Supply Chain Management and Cost of Production

Supply Chain Management and Cost of Production Nexus - An Empirical Analysis Md. Entazul Huque * Md.
Anwarul Islam **
Abstract: It is only in the recent past that business organizations have come to recognize the vital impact that logistics/ supply chain management can have in the achievement of competitive advantage. There are important five generic competitive strategies to achieve competitive advantage. The vital one is low-cost. Logistics / supply chain management has the potential to assist the organization in the achievement of cost / productivity advantage and a value advantage. The productivity advantage gives a lower cost profile and value advantage gives the product or offering a differential plus over competitive offerings. Logistics costs represent a significant proportion of total costs. As the logistics/ supply chain process strategically manage the procurement, movement and storage of materials, parts, and finished inventory ( and related information flows) thorough the organization and its marketing channels in such a way that current and future profitability are maximized through the cost-effective fulfillment of orders, so the scope of taking advantage of lowering unit cost is very significant. Further that Logistics/ supply chain management increase efficiency. Productivity plays an important role in this respect. The higher productivity is, the lower costs are in producing goods and services, the lower prices can be. Therefore, logistics/ supply chain management has the scope of planning, implementing and controlling the efficient and effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers requirements. To survive in the present context of globalizing the business, increase in competitors and explosion of production technology as well as information technology compelled the business firms to think effective & efficient logistics/ supply chain management. It is a fact of priority that will contribute significantly to achieve competitive advantage by lowering unit cost. Key words: Logistics, supply chain, productivity, efficiency, logistics/ supply chain management, competitiveness, and competitive advantage.
* **
Professor & Chairman, Dept. of Business Administration, Bangladesh University Professor, Department of Marketing, Dhaka University
D. U. Journal of Marketing, Vol. No. 10, June 2007
INTRODUCTION Despite advancement of management theory and information system, logistics management/ supply chain management has evolved in scope and influence in the private sector since mid to late 1940s. In 1950s and 60s, the military was the only organization using the term logistics (Edward H. Frazelle, 2004). There was no true concept of logistics in the private industry at that time. In the 1960s, material handling, warehousing, and traffic were grouped together to become known as physical distribution: procurement, marketing, and customer service were grouped together to become known as business logistics. Even today in many academic institutions, logistics is still divided along these lines; where logistics is taught in the business school, it is taught as business logistics and in the engineering schools as physical distribution (Edward H. Frazelle, 2004). Throughout the history of mankind wars have been won and lost through logistics strengths and capabilitiesor 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 failure (Martin Christopher, 2005). An organization capable of supplying the army was not developed until 1781 and by then it was too late. In the Second World War logistics also played a major role. The allied Forces invasion of Europe was a highly skilled exercise in logistics. In the early part of 1991 the world was given a dramatic example of the importance of logistics. In the late 1960s and early 1970s, cost was the primary concern, a holdover from the philosophy of the 1950s that manufacturings only objective was to minimize production costs. However, as more and more companies began to produce low-cost products, the need became apparent to develop other ways to differentiate themselves from their competitors. The priority thus shifted to quality. Companies at this time obtained a competitive advantage by producing high quality products,
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Supply Chain Management and Cost of Production Nexus - An Empirical Analysis
which allow them to change morealthough price still was a factor in the consumers buying decision. However, competition again soon caught up, and everyone was offering high-quality products that reasonably priced. Companies, in looking to obtain competitive advantage in the market place turned to speed of delivery as a means of differentiation themselves from the rest of the competitors (Aquilano, Chase, Davis: Fundamental of operation management, second edition). George Stalk, a leading management guru has identified speed as one of the major factor of competitive advantage 1(a). Eventually, the competition again caught up and the more aggressive firms looked for still another means to obtain a competitive advantage. This time the flexibility was selected as manifested by the ability of the firms to produce customize products. In 1993, the companies have taken into consideration service as another item for competitive advantage. As the rules for operation strategy shifted from that of primary reducing manufacturing costs to that of including quality, speed of delivery, flexibility, and service the paradigm for logistics / Supply chain management functions has also came in picture of considering maximizing value along with the cost minimizing of products(Aquilano, Chase, Davis: Fundamental of operation management, second edition). Supply chain is about creating valuevalue for customers and suppliers of the firm, and value for the firms stakeholders. Value in logistics/ supply chain is primarily expressed in terms of time and place. Product and services have no value unless they are in the possession of the customers when (time) and where (place) they wish to consume them. The mission of logistics/supply chain management is to plan and coordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible costs (Martin Christopher, 2005). Logistics/ supply chain management must therefore be seen as the link between the market place and the operating activities of the business. Logistics management, from this system viewpoint, is
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the means whereby the needs of customers are satisfied through the coordination of the materials and information flows that extend from the marketplace, through the firm and its operations and beyond that to suppliers. Logistics / supply chain management functions integration are shown in a flow diagram-1: Materials flow Supplier Distribution Procurement Customers Operations
Information flow Diagram: 1 From the diagram-1, we can draw the definition of logistics in a simplest way as Logistics is the flow of material, information, and money between consumers and suppliers (Martin Christopher, 2005). Supply Chain Management is relatively a new field of integrated management in comparison with the traditional fields of finance, marketing, and production. Logistics is the part of supply chain process. Supply Chain Management is a term that has emerged in recent years that captures the essence of integrated logistics and even goes beyond it. Supply chain management emphasizes the logistics interactions that take place among the functions of marketing, logistics, and production within a firm and those interactions that take place between legally separate firms within the product flow channel. Therefore, supply chain management can be defined as the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across business within supply
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chain, for the purpose of improving the long-term performance of the individual companies and the supply as a whole (Benjamin S. Blanchard, 2005, 2006). Over the years, several studies have been conducted to determine the costs of logistics for the whole economy and for the individual firm. These are widely varying estimates of the cost levels. According to the International Monetary Fund (IMF), logistics costs average about 12% of the worlds gross domestic product. For the firm, logistics costs have ranged fro 4% to over 30% of sales. Value is added by maximizing the logistics costs and by passing the benefits on to customers and to the firms shareholders. It is the point of empirical analysis of the researcher that the firm must deeply exercise their knowledge and skill in logistics /supply chain management to understand as well as to apply it in the manufacturing process so that firm can be benefited to reduce costs. The results from a cost survey of individual firms are shown in Table-1 below: Table-1 Average Physical Distribution cost Cost Category Cost in terms of % of Sales Transportation 3.34% Warehousing 2.02% Customer service/order entry 0.43% Administration 0.41% Inventory carrying cost @18%/ year 1.72% Total distribution cost 7.65%
Source: Herbert W. Davis and William H. Drumm,Logistic costs and service Database2002, Annual Conference proceedings), (San Francisco,
CA: Council of Logistic management, 2002) at www.cclml.org.)
