumption. The fundamental difference is that products are the result of adding value to materials during production, sorting or assembly.
Procurement is responsible for having the right mix of materials in the right place at the right time. While physical distribution serves to supply products to the outside world, purchasing ensures that materials are brought in from outside, sorted and assembled. In most consumer goods situations - say, on delivery food products to the retail network - the physical distribution of the manufacturer and the supply of the retailer are one and the same process. But despite the similarity or even complete identity of transport needs, physical distribution and supply differ significantly in terms of the degree of managerial control and the risk of possible failure.
In a typical company, these three areas of logistics overlap. Managing them as integrated components of a single value-added process allows you to multiply the benefits generated by the unique properties of each of them, and at the same time facilitates logistics activities as a whole. The main task of integrated logistics is to coordinate all movements of stocks, giving them additional value. The combination of these three areas gives the company the opportunity to establish a unified management of the flow of materials, semi-finished products, moving between its enterprises, sources of supply and consumers. In this sense, logistics serves as a tool for the strategic management of the total inventory flow. Table 2.1 defines more specifically the day-to-day activities that make up the components of logistics.
Table 2.1. The content of physical distribution, production and supply as components of logistics
Physical distribution
Consumer service activities. Requires receiving and processing orders; placement, storage and processing of stocks; transportation to external consumers through distribution channels. Includes coordination with marketing plans regarding pricing, sales promotion, service levels, delivery terms, return procedures, life cycle support. The main objective is to help generate revenue from sales by providing the level of customer service envisaged by the strategy with minimal overall costs.
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Logistics support of production
Activities related to the planning and support of the production process. Requires the preparation of calendar plans (schedules) for the release of products; storage of work in progress; processing, transportation and timely replenishment of stocks of materials and components. It includes the storage of inventories at production sites, as well as the most flexible coordination between production and physical distribution in geographical and temporal terms.
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Supply
Activities related to the acquisition of products and materials from external suppliers. Requires resource planning; choice of sources of supply; negotiations on the terms of supply; placing orders; transportation, receipt, verification of compliance, storage, processing and quality control of resources. Includes coordination with suppliers on schedules, deadlines and continuity of supply; risk hedging; search for new sources or development of new supply chains. The main goal is to support production or trade through timely purchases at the lowest total cost.
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Information flow
Information reveals the specific needs of specific objects of the logistics system. In addition, the information brings together the three areas of logistics. Actually, the identification of needs is necessary first of all for planning and integrating logistics operations. Each area of logistics has its own requirements for the size of orders, the availability of stocks, as well as the speed of their movement. The main task of information exchange is to reconcile these differences. It should be emphasized that the flow of information moves in parallel with practical activities in the areas of physical distribution, production support and supply. While the real logistics work is done in these areas, the information facilitates the coordination, planning and control of day-to-day operations. Without accurate information, most efforts and logistics are likely to remain fruitless.
The entire array of logistics information is formed by two main streams: coordination and operational. The relationship between them is shown in Figure 2.2. We will postpone a thorough study of information flows until Chapter 6, where we will consider in detail the structure of logistics information. Now our task is to give a general preliminary idea of the information necessary for the effective integration of the logistics system.
Rice. 2.2. Information needs of logistics
Information flow planning and coordination. Coordination is the core of the entire system of information exchange between participants in the value chain. Coordination is embodied in plans defining; (1) strategic goals; (2) limitations due to available capacity; (3) logistics needs; (4) placement of stocks; (5) production needs; (6) supply needs; (7) forecasts for the future.
The key drivers of a company's value are its strategic goals based on marketing and financial goals. Strategic objectives describe the nature and location of the consumers (markets) to which the goods and services produced must correspond. Financially, strategic plans detail what resources are required to build inventories, receivables, facilities, equipment, and facilities.
Capacity constraints coordinate internal and external production needs. Non-manufacturing participants in the value chain do not need this form of capacity planning. With these strategic goals, capacity constraints define the limits and bottlenecks of production possibilities, as well as the corresponding requirements for external sources. Take Kellogg as an example: it owns its own brand and sells its product (Crackling Oat Bran), but all production is done by a third party on a contract basis. Based on the identified capacity constraints, a plan is drawn up that gives time parameters to strategic goals, defines in detail the capacity utilization, the required amount of financial resources and labor requirements.
Logistics requirements are the work that is required from distribution companies, equipment and labor to meet the capacity utilization plan. On the basis of data on incoming resources, gleaned from forecasts, sales schedules, customer orders, reports on the status of stocks, logistics needs are established, which, in turn, determine the parameters of the value chain.
Stock placement reflects the relationship between planning/coordination and operational activities and tells when, in what composition and where stocks should go. The main task of the placement is to maintain a balance between the timing and stock picking to ensure the efficiency of their movement along the value chain. The unique property of stocks lies in the fact that they are an integral part of both the coordination and operational flows that make up the information array of logistics. In terms of information, the placement of stocks specifically determines what, where and when should take place within a single logistics process. Inventory management as an element of operations is a continuous daily work. For this reason, the placement and management of stocks in Figure 2.2 is given an intermediate place between the coordination and operational information flows.
