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MIT Center for. Transportation & Logistics. echecs16.info1x -Supply Chain & Logistics Fundamentals. Introduction to Logistics & Supply. Chain Management. this book is an excellent tool for reflection on all things supply chain. “Paul does a great job compacting supply chain management and logistics into one text. I. He has written numerous books and articles and is on the editorial advisory board Logistics & Supply Chain Management examines the tools, core processes.

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PDF | 32 hours read | On Feb 1, , Andrzej Szymonik and others r. Material management. Physical. distribution. Logistics supply. chain. 11 .. electronic formats, depending on the level of relevance to the consumer; i. e. books. This book contains information obtained from authentic and highly regarded Supply chain project Supply Chain Management Global Logistics and Operations. Most of my courses on supply chain management were targeted at the master of pages, this book will primarily focus on the fundamental principles of supply chain .. downloading function improvement and optimising the logistics operations.

Downloads can be used by educators, training professionals and consultants and all we ask is that you give recognition with the appropriate reference incorporated into the processes of your enterprise or learning in a class. But to gain recognition of value to the enterprise requires financial measures that boards of director and CEOs recognise. This eBook outlines the four financial measures of value for Supply Chains — Operations: 1. Supply Chains Working Capital 2. Cash to Cash cycle time 3. Use the proposal in your organisation and in business courses to test the approach and to start changes and improvements to the measurement of performance for your Core Supply Chains. Careers in Logistics What is Logistics About?

An example of these conflicts is the interrelation between the sale department desiring to have higher inventory levels to fulfill demands and the warehouse for which lower inventories are desired to reduce holding costs. Supply chains were originally defined as encompassing all activities associated with the flow and transformation of goods from raw materials through to the end user, as well as the associated information flows.

Supply-chain management was then further defined as the integration of supply chain activities through improved supply-chain relationships to achieve a competitive advantage. As a consequence, costs must be lowered throughout the chain by driving out unnecessary expenses, movements, and handling.

The main focus is turned to efficiency and added value, or the end user's perception of value. Efficiency must be increased, and bottlenecks removed.

The measurement of performance focuses on total system efficiency and the equitable monetary reward distribution to those within the supply chain. The supply-chain system must be responsive to customer requirements.

It also includes coordination and collaboration with channel partners , which may be suppliers , intermediaries , third-party service providers, or customers. More recently, the loosely coupled, self-organizing network of businesses that cooperate to provide product and service offerings has been called the Extended Enterprise.

Supply-chain management is the management of such a chain. With SCEM, possible scenarios can be created and solutions devised. Including third-party logistics or other gathering agencies as part of the RM re-patriation process is a way of illustrating the new endgame strategy.

As organizations strive to focus on core competencies and become more flexible, they reduce their ownership of raw materials sources and distribution channels.

Operations, Logistics and Supply Chain Management

These functions are increasingly being outsourced to other firms that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing managerial control of daily logistics operations. Less control and more supply-chain partners lead to the creation of the concept of supply-chain management.

The purpose of supply-chain management is to improve trust and collaboration among supply-chain partners thus improving inventory visibility and the velocity of inventory movement. In recent decades, globalization, outsourcing, and information technology have enabled many organizations, such as Dell and Hewlett Packard , to successfully operate collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities.

However, with the complicated interactions among the players, the network structure fits neither "market" nor "hierarchy" categories. From a systems perspective, a complex network structure can be decomposed into individual component firms.

How should we know which aspects of service are most highly rated by the customer? Given the complexity of the market that the typical company serves how might it better understand the segmentation of those markets in terms of service requirements? What does it take for a company to become the supplier of choice?

Clearly it is important to develop an understanding of the service needs of customers through detailed research. The first step in research of this type is to identify the key sources of influence upon the download decision. If, for example, we are selling components to a manufacturer, who will make the decision on the choice of supplier?

This is not always an easy question to answer as in many cases there will be several people involved. The downloading manager of the company to which we are selling may only be acting as an agent for others within the firm.