OBJECTIVE OF THE RESEARCH 1. To address the subject of logistics/ supply chain management in general, to include some terms and definitions, and to describe the importance /need for logistics in the context of current competitive global environment. 2. Introduces the concept of logistics/ supply chain management with a brief review of its evolution and adoption within industry 3. To introduce new and evolving concept for greater application in the industry and to achieve benefit in terms of increasing efficiency and productivity. 4. To develop clear understanding about the way of cost reduction by application of logistic / supply chain management so that firm can significantly play role in the competitive environment to get competitive advantage. 5. It is an academic based empirical analysis that will help the professionals to explore further knowledge in order to fine tuning as well as to deliver knowledge to academic pursuits. METHODOLOGY For making the research success relevant knowledge and information were collected from two sources, viz. from text books and fro different journal. It is worthwhile to say that remarkable research or publication on this issue has not been found. So, information & knowledge, used in this study, has been collected from text book, internet source and journal / conference discussion records. Ideas have been developed from the requirement and necessity of this aspect in the industry for precise application to become benefited in the competitive global business environment. Moreover, the researcher feels the enduring use of logistic/ supply chain management knowledge to impart to educational institution through seminars and workshops.
Literature related to this aspect has been studies to provide references with confident. Theories of logistic and supply chain management, Logistic engineering, supply chain strategy, marketing, production & operation, strategic management and economics have been studied from the text books and knowledge of these theories has been exercised precisely to clear the issue of research article. The experience of the researcher in the field of logistic and supply chain management helps to analyze and develop concrete idea as well concept. Graphical representation and other tools and techniques have been used to analyze the operational definition of variables, system, and outcome to draw concluding rational findings. RESEARCH DESIGN The research design for the current study includes analytical framework, application of theory and practices, and empirical knowledge. In order to attain the objectives of the study we have identified some factors or attributes which are expected to have crucial relationship with ensuring access to cost reduction and increase of efficiency and productivity. Empirical analysis are then developed to identify factors relating to access to reach cost reduction in production, procurement, information flow, and distribution level and factors explaining the need for cost reduction and attaining efficiency as well as productivity. In order to examine the determinants of accessibility and magnitude of cost reduction, during empirical the researcher used a number of explanatory variables identified in literature review to observe their potential impact to cost reduction and to increase efficiency and productivity of a firm. The essence of theories of logistics and supply chain management, marketing, production & operation, strategic management and
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economics has been used from the concerned text books for empirical analysis. The concept of application of productivity advantage, value advantage, customer service, elements of logistics, logistics information, the evolution of logistics, logistics framework, universal system of manufacturing/ service organization (inputtransformationoutput), value chain system have been actively considered during empirical analysis of the research article. LITERATURE REVIEW Logistics and logistics management: The word Logistics has originated from the Greek word logistikos and from the Latin word logisticus, meaning science of computing and calculating. Logistics is that part of supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, service, and related information from the point of origin to the point of consumption in order to meet the customers requirement (Ronald H. Ballau, 2005). Logistics is also referred to as physical distribution. Philip Kotler defines logistics as planning, implementing, and controlling the physical flows of materials and finished goods from the point of origin to the point of use to meet the customers need at a profit. Logistics Management is basically an integrative process that optimizes the flow of materials and supplies through the organization and its operations to the customer. Martin Christopher says that logistics is essentially a planning process and an information based activity.