Production plans are based on the needs of logistics and are usually reflected in the placement of stocks. For scheduling production and planning of production requirements, first of all, information is needed on the required timing of the renewal of stocks. Production needs predetermine daily production schedules, on the basis of which a specific need for materials and components is established.
Supply requirements are embodied in a schedule of external supplies of materials and components necessary to ensure production. In wholesale and retail trade, sourcing maintains a continuous supply of products for sale. In the field of production, purchases are designed to ensure the flow of materials and components from suppliers. But in any case, the procurement (purchasing) activity coordinates decisions related to the terms of supply, the desired volume of exchange transactions, agreements with a third party, the possibility of long-term contracts.
Forecasting outlines the parameters of future activities based on past and current performance, as well as planned standards. Forecasts in logistics tend to be relatively short-term (do not extend beyond 90 days) and provide periodic (usually monthly or weekly) sales forecasts for each product, from which, in turn, logistics needs and operational plans are established. .
The general purpose of the planning/coordination information flow is to integrate individual operations within the firm and facilitate integrated activities as a whole. Without a high degree of integration, conditions remain for the unproductive use of resources and the formation of excess stocks. An example of planning and coordinating core health care activities is provided in the supporting section on how hospitals use information to improve efficiency and improve customer service.
How Hospitals Cure Inefficiency
Dr. James J. Cimino is in trouble. To confirm the hypothesis that his patients' cardiac abnormalities are a symptom of a neurological disease, Cimino needed studies of the cerebrospinal fluid. But using the services of the neurology department of Columbia Presbyterian Hospital, which performs such studies, was very difficult because of its extremely busy schedule. So Dr. Cimino entered a reminder on his computer to take a spinal cord sample the next time his chronic heart patient was admitted to the emergency room at New York Hospital. It happened two weeks later. And then, having read the prescription of Dr. Cimino, which he entered into the patient's medical history, which entered the computer system of the hospital, the local doctors performed a puncture of the spinal cord.
This case illustrates how reengineering medical institutions, based on the introduction of computer networks, helps to treat one of the most serious diseases of public health - inefficiency. According to Dr. William M. Tierney of Indianapolis Wishard Memorial Hospital, "Up to 40% of a hospital's total expenditure is spent on collecting and storing information, so information technology should, in theory, help improve efficiency." Wishard Hospital now has a mandatory rule that physicians order all medications and prescribe procedures for patients through a computer system that automatically alerts them to possible problems, such as allergic reactions or the rescheduling of an examination already performed. As a result, doctors, on average, began to make fewer mistakes and prescribe fewer tests. As a result, costs per patient were reduced by $900. "For the sake of competitiveness, - concludes Tierni, - doctors are simply forced to master electronics."
Source: John Carey, The Technology Payoff // Business Week. 1993. June 14. P. 60. Reprinted with permission from McGraw-Hill, Inc.
operational information flow. Information needs of the second type are dictated by the need to organize the receipt, processing and delivery of stocks in a way that is required for the fulfillment of customer orders and for purchases. Operational information needs relate to: (1) order management; (2) order processing; (3) distribution; (4) inventory management; (5) transportation; (6) supply.
Order management is associated with the exchange of information about the needs between participants in the value chain, including the link where the physical distribution of finished products takes place. The primary function of order management is the precise formulation and placement of customer orders. The exchange of information between participants in the value chain typically uses means of communication such as telephone, mail, fax machines or computer systems. The impact of information technology on order management is extremely large and diverse. The advent of widely available and cheap means of communication has actually revolutionized the order management process.
Order processing means allocating inventory and duties in such a way as to satisfy customer needs. The traditional approach is to assign to each customer a certain amount of available inventory or planned production in accordance with predetermined priorities. Modern order processing systems, based on highly developed technologies, allow you to maintain two-way communication with consumers and negotiate the conditions of orders ahead of time so that they fit into the framework established by the planned parameters of logistics activities.
In the field of distribution, information flows serve to facilitate and coordinate the work of individual capacities (divisions) of logistics. The main task of any division of the logistics system is to provide such a quantitative and qualitative composition of materials or products that is necessary for the execution of an order. The most important thing here is to provide the desired range of products at the right time with minimal duplication of activities and minimal overhead. The whole focus of distribution is to keep inventory as low as possible, while still satisfying consumer needs.
Inventory management is reduced to the use of incoming information for the strict implementation of logistics plans. With the help of existing labor resources and information technology stocks are placed and managed in such a way as to meet the planned requirements for them. The task of inventory management is to ensure that the logistics system as a whole does not lack the resources necessary to work as planned.
In the field of transportation and cargo handling, information serves as a tool for managing the delivery of stocks to their destination. The efficiency of transport depends on such coordination of orders that would ensure the full loading of transport capacities. In addition, the right vehicles must be in the right place at the right time. Finally, since the transfer of ownership often takes place on final stage transportation, the transported goods must be provided with proper accompanying documentation.
Procurement requires information suitable for preparing, modifying or canceling a purchase order in full agreement with suppliers. Procurement-related information is very similar to that used in order processing. In both cases, the exchange of information plays the role of an auxiliary means, facilitating those operations that connect consumers and suppliers. The main difference between sourcing and order processing lies in the activities that follow the transfer of an order.
