Logistics Evolution in Global Economy - Challenges & Strategies | Loyola University Study

1. “COMPETITIVE ADVANTAGE THROUGH GLOBAL SUPPLY CHAIN MANAGEMENT: A NEWMANAGERIAL CHALLENGE” Burak Kazaz Loyola University Chicago School of Business

2. THE GLOBAL ECONOMY is an ACCEPTED REALITY • Key Questions: • What forcesare shaping the Global Economy? • What are the consequencesof Globalization? • How to take advantage of the dynamic process?

3. 15.2 16 12.5 14 12 10.2 9.5 Percentage Average Annual Growth 8.7 10 8 5.8 5.6 5.6 6.0 4.7 6 3.7 4 1.4 2 0 N. America/ Far East Far East/ N. America Europe / Far East Far East/ Europe N. America/ Europe Europe/ N. America 1985 - 1990 1990 - 1995 (forecast) LONG TERM GROWTH OF WORLD TRADE Source: TBS/DRI World Trade Service, 1991

4. $ Billions (1980 $) 2500 2000 1500 1000 500 0 1980 1985 1990 1995 1999 WORLDWIDE LOGISTICS EXPENDITURES * Approximately 20-25 centsofevery sales dollarwithin the US. It should exceed $600 billion per year during the 1990s. * Worldwide logistics expenditures should rise to nearly 2.1 trillion $US by 1999 (approx. 16% of worldwide GNP). Source: Temple, Barke, & Sloane, Inc., 1989

5. LOGISTICS EXPENDITURES In 1994, the world market spent 2.5 trillion on logistics related activities (Financial Times 9/21/94) Last year American companies spent $670 billion (10.5% of GDP) to wrap, bundle, load, unload, sort, reload, and transport goods (Fortune, 11/28/94) By 1996, contract logistics will be a $25 billion-a-year business, growing 6% annually, reaching$47 to $50 billion in revenues by the year 2000 (Journal of Commerce, 5/31/95)

6. SOME FORCES SHAPING THE GLOBAL ECONOMY Environmental Changes: * Regional Economic Alliances (e.g., NAFTA, MercoSur) * Government Regulations (e.g., content and import restrictions) * Increased uncertainty (e.g., political risks, exchange-rate volatility) TechnologicalChanges: * Communication Links (e.g., Computer networks) * Manufacturing Innovations (e.g., CAD/CAM, FMS) * Transportation Improvements (e.g., mixed platforms)

7. NAFTA IMPACT ON TRADE Total Merchandise Traded 1993 1994 % Change United States to Canada 100.2 114.4 14.2 % United States to Mexico 41.6 50.8 22.1 % Canada to United States 111.2 128.9 15.9 % Canada to Mexico 0.6 0.7 24.6 % Mexico to United States 40.0 49.5 23.8 % Mexico to Canada 2.9 3.3 11.5 % TOTAL 296.5 347.6 17.2 % Source: U.S. Department of Commerce, NAFTA Office

8. SOME CONSEQUENCES OF GLOBALIZATION Changing Markets: * Less Protectionism (e.g., countries are reducing the barriers) * New Competitive Pressures (e.g., monopolies are disappearing) * Customers are more sophisticated (e.g., worldwide standards of quality, global products and world brand development) ChangingRequirements: * Product Life Cycle Compression (e.g., information and innovation) * Faster Efficient and Effective Response (e.g., more than just cost) * New Management Strategies (e.g., TQM, Reengineering, Global Logistics)

9. THE LOGISTICS SYSTEM Component Manufacturing Final Assembly Distribution & Warehousing CUSTOMERS SUPPLIERS Physical Supply Inbound Logistics Physical Distribution Outbound Logistics

10. THE LOGISTICS FUNCTION • The set of facilities, equipment, people, and operating policies that make possible the flow of goods from acquisition of raw material through production and distribution into the hands of the consumer

11. 7 Rights of the Logistics Manager • Ensure the availability • of the right product, • in the right quantity, • and the right condition, • at the right place, • at the right time, • for the right customer, • at the rightcost.

12. INTERFACE WITH OTHER FUNCTIONAL AREAS Price, Product, Promotion, Place Length of Production Run Supply Side Interfaces Marketing Production Logistics Others Finance Management of Information Accounting Congruency Competing for Resources

13. THREE AXIS OF THE LOGISTICS EVOLUTION SERVICES INFORMATION FLOW • EXTERNAL • THIRD PARTY • LOGISTICS COSTS PHYSICAL FLOW INTERNAL

14. S U P P L I E R S Market Response A Competitive Framework for Operations and Logistics Inputs Demand Share MY COMPANY C U S T O M E R S Outputs Preferences Service Performance Cost Quality Flexibility Market Size Outputs Inputs Competitors Demand Share