Supply chain and supply chain management According to Ronald H Ballou in his book- Business logistics / supply chain management (page-5) supply chain is the networks of facilities, vehicles, and logistics information systems. Supply chain encompasses all activities associated with the flow and transportation of goods from the raw materials stage (extraction), through to the end user, as well as the associated information flows. Supply chain management is the integration of these activities, through improved supply chain relationship, to achieve a sustainable competitive advantage. Relationship of Logistics and supply chain There is a lot of confusion surrounding the terms logistics and supply chain. Edward H. Frazelle in his book supply chain management (Page-8) has distinguished the two by explaining that the supply chain is the network of facilities (warehouse, factories, terminals, ports, stores and homes), vehicles ( trucks, trains, planes, and ocean vessels), and logistics information systems (LIS) connected by an enterprises suppliers suppliers and its customers customers. Logistics is what happens in the supply chain. Logistics activities (customer response, inventory management, supply, transportation, and warehousing) connect and activate the objects in the supply chain. The Evolution of Logistics and Supply Chain Management There was no true concept of logistics in private industry up to late 1940s. Its application started in military operations in 1950s and 1960s. The development of logistics in industry starts very slowly in the five phases namely, i) Workplace logistics, ii) Facility logistics, iii) Corporate logistics, iv) supply chain logistics , and v) Global logistics. This development is shown in the diagram-2:
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Scope & Influence
Supply Chain Logistics

Corporate Logistics Facility Logistics
Workplace logistics
Global Logistics
1950s
1960s
1970s
1980s
1990s
Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301).
Diagram-2 Workplace logistics: Workplace logistics is the flow of materials at single workstations. The objective of the workplace logistics is to streamline the movement of an individual working at a machine or along an assembly line. Ergonomics is the example of workplace logistics. Facility logistics: Facility logistics is the flow of material between workstations within the four walls of a facility. The facility could be a factory, terminal, warehouse or distribution center. Facility logistics can be termed as material handling. In 1960s, material handling, warehousing, and traffic were grouped together to become known as physical distribution; procurement, marketing and customer service were grouped together to become known as business logistics. Corporate logistics: Corporate logistics is the flow of material and information between facilities and processes of a corporation. In 1970s, the first application of true logistics within a corporation starts by
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Supply Chain Management and Cost of Production Nexus - An Empirical Analysis 11
assimilating and synthesizing departments (material handling, warehousing and so on) into functions (physical distribution and business logistics). The objective is to develop and maintain a profitable customer service policy while maintaining and reducing total logistics costs. Supply chain logistics: Supply chain logistics is the flow of material, information, and money between corporations (interworkstation, interfaculty, inter-corporate, and intra-chain). Global logistics: Global logistics is the flow of material, information, and money between countries. Global logistics flows have increased dramatically during the last several years due to globalization in the world economy, expanding use of trading blocs, and global access to Web sites for buying and selling merchandise. Global logistics is much more complex than domestic logistics, due to the multiciplicity of handoffs, players, languages, documents, currencies, time zone, and cultures that are inherent to international business. Gaining competitive advantage through logistics To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing value chain activities. Value chain activities have been categorized in two groupsprimary activities (inbound logistics, operations, outbound logistics, marketing, and sales & service) and support activities (general administration, human resource management, technology development, and research). This is depicted in diagram-3 below:
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The Value Chain
Diagram
1
Primary activities and cost Purchased Supplies & Inbound logistics
Operations
Outbound logistics
Sales & marketing
service
Profit margin
Product R&D, Technology, and System development Support Activities & cost Human resource management General Administration
Diagram-3 Logistics deliver s value to the customers through three logistical processes. Inbound logistics: Operation preceding manufacturing. This includes: i) Movement of raw materials, ii) Components for processing from raw materials. Process logistics: Operations directly related to processing. This includes:-i) Storage & movement of raw materials and components within the manufacturing premises as per manufacturing schedule ii)The inventory management of stored material and in-process goods is part of process logistics. Outbound logistics: Operations following the production process. This includes:- i) Warehousing, ii) Transportation, iii) Inventory management of finished products.
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Interdepended logistics activities The definition of logistics and supply chain management speaks itself the interdependent activities of customer response, inventory planning and management, supply, transportation, and warehousing. The interdepended activities are summarized below in diagram-4:
Interdependent logistics activities
-receiving -put away -storage -order picking -shipping
ousin g
ns
po r
ta tio n
-network design -shipment management -fleet container management -carrier management -freight management
tra
ware h
Logistics
su
-customer service policy -customer satisfaction -order entry -order processing -inventory & collection
Customer response
pp ly
Inventory t managemen
-Supplier service policy -sourcing -supplier integration -purchase order processing -buying and payment -
-forecasting -order quantity engineering -fill rate planning -control policy -deployment
Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-1, published by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)
Diagram-4
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Logistics Master Planning (LMP) 4:
LMP three steps

-systematize (develop and document detailed procedures) -Automate (justify, select, and implement appropriate systems) -Humanize (design, populate, and develop organization plans for human resource
LMP Methodology
This methodology can and has been used in a Wide variety of industries, countries, any other operating situation. implement
implement
e ns t po en es m r r age me an sto y m ly on Cu tor upp ati en S port sing s u Inv an o Tr areh w
LMP
investigate
innovate
Master planning
Lo g org istic an s iza ti o n
processes Logistic Information system
Me & g asure oa s l
Logistics
-Profile current logistics activity -Measure current logistics performance -Benchmark performance and practices versus world- class standards.