The main purpose of the operational flow of information is to support the integration of activities in the areas of physical distribution, logistics of production and supply. While the planning/coordination flow provides information about the planned parameters of an activity, the operational flow is needed to manage day-to-day work. The full realization of the competence of the company in logistics requires managers to achieve certain target standards related to both the information flow and the flow of stocks. Below we consider the operational goals of integrated logistics.
Operational goals
With regard to the organization of the logistics system and its management, each company is guided simultaneously by at least six operational goals, the achievement of which in the first place predetermines the effectiveness of logistics. These include: quick response, minimum uncertainty, minimum inventory, consolidation (consolidation) of cargo transportation, quality, life cycle support. Let's take a quick look at each of these goals.
Fast reaction
Responsiveness characterizes the ability of the company to meet the needs of consumers in a timely manner. Information technology makes it possible to postpone the immediate execution of logistics operations as long as possible, and then to quickly deliver the required stocks. This leads to the elimination of excess inventory that firms previously had to hold in anticipation of orders. The ability to quickly respond to customer demands is shifting the focus of firms from waiting for orders based on forecasting and stockpiling to immediate customer satisfaction on a delivery-by-delivery basis. But since, in such a real-time logistics system, inventory typically doesn't move until a customer order that needs to be filled, even the slightest disruption becomes increasingly intolerable.
Minimum Uncertainty
Uncertainty is a general term for various kinds of unforeseen events that disrupt the normal operation of the system. Uncertainty can arise from actions in any area of logistics itself. Delays in receiving an order from a customer, an unexpected production failure, damage to a product in transit to a consumer, or delivery to a different destination are all isolated incidents that need to be corrected. Opportunities to reduce uncertainty lie in both internal and external logistics operations, because all its functional areas are potentially subject to uncertainty. Traditionally, the means of smoothing uncertainty were the accumulation of insurance (buffer) stocks and the use of expensive transportation methods. Such methods, with their inherent costs and risks, are giving way to the use of information technology to establish tight control over logistics operations. As uncertainty is eliminated (minimized), the productivity of logistics increases due to the savings achieved. Therefore, uncertainty minimization is key goal all logistics activities.
Minimum inventory
The inventory minimization problem concerns both absolute value relevant assets, and the relative speed of their turnover. The value of assets is the monetary value of all stocks placed in the logistics system. Turnover shows how many times inventory is used during a given period of time. A high turnover rate, combined with the availability of inventory, means that the assets placed in them are put to good use. The goal is to reduce on-hand inventory to the minimum amount consistent with the target level of customer service, which ensures the lowest overall logistics costs. Managers are increasingly pushing for this goal, and at the same time, the popularity of such concepts as, for example, the concept of zero stocks is growing. However, the reengineering of logistics systems has revealed one important fact: many of the shortcomings of current activities do not appear until stocks have reached the lowest possible level. In addition, although the complete elimination of stocks is quite achievable, we should not forget that stocks can bring real benefits to logistics. Inventory can be a return on investment if it provides economies of scale in production or supply. Therefore, it is necessary to strive to reduce stocks to the lowest possible level, but at the same time allowing to achieve other operational goals. To minimize the volume of stocks, the logistics system must be organized in such a way as to control the value of related assets and their turnover throughout the company, and not just at each individual enterprise.
Transportation Consolidation
One of the largest elements of logistics costs is transportation costs. Their value is directly related to the type of cargo, the size of the shipment and the distance of cargo transportation. Many logistics systems providing Additional services with a price premium, depend on high-speed ways to transport small loads. But this is usually very costly. To reduce transportation costs, it is desirable to achieve consolidation of transportation by combining individual goods. As a rule, the larger the transported cargo and the greater the transportation distance (distance), the lower the transportation costs per unit of cargo. This requires the development of special programs for the acquisition of small cargoes in batches for the consolidation of cargo transportation. The implementation of such programs is facilitated by temporary agreements between different participants in the supply chain. Other ways to effectively scale up freight traffic are discussed in detail in Chapter 12.
Quality
The fifth goal of logistics is the continuous improvement of quality. Total quality management has become widespread across all industries, and as we discussed in Chapter 1, this has been a powerful force behind the logistics renaissance. If a damaged or defective product is delivered to the consumer, or if the promised conditions of service are not met, then in such circumstances logistics hardly creates any significant added value. At the same time, logistical costs, once incurred, are non-refundable. The operation of the logistics system itself must also meet the required quality standards. The problems posed to managers by the need to maintain a zero level of "marriage" in logistics are significantly complicated by the fact that this activity is carried out on a huge geographical scale and does not stop day or night. In addition, most of the specific labor operations in logistics are not directly controlled by higher managers. Correcting any mistake made in the execution of a customer's order - whether it is delivery of goods to the wrong destination or damage in transit - is much more expensive than correct and timely work. In fact, logistics plays a major role in the development of principles general management quality.