In other cases his or her influence will be much greater. Alternatively if we are manufacturing products for sale through retail outlets, is the decision to stock made centrally or by individual store managers? The answers can often be supplied by the sales force. The sales representative should know from experience who the decision makers are.

Given that a clear indication of the source of decision-making power can be gained, the customer service researcher at least knows who to research. Ideally once the decision-making unit in a specific market has been identified, an initial, small-scale research programme should be undertaken based upon personal interviews with a representative sample of downloaders. The importance of this initial step in measuring customer service is that relevant and meaningful measures of customer service are generated by the customers themselves.

Once these dimensions are defined we can identify the relative importance of each one and the extent to which different types of customer are prepared to trade off one aspect of service for another.

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In practice this is difficult, particularly with a large number of components, and would not give any insight into the relative importance of each element.

Alternatively a form of rating scale could be used. For example, the respondents could be asked to place a weight from 1 to 10 against each component according to how much importance they attached to each element. The problem here is that respondents will tend to rate most of the components as highly important, especially since those components were generated on the grounds of importance to customers in the first place. A partial solution is to ask the respondent to allocate a total of points amongst all the elements listed, according to perceived importance.

However, this is a fairly daunting task for the respondent and can often result in an arbitrary allocation. Fortunately a relatively recent innovation in consumer research technology now enables us to evaluate very simply the implicit importance that a customer attaches to the separate elements of customer service. The technique is based around the concept of trade-off and can best be illustrated by an example from everyday life.

In considering, say, the download of a new car we might desire specific attributes, e. However, it is unlikely that any one car will meet all of these requirements so we are forced to trade off one or more of these attributes against the others. The same is true of the customer faced with alternative options of distribution service.

The downloader might be prepared to sacrifice a day or two of lead time in order to gain delivery reliability, or to trade off order completeness against improvements in order entry, etc. Essentially the trade-off technique works by presenting the respondent with feasible combinations of customer service elements and asking for a rank order of preference for those combinations.

Computer analysis then determines the implicit importance attached by the respondent to each service element. This understanding must then drive the design of the supply chain processes that will enable success in the marketplace. If one group of respondents, for example, has a clearly distinct set of priorities from another then it would be reasonable to think of them both as different service segments. How can these customer service segments be identified? One technique that has been successfully used in this connection is cluster analysis.

Thus if two respondents completed the step 2 trade-off analysis in a similar way their importance scores on the various service dimensions would be similar and hence the cluster analysis would assign them to the same group.

The classic categorisation of customers according to industry sector did not correlate with the attributes they sought from suppliers. As a result of this research the supplier was better able to focus its marketing efforts and to re-engineer its supply chain strategy to achieve a better match with customer requirements.

The challenge to logistics management is to create appropriate supply chain solutions to meet the needs of these different value segments. This issue will be dealt with in detail in Chapter 5 where the concept of supply chain agility is discussed. Defining customer service objectives The whole purpose of supply chain management and logistics is to provide customers with the level and quality of service that they require and to do so at less cost to the total supply chain.

The whole purpose of supply chain management and logistics is to provide customers with the level and quality of service that they require and to do so at less cost to the total supply chain. The definition of appropriate service objectives is made easier if we adopt the concept of the perfect order.

Clearly such a definition is specific to individual customers, but it is usually possible to group customers into segments and then to identify, along the lines described earlier, the key service needs of those segments.

Normally this percentage would be measured across all customers over a period of time. An extension of this is on-time, in-full and error-free. This latter element relates to documentation, labelling and damage to the product or its packaging.

To calculate the actual service level using the perfect order concept requires performance on each element to be monitored and then the percentage achievement on each element to be multiplied together. For example, if the actual performance across all orders for the last 12 months was as follows: The cost benefit of customer service All companies have to face a basic fact: Not only do different customers download different quantities of different products, but the cost to service these customers will typically vary considerably.

This issue will be explored more fully in Chapter 3. Furthermore, 80 per cent of the total costs to serve will be generated from 20 per cent of the customers but probably not the same 20 per cent! This is the so-called Pareto Law, named after a nineteenth century Italian economist. The challenge to customer service management therefore is, firstly, to identify the real profitability of customers and then, secondly, to develop strategies for service that will improve the profitability of all customers.