-Simplify (eliminate And combine activities -Optimize (apply decision Support tools to determine Optimal resource Requirements) -Apply world-class practices
innovate investigate
Source: Strategic management, Pearce & Robinson, sixth edition. Logistics and supply chain management, Martin Christopher, second edition
Diagram-5 Logistic master planning is a planning process that develops short-and long-term metrics, process definitions, information system requirements, and organizational requirements for logistics as a whole and for logistics activities like customer response, inventory management, supply, transportation, and warehousing separately. There are three steps in logistics master planning namely, i) investigate, ii) innovate, and iii) implement. The LMP methodology and its three steps are shown separately in diagram-5: Competitive advantage The transition of volume-based growth to value based growth will require ensuring much greater focus on the core processes of the business. As the competitive model in the contemporary competitive
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business environment rely on process rather than product, the question of determining factors of competitive advantage has come in the frontline. The factors on which competitive advantage depend on are described below in a statement in the mathematical form: Competitive advantage5 = product excellence x process excellence Process excellence is related to logistics/supply chain. The key issues of process excellence are responsiveness, reliability, and relationships. Responsiveness refers to shorter lead time, flexibility and quick solution to the problem of customers. In other words the customers desire an environment of agility. Agility implies the ability to move quickly and to meet customer demand sooner. A key to improving reliability in logistics process is enhanced pipeline visibility. Buyer/ supplies relationships development is trend towards fulfillment of demanddriven marketplace. Supply chain management by definition is about the management of relationship across complex networks of companies. Therefore, the three themes of responsiveness, reliability and relationships provide the basis for successful logistics and supply chain management which in tern support competitive advantage. An input output perspective on logistics productivity7: Logistics / supply chain management recognize the amount of logistics resources consumed in providing in target customer service levels. Hence a fair set of performance indicators will include measures of logistics resource utilization and productivity. Those measures describe utilization and productivity for the logistics workforce, transportation capacity, logistics facilities, and inventory. The perspective on logistics productivity in an input output diagram-6 is shown below: Diagram-6
Logistics requirements: Workforce Space Inventory Transport systems Logistics information system
Logistics processes Customer response 15 Inventory management Supply Transportation Warehousing
Logistics Outp Perfect orders Storage capacit Information Sa le s
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C o s t s 1.11 Financial measures of Logistics performance: Diagram-7

Logistics Financial Measures
Corporate Financial Measures with notation
Logistics Financial Measures with notation
Description of Logistics expenses items
Revenue-R Expense-E Profit-P=R- E Asset Value-AV Asset Turnover-AT=R/AV Asset carrying rate-ACR Corporate capital charge-CCC Total corporate cost-TCC=E+CCC Cost sales ratio-CRS=(E+CCC)/R Return on assets-ROA+P/AV Economic value added-EVA =P- (AV x ACR) Logistics capital charges-LCC =LAV x ACR Total logistics cost-TLC =LE+LCC Logistics cost sales ratio-LCSR =TLC/R Return on logistics assets-ROLA =LP/ LAV Logistics value added-LVA =P- ( LAV x ACR)
Product of the investment in logistics assets, And the asset carrying rate. Customer response, inventory planning & Management, supply, transportation, and Warehousing. Customer response: cost of labor, space for Order processing, telecommunication. Inventory management: inventory carrying cost, Cost of personnel, system cost. Supply: cost of labor, space, system, and Telecommunication for performing activities. Transportation cost: Inbound & outbound cost. Ware housing cost: Cost of labor, space, material handling system, and information handLing system
Logistics expenses-LE
Telecommunications, inbound & outbound freight, fuel, fees to third parties and leased or rented space. Inventory, logistics facilities, transportation Fleets, material handling system, logistic Information system.
Logistics asset value-LAV Logistics assets turnover-LAT =R/LAV
Logistics is playing an increasingly important role in value creation, revenue enhancement, capital consumption, and expense control. As a result, logistics financial performance is playing a bigger role in corporate financial performance. Like our corporate financial measures we have similar logistics financial measures. To sharpen focus of our
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vision in respect to logistics financial measures and logistics performance measures it is necessary to produce two matrix namely i) Logistics financial measures matrix, and ii) Logistics performance measures matrix wherein the aspects like logistics activities, logistics financial measures with notation, corporate financial measures with notation, logistics productivity indicators, quality indicators, and response tome indicators are shown. The cost items involved against logistics expense, logistics asset value, and logistic capital charges are shown, in brief, under the description of logistics expenses column in diagram-7.