Lifecycle Support
Finally, another goal of logistics is to support the life cycle of a product. Few products can be sold without any guarantee that they will perform as advertised over time. Sometimes the normal movement of inventories, in which added value is created, is forced to reverse. The practice of returning goods requires special skills, but it is very important when new, stricter quality standards are introduced, when products reach the expiration date, or when there is doubt about their safety for users. The need for such "reverse" logistics also arises under the influence of laws that prevent the accumulation of household waste and stimulate the recycling of packaging materials. The most important reason for reverse movement in logistics is the need to provide maximum control in situations where there is even the slightest likelihood of a threat to the health and safety of consumers (that is, when it comes to potentially dangerous products). In this sense, the return policy is similar to the strategy of providing the highest level of customer service regardless of cost. A classic example of how to capitalize on adversity is Johnson & Johnson's handling of the Tylenol crisis (see the supporting column "Why Tylenol Stays First"). Reverse flows in logistics take a wide variety of forms, from return of bottles for reuse, which does not increase overall costs, to the largest operations in problem cases. In this regard, it is important to remember that a reliable logistics strategy cannot be developed without taking into account such reverse flows.
Some products - for example, copiers - bring the main profits not only as a result of sales, but also in the after-sales service. However, the value of logistics service support is not the same for different types of products and different customers. For companies selling consumer durables or industrial equipment, comprehensive life cycle support is a must, which forms the largest element of all logistics costs.
A logistics service infrastructure designed to support the life cycle of products needs careful design and organization. As we have already said, to ensure the reverse flows, the need for which is generated by the widespread concern for the protection environment, the logistics system must include facilities for the processing of packaging materials and components. In the modern sense, product life cycle support is logistical support from the first to the last step.
Why Tylenol stays in first place
In September 1982, McNeil, one of the consumer goods divisions of Johnson & Johnson (J&J), was in the midst of a severe crisis. Tylenol, the top-selling drug of all McNeil products, was "implied" in seven deaths in Chicago. When all this happened, Tylenol's share of the $1 billion analgesics market It was 35%, and by the end of September it had decreased by 80%. Today, Tylenol is again ahead of all brands, accounting for about 30% of the analgesic market, now valued at $2.7 billion. How did J&J manage to regain market share and maintain its excellent reputation after such a devastating tragedy? The company successfully emerged from the crisis due to its ability to establish reverse logistics flows and thanks to marketing strategy aimed at protecting consumers and not limited to the most necessary measures to restore confidence. The J&J "revival" program is a good role model that could serve as a lesson for other corporations to voluntarily recall their products.
When the first startling reports of cyanide impurities in Tylenol capsules came in, J&J was quick to confirm that a counterfeit drug had entered the manufacturing or retail trade. First of all, the company directed efforts to find the source of the problem. As soon as the serial numbers of the packages associated with the first accidents were found out, J&J stopped production at the plant where this lot of the drug was manufactured. At the same time, the company announced that it would stop selling Tylenol in the country and demanded the return of the drug. In total, she took back 31 million vials worth $100 million.
Another feature of J&J's chosen strategy was open and close interaction with the media. Traditionally, the company has kept the press at bay, but in this case, it felt that openness and sincerity would help ease panic among consumers and reduce the flow of criticism directed at the company. A special crisis team was created, which included senior leaders and managers from both the J&J headquarters and the McNeil division. The team determined for certain that a counterfeit drug did indeed enter the retail chain, that the accidents did not go beyond Chicago's eastern neighborhoods, and that other samples from the same batch were of normal composition. But despite this, the entire batch, which numbered 93 thousand vials, was withdrawn from circulation. At this stage of the return of the goods, the company spent $ 1 million. only to pay for phone calls and telegrams to doctors, hospitals and distributors.
The investigation of the sixth poisoning conclusively confirmed that the substitution of the drug occurred precisely in retail network, since the serial number of the vial indicated a batch of products produced by a completely different company company. Now that the source of the problem had been identified and "neutralized", J&J was able to focus on overcoming the problem itself. The first step was to explain and justify the complete withdrawal of the product from circulation. While the measure wasn't absolutely necessary, the company believed it was critical to restoring consumer confidence. Initially, experts from the FBI and other federal agencies involved in investigating these incidents even dissuaded the company from completely withdrawing the product; explaining this as a possible undesirable reaction of those who produced the counterfeit, as well as the reaction of consumers. However, after a similar case of strychnine poisoning in California, all parties agreed that total withdrawal was the best solution under the circumstances.
This decision was followed by the following actions: (1) announcement by McNeil division executives of the mandatory replacement of capsules with tablets; (2) sending out thousands of emails trade organizations explaining the causes of accidents and product recall procedures; (3) statements in the media; (4) sending more than 2,000 workers to direct contact with doctors and pharmacists to restore their confidence and convince them to continue prescribing Tylenol to patients, since it was the recommendations of these specialists that traditionally served as the main tool for promoting its sales; (5) bulk logistical operations that provide reverse flows, including the purchase of the drug from retailers and consumers, and the organization of its delivery to the distribution centers of the company; (6) the creation of packaging that protects the drug from counterfeiting or substitution. The total cost of this return is estimated to be at least $100 million, with the bulk of the cost coming from the logistics of return flows.
In January 1983, new bottles of Tylenol entered the retail trade, guaranteeing against fakes and substitutions. Through a massive voluntary product recall program, an effective public relations strategy, sales policy and the introduction of new packaging, consumer confidence has been fully restored. "Tylenol" gradually captured the former market share. Although it has not increased from its pre-crisis level, stopping at about 30%, absolute sales in monetary terms have doubled as industry-wide sales have risen from $1 billion to $7 billion since the early 1980s.
