Logistics and Competitive Strategy
Throughout the history of mankind wars have been won or lost through logisticsstrengths and capabilities. It hasbeen argued that the American Warof Independence was lost by the British since they did not have proper supply lines andrelied heavily on Britain. This resulted in poorly equipped and demoralized troops.Proper supply lines were established only in 1781 by which time it was too late to haveany impact on the war.Whilst Generals and Field Marshalls from the earliest times understood the importanceof logistics it is only recently that organizations have come to realize the importance of managing logistics.
A central theme of these series of articles is to show that effective logisticsmanagement can provide a major source of competitive advantage.The source of competitive advantage is found firstly in the ability of the organization todifferentiate in the eyes of the customer, from its competition and secondly fromoperating at lower cost and hence at lower cost and greater profit.Put simply, successful companies either have a productivity advantage or they have avalue advantage or a combination of the two. The productivity advantage gives a lowercost profile and the value advantage gives the product or offering a differential overcompetitive offerings.Let us take a brief look at the two methods of competitive advantage.
- In any industry we will find that there is one company thatis able to achieve highest sales and thereby also achieve the lowest cost per unit due toeconomies of scale. There is substantial evidence to prove that in these cases that 'bigis beautiful' when it comes to cost advantage.The experience curve has its root in the earlier concept of the learning curve. Thelearning curve effect was discovered in the Second World War where is was seen that asthe number of units produced increased every additional unit produced could be createdusing less time and resources. Subsequently Bruce Henderson of the BostonConsultancy Group extended this concept to state that all costs - production related ornot reduced and the volume of output increased. In fact to be more precise, therelationship exists between real unit costs and cumulative volume. Further it isrecognized that cost decline exists only for value added and not for bought in supplies.Hence it has been accepted that one of the principle ways of improving cost advantageis through greater production and sales. However, through logistics we will demonstratethat there are multiple methods and means of improving cost efficiency through betterlogistics management.
it has long been an axiom in marketing that customers don't butproducts they buy benefits. Put another this means that the product is not purchasedfor itself but for what it will deliver. The benefits may be intangible such as image orreputation. Unless the product can be differentiated in some way from the competition it will be seen as generic and will get only commodity prices. The values of the marketcan only be fully realized by segmenting the market and creating distinct valuesegments. In other words different groups in different markets place different values tobenefits.Adding value through differentiation is a powerful way of achieving a defensibleadvantage in the market.
Gaining Competitive Advantage through logistics
One of the distinguishing features of the value chain is to postpone the final creation of the product as much as possible. The idea behind this is that maximum flexibility can beachieved through postponement by obtaining time place and form utility. This can beachieved by aggregating production systems rather than catering to individual customerrequirements.Competitive advantage cannot be understood by looking at a firm as a whole. It stemsfrom the many discrete activities a firm performs in designing, producing, marketing,delivering, and supporting its product. Each of these activities can contribute to a firm'srelative cost position and create a base for differentiation... the value chaindisaggregates a firm into its strategically relevant activities in order to understand thebehaviour of costs and the existing and potential sources of differentiation. A firm gainscompetitive advantage by performing these strategically important activities morecheaply or better than its competitors.
Understanding logistics management
The mission of logistics management is to plan and coordinate all activities necessary toachieve desired levels of delivered service and quality at lowest possible cost. Logisticsmust therefore be seen as the link between the market and the company. The scope of logistics spans the organization from raw material management to delivery of the finalproduct.To achieve companywide integration requires quite a different orientation than what isseen in the conventional organizations.
The supply chain and competitive performance
Traditionally most organizations view themselves as entities that exist independentlyfrom others and indeed need to compete with them in order to survive. However such aphilosophy can be self-defeating if it leads to unwillingness to corporate in order tocompete. Behind this seemingly paradoxical concept is the idea of supply chainmanagement.The supply chain is the network of organizations that are involved, through upstreamand downstream linkages in the different processes that produce value in the form of products and services in the hands of the ultimate consumer.A typical example of the new type of organization that we discuss is Apple Computerswhere over 90% of the cost of sales of a typical Apple computer is purchased content.Clearly this trend has many implications for logistics management, not the least beingthe challenge of integrating and co-ordinating the flow of materials from a multitude of suppliers, often offshore, and similarly managing the distribution of the finished productby way of multiple intermediaries.There are still some companies that will reduce cost and improve profit margins at theexpense of supply chain partners. These companies do not realize that they are simplytransferring costs upstream and downstream and this does not make them any morecompetitive. All costs incurred by intermediaries will ultimately reflected in the pricecharged from the end-user. The leading logistics companies recognize the fallacy of thisconventional approach and instead seek to recognizedLogistics management is simply the management of flows of materials within theorganization but supply chain management recognizes that this is simply not enoughand linkages with external supply chain partners upstream and downstream is essential.For the purposes of clarity we define supply chain management as:"The management of upstream and downstream relationships with suppliers andcustomers to deliver superior customer value at less cost to the supply chain as awhole"
The changing logistics environment
As the new competitive context of business continues to change, bringing with it newcomplexities and concerns for management generally, it also has to be recognized thatthe impact of these changes on logistics can be considerable. Of the many issues facingorganizations today perhaps the most challenging are in the area if logistics.The pressing issues facing organizations today are listed below: