"The Logistics Handbook" encompasses all of the latest advances in warehousing and distribution. It provides invaluable "how to" problem-solving tools and techniques for all the ever-increasing logistical problems managers face-- making it the most complete and authoritative handbook to date.
Special features include:
The most in-depth coverage of a wide range of topics, including information systems, benchmarking, and environmental issues
Contributions found nowhere else from the leading executives, consultants, and academics in the field, such as C. John Langley, James Heskett, and David Anderson
State of the art graphics
Information-packed appendixes of logistics publications and organizations
This all-inclusive reference will enable the next generation of managers to thoroughly integrate their logistics operations at all levels-- strategic, structural, functional, and implementation-- into a comprehensive logistics strategy.
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Evolution of the Integrated Logistics Concept
Bernard J. La Londe
One of the challenges in writing on the subject of "evolution of the integrated logistics concept" is trying to decide where to begin. To be sure, logistics was an integral part of warfare dating from the dawn of recorded history. The ability to move people, machines, arms, and supplies was an important determinant of the winner and loser in early conflicts and remains so today. In a book on the Gulf War, it is noted on the first page that U.S. forces planned, moved, and served 122 million meals during the brief engagement -- a task comparable to feeding all the residents of Wyoming and Vermont three meals a day for forty days. There is a long and illustrious history of logistics as an element of both ancient and modem warfare. One view of the derivation of logistics is that it comes from logistique, the title given to an officer in Napoleon's army responsible for quartering the troops and finding forage for the horses and other animals.
The importance of transporting products from their point of production to their point of consumption is also well documented in historical files. Applied logistics probably began when early cultures found that, because of a refined expertise, one community produced excess quantities of certain goods such as arrowheads and another community downstream could make better goods of another sort, such as pottery, because of access to better materials. Thus, applied logistics began with the inception of trade. In a more contemporary context, the industrial revolution and the advent of the mass production and mass consumption economy heralded the beginning of mass distribution in the industrialized countries of the world. As early as 1915, the two functions of marketing were identified as demand creation and physical supply. With urbanization and scale economies in the factory, the buyer and the seller grew further apart and it was necessary to bring the goods to the buyer. Specialized middlemen and transportation services emerged to serve this growing need. The task of the seller was not only to make and sell the product but also to deliver it to the buyer. In the early days of the United States, this often meant serving a buyer at a great distance without the benefit of roads or regular delivery services or agents.
The purpose of this introduction is to present a view of the "evolution of the logistics concept." As noted in the earlier discussion, distribution -- or logistics -- was recognized as a vital business process from an early time. However, during the past three decades, logistics has evolved considerably. This introductory chapter traces that evolution by addressing three questions:
* What is integrated logistics management?
* Why did the issue of integrated logistics (distribution) become important?
* How has integrated logistics evolved over the past three decades?
Executives and managers should be familiar with the history of integrated logistics management, for the history is enlightening and useful in today's business environment. Integrated logistics management did not develop by accident; the fundamental reasons for its evolution are as valid today as they were at its outset and can provide lessons and frameworks for tackling new challenges.
Integrated Logistics Management
The very definition of integrated logistics management is difficult and complicated by the fact that there has been a broad-based shift in business terminology during the past decade. When management first became interested in the potential of material flow to reduce cost or increase service, the term commonly used was physical distribution. The use of this terminology began in the 1920s and was adopted by post-World War II business management. In 1948, the American Marketing Association defined physical distribution management as "The movement and handling of goods from the point of production to the point of consumption or use."
Figure 1-1 identifies the distinction between various approaches to integration in the materials flow process. These distinctions were presented early in the development of physical distribution management theory to show the three basic approaches. The first approach, physical distribution, focuses on the flow of outbound finished goods. The second approach, materials management, is best described by Dean Ammer:
That aspect of the industrial management concerned with the activities involved in the acquisition and use of all materials employed in the production of the finished product. These activities may include production and inventory control, purchasing, traffic, materials handling and receiving.
The third approach, business logistics, encompasses the total material flow process from raw material through finished goods inventory. Here is an early definition of this approach:
A total approach to the management of all activities involved in physically acquiring, moving and storing raw materials, in-process inventory, and finished goods inventory from point of origin to the point of use or consumption.
In the relatively few short years since the logistics concept was accepted by major finns, department names for the function have quickly changed. Each year The Ohio State University conducts a study on logistics career patterns. The study indicates, as shown in Figure 1-2, that the commonly accepted distribution or marketing titles are giving way to reflect the new emphasis on logistics, which now accounts for almost one-third of logistics-related department names.
Over the past two decades there has been a broadening of executive responsibility for total material flow. Executive scope has been expanded to control functions that had previously been fragmented among separate departments, with little operational integration and even less attention from senior executives. Now, some firms regard logistics as a strategic function on a par with other major departments such as production, finance, product development, and marketing. Figure 1-3 shows the level of logistics responsibility by functional activity. The broadening of scope is demonstrated well by the changes in functional responsibility for international distribution. In the first Career Patterns study in 1972, international distribution management received a 9% response, whereas in the 1992 survey, 65% of logistics-related departments had international responsibility.
Thus, structural changes in business organization and a new focus on bringing value to the customer have created a range of adaptive behavior on the part of business firms. For forward-looking companies, integrated logistics management as a dominant material flow strategy emerged during the last half of the 1980s and the first half of the 1990s. Neither a single prototype organization nor a single set of performance metrics characterizes firms that have adopted integrated material flow solutions. Rather, in the early stages of change, the firms that have adopted integrated logistics management choose continuous innovation and improvement as their path to change.
Development of Integrated Distribution
Integrated distribution systems developed during the 1950s and 1960s. Four primary factors shaped the development of distribution thinking during this period: scientific management, data processing technology, a customer focus, and profit leverage.