Sources: Thomas Moore. The Fight to Save Tylenol // Fortune 106:11. November 29, 1982, pp. 44-49; Johnson & Johnson Sets Nighttime Tylenol // Advertising Age. 1992. February 18. P.I. Marc G.Weinberger, Jean B.Romeo, The Impact of Negative Proc.c: News // Business Horizons. 32:1. 1989. January-February P. 44-50.
Barriers to internal integration
The internal integration of logistics cannot be isolated from other processes and phenomena in the organization. Therefore, it is very important to understand what obstacles or barriers they can create that make integration difficult. In traditional practice, such obstacles often arise in connection with the organizational structure, the system for evaluating performance, the ownership of reserves, information technology, and the system of knowledge exchange established in the organization.
Organizational structure
Traditional organizational structures in business make any cross-functional processes difficult. In most organizational structures, powers and responsibilities are distributed along functional lines. In fact, both organizational structures and budgets (estimates) correspond to the type of work performed. In traditional practice, workers are combined into functional units according to their specialization; on this principle are built, say, the department of inventory management, warehousing, transport department, etc. Any such unit is concerned primarily with the improvement of its function. And since the purpose of integration is the interaction of functional areas, the formal organizational structure plays the role of a deterrent. To characterize traditional functional structures often use the expression local thinking. On the other hand, such a highly specialized approach of managers is quite understandable, because the remuneration of most of them is based on the performance of functional units. It is a widely held belief that the excellent performance of individual functions leads to an overall outstanding result. However, integrating activities such as logistics requires managers to take a broader view beyond the formal boundaries of organizational structures and to be able to facilitate cross-functional coordination. The emergence of new organizational forms does not yet guarantee this. In any case, regardless of the type of structure, successful integration requires significant changes in traditional cross-functional relationships in organizations.
Results evaluation system
Traditional performance appraisal systems also make cross-functional coordination difficult. Most of them directly reflect the organizational structure. Successful integration requires the development and implementation of new evaluation schemes that encourage managers to perceive the individual functions for which they are responsible as components of a single process, and not as self-sufficient activities. The manager must understand that sometimes it is simply necessary to go for an increase in expenses in his functional area in order to reduce overall costs. Until such a system for evaluating results is created that will not "punish" managers for such a line of behavior, the integration of logistics will remain more in the field of theory than practice.
Inventory ownership
It is no secret that in certain functional areas, stocks help to achieve the intended goals. The traditional approach to inventories is to keep them at a constant level and feel safe and secure in the face of any fluctuations in market demand or economic activity. The availability (or accessibility) of inventory, say, allows mass production to be maintained, which provides economies of scale. And the advance delivery of stocks to local markets facilitates the work in the field of sales. But with all the undoubted benefits, such a practice is associated with costs. It is important here not to lose sight of the relationship between these costs and benefits, as well as the risk associated with misallocation or obsolescence of stocks.
Information Technology
Information technology is a key resource for any integration. However, the configuration of information systems, like the evaluation schemes, as a rule, reproduces the organizational structure. Most databases are formed on a functional basis and are not very suitable for use on a cross-functional basis. The need for information exchange has already led to the creation of data banks that serve a single purpose: mutual information support of various economic and management systems. But in the absence of such forms of information exchange, the use of information technology can create barriers to integration, because in this case, the most important data does not become public domain.
Knowledge Exchange
Accumulated knowledge is a powerful driving force in almost any business. But if the current environment in the organization limits the free exchange of knowledge, then this creates additional barriers to integration. The inability of the organization to establish an unhindered transfer of information and knowledge enhances its functional nature, because it helps to consolidate the narrow specialization of employees. In such a situation, another barrier to integration may arise: when experienced employees leave the organization for one reason or another. The fact is that in this case, those who come to replace them do not have the opportunity to adopt the accumulated knowledge and experience. Even more serious problems are caused by the inability of many firms to develop practical procedures for sharing knowledge between functional units. The integration process usually requires the participation of many people and is not limited to one or another functional area. This type of knowledge transfer mechanism is very difficult to standardize.
Functional cycle of logistics
The main object of analysis of integrated logistics is its functional cycle, or order execution cycle. The study of integration parameters based on functional cycles allows you to determine the dynamics, relationships and decisions that together form the logistics operating system. Initially, the firm is connected with its suppliers and consumers by information and transport networks. The objects of the logistics infrastructure, interconnected by the functional cycle, are usually called nodes.
In addition to nodes and communication channels, stocks are required to complete the functional cycle of logistics. Stocks are valued at the value of assets intended to support logistics operations. The total volume of stocks placed in the logistics system consists of current (basic) stocks and insurance (buffer) stocks created to protect against uncertainty. Inventories accumulate within nodes and move between sites, which, of course, creates the need for some types of cargo handling and storage. Although the transportation process also involves handling and storing inventory in transit, the scale of this activity is minimal compared to that of logistics facilities such as warehouses.
