Logistics & supply chain management

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Contents

About the author

Preface

Publisher’s acknowledgements

1 Logistics, the supply chain and competitive strategy

Supply chain management is a wider concept than logistics

Competitive advantage

The supply chain becomes the value chain

The mission of logistics management

The supply chain and competitive performance

The changing competitive environment

2 Delivering customer value

The marketing and logistics interface

Delivering customer value

What is customer service?

The impact of out-of-stock

Customer service and customer retention

Market-driven supply chains

Defining customer service objectives

Setting customer service priorities

Setting service standards

3 Going to market

Distribution channels are value delivery systems

Innovation in the distribution channel

The omni-channel revolution

Omni-channel retailing

4 Measuring logistics costs and performance

Logistics and the bottom line

Logistics and shareholder value

Logistics cost analysis

The concept of total cost analysis

Understanding the cost-to-serve

Customer profitability analysis

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Direct product profitability

Cost drivers and activity-based costing

5 Matching supply and demand

The lead-time gap

Improving visibility of demand

The supply chain fulcrum

Forecast for capacity, execute against demand

Demand management and planning

Collaborative planning, forecasting and replenishment

6 Creating the responsive supply chain

Using the volume/variability matrix

Product ‘push’ versus demand ‘pull’

The Japanese philosophy

The agile supply chain

The foundations of agility

A routemap to responsiveness

7 Strategic lead-time management

Time-based competition

The concept of lead-time

Logistics pipeline management

Reducing logistics lead-time

8 The synchronous supply chain

The extended enterprise and the virtual supply chain

The role of information in the virtual supply chain

Laying the foundations for synchronisation

‘Quick response’ logistics

Production strategies for QR

Logistics systems dynamics

9 Complexity and the supply chain

The sources of supply chain complexity

The cost of complexity

Product design and supply chain complexity

Mastering complexity

10 Managing the global pipeline

The trend towards globalisation in the supply chain

Gaining visibility in the global pipeline

Financing global supply chains

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Organising for global logistics

Thinking global, acting local

The future of global sourcing

11 Service logistics

What is a service?

Buying performance

The service dominant logic

The trend to ‘servitisation’

Implications of servitisation for logistics

The critical role of capacity

Service supply chain processes

Managing the service supply chain

12 Managing risk in the supply chain

Why are supply chains more vulnerable?

Understanding the supply chain risk profile

Managing supply chain risk

Achieving supply chain resilience

13 The era of network competition

The new organisational paradigm

Collaboration and trust in the supply chain

Reducing costs through collaborative working

‘Co-opetition’ – co-operating with competitors

Managing the supply chain as a network

Supply chain orchestration

From 3PL to 4PL™

The last word

14 Overcoming the barriers to supply chain integration

Creating the logistics vision

The problems with conventional organisations

Developing the logistics organisation

Logistics as the vehicle for change

Benchmarking

15 Creating a sustainable supply chain

The triple bottom line

Greenhouse gases and the supply chain

Reducing the transport-intensity of supply chains

Beyond the carbon footprint

Reduce, re-use, re-cycle

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The impact of congestion

16 The supply chain of the future

Emerging mega-trends

Shifting centres of gravity

Supply chain governance and compliance

The need for adaptability

Seeking structural flexibility

2020 vision

Waste in the supply chain

The New Industrial Revolution

Seven major business transformations

The implications for tomorrow’s logistics managers

Index

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For Denis Towill (1933–2015). A scholar and an inspiration.

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About the author

Martin Christopher is Emeritus Professor of Marketing and Logistics at Cranfield School

of Management in the United Kingdom. His work in the field of logistics and supply chain

management has gained international recognition. He has published widely and his books

have been translated into many languages. Martin Christopher co-founded the

International Journal of Logistics Management and was its joint editor for 18 years. He is a

regular contributor to conferences and workshops around the world.

In addition to working with many companies in an advisory capacity he is also a Visiting

Professor at universities in the UK and overseas.

Martin Christopher is an Emeritus Fellow of the Chartered Institute of Logistics and

Transport and is also a Fellow of the Chartered Institute of Procurement and Supply. He is

the recipient of the Distinguished Service Award of the USA Council of Supply Chain

Management Professionals.