(Source: Edward H. Frazelle Ph.D: supply chain Management, chapter-3, published by Tata Mc Graw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008 and printed at Saurabh Printers Pvt Ltd., Nodia 201 301)
Total logistics cost (TLC) Total logistics costs are defined to include expense and capital costs in the five logistics processes: customer response, inventory planning and management, supply, transportation, and warehousing. The total logistics costs are made up of the costs namely i) Total customer response costs (CRC), Total inventory costs (TIC), Total supply costs (TSC), Total transportation costs (TTC), and Total Ware housing costs (TWC). Therefore, the total logistic costs can be written in a mathematical formula as: Total Logistics Costs, TLC = TRC + TIC + TSC + TTC + TWC. Analysis of important aspects related to subject of the article The researcher has outlined and explained, in the literature review, the theories and practices of logistics/ supply chain management. The purpose is to reach a conclusion that cost reduction of the product/ service is achieved significantly through logistics/ supply chain
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management. Therefore, a systematic analysis is presented to provide an understanding as well as in-depth knowledge about logistics and the need of its application in the present global business environment. Competitive advantage through productivity & value advantage Traditionally, it has the wide spread opinion that the main route to cost reduction was by gaining greater sale volume and there can be no doubt about the close linkage between relative market share and relative costs. However, it must also be recognized that logistics management can contribute significantly to reduce costs. In other words, it is central theme that effective logistics 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 logistics. Competitive advantage can be achieved through productivity advantage and value advantage or combination of two. The productivity advantage provides a lower cost profile and value advantage provide the differential product offerings and customer service. Service is as a means of gaining a competitive edge. Service in this context relates to the process of developing relationships with customers through the provision of augmented offer in the form of delivery service, after-sales services, financial packages, technical support and so forth. Firms can able to reach cost and service leader position in the industry based upon both a productivity advantage and a value advantage as shown in matrix (a). Indeed the challenge to management is to identify appropriate logistics strategies to take the organization to the right hand corner of the matrix (b).
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Logistics and competitive advantage matrix Marketing logistics strategic goal
HI
Commodity market
Cost leader
Relative differentiation
Service leader
LO
Cost and Service leader
Value advantage
LO
HI
HI LO HI Relative delivered costs (b) Productivity advantage (a)
LO
Matrix-1(a) and Matrix-1(b)
Competitive advantage & value chain: Competitive advantage through logistics is another important issue in the competitive business environment. In this respect the contribution of Michael Porter, Professor, Harvard Business School has been recorded in his research and writing8,9 . One concept, in particular, that Michael Porter has brought is the value chain
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A Model of supply Chain Management
The supply Chain The global environment

Intercorporate coordination ( Functional shifting, third-party providers, relationship management, supply chain structures.
Supply Chain Flows
Interfunctional Coordination Trust Commitment Risk Dependence Behaviors
Marketing Sales Research & Development Forecasting Production Purchasing Logistics Information system Finance Customer service
supplier Focal firm Customer Customers customer
Products Services Information Financial Resources Demand Forecasts
Customer Satisfaction/ Value/ Profitability/ Competitive advantage
Suppliers supplier
Source: Mentzer et al; Defining supply chain management, Journal of Business Logistics, Vol.22, No. 2 (2001), p. 19)
Table-3 Value chain activities, categorized into two pats, are integrated functions (shown in the diagram of value chain). Competitive activities are derived from the way in which firms organize and perform these discrete activities within the value chain. Therefore, to gain competitive advantage over its rivals, a firm must deliver value to its customers through performing these activities more efficiently than its competitors or by performing the activities in a unique way that creates greater differentiation. Another consideration is the supply chain networks that are involved through upstream and downstream linkages in the different processes and activities that produce value in the form of products and service. In the past it was simply considered as relationship with the suppliers and customers. It is the case today for judgment of cost
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reduction or profit improvement at the expense of their supply chain partners. Companies should realize that simply transferring costs, upstream and downstream, may not make them more competitive. So, supply chain management is essentially required to combat the cost reduction or profit maximization situation. To ensure such situation companies shall consider a model of supply chain management model in Table-3. Logistic environment and pressing current issues: As the competitive context of business continues to change, bringing with it new complexities and global concerns for management in reality, it is the time to be recognized that the impact of these changes on logistics can not be overlooked rather it is a time for giving due attention to logistics / supply chain management. Indeed, of many strategic issues that confront the business organization today, perhaps the most challenging are in the area of logistics. The researcher at this stage would like to highlight, in a brief diagrammatic form diagram-8, about the most pressing issues considered currently:
Changing Logistics Environment Due To Pressing Current Issues
Current issues
The customer Service explosion
Description of current issues

The customer in todays marketplace is more demanding, not just of product quality, but also of service. The companies that have achieved recognition for service excellence, and thus have been able to establish a differential advantage over their competition are those companies where logistics management is a high priority. Xerox, BMW, Dell Computers are example. One of the most visible features of recent years has been the way in which time has become a critical issue in management. The concept of logistics lead time is one of prominent issue. From the moment when decisions are taken on the sourcing and procurement of materials and components through the manufacturing sub assembly process to final distribution and after-market support, there is a true scope of logistics lead-time management. The third issue that provide a challenge for logistics management is the trend towards globalization. In the global business materials and components are sourced worldwide, manufactured offshore and sold in many different countries along with local customization. The global company seeks to achieve competitive advantage by identifying world markets exercising effort through logistics management. The challenges that face the business organization in todays environment are quite different to those of the past in respect of many issues and out of those organizational integration is another important one. Now we need broadbased integration with Production, marketplace, service delivery system, and inbound as well as outbound logistics.
Time compression
Globalization Of industry
Organizational integration
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(This diagrammatic form is designed and developed by the researcher from the knowledge gained from text book. Source: Logistic and supply chain management; Strategies for reducing cost and improving service, Second edition, written by Martin Christopher.)