The dynamics of functional cycles is given by the need to coordinate the requirements for resources "input" and "output". The needs of the functional cycle "at the input" are determined by the order for a specific quantity of specific products and materials. A full-scale logistics system capable of completely fulfilling an order of any volume, as a rule, needs to do this in "combined" functional cycles, which include different transactions and operations at different stages. But if the needs are easily predictable or relatively small, then the configuration of the functional cycles that provide logistics activities can be simplified. For example, large retailers (such as Target or Wal-Mart) need a much more sophisticated system to fill orders. general structure functional cycle than to serve the needs of a direct mail company.
Needs "at the exit" are the results of work expected from the logistics system. To the extent that these needs are satisfied, we can talk about the effectiveness of the functional cycle in the sense of fulfilling its purpose. The productivity of the functional cycle is directly related to the cost of resources necessary for fruitful and high-quality logistics. Efficiency and productivity of the functional cycle (order execution cycle) - key indicators in logistics management.
Depending on the purpose of a particular functional cycle, the actions and operations necessary to complete it may be fully managed by one company, or may require the participation of several companies. For example, in the field of logistics of production, cycles, as a rule, are completely controlled by one enterprise. Conversely, in functional cycles related to physical distribution or supply, in addition to the firm itself, its customers or suppliers are usually involved. In fact, functional cycles form a single supply and marketing (logistics) chain and link its participants together.
It is important to remember that different functional cycles have different frequency (intensity) of operations and transactions. Some cycles are designed to provide a one-time buy or sell. In such cases, the cycle is planned, carried out, and upon completion of the transaction ceases to exist. Other functional cycles involve the execution of long-term contracts. The situation is further complicated by the fact that any operation or object within the framework of a specific logistics contract can simultaneously be involved in many other functional cycles. For example, a warehousing company or a computer equipment dealer can regularly purchase goods from several manufacturers at once. In the same way, a truck owner who provides transport services for hire, as a rule, serves several functional cycles, "entwining" many industries with his transportation.
When analyzing a national or international business enterprise that sells a variety of products to many consumers and also purchases materials and components for its production in the world market, it is very difficult to isolate a separate functional cycle that links all operations. And an almost impossible task is to imagine the whole multitude of functional cycles that make up the logistics systems of such giants as General Motors and IBM.
Regardless of the number and variety of functional cycles that provide the logistical needs of the company, planning their structure and operational management of them must be carried out on an individual basis. The value of carefully designing the structure of the order fulfillment cycle and monitoring its progress cannot be overestimated. The functional cycle is the main object of planning and operational management in logistics. It plays a critical role in meeting logistical needs. In fact, the functional cycle provides the structural basis for integrated logistics. Figure 2.3 shows the structure of the order fulfillment cycle in the three main functional areas of logistics. Figure 2.4 illustrates the complex combination of such cycles in a multilevel logistics system.
To understand the logistics system, it is important to consider three circumstances. First, the order fulfillment cycle (functional cycle) serves as the main object of analysis for the integration of logistics functions. Secondly, the basic structure of the functional cycle in terms of links and nodes is the same for physical distribution, and for the logistics of production, and for supply. The essential difference, however, is the extent to which the firm has control over different types functional cycle. Thirdly, no matter how complex the logistics system as a whole, it is necessary to examine the configuration of a separate functional cycle in order to identify the most important relationships and lines of control. This is not a simple, but a prerequisite for integration.
It will help to understand this important idea. detailed analysis common features and differences in functional cycles in physical distribution, logistics of production and supply.
Rice. 2.3. Functional cycles of logistics
Function cycle in physical distribution
Physical distribution is reduced to the processing and execution of consumer orders up to the direct delivery of goods. Physical distribution is an essential element of marketing and sales, ensuring the availability of goods in a timely and cost-effective manner. All activities related to attracting and retaining customers can be roughly divided into two components: the conclusion of transactions and their actual execution. Closing deals is a function of advertising and sales. Physical distribution is responsible for the actual execution of transactions and consists of such activities as transfer, processing, order picking, transportation of ordered goods, delivery to consumers. The basic physical distribution cycle is shown in Figure 2.5.
Physical distribution as an element of the logistics system connects the firm with its customers. In addition, physical distribution aligns production and marketing efforts. The fact is that the interaction between production and marketing is rather contradictory. On the one hand, marketing is designed to please consumers. In most firms, marketing and sales people will spare no effort to meet customer demand. This often results in them insisting on producing a wide range of products and maintaining large inventories without considering the potential profitability of each product. This approach means that any consumer order, regardless of its size, must be executed. At the same time, it is expected that a zero level of "marriage" in the service will be achieved, and consumer-oriented marketing efforts will receive full support. In manufacturing, on the other hand, the focus has traditionally been on cost control, and this is usually achieved through long-term and stable mass production. Continuous manufacturing processes provide economies of scale as well as minimal unit costs. This approach is most fully embodied in the mass production of a rather narrow range of products.