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Preface

Logistics and supply chain management are now firmly established as critical business

concerns. Many companies have appointed Directors and Vice-Presidents who are

responsible for ensuring the cost-effective operation of the ‘end-to-end pipeline’ that links

the supply side of the business with the end market. When the first edition of this book was

published in 1992, the practice of logistics and supply chain management was still in its

infancy even though the underlying ideas had been around for a while.

In preparing this fifth edition of Logistics and Supply Chain Management I have continued

to maintain the focus of the book around the role that logistics and supply chain

management play in achieving competitive advantage. The premise that has underpinned

this book since the first edition is that businesses compete as supply chains rather than as

stand-alone companies. Converting this idea from an abstract concept into real-world

practice is still proving a challenge for many organisations. Hopefully this book will provide

some guidance on how that transformation can be achieved.

Supply chains today operate in a world where the rate of change continues to increase. As

we enter an era that some have termed ‘The New Industrial Revolution’ much of the

conventional wisdom that has been the basis for supply chain design and thinking will have

to be questioned. Hence the emphasis in the book on the need to develop logistics and

supply chain solutions that are flexible and capable of adapting quickly to changes in the

business environment.

In writing any book there will be many sources of inspiration and this is certainly the case

with this current volume. Over the years I have the good fortune to work with thought￾leaders in logistics and supply chain management – both academics and practitioners –

from around the world and I have learned much from them. Instead of attempting to list

them I would rather acknowledge with gratitude the collective role they have played in

shaping the ideas that I present in this book. I thank them all.

MARTIN CHRISTOPHER

EMERITUS PROFESSOR OF MARKETING AND LOGISTICS CENTRE FOR

LOGISTICS AND SUPPLY CHAIN MANAGEMENT CRANFIELD UNIVERSITY,

UK

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Publisher

’

s acknowledgements

We are grateful to the following for permission to reproduce copyright material:

Figures

Figure 1.7 reprinted with the permission of The Free Press, a division of Simon &

Schuster, Inc. from Competitive Advantage by Porter, M. E. Copyright © 1985 by Porter,

M. E. All rights reserved; Figure 1.9 reprinted with permission from Emerald Group

Publishing Limited, originally published in Stevens, G. C., ‘Integrating the supply chain’,

International Journal of Physical Distribution and Materials Management, 19(8) © Emerald

Group Publishing Limited 1989; Figure 2.2 reprinted with permission of Harvard Business

Review, from ‘Stock-outs cause walkouts’ by Corsten, D. and Gruen, T. Copyright © 2004

by Harvard Business Review; Figure 4.10 from Hill, G. V., Logistics – The Battleground of the

1990s, A. T. Kearney, Inc.; Figure 4.11 from Gattorna, J. L. and Walters, D. W.,

Managing the Supply Chain: A Strategic Perspective (Palgrave Macmillan, 1996), reproduced

with permission of Palgrave Macmillan; Figure 7.13 reprinted with permission from

Emerald Group Publishing Limited, originally published in Scott, C. and Westbrook, R.,

‘New strategic tools for supply chain management’, International Journal of Physical

Distribution of Logistics Management, 21(1) © Emerald Group Publishing 1991; Figure

10.3 from Creating Resilient Supply Chains, Report on Behalf of the Department for Transport,

Cranfield School of Management, Cranfield University, 2003; Figure 10.4 courtesy of

Price-WaterhouseCoopers (PWC); Figure 11.1 reprinted with permission from Emerald

Group Publishing Limited, originally published in Aronsson, H., Abrahamsson, M. and

Spens, K., ‘Developing lean and agile health care supply chains’, Supply Chain Management:

An International Journal, Vol. 16, No. 3, 176–183 © Emerald Group Publishing Limited

2011; Figure 11.2 from Ellram, L. M., Tate W. L. and Billington, C., ‘Understanding and

managing the supply chain model’, Journal of Supply Chain Management, Vol. 40, No, 4,

17–32 (Wiley-Blackwell, 2004).