Diagram-8 Alignment of organization structure: The transition to the 21st century seems to have been accompanied by ever-higher levels of turbulence in the organizational structure in the business environment. Traditional organization has grown heavy with layer upon layer of management and bureaucracy. Such companies have little chance of remaining competitive in the new market place. Experienced observers and commentators of the logistic management process have general agreement that the major barrier to the implementation of the logistics concept is traditional organizational structure. Moreover, the companies do not recognize the need for organizational change, and still have poor knowledge about logistics /supply change management and its effect on production cost and profit maximization. Therefore, most of the organization maintain and manage the activities on a functional basis (production, marketing, HRM, finance & accounting, R & D, engineering etc.). It may be mentioned here that the process of satisfying customer demand begins with inbound supply and continues through manufacturing or assembly operations and onwards by way of distribution to the customers. To manage this process it is required a complete system involving the logistics / supply chain management. By doing this the organization can achieve a smooth- flowing logistics pipeline that facilitates end-to-end process management. The cost reduction by way of this process management can effectively be managed which ultimately give rise to profit. As markets, technologies and competitive forces change at ever-increasing rates and the trend towards globalization of industry is a future-oriented avenue so the imperative for organizational structure change is required considering logistics as driving force. The importance of logistics / supply chain
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incorporation in the traditional organizational structure is a must to avoid problem and at the same time to make alignment of organization without separating the logistics management from the functional activities. The gradual approach of evolutionary steps to an aligned logistics organization is outlined hereunder in Diagram-9: Evolutionary steps to an aligned logistics organization
Evolutionary steps to an aligned logistics organization
Aligned logistics organization includes process organization, matrix organization, integrated logistics organization, global Logistics organization, business unit logistics organization, distributed logistics organization, hybrid model.
Aligned Logistics organization Remuneration Based on
Training & education for the individuals about the Aligned logistics organization
Training & development
performance
Remuneration on the basis of Performance to be decided by The council so that employees perform effectively & efficiently.
Performance Measure definition
To develop a set of standard of measuring to reach a common purpose of satisfying customers at the total lowest logistics costs and maximizing share holder value added concepts by the council
Logistics Council
Logistics council comprised of the individuals whose decisions impact the flows of Materials, information, and money across the organization. It includes representation from inbound and outbound transportation, warehousing, procurement, inventory planning, customer service, manufacturing, information Technology, and finance.
Diagram-9
Source: Text Book: supply Chain Strategy; Edward H, Frazelle, Ph.D. TATA Mc Graw-Hill Edition.
Reshaping of Organizational Structure: Based on organizations mission and corporate culture the existing traditional organizational structure is to be reshaped and integrated organizational structure including logistics/ supply chain management is arranged in many organizations of the world in order to survive as well as to take advantage in the competitive global business environment. The
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Distributed logistics organizational model and global logistics organization model is shown below in Diagram-10 as an example. Another important aspect is considered to develop logistics scoreboard framework to present a set of indicators for aligning logistics performance towards the unifying goals of reducing logistics costs, decreasing the logistics labor content per order, increasing total logistics quality, and decreasing total logistics cycle time.
Distributed Logistics Organization Model

CEO
Marketing Sales R&D Production Quality Finance
Logistics Analyst
Logistics Analyst
Logistics Analyst
Logistics Analyst
Logistics Analyst
Logistics Analyst
Chief Logistician
Global Logistics Organization Model Global Logistics Officer
Regional Logistics Manager NAFTA
Regional Logistics Manager EU
Regional Logistics Manager ASIA PACIFIC
Domestic Logistic Manager US, Canada, Mexico
Domestic Logistic Manager Netherlands, UK
Domestic Logistic Manager Japan, Hong Kong
Diagram-10 Logistics optimization: To create logistics optimization it is essential to look into the logistic activities that has been described under the heading Interdependent logistics activities. The activities are customer response, inventory management and planning, supply, transport, and warehousing. Brief analysis is focused to understand the effect on cost reduction.
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The logistics of customer response consists of five interrelated activities as has been stated in the diagram of interdependent logistics activities. Customer response is optimized when the customer service policy (CSP) yielding the lowest cost of lost sales, inventory carrying, and distribution is identified and executed. The inventory planning and management (IP&M) is the combination of five activities namely, forecasting, order quantity engineering, service level optimization, replenishment planning, and inventory deployment. The objective of supply management is to minimize the total acquisition cost while meeting the availability, response time, and quality requirements stipulated in the customer service policy and in the inventory master plan. The logistics of supply include developing and maintaining a supplier service policy, sourcing, supplier integration, purchase order possessing, and buying and payment. The objective of transportation is to link all pick-up and deliver-to points within the response time requirements of the customer service policy and the limitations of the transportation infrastructure at the lowest possible cost. The logistics of transportation include network design and optimization, shipment management, fleet and container management, carrier management, and freight management. The objective of warehousing is to minimize the cost of labor, space, and equipment in the warehouse while meeting the cycle time and shipping accuracy requirements of the customer service policy and the storage capacity requirements of the inventory play. The logistics of warehousing includes receiving, put away, storage, order picking, and shipping. Therefore, to achieve lowest cost effective management of interdependent logistics activities shall have to be provided attention on top priority basis. The companies who are considering this fact in reality are known as the survival of the fittest. Nevertheless, it goes without