What has to be recognised is that there are costs as well as benefits in providing customer service and that therefore the appropriate level and mix of service will need to vary by customer type.

The basic relationship between the level of service and the cost is often depicted as a steeply rising curve Figure 2. A feature of the normal distribution is that once its two key parameters, the mean x— and standard deviation s , are known, the probability of a given value occurring can be easily calculated. Thus, as Figure 2. Costs of service Figure 2. If sales are approximately normally distributed, demand will be lower than average approximately 50 per cent of the time, and thus a 50 per cent service level would be maintained with no safety stock.

It is on those occasions when demand exceeds the average that safety stock is required. In other words we must focus attention on the area of the curve to the right of the mean. By setting the level two standard deviations greater than the mean the service level would be approximately 98 per cent and with three standard deviations it would be The table below illustrates this effect: If safety stock equivalent to one standard deviation of demand s is held then the service level would be 84 per cent, etc.

However, if it is possible to find alternative service strategies for servicing customers, say, for example, by speeding up the flow of information about customer requirements and by using faster modes of transport, then the same level of service can be achieved with less inventory — in effect pushing the curve to the right Figure 2.

This is the idea of substituting information and responsiveness for inventory. In other words if we can gain earlier warning of customer requirements and our lead times are short, then we can reduce our reliance on inventory. Fundamentally, the service issue is that since not all our customers are equally profitable nor are our products equally profitable, should not the highest service be given to key customers and key products?

Since we can assume that money spent on service is a scarce resource then we should look upon the service decision as a resource allocation issue. The precise split between the categories is arbitrary as the shape of the distribution will vary from business to business and from market to market. The appropriate measure should be profit rather than sales revenue or volume. The reason for this is that revenue and volume measures might disguise considerable variation in costs.

In the case of product profitability we must also be careful that we are identifying the appropriate service-related costs as they differ by product. One of the problems here is that conventional accounting methods do not help in the identification of these costs. What we should be concerned to do at this stage in the analysis is to identify the contribution to profit that each product at the individual stock keeping unit SKU level makes.

By contribution we mean the difference between total revenue accruing and the directly attributable costs that attach as the product moves through the logistics system. Looking first at differences in product profitability, what use might be made of the A,B,C categorisation? Thus we might seek to follow the stock holding policy shown below: Perhaps the best way to manage product service levels is to take into account both the profit contribution and the individual product demand.

We can bring both these measures together in the form of a simple matrix in Figure 2. The matrix can be explained as follows. Seek cost reductions Because these products have high volume it would suggest that they are in frequent demand. However, they are also low in profit contribution and the priority should be to re-examine product and logistics costs to see if there is any scope for enhancing profit.

Quadrant 2: Provide high availability These products are frequently demanded and they are more profitable. We should offer the highest level of service on these items by holding them as close to the customer as possible and with high availability. Because there will be relatively few of these items we can afford to follow such a strategy. Quadrant 3: Review Products in this category should be regularly appraised with a view to deletion from the range.

They do not contribute to profits or at least only marginally and they are slow movers from a sales point of view. Unless they play a strategic role in the product portfolio of the firm then there is probably a strong case for dropping them. Quadrant 4: Centralised inventory Because these products are highly profitable but only sell at a relatively slow rate they are candidates for centralised management.

In other words, they should be kept in some central location, as far back up the supply chain as possible in order to reduce the total inventory investment, and then shipped by express transport direct to customers. Indeed the arithmetic is easy: The first thing is obviously to offer the highest levels of service and availability to key customers ordering key products.

At the other end of the spectrum we should constantly review the less profitable customers and the less profitable products. This is particularly relevant when developing a service strategy for spare parts.

Ultimately the only standard to be achieved is per cent conformity to customer expectations. In other words there must be a complete match between what the customer expects and what we are willing and able to provide. What are the customer service elements for which standards should be set? To be effective these standards must be defined by the customers themselves.