Rice. 2.4. The structure of a multi-level flexible logistics system
Stocks have traditionally served as a means of resolving this contradiction, inherent in the two "ideologies". Use of reserves to coordinate efforts in different areas activity usually comes down to their advanced placement in all areas of the logistics system in anticipation of sales. Products are sent to warehouses in accordance with demand forecasts, which is fraught with possible errors in distribution - deliveries to the wrong market or at the wrong time. As a result of such risky decisions, attempts to provide effective customer service can end in failure if it turns out that critical inventories are misplaced. Here it is worth emphasizing one important circumstance: the functional cycle of physical distribution covers those links in the supply chain that stretch from the producer to the consumer. For this reason, stocks that have entered the physical distribution system, if properly located, acquire the highest value that can ever be created in logistics.
The mere fact that physical distribution is in charge of satisfying consumer demands predetermines a relatively higher risk of this activity compared to the logistics of production and supply. To reduce the uncertainty inherent in physical distribution and facilitate operations and transactions in this area, it is very important to monitor how consumers place orders. First, every possible effort should be made to improve the accuracy of forecasts. Secondly, it would be good to develop a program of coordination with consumers, on the basis of which to build order management; this also contributes to the reduction of uncertainty. And finally, thirdly, the functional cycle of physical distribution should be planned in such a way as to give it maximum flexibility and adaptability to market requirements.
The key to understanding the dynamics of the functional cycle of physical distribution is the fact that the beginning of the whole process is laid by customer orders. The ability of the seller's logistics system to quickly respond to these orders is one of the most important competencies in his overall marketing strategy.
Rice. 2.5. Basic physical distribution cycle
Functional cycle in the logistics of production
The functional cycle in the logistics of production is designed to provide logistical support for production processes. If we consider the economic activity of the company as a whole, then we can conditionally place production between physical distribution and supply. The main task of logistical support for production is the formation of a regular flow of materials and semi-finished products at minimal cost, ensuring compliance with the production schedule. The special skills required for physical distribution and supply can be useful when creating, locating, and timely replenishing inventories in a manufacturing facility. But the movement of products, materials, semi-finished products, components between production facilities, as well as their storage at intermediate stages, is a daily duty of logistical support for production. The same work is carried out in retail and warehouse enterprises, when it is necessary to complete a certain composition of stocks for transfer to the next link in the value chain. Since the logistics of production is the most complex element of internal logistics, we will consider it in more detail.
The allocation of material and technical support of production as an independent field of activity is a relatively new concept of logistics management. The need for a separate analysis of the production support functional cycle is explained by the unique needs and limitations inherent in production strategies. The traditional paradigm of the organization of production, which emphasizes economies of scale, needs to be revised. In the current conditions, such criteria as flexibility and the ability to quickly update the range of manufactured products and production technologies are put forward in the first place. Logistics support is precisely designed to facilitate the implementation of such strategies. It is worth recalling once again that the purpose of logistics in the field of logistics of production extends to what, where and when it is produced, and not to how it happens. Thus, the task of logistics support is to meet production needs in the most efficient and cost-effective way.
Logistics support of production according to their own logistics characteristics significantly different from physical distribution and supply. As a rule, activities related to the provision of production are under the full responsibility and control of a single firm, while the other two areas of logistics are subject to the uncertainty of the behavior of external suppliers and consumers. Even in cases where external contractors are involved in the production process in addition to internal capacities on a contractual basis, the degree of overall control remains much higher than in other areas of logistics. The isolation of the material and technical support of production from the general complex of logistics operations into a separate control object is justified precisely by the fact that it allows the fullest use of the advantages of such control.
In a typical manufacturing plant, sourcing is responsible for getting materials and components from outside to the right place at the right time. But as soon as the production process is put into action, the service of all the needs that arise after this in the movement of materials and semi-finished products within the enterprise is classified as the logistics of production. Logistics operations in this case are limited to loading and unloading and transportation of stocks between production sites within the company, as well as, if necessary, storage of stocks at intermediate stages. After production is completed, the stock of finished goods is distributed and delivered either directly to consumers or to distribution warehouses for onward transportation to consumers. All these flows are already controlled by the physical distribution.
For a firm that owns a complex of enterprises specializing in individual production operations, the logistics system for production may consist of a complex combination of functional cycles. If these specialized enterprises are responsible for different stages of the production process (from the zero stage to the final assembly of finished products), many different interactions and transactions are likely to be required to complete it. Their service is the logistical support of production. In some cases, functional cycles in the logistics of production form a much more complex structure than in physical distribution or supply.
As already noted, the work of ensuring production, unlike distribution and supply, does not go beyond the sphere of internal control of the company's managers. For this reason, the uncertainty generated by the receipt of random orders or disruptions in the activities of suppliers, in logistics related to production support, can be controlled and managed, which allows operations to be carried out more evenly and on time, and also contributes to the overall reduction in safety stocks.
Functional cycle in supply
The regular flow of materials, components or finished products to manufacturing plants and distribution facilities requires certain ancillary activities, which include: (1) selection of the source of resources; (2) placing and sending an order; (3) transportation; (4) receipt of delivery. All these actions are necessary to complete the procurement process, as shown in Figure 2.6. As soon as materials or products intended for resale are received, they immediately need to be stored, processed and transported in order to ensure a production or distribution process that belongs to a different functional cycle. Due to the limited scope of supply operations, they have recently been often referred to as "input" logistics. The supporting column on Lands' End's experience illustrates how inbound logistics contribute to overall business success.