15. Winning versus Qualifying Criteria { Initial Cost: the cost of acquiring the product which is directly related to the price the customer pays (usually relevant in everyday use consumer products) Lifecycle Cost: the cost of acquiring, maintaining and disposing the product (relevant in industrial equipment markets) Design Quality: features, styling and other product attributes that enhance fitness for use (typically important in luxury products) Conformance Quality: the product conforms to set standards during the production process (important for almost all product markets) Delivery Speed: ability to produce and deliver the product in a short notice(characteristic environments of time based competition) Delivery Reliability: ability to produce and deliver consistently products according to contractually prespecified time intervals New Product Flexibility: ability to introduce in an effective and timely manner new products (again characteristic of time based competition) Customization: ability to produce a large variety of products that match the needs of a highly segmented market (mass customization) Product Mix Flexibility: ability to efficiently and effectively adjust the production mix in response to demand fluctuations of various products (cyclical demand markets) COST { QUALITY { SERVICE { FLEXIBILITY

16. Geographic Sectorial Functional GLOBAL LOGISTICS FRAMEWORK

17. Functional INTRA-FIRM INTEGRATION * Firms are formed by different functional areas, e.g., marketing, production, finance, accounting, etc. * They are NOT competing among themselves. * They are part of the same organization and “hopefully” after the SAME objectives. * LEADERSHIP consists on finding the right incentives for making ALL move in the same direction.

18. PERFORMANCE MEASURES Business As A System INTRA-FIRM INTEGRATION COST RATIOS Functionally Oriented

19. Sectorial INTER-FIRM INTEGRATION * Industrial Markets are formed by suppliersandcustomersor, more generally, by buyers and sellers. * Lasting relationshipsare beneficial for all parties involved. * The interaction requires extensive knowledgeabout each other, e.g., resources, organization, strategies. * LEADERSHIP consists on finding the right mechanism of control, coordination, and conflict resolution.

20. INTER-FIRM INTEGRATION EFFICIENT CONSUMER RESPONSE: Program searching for a close Coordinationand Cooperation among participants of the Supply Chain The final Objective is the satisfaction of the CONSUMER Cooperation is obtained through: * Optimization of flows (e.g., sharing data, transport, packaging) * Effective coordination of promotionsand negotiations * Effective selection of existing products * Effective introduction of new products

21. 100 100 = Average Retail Price 89.2 Margin 12.1 9.8 Stores Operating Cost 18.1 16.4 5.0 Administration 8.1 4.8 Logistics 4.1 Sales/Purchases 6.2 3.0 9.7 Marketing 8.2 Production Cost 42.7 40.8 ACTUAL TARGET COST STRUCTURE IN THE SUPPLY CHAIN Source: Food Marketing Institute and Andersen Consulting (1992)

22. Geographic GEOGRAPHIC ELEMENTS • WorkerProductivity is not necessarily the same everywhere • ProcessAdaptability might be difficult • Governmental Concerns and/or Incentivesmay balance economic problems • Infrastructure Available (e.g., transportation) • Cultures (e.g., social structure) are not homogeneous • Exchange Rate Volatility affects long term decisions

23. Hourly Compensation Costs for Production Workers in Manufacturing* (in U.S. Dollars) Western Germany $22.69 $25.41 $25.71 Canada 17.09 16.97 16.30 United States 15.58 16.15 16.73 France 15.26 16.89 16.23 Japan 14.66 16.28 19.01 United Kingdom 13.77 14.44 12.76 Korea 4.61 5.10 5.53 Taiwan 4.39 5.13 5.22 Singapore 4.35 4.95 5.25 Mexico 1.93 2.29 2.59 1991 1992 1993 * Includes: Health care, pensions, workers’ compensation and other insurance programs Source: Bureau of Labor Statistics, U.S. Department of Labor

24. Geographic Functional RESOURCES ORIENTED LOGISTICS • Rationalization of Resources • Economies of Scale • Supply Chain Coordination • Financial Flexibility(e.g., Tax Incentives)

25. Geographic Sectorial INFORMATION ORIENTED LOGISTICS • Rationalization of Resources • Economies of Scope • Network Optimization • Operational Flexibility

26. Sectorial Functional USER ORIENTED LOGISTICS • Rationalization of Resources • Technology Development and R&D • Customer Service(Winning, Maintain) • Responsiveness Flexibility

27. GLOBAL LOGISTICS FRAMEWORK Geographic Information Oriented Logistics Resource Oriented Logistics Sectorial Functional User Oriented Logistics

28. LOGISTICS ORIENTATIONS FOR COMPANIES Resources Information User Oriented Oriented Oriented • Cost • Utilization • Efficiency • Speed of Exchange • Extent of Communication • Customer Service • Bargaining Power

29. Information Logistics Resources Logistics GLOBAL LOGISTICS User Logistics Dynamic Forces of GLOBAL LOGISTICS