This requires customer research and competitive benchmarking studies to be conducted so that an objective definition of customer service for each market segment may be identified. Order cycle time This is the elapsed time from customer order to delivery. Stock availability This relates to the percentage of demand for a given line item stock keeping unit, or SKU that can be met from available inventory.

Order-size constraints More and more customers seek just-in-time deliveries of small quantities. Do we have the flexibility to cope with the range of customer demands likely to be placed upon us? Ordering convenience Are we accessible and easy to do business with? Do our systems talk to their systems?

Frequency of delivery A further manifestation of the move to just-in-time is that customers require more frequent deliveries within closely specified time windows.

Again it is flexibility of response that should be the basis for the performance standard. It is a reflection not just of delivery performance but also of stock availability and order processing performance.

Documentation quality What is the error rate on invoices, delivery notes and other customer communications? A surprisingly large number of service failures are from this source.

Claims procedure What is the trend in claims? What are their causes? How quickly do we deal with complaints and claims? Order completeness What proportion of orders do we deliver complete, i. Technical support What support do we provide customers with after the sale?

If appropriate do we have standards for call-out time and first-time fix rate on repairs? Order status information Can we inform customers at any time on the status of their order? Do we have procedures for informing customers of potential problems on stock availability or delivery?

All of these issues are capable of quantification and measurement against customer requirements. Similarly they are all capable of comparison against competitive performance.

It must also be remembered that per cent order fill rates are extremely difficult to achieve — the laws of probability see to that! If there are ten items on a particular order and each item is carried in stock at the 95 per cent level of availability then the probability that the complete order can be filled is 0.

For example, using the pre-transaction, transaction and post-transaction framework, the following measures provide valuable indicators of performance: Such an index is shown in Table 2. The key message of this chapter has been that the quality of customer service performance depends in the main upon the skill with which the logistics system is designed and managed.

Put very simply, the output of all logistics activity is customer service. Schonberger, R. LaLonde, B. Bayle, M. Levitt, T. Reichheld, F. Christopher, M. Creating Stakeholder Value, Butterworth-Heinemann, Baker, S.

One reason for this is that traditional accounting systems tend to be focused around understanding product costs rather than customer costs. Whilst logistics costs will vary by company and by industry, across the economy as a whole the total cost of logistics as a proportion of gross domestic product is estimated to be close to 10 per cent in the US1 and in other countries costs of similar magnitudes will be encountered.

However, logistics activity does not just generate cost, it also generates revenue through the provision of availability — thus it is important to understand the profit impact of logistics and supply chain decisions.

At the same time logistics activity requires resources in the form of fixed capital and working capital and so there are financial issues to be considered when supply chain strategies are devised. In some cases this has led to a limiting, and potentially dangerous, focus on the short term. Just as powerful an influence on decision making and management horizons is cash flow. Strong positive cash flow has become as much a desired goal of management as profit.

The third financial dimension to decision making is resource utilisation and specifically the use of fixed and working capital. In this regard it is usual to utilise the concept of return on investment ROI. Return on investment is the ratio between the net profit and the capital that was employed to produce that profit, thus: Thus to gain improvement on ROI one or other, or both, of these ratios must increase.

Typically many companies will focus their main attention on the margin in their attempt to drive up ROI, yet it can often be more effective to use the leverage of improved capital turnover to boost ROI. For example, many successful retailers have long since recognised that very small net margins can lead to excellent ROI if the productivity of capital is high, e. Figure 3. The challenge to logistics management is to find ways of moving the iso-curve to the right.

The ways in which logistics management can impact on ROI are many and varied. By examining each element of the balance sheet in turn it will be seen how logistics variables can influence its final shape.

In recent years its importance has been recognised as more companies become squeezed for cash. It is not always recognised, however, that logistics variables have a direct impact on this part of the balance sheet.

For example, the shorter the order cycle time, from when the customer places the order to when the goods are delivered, the sooner the invoice can be issued. Likewise the order completion rate can affect the cash flow if the invoice is not issued until after all the goods are despatched. One of the less obvious logistics variables affecting cash and receivables is invoice accuracy. A customer who receives an inaccurate invoice is unlikely to pay and the payment lead time will be extended until the problem is rectified.