By the end of World War II, large gains had been made in production technology that, in turn, renewed interest in scientific management of the business enterprise. In the post-World War II period, particularly during the late 1950s and the 1960s, there was increasing emphasis on the marketing function. During this period, the amount spent on advertising in the American economy quadrupled and the number of new products launched increased almost geometrically. Thus, by the mid- 1950s, businesspeople were in a situation where production technology was well advanced and marketing costs were steadily increasing. To reduce costs and remain competitive in the increasingly crowded marketplace, it was necessary to look to one of the few areas that was relatively untouched, the distribution costs of the firm.
In most firms, the cost of distribution represents from 10% to 30% of total costs. These costs, however, are diffused throughout the company. Some of the costs are incurred in inventory, some in materials handling, some in transportation, others in warehousing and storage, and so on. It is logical that this focus on efficiency in distribution was an outgrowth of the American business environment, for distribution was one of the last remaining frontiers for significant operational cost savings. The principal method of securing such cost reduction opportunity was to view distribution as an integrated task rather than as the many traditional fragmented tasks taking place in many parts of the firm.
Data Processing Technology
Another major precipitator of the "distribution revolution" was the advent of new technology in data processing. As computer technology became increasingly powerful, less costly, and more accessible, the possibility of automated inventory control procedures was realized. Distribution data generally require high-input, low-calculation, and high-output processing -- the type of processing that both management and workers prefer to automate, as it is time-intensive and tedious. The new technology contributed to the technical capability of handling large amounts of order and shipment data in a rapid and efficient manner. Computers allowed data to be entered once and reused for various purposes including order tracking, production scheduling, shipping, invoicing, and analysis. Data processing technologies reduced repetitive, error-prone manual data recording and manipulation work.
A side effect of the computer was its impact on total integration of management within the firm. Data processing caused some breakdown in the traditional departmentalization within firms and paved the way for integrated distribution management, which, of course, cuts across departmental lines just as data do. Undoubtedly, increasing levels of computer technology will continue to contribute to expanding information system applications in logistics problem-solving and operations.
The 1950s and 1960s brought increased management attention to logistics, for logistics was recognized as important in providing customer satisfaction. Management finally began to realize that selling a product is really only half the job. Getting the product to the customer at the right time in the fight quantity and with the right logistical support (parts and service) is the other equally important half. There was increased recognition that marketing management could not have a successful sales and marketing program unless the logistics system provided adequate support.
Customer satisfaction and logistical support of sales were of particular importance for those companies selling relatively homogeneous products like chemicals, paper, and dairy foods. Such companies often competed on the basis of efficiency in logistics, and their profits, in large measure, were determined by their success in effecting a sound logistics system. Of course, companies selling differentiated products like automobiles, pharmaceuticals, and clothing also found customer satisfaction and logistical support to be important, especially those in premium niches requiring great attention to detail.
Management also realized that there was significant profit leverage available from reduced logistics costs. As markets constantly expanded during the 1950s and 1960s, emphasis was on increased sales. As the tempo of domestic and international competition increased, a "profit squeeze" was reflected in the financial statements of many American firms. This prompted many firms to look for cost reduction opportunities along with market expansion opportunities in the previously untouched logistics area.
Evolution of Integrated Logistics Management
There are many factors that impact how a firm uses its resources to focus on strategic opportunities in the marketplace. Among them are external issues such as technology, globalization, and competition. There are also internal factors, which include management style, culture, human resources, and facilities. A firm must place its available resources against the more uncertain external resources in effecting strategy. Strategy, in turn, must leverage certain advantages that the firm has or feels it can achieve in the marketplace. Many firms have chosen to allocate resources to logistics as a strategy to gain advantage.
Those firms choosing to be in the forefront of the logistics concept development did not simply stumble upon "logistics" or distribution as a strategy. Rather, they reviewed alternative ways of bringing value to their customers and then decided that logistics offered more opportunity to impact value at the customer level than other business processes. Companies have pursued three general stages in their evolution into integrated logistics management: physical distribution focus, internal linkages, and external linkages.
Many firms do not even get to the first stage; or even if they do, they can be stalled for many years, depending on the combination of internal and external factors that play on decision-making processes of the firm. Thus, an explanation of evolution must not be viewed as a "biological" phenomenon that companies will naturally and automatically pass through, but rather as a characterization of change in the thinking of leading companies over the past three decades.
Underlying the stages of evolution philosophy is the concept that all manufacturing firms typically have three internal material flow loops. Figure 1-4 shows the internal loops as procurement, operations, and physical distribution. Procurement is the material flow loop that extends from the point of vendor location to the point of first manufacture (or perhaps reprocessing or simply repackaging). Operations is the material flow loop that extends from the point of first manufacture to a completed finished good. Accountants refer to material in this loop as work-in-process (WIP). Physical distribution is the material flow loop that extends from finished goods to the ultimate consumer.
Evolution of integrated logistics management is best framed in terms of inventory, because inventory represents 35% to 50% of current assets for an average company. This level of investment demands the attention of a firm's most senior executives and advisers. In a typical company, 30% of total inventory is in the procurement loop, 30% is in the operations loop, and 40% is in the physical distribution loop. Inventory was used as a buffer between the three internalmaterial flow loops and indeed was used as a buffer between the internal operations and the two flanking external material flow loops -- between the vendor and procurement on the inbound side and between physical distribution and the customer on the outbound side. The net result of this multiple inventory buffering was inventory turns (total unit flow ÷ average unit level) far below what could have been achieved if common inventory theory had been used.
Stage 1: Physical Distribution
Not surprisingly, the first stage, physical distribution,
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