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saying that logistics /supply chain management has nexus to unit cost of production provided an integrated action is matched through alignment in the traditional organization structure. Logistics impact on Return on investment (ROI):
The impact of margin and asset turn on ROI Profit/sales (margin) 20% ROI 15% ROI 10% ROI
It illustrates the opportunities that exits for boosting ROI through either achieving better Margins or higher assets turns or both
Sales/ Capital employed (Asset turnover) Logistics impact on ROI

Customer service Logistics efficiency
Sales revenue
--
Profit
Return On investment
costs
Inventory
Assets deployment & utilization
Capital employed
+
Accounts receivable
+
Cash
+
Fixed assets
Source: Logistic and Supply Chain Management, second edition, Martin Christopher,
Graph-1 & Diagram-11 The ways in which logistics management can impact on ROI are many and varied. Return on investment is the ratio between the net profit and the capital that was employed to produce that profit, thus: ROI = Profit Capital employed. This ratio can be further expanded: ROI = Profit Sales Sales Capital employed. The figure below shown in graph-1 & diagram-11 highlights the major elements determining ROI and the potential for improvement through more effective logistics management. The ways in which logistics
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management can impact on ROI are many and varied. Return on investment is the ratio between the net profit and the capital that was employed to produce that profit, thus: ROI = Profit Capital employed. This ratio can be further expanded: ROI = Profit Sales Sales Capital employed. The figure below shown in graph-1 & diagram-11 highlights the major elements determining ROI and the potential for improvement through more effective logistics management. Addressing logistics/supply chain in general: To address about logistics/supply chain it is imperative to provide some terms and definitions, to describe the need for logistics in the current international and global business environment, outlined logistics elements, and alignment of the organizational structure. The researcher has described different aspects in the foregoing paragraphs and diagrams wherein an integrated logistics approach is emphasized and the need for considering logistics to reduce cost for attaining competitive advantage in the business arena is focused. In the context of Bangladesh, the logistics/supply chain management is a new thought although the issue is not new in the global business. In our country logistics/ supply chain management is no more than a distribution system. The idea is to be changed. As soon as the old concept is prevailed in the mind of the entrepreneurs and even sustained in the public/ autonomous office the growth of the organization / government sector will be under threat in gaining the competitive advantage. In the sector of agriculture, food management, glossary shops, departmental stores, healthcare service, and even vegetables supply logistics management should immediately be thought of so that sustainable situation of competitive advantage can be attained through productivity management and value advantage. The price control in the
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market can be effective by efficient integrated logistics/ chain supply management throughout the country. For creating such situation knowledgeable professional are to be engaged in the concerned area or professional can be created through training and development. Information system of the supply chain management plays a very important role for quick response to the users/customers as well as other stakeholders. Mode of delivery, warehousing, transportation ete is to be arranged (on the basis of logistics activities) in the system design so that the whole operation can be made cost-effective. FINDINGS & RECOMMENDATIONS: The findings after careful analysis on various aspects related to logistics and supply chain management as well as surrounding field is captured as under: 3.1 To achieve leadership through logistic/ supply chain management the organization must go through a number of fundamental transformation such as i) from functional to a process orientation, ii) Performance measurement through indicators of logistics activities, iii) To switch over from the product management to customer management, and iv) Need to change from a transaction mentality to a relationship mentality. A responsive supply chain by definition is highly integrated. They are internally integrate across functions and externally integrated with upstream suppliers and downstream customers. A key to supply chain integration is the open flow of information from one end of pipeline to another. Quick customer response is the broadly considerable aspect to characterize logistics strategies which aim to meet the precise customer requirements in short time frames. Inventory
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3.2
3.3
management with minimum cost is also important related issue of quick response. 3.4 Time compression in the pipeline has the potential to speed up response times and to reduce logistics/ supply chain cost. These dual goals are achieved through reduction of non-value adding timeand particularly time spent as inventory. Paradoxically the trend to globalization has increased the complexity of logistics/ supply chain. For this reason question of providing attention to logistics/ supply chain management has come in the front line to combat the competitive environment. Logistics costs can account for a large proportion of total costs in the business, hence it is critical and attention is required to manage carefully as otherwise cost reduction can not be possible. Appropriate cost accounting approach (probably activity-based costing) in place of tradition approach is important. Manager will seek rather explore logistics strategies that develop latent opportunities to increase efficiency and productivity which in tern deliver significant advances in customer service. Differentiation through service excellence is an example of a well thought through strategy for managing the logistics of service delivery. Professional training on logistics / supply chain management is required to be enhanced in order to match the knowledge in the changing business environment. This training will also help build awareness about impact of cost on logistics/ supply chain.
3.5
3.6
3.7
3.8
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3.9
In Bangladesh, the knowledge of logistics is in the primitive stage. Organizations and public bodies should come forward and incorporate the modern technology and concepts of logistics / supply chain management in order to have a chance to catch and reach the competitive avenue both at national, international, and global level.
3.10 In todays fast-paced and customeroriented business environment, superior logistics/supply chain performance is a prerequisite to becoming and staying competitive. This can be achieved through cost reduction and increasing efficiency as well as productivity based on the logistics / supply chain integrated organizational structure. 3.11 It is imperative to develop Human-friendly logistics which is based on the Golden Rule treat people the way you would like to be treated. Human friendly transportation (driver routes and schedules that minimize the away from families, on- board communications, Loading/ unloading facility etc.) and Humanfriendly warehousing (natural light and color coordination, lifting aids, safety, picking facility etc.) is a factor for the customers. CONCLUSION Logistics/ Supply Chain Management are now a new growing concept in the world. But more interesting aspects of this issue is effective logistics / supply chain management is a major source of competitive advantage and this lead to superiority over competitors in two ways namely, i) reducing cost, and ii) increasing profit. Success of competitive advantage depends on product excellence and process excellence. The trends towards globalization of industry, involving as it does the coordination of complex flows of materials and information from a
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multitude of offshore sourcing and manufacturing plants to a diversity of markets has sharply highlighted the inappropriateness of existing structures. It is a fact that logistics/ supply chain is the driving force in the contemporary competitive business environment for bringing structural change of the organization. In todays highly competitive global marketplace, the pressure on organizations to find new ways to create and deliver value to customers grows ever stronger. There is a growing recognition that it is through logistic efficiency and effective management of the supply chain that the twin goals of cost reduction and service enhancement can be achieved. Application of logistics/ supply chain management in the organizations of Bangladesh is still in a fluid condition. It may be pointed out that the companies who were market leaders a decade ago have in many cases encountered severe reversals of fortune due to failure of timely application of logistics/ supply chain management. The industry in Bangladesh is facing competitive disadvantage in many ways out of which non integration of logistic/ supply chain. The importance of logistics/ supply chain management is to understood and necessary steps are to be taken so that products and service can be marketed with due consideration of competitive price and customer response. It is the sincere effort of the researcher to present this article in order to create sensation to the entrepreneurs/ businessman/ Government organizations about the logistics/ supply chain management knowledge and its importance in the global business environment. This research presentation will provide extraordinary help to the professional for academic as well as further research purpose.
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REFERENCES Aquilano, Chase, Devis; Fundamentals of Operations Management, Second edition, Mc Grow-Hill. Benjamin S. Blanchard; Logistics Engineering and Management, Sixth Edition, Second Impression, 2006. Acquilano, Chase, and Davis; Fundamentals of Operations Management, Second edition, Chapter-3. American Heritage Dictionary, 4th edition, Houghton mifflin Co., Boston, MA, 2002. Bernard J. LaLonde and Paul H. Zinszer, Customer service: Meaning and measurement (Chicago: National council of Physical Distribution Maanagement, 1976): Richhard E. Snyder, Physical Distribution costs: A Two year analysis, distribution Age Vol. 62 (January 1963) , pp.50-51. Bowler, R.A. , Logistics and the failure of the British Army in America 17751783, Princeton university Press, 1975. Christopher, M, and Braithwaite, A., Managing Strategies Lead times, Logistics Information Management, December 1989. David C. Colander; Economics, Fourth Edition Mc Grow-Hill, Irwin.77 Edward H. Frazelle, Ph.D; Supply Chain Management, chapter-1, page18, Tata Mc Graw-Hill Publishing Company Limited, New Delhi. Edward H. Frazelle, Ph.D; Supply Chain Management, chapter-3, page49-50, Tata Mc Graw-Hill Publishing Company Limited, New Delhi. Frazier, R.M Quick Response in soft lines, Discount Merchandiser, January 1986.
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Nickels, James M. McHugh, Susan m. McHugh: Understanding Business, Sixth Edition. Roberts, J., Formulating and Implementing a Global Logistics Strategy, International Journal of Logistics Management, Vol 1, No 2, 1990. Martin Christopher; Logistics and Supply Chain management; strategies for reducing cost and improving service, chapter-1, page-30, Second edition. MIL- HDBK 502, Department of Defense handbook on Acquisition Logistics, Department of Defence, Washington, DC, May 1997. Porter, M. E., Competitive strategy, The Free Press, 1980 Porter, M. E., Competitive Advantage, The Free Press, 1985. P.J. Metz, Demystifying Supply Chain Management, supply Chain Management Review, winter, Reed El-sevier, New work, NY, 1998. Ronald H. Ballou; Business Logistics/ Supply Chain Management, Planning, Organizing, and Controlling the supply chain; Fifth Edition. Sherman, R.J., Improving Customer Service Through Integrated Logistics, Council of Logistics Management Annual Conference Proceedings, 1991. Schonberger, R.J., Building a Chain of Customers, The Free Pre Van Hoek, R.I., Commandeur, H.R. and Vos, B., Reconfiguring Logistics System through Postponment Strategies, Journal of Business Logistics, Vol 18,No 2, 1998 , 1990.
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Van Hoek, R.I., Commandeur, H.R. and Vos, B., Reconfiguring Logistics System through Postponment Strategies, Journal of Business Logistics, Vol 18,No 2, 1998. George Stalk, Jr., TimeThe Next Source of Competitive Advantage, Harvard Business Review, JulyAugust 1988, pp.44-51. Wendall M. Stewart, Physical tribution: Key to Improved Volume and Profits, Journal Of Marketing Vol. 29 ( January 1965), p.67. Robert B. Handfield and Ernest L. Nichols Jr. Introduction to supply chain management (Upper Saddle River, NJ: Prentice- Hall, 1995), p.2 The New Oxford Dictionary, Oxford University Press, 2001. This definition was developed by the Council of Logistics Management (CLM), 2805 Butterfield Road Oak.
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Supply Chain Management and Cost of Production

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Supply Chain Management and Cost of Production Nexus - An Empirical Analysis Md. Entazul Huque * Md.

D. U. Journal of Marketing, Vol. No. 10, June 2007