Rice. 2.6. Functional Supply Cycle
The functional procurement cycle is similar to the order processing cycle in many ways, except for three important differences. First of all, the supply differs in terms of delivery, the size of cargo transportation, methods of transportation and the cost of the products involved. The procurement process often requires very large shipments involving such Vehicle like barges, deep sea vessels, freight trains and convoys. With rare exceptions, the usual task of supply is logistical operations with minimal costs. The relatively lower cost of materials and components compared to finished products opens up a lot of room for maneuver when choosing the balance between the costs of holding stocks in transit and transportation times using cheap shipping methods. Since the cost of maintaining most types of materials and components per day of travel is lower than the cost of maintaining finished products, in procurement, as a rule, there is no point in paying a premium rate for the accelerated transportation of stocks of the first type. In this regard, the functional cycle of the procurement process is usually longer than the cycle of processing customer orders.
Of course, there is no rule without exception. If expensive components are used in production, the approach changes: purchases are made in smaller batches in strict accordance with the need, at the right time and under strict logistical control. In such cases, the high cost of materials and components often justifies the use of more expensive high-speed and reliable delivery methods.
For example, an enterprise engaged in the production of ready mixes for baking cakes uses flour in significant volumes as a raw material. Since flour is a relatively inexpensive product, such a company should buy it in large quantities and deliver it by rail. Conversely, it hardly makes sense for her to make small purchases, missing out on the price discount provided for a large order, and also overpaying for the transportation of small loads. On the other hand, a car manufacturer could probably buy individual complex components - say, roofs with an automatically opening window - as the need for them arises. The kit that makes up such a roof is individual for each car, and the cost of each kit is relatively high. Because of this, the manufacturer will probably prefer to order small quantities - perhaps one set at a time to avoid stockpiling - and will not refuse to pay extra for expedited shipping.
The second distinguishing feature of procurement (compared to order processing) is that the number of suppliers to the firm, as a rule, is less than the number of its customers. This difference is perfectly illustrated by the example of Lands "End, described in the auxiliary column. The company has a customer base of more than 6 million people, and it has only about 250 suppliers. In physical distribution, each firm is just one of a host of participants in the entire intricate supply chain. In procurement, however, the functional cycle usually has a much simpler configuration.Materials and components are often purchased directly from the manufacturer or from a specialized wholesaler.When designing a logistics system, it is important to consider the need and possibility of using such direct supply channels.
Finally, the order processing functional cycle, by definition, begins in response to incoming customer requests; as a result, the physical distribution system is forced to accommodate occasional or irregular customer demands. The supply chain, on the other hand, generates orders on its own. The ability to "designate" the time and place of purchases significantly reduces the uncertainty (variability) of economic activity.
Understanding these three main differences between the functional supply cycle and the order fulfillment cycle in physical distribution helps to plan and organize the work of logistics more clearly. The main sources of supply uncertainty are possible price changes or supply disruptions. Despite all the differences, uncertainty is an integral feature of functional cycles in all links of logistics.
Logistics "at the entrance" to the Lands "End
Lands "End is one of the well-known mail order companies. Its popularity is due to high quality goods, providing reliable guarantees and fast execution of orders. Serving a customer base of 6 million people from a massive 500,000-square-foot distribution center in Dodgeville, Wisconsin is no easy task. Lands "End has two call centers with 900 operators who receive and process a huge number of orders. The company owes much of its success to the logistics system" at the entrance.
Lands" End deals with approximately 250 suppliers - manufacturers and traders - who meet its specific needs for high-quality products. Moreover, Lands" End maintains partnerships with transport companies that serve its logistics operations "at the entrance." Lands "End publishes 13 catalogs annually - one per month plus a special Christmas issue. Each catalog offers new products, seasonal items and a wide selection of various goods in general: clothes, bags and suitcases, bedding and cosmetics.
In an effort to provide consumers with a real opportunity for such a choice, that is, the real availability of goods, the company has set strict targets for its functional supply cycle. The main goal is to have a full range of products included in the forthcoming catalog in the Dodgeville distribution center before it is finally sent to customers. This allows the company to guarantee the delivery of ordered products within 24 hours, even if the order arrives on the same day that the customer first received the catalog sent.
In order to achieve this goal, Lands "End has focused close attention on the quality of services of suppliers and transport companies. As for suppliers, Lands" End has put into practice mass quality checks of the materials it receives, as well as inspection trips of its specialists to suppliers' enterprises to evaluate their performance and and, if necessary, make suggestions for improvement. Moreover, all suppliers have received a special manual explaining in detail the requests of Lands "End and its requirements for the quality of goods.
In relations with transport companies, Lands "End has introduced strict control over all cargo transportation related to logistics" at the entrance ". Largely due to this, she was able to enter into partnership agreements with the main firms providing transport services to her in the supply, which made it possible to reduce transport costs due to consolidation of cargo transportation and their range. In addition, Lands "End established information exchange with partners by establishing an electronic connection between the performers of specific transportation and its distribution center in Dodgeville.
Lands' End believes that its outbound success, achieved through an excellent physical distribution system, is directly related to successful inbound logistics. The high productivity and efficiency of the supply chain in this case is based on strict quality control and partnerships. with previous links in the value chain.