Table

Table on page 86 from Hill, G. C. and Harland, D. V., ‘The customer profit centre’, Focus,

2(2), Institute of Logistics and Distribution Management, 1983.

Text

Text on page 152 from The Scotsman, 14/02/2007; text on page 223 from Supply Chains in

a Vulnerable World (A. T. Kearney, 2003); text on page 272 from Butner, K. Geuder, D.

and Hittner, J., Mastering Carbon Management: Balancing Trade-Of s to Optimise Supply

Chain Ef iciencies (IBM Global Services, 2008).

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1

Logistics, the supply chain and competitive

strategy

Supply chain management is a wider concept than logistics

Competitive advantage

The supply chain becomes the value chain

The mission of logistics management

The supply chain and competitive performance

The changing competitive environment

Logistics and supply chain management are not new ideas. From the building of the

pyramids to the relief of hunger in Africa there has been little change to the principles

underpinning the effective flow of materials and information to meet the requirements of

customers.

Throughout the history of mankind, wars have been won and lost through logistics‘

strengths and capabilities – or the lack of them. It has been argued that the defeat of the

British in the American War of Independence can largely be attributed to logistics failures.

The British Army in America depended almost entirely upon Britain for supplies; at the

height of the war there were 12,000 troops overseas and for the most part they had not only

to be equipped, but fed from Britain. For the first six years of the war the administration of

these vital supplies was totally inadequate, affecting the course of operations and the morale

of the troops. An organisation capable of supplying the army was not developed until 1781

and by then it was too late.

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In the Second World War logistics also played a major role. The Allied Forces’ invasion of

Europe was a highly skilled exercise in logistics, as was the defeat of Rommel in the desert.

Rommel himself once said that ‘… before the fighting proper, the battle is won or lost by

quartermasters’.

However, whilst the Generals and Field Marshals from the earliest times have understood

the critical role of logistics, strangely it is only in the recent past that business organisations

have come to recognise the vital impact that logistics management can have in the

achievement of competitive advantage. Partly this lack of recognition springs from the

relatively low level of understanding of the benefits of integrated logistics. As early as 1915,

Arch Shaw

2 pointed out that:

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The relations between the activities of demand creation and physical supply … illustrate the

existence of the two principles of interdependence and balance. Failure to co-ordinate any one

of these activities with its group-fellows and also with those in the other group, or undue

emphasis or outlay put upon any one of these activities, is certain to upset the equilibrium of

forces which means ef icient distribution.

… The physical distribution of the goods is a problem distinct from the creation of demand

… Not a few worthy failures in distribution campaigns have been due to such a lack of co￾ordination between demand creation and physical supply …

Instead of being a subsequent problem, this question of supply must be met and answered

before the work of distribution begins.

It is paradoxical that it has taken 100 years for these basic principles of logistics

management to be widely accepted.

What is logistics management in the sense that it is understood today? There are many ways

of defining logistics, but the underlying concept might be defined as follows:

Logistics is the process of strategically managing the procurement, movement and storage of

materials, parts and finished inventory (and the related information flows) through the

organisation and its marketing channels in such a way that current and future profitability

are maximised through the cost-ef ective fulfilment of orders.

Ultimately, the mission of logistics management is to serve customers in the most cost￾effective way. A recurring theme throughout this book is that the way we reach and serve

customers has become a critical competitive dimension. Hence the need to look at logistics

in a wider business context and to see it as far more than a set of tools and techniques

Supply chain management is a wider concept than logistics

Logistics is essentially a planning orientation and framework that seeks to create a single

plan for the flow of products and information through a business. Supply chain

management builds upon this framework and seeks to achieve linkage and co-ordination

between the processes of other entities in the pipeline, i.e. suppliers and customers, and the

organisation itself. Thus, for example, one goal of supply chain management might be to

reduce or eliminate the buffers of inventory that exist between organisations in a chain

through the sharing of information regarding demand and current stock levels.

The concept of supply chain management is relatively new. It was first articulated in a

white paper

3 produced by a consultancy firm – then called Booz, Allen and Hamilton –

back in 1982. The authors, Keith Oliver and Michael Webber, wrote:

Through our study of firms in a variety of industries … we found that the traditional

approach of seeking trade-of s among the various conflicting objective of key functions –

purchasing, production, distribution and sales – along the supply chain no longer worked very

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well. We needed a new perspective and, following from it, a new approach: Supply-chain

management.

It will be apparent that supply chain management involves a significant change from the

traditional arm’s-length, even adversarial, relationships that have so often typified

buyer/supplier relationships in the past and still today. The focus of supply chain

management is on co-operation and trust and the recognition that, properly managed, the

‘whole can be greater than the sum of its parts’.

The definition of supply chain management that is adopted in this book is:

The management of upstream and downstream relationships with suppliers and customers in

order to deliver superior customer value at less cost to the supply chain as a whole.

Thus the focus of supply chain management is upon the management of relationships in

order to achieve a more profitable outcome for all parties in the chain. This brings with it

some significant challenges as there may be occasions when the narrow self interest of one

party has to be subsumed for the benefit of the chain as a whole.

Whilst the phrase ‘supply chain management’ is now widely used, it could be argued that

‘demand chain management’ would be more appropriate, to reflect the fact that the chain

should be driven by the market, not by suppliers. Equally, the word ‘chain’ should be

replaced by ‘network’ as there will normally be multiple suppliers and, indeed, suppliers to

suppliers as well as multiple customers and customers’ customers to be included in the total

system.

Figure 1.1 illustrates this idea of the firm being at the centre of a network of suppliers and

customers.

Extending this idea, it has been suggested that a supply chain could more accurately be

defined as:

A network of connected and interdependent organisations mutually and co-operatively

working together to control, manage and improve the flow of materials and information from

suppliers to end users.

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Figure 1.1 The supply chain network

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Competitive advantage

A central theme of this book is that effective logistics and supply chain management can

provide a major source of competitive advantage – in other words, a position of enduring

superiority over competitors in terms of customer preference may be achieved through

better management of logistics and the supply chain.

The foundations for success in the marketplace are numerous, but a simple model is based

around the triangular linkage of the company, its customers and its competitors – the

‘Three Cs’. Figure 1.2 illustrates the three-way relationship.

Figure 1.2 Competitive advantage and the ‘Three Cs’

Source: Ohmae, K., The Mind of the Strategist, Penguin Books, 1983

The source of competitive advantage is found firstly in the ability of the organisation to

differentiate itself positively, in the eyes of the customer, from its competition, and

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secondly by operating at a lower cost and hence at greater profit.

Seeking a sustainable and defensible competitive advantage has become the concern of

every manager who is alert to the realities of the marketplace. It is no longer acceptable to

assume that good products will sell themselves, neither is it advisable to imagine that

success today will carry forward into tomorrow.

Let us consider the bases of success in any competitive context. At its most elemental,

commercial success derives from either a cost advantage or a value advantage or, ideally,

both. It is as simple as that – the most profitable competitor in any industry sector tends to

be the lowest-cost producer or the supplier providing a product with the greatest perceived

differentiated values.

Put very simply, successful companies either have a cost advantage or they have a value

advantage, or – even better – a combination of the two. Cost advantage gives a lower cost

profile and the value advantage gives the product or offering a differential ‘plus’ over

competitive offerings.

Let us briefly examine these two vectors of strategic direction.

1 Cost advantage

In many industries there will typically be one competitor who will be the low-cost producer

and often that competitor will have the greatest sales volume in the sector. There is

substantial evidence to suggest that ‘big is beautiful’ when it comes to cost advantage. This

is partly due to economies of scale, which enable fixed costs to be spread over a greater

volume, but more particularly to the impact of the ‘experience curve’.

The experience curve is a phenomenon with its roots in the earlier notion of the ‘learning

curve’. Researchers in the Second World War discovered that it was possible to identify and

predict improvements in the rate of output of workers as they became more skilled in the

processes and tasks on which they were working. Subsequent work by Boston Consulting

Group extended this concept by demonstrating that all costs, not just production costs,

would decline at a given rate as volume increased (see Figure 1.3). In fact, to be precise, the

relationship that the experience curve describes is between real unit costs and cumulative

volume.

Figure 1.3 The experience curve

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