Logistics is concerned with all inventory within the business from raw materials, sub-assembly or bought-in components, through work-in-progress to finished goods. Property, plant and equipment The logistics system of any business will usually be a heavy user of fixed assets.

The plant, depots and warehouses that form the logistics network, if valued realistically on a replacement basis, will represent a substantial part of total capacity employed assuming that they are owned rather than rented or leased.

Materials handling equipment, vehicles and other equipment involved in storage and transport can also add considerably to the total sum of fixed assets. Many companies have outsourced the physical distribution of their products partly to move assets off their balance sheet. Warehouses, for example, with their associated storage and handling equipment represent a sizeable investment and the question should be asked: From the logistics point of view the key elements are accounts payable for bought-in materials, components, etc.

This is an area where a greater integration of downloading with operations management can yield dividends. The traditional concepts of economic order quantities can often lead to excessive levels of raw materials inventory as those quantities may not reflect actual manufacturing or distribution requirements. The phasing of supplies to match the total logistics requirements of the system can be achieved through the twin techniques of materials requirement planning MRP and distribution requirements planning DRP.

If premature commitment of materials can be minimised this should lead to an improved position on current liabilities. More companies are leasing plant facilities and equipment and thus converting a fixed asset into a continuing expense.

These changes obviously affect the funding requirements of the business. They may also affect the means whereby that funding is achieved, i.

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In other words, what is the company worth to its owners? Increasingly senior management within the business is being driven by the goal of enhancing shareholder value.

There are a number of complex issues involved in actually calculating shareholder value but at its simplest it is determined by the net present value of future cash flows. These cash flows may themselves be defined as: Essentially EVA is the difference between operating income after taxes less the true cost of capital employed to generate those profits.

In other words, the cost of capital employed is greater than the profit after tax. The impact of a negative EVA, particularly if sustained over a period of time, is to erode shareholder value. Equally improvements in EVA will lead to an enhancement of shareholder value. If the net present value of expected future EVAs were to be calculated this would generate a measure of wealth known as market value added MVA , which is a true measure of what the business is worth to its shareholders.

A simple definition of MVA is: Not only the impact that logistics service can have upon net operating income profit but also the impact on capital efficiency asset turn. Many companies have come to realise the effect that lengthy pipelines and highly capital-intensive logistics facilities can have on EVA and hence shareholder value.

As a result they have focused on finding ways in which pipelines can be shortened and, consequently, working capital requirements reduced. At the same time they have looked again at their fixed capital deployment of distribution facilities and vehicle fleets and in many cases have moved these assets off the balance sheet through the use of third-party logistics service providers. The drivers of shareholder value The five basic drivers of enhanced shareholder value are shown in Figure 3.

They are revenue growth, operating cost reduction, fixed capital efficiency, working capital efficiency and tax minimisation.

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All five of these drivers are directly and indirectly affected by logistics management and supply chain strategy.

Whilst it is not generally possible to calculate the exact correlation between service and sales there have been many studies that have indicated a positive causality. In Chapter 2 it was suggested that higher levels of customer retention lead to greater sales. Typically this occurs because satisfied customers are more likely to place a greater proportion of their downloads with that supplier.

Operating cost reduction The potential for operating cost reduction through logistics and supply chain management is considerable. Because a large proportion of costs in a typical business are driven by logistics decisions and the quality of supply chain relationships, it is not surprising that in the search for enhanced margins many companies are taking a new look at the way they manage the supply chain.

It is not just the transportation, storage, handling and order processing costs within the business that need to be considered. Often the upstream logistics costs can represent a significant proportion of total supply chain costs embedded in the final product. There is also a growing recognition that time compression in the supply chain not only enhances customer service but can also reduce costs through the reduction of non-value-adding activities.

This is an issue that we shall return to in Chapter 6. Trucks, distribution centres and automated handling systems involve considerable investment and, consequently, will often depress return on investment. In conventional multi-echelon distribution systems, it is not unusual to find factory warehouses, regional distribution centres and local depots, all of which represent significant fixed investment.

