CHAPTER I. Logistics, The Supply Chain and Competitive
Strategy
Logistics and supply chain management has played a role throughout history, including wars.
Logistics management can have a vital impact in the achievement of competitive advantage.
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-effective fulfilment of orders.
Ultimately, the mission of logistics management is to serve customers in the most cost-
effective way.
1.1. 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. SCM builds upon this framework
and seeks to achieve linkage and coordination between the processes of other entities in the
pipeline, i.e. suppliers and customers, and the organisation itself.
The concept of SCM is relatively new. It was first articulated in a white paper produced by a
consultancy firm – then called Booz, Allen and Hamilton – back in 1982. The focus of SCM is
on cooperation and trust and the recognition that, properly managed, the ‘whole can be greater
than the sum of its parts’. Definition of SCM:
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.
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.
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.
1.2. Competitive Advantage
Effective logistics and SCM can provide a major source of
competitive advantage. 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’, illustrated on the left.
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,The source of competitive advantage is found
1. Firstly, in the ability of the organisation to differentiate itself positively, in the eyes of
the customer, from its competition, and
2. Secondly, by operating at a lower cost and hence at greater profit.
Commercial success derives from either a cost advantage or a value advantage or, ideally, both.
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.
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. ‘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’. BCG: all costs, not just
production costs, would decline at a given rate as volume increased.
The relationship that the experience curve describes is between real
unit costs and cumulative volume.
The blind pursuit of economies of scale through volume increases may not always lead to
improved profitability. It is increasingly through better logistics and SCM that efficiency and
productivity can be achieved, leading to significantly reduced unit costs.
2. Value advantage
Customers don’t buy products, they buy benefits (tangible or intangible). In addition, the
delivered offering may be seen to outperform its rivals in some functional aspect. Unless the
product or service we offer can be distinguished in some way from its competitors, there is a
strong likelihood that the marketplace will view it as a ‘commodity’ and so the sale will tend to
go to the cheapest supplier.
Means of value differentiations:
• Benefit segmentation: different groups of customers within the total market attach
different importance to different benefits. Adding value through differentiation is a
powerful means of achieving a defensible advantage in the market. E.g. automobile
industry
• Augmentation: there is a trend in many markets towards a decline in the strength of
the ‘brand’ and a consequent move towards ‘commodity’ market status. There is a need
to seek differentiation through means other than technology. In this context service
relates to the process of developing relationships with customers through the provision
of an augmented offer. This augmentation can take many forms, including delivery
service, after-sales services, financial packages, technical support and so forth.
Seeking the high ground
Successful companies will often seek to achieve a position based
upon both a cost advantage and a value advantage. A useful way of
examining the available options is to present them as a simple
matrix.
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,Commodity market: products are indistinguishable from competitors’ offerings and these
companies have no cost advantage. Ultimately the only strategy is either to move to cost
leadership, or towards service leadership.
• Cost leadership strategies have traditionally been based upon the economies of
scale, gained through sales volume – i.e. why market share is so important in many
industries. However, an increasingly powerful route to achieving a cost advantage
comes not necessarily through volume and the economies of scale but instead through
logistics and SCM. In many industries, logistics costs represent such a significant
proportion of total costs that it is possible to make major cost reductions through
fundamentally re-engineering logistics processes.
• The other way out of the ‘commodity’ quadrant of the matrix is to seek a strategy of
differentiation through service excellence. Customers in all industries are
seeking greater responsiveness and reliability from suppliers: they are looking for
reduced lead-times, just-in-time (JIT) delivery and value-added services that enable
them to do a better job of serving their customers.
There is no middle ground between cost leadership and service excellence. Indeed, the
challenge to management is to identify appropriate logistics and supply chain strategies to
take the organisation to the top right-hand corner of the matrix. Companies which occupy that
position have offers that are distinctive in the value they deliver and are also cost competitive.
Clearly it is a position of some strength, occupying ‘high ground’ that is extremely difficult for
competitors to attack.
Logistics and SCM has the potential to assist the organisation in the achievement of both a
cost advantage and a value advantage. As Figure 1.6 suggests, in the first instance there are a
number of important ways in which productivity can be enhanced through logistics and SCM.
Figure 1.6 Gaining competitive advantage
Those organisations that will be the leaders in the markets of the future will be those that have
gained both cost leadership and service leadership.
1.3. The Supply Chain Becomes the Value Chain
One concept in particular that Michael Porter has
brought to a wider audience is the ‘value chain’.
Competitive advantage is derived from the way in
which firms organise and perform primary- and
support activities within the value chain. To gain
competitive advantage over its rivals, a firm must
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, deliver value to its customers by performing these activities more efficiently than its
competitors or by performing the activities in a unique way that creates greater differentiation.
The implication of Porter’s thesis is that organisations should look at each activity in their
value chain and assess whether they have a real competitive advantage in the activity. If they
do not, then perhaps they should consider outsourcing that activity to a partner who can
provide that cost or value advantage. However, such decisions may add to the complexity of
the supply chain.
The effect of outsourcing is to extend the value chain beyond the boundaries of the business.
I.e. the supply chain becomes the value chain. Value (and cost) is not just created by the focal
firm in a network, but by all the entities that connect to each other. This ‘extended enterprise’
becomes the vehicle through which competitive advantage is gained – or lost.
1.4. The Mission of Logistics Management
The mission of logistics management is to plan and coordinate all those activities necessary to
achieve desired levels of delivered service and quality at the lowest possible cost. Logistics
must be seen as the link between the marketplace and the supply base. The scope of logistics
spans the organisation. Logistics management: 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.
The last few decades have seen the introduction of flexible manufacturing systems
(FMS), of new approaches to inventory based on materials requirements planning
(MRP) and JIT methods and, perhaps most important of all, a sustained emphasis on total
quality management (TQM). Procurement also plays a critical role in creating and
sustaining competitive advantage as part of an integrated logistics process.
Logistics is essentially an integrative concept that seeks to develop a system-wide view of the
firm. It is fundamentally a planning concept that seeks to create a framework through which
the needs of the marketplace can be translated into a manufacturing strategy and plan, which
in turn links into a strategy and plan for procurement. Ideally there should be a ‘one-
plan’ mentality within the business that seeks to replace the conventional stand-alone and
separate plans for marketing, distribution, production and procurement.
1.5. The Supply Chain and Competitive Performance
The supply chain is the network of organisations that are involved, through upstream and
downstream linkages, in the different processes and activities that produce value in the form
of products and services in the hands of the ultimate consumer. Each of the organisations in
the chain are dependent upon each other and yet, paradoxically, by tradition do not closely
cooperate with each other.
SCM is not the same as ‘vertical integration’. Vertical integration normally implies
ownership of upstream suppliers and downstream customers. This was once thought to be a
desirable strategy but increasingly organisations are now focusing on their ‘core business’,
everything else is ‘outsourced’. These companies have sometimes been termed ‘virtual’ or
‘network’ organisations.
This trend has many implications for SCM, not the least being the challenge of integrating and
coordinating the flow of materials from a multitude of suppliers, often offshore, and similarly
managing the distribution of the finished product by way of multiple intermediaries.
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