One of the main drivers behind the growth of the third-party logistics service sector has been the desire to reduce fixed asset investment. At the same time the trend to lease rather than download has accelerated.

Decisions to rationalise distribution networks and production facilities are increasingly being driven by the realisation that the true cost of financing that capital investment is sometimes greater than the return it generates.

Logistics and Supply Chain Management, 4th Edition

Working capital efficiency Supply chain strategy and logistics management are fundamentally linked to the working capital requirement within the business. Long pipelines by definition generate more inventory; order fill and invoice accuracy directly impact accounts receivable and procurement policies also affect cash flow. Working capital requirements can be dramatically reduced through time compression in the pipeline and subsequently reduced order-to-cash cycle times.

Surprisingly few companies know the true length of the pipeline for the products they sell. So many companies have lived with low inventory turns for so long that they assume that it is a feature of their industry and that nothing can be done. They are also possibly not motivated to give working capital reduction a higher priority because an unrealistically low cost of capital is often used in decision making.

Because tax regimes are different country by country, location decisions can have an important impact on after-tax free cash flow. It is not just corporate taxes on profits that are affected, but also property tax and excise duty on fuel.

Customs regulations, tariffs and quotas become further considerations, as do rules and regulation on transfer pricing. For large global companies with production facilities in many different countries and with dispersed distribution centres and multiple markets, supply chain decisions can significantly affect the total tax bill and hence shareholder value.

The role of cash flow in creating shareholder value There is general agreement with the view of Warren Buffet3 that ultimately the value of a business to its owners is determined by the net present value of the free cash flow occurring from its operations over its lifetime. Thus the challenge to managers seeking to enhance shareholder value is to identify strategies that can directly or indirectly affect free cash flow.

Srivastava et al. In effect, what Srivastava et al. Those strategic objectives can be graphically expressed as a cumulative distribution of free cash flow over time see Figure 3. Obviously the sooner cash is received and the greater the amount then the greater will be the net present value of those cash flows. In recent years a number of studies have been conducted which highlight the connection between supply chain excellence and financial performance.

Srivastava, R. More recently AMR Research6 has conducted an annual survey of the top 25 supply chains, drawing on a combination of published financial data and peer group evaluation. It is probably no coincidence that most of those companies ranked in the top 25 are also above average in terms of market value added MVA. Logistics cost analysis After a century or more of reliance upon traditional cost accounting procedures to provide an often unreliable insight into profitability, managers are now starting to question the relevance of these methods.

Indeed, as we shall see, these traditional accounting methods are often quite unsuited for analysing the profitability of customers and markets since they were originally devised to measure product costs. Because logistics management is a flow-oriented concept with the objective of integrating resources across a pipeline which extends from suppliers to final customers, it is desirable to have a means whereby costs and performance of that pipeline flow can be assessed.

Probably one of the main reasons why the adoption of an integrated approach to logistics and distribution management has proved so difficult for many companies is the lack of appropriate cost information. The need to manage the total distribution activity as a complete system, having regard for the effects of decisions taken in one cost area upon other cost areas, has implications for the cost accounting systems of the organisation.

Typically, conventional accounting systems group costs into broad, aggregated categories which do not then allow the more detailed analysis necessary to identify the true costs of servicing customers downloading particular product mixes. Without this facility to analyse aggregated cost data, it becomes impossible to reveal the potential for cost trade-offs that may exist within the logistics system. Generally the effects of trade-offs are assessed in two ways: For example, it may be possible to trade off costs in such a way that total costs increase, yet because of the better service now being offered, sales revenue also increases.

If the difference between revenue and costs is greater than before, the trade-off may be regarded as leading to an improvement in cost effectiveness. However, without an adequate logistics-oriented cost accounting system it is extremely difficult to identify the extent to which a particular trade-off is cost-beneficial.

The concept of total cost analysis Many problems at the operational level in logistics management arise because all the impacts of specific decisions, both direct and indirect, are not taken into account throughout the corporate system. Too often decisions taken in one area can lead to unforeseen results in other areas. Changes in policy on minimum order value, for example, may influence customer ordering patterns and lead to additional costs.

Similarly, changes in production schedules that aim to improve production efficiency may lead to fluctuations in finished stock availability and thus affect customer service. The problems associated with identifying the total system impact of distribution policies are immense. By its very nature logistics cuts across traditional company organisation functions with cost impacts on most of those functions.

Conventional accounting systems do not usually assist in the identification of these company-wide impacts, frequently absorbing logistics-related costs in other cost elements.

The cost of processing orders, for example, is an amalgam of specific costs incurred in different functional areas of the business which generally prove extremely difficult to bring together. The trouble is that policy costs do not usually confine themselves within the same watertight boundaries. It is the nature of logistics that, like a stone thrown into a pond, the effects of specific policies spread beyond their immediate area of impact.

A further feature of logistics decisions that contributes to the complexity of generating appropriate cost information is that they are usually taken against a background of an existing system. The purpose of total cost analysis in this context is to identify the change in costs brought about by these decisions.

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Cost must therefore be viewed in incremental terms — the change in total costs caused by the change to the system. It is the incremental cost difference between the two options that is the relevant accounting information for decision making in this case.

However, one of the largest cost elements is also the one that is perhaps least well accounted for and that is inventory. It is probably the case that many managers are unaware of what the true cost of holding inventory actually is. If all the costs that arise as a result of holding inventory are fully accounted for, then the real holding cost of inventory is probably in the region of 25 per cent per annum of the book value of the inventory.

This figure is as high as it is because there are a number of costs to be included. The largest cost element will normally be the cost of capital. The cost of capital comprises the cost to the company of debt and the cost of equity. It is usual to use the weighted cost of capital to reflect this. Hence, even though the cost of borrowed money might be low, the expectation of shareholders as to the return they are looking for from the equity investment could be high.

That is, the ability to focus upon the output of the distribution system, in essence the provision of customer service, and to identify the unique costs associated with that output. Traditional accounting methods lack this focus, mainly because they were designed with something else in mind.

One of the basic principles of logistics costing, it has been argued, is that the system should mirror the materials flow, i. A second principle is that it should be capable of enabling separate cost and revenue analyses to be made by customer type and by market segment or distribution channel.

This latter requirement emerges because of the dangers inherent in dealing solely with averages, e. In other words, we must first define the desired outputs of the logistics system and then seek to identify the costs associated with providing those outputs.

Missions can be defined in terms of the type of market served, by which products and within what constraints of service and cost. The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are vulnerable to disruption and, in consequence, the risk to business continuity is increased. Whereas in the past the prime objective in supply chain design was probably cost minimisation or possibly service optimisation, the emphasis today has to be upon resilience.

Resilience refers to the ability of the supply chain to cope with unexpected disturbances. There is evidence that the tendencies of many companies to seek out low-cost solutions because of pressure on margins may have led to leaner, but more vulnerable, supply chains. Resilient supply chains may not be the lowest-cost supply chains but they are more capable of coping with the uncertain business environment.

Resilient supply chains have a number of characteristics, of which the most important is a business-wide recognition of where the supply chain is at its most vulnerable. Managing the critical nodes and links of a supply chain, to be discussed further in Chapter 10, becomes a key priority. It is usually suggested that the benefits of such practices include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries.

Increasingly companies are discovering the advantages that can be gained by seeking mutually beneficial, long-term relationships with suppliers. The more that processes are linked between the supplier and the customer the more the mutual dependencies increase and hence the more difficult it is for competitors to break in.

Supply chain management by definition is about the management of relationships across complex networks of companies that, whilst legally independent, are in reality interdependent.

Successful supply chains will be those that are governed by a constant search for win-win solutions based upon mutuality and trust. This is not a model of relationships that has typically prevailed in the past.

It is one that will have to prevail in the future as supply chain competition becomes the norm. These four themes of responsiveness, reliability, resilience and relationships provide the basis for successful logistics and supply chain management. They are themes that will be explored in greater detail later in this book. Bowler, R.