Logistics/Supply Chain Organization

1. Logistics/Supply Chain Organization A good organization structure does not by itself produce good performance--just as a good constitution does not guarantee great presidents, or good laws, or a moral society. But a poor organization structure makes good performance impossible, no matter how good the individual managers may be. To improve organization structure…will therefore always improve performance. Peter F. Drucker Chapter 15 CR (2004) Prentice Hall, Inc.

2. Organizing for Logistics/Supply Chain Management CR (2004) Prentice Hall, Inc.

3. Objectives for Organization • Definitively defines responsibility, accountability, and authority–essentials for good management • Collects people together in a meaningful way to achieve the goals of supply management • Sets initial conditions so that proper cost tradeoffs can be realized • Facilitates the implementation of plans as well as the planning process • Aids administration CR (2004) Prentice Hall, Inc.

4. Activity Fragmentation in the Supply Chain Responsibilities President Marketing Finance Operations • Distribution channels • Customer service • Field inventories • Revenue • Cost of capital • ROI • Inventory carrying costs • Supply alternatives and supply costs • Warehousing • Purchasing • Transportation 15-4 CR (2004) Prentice Hall, Inc.

5. Activity Fragmentation in the Supply Chain (Cont’d) Objectives President Marketing Finance Operations • More inventory • Frequent & short production runs • Fast order processing • Fast delivery • Field warehousing • Less inventory • Cheap order processing • Less warehousing • Long production runs • Lowest cost routing • Plant warehousing 15-5 CR (2004) Prentice Hall, Inc.

6. Activity Fragmentation in the Supply Chain (Cont’d) • Reasons for fragmentation • Lack of understanding of key cost tradeoffs • Traditions and conventions • Other areas considered to be more important to the firm than logistics • Organization structure can be in an evolutionary state • Benefits of fragmentation elimination • Encourages important cost tradeoffs to be effected • Focuses on an important, defined area by top management • Sets the structure within which control can take place CR (2004) Prentice Hall, Inc.

7. Organizational Choices • Informal structure • Persuasion of top management • Coordinating committees • Incentive arrangements • Profit sharing • Cross charges • Semi-formal structure • Matrix organization • Formal structure • Line--creates value in products, therefore it has operating status • Staff--provides assistance to the line organization CR (2004) Prentice Hall, Inc.

8. Logistics Matrix Organization 15-8 CR (2004) Prentice Hall, Inc.

9. Formalized, Centralized Organization Chief executive officer Vice-president Vice-president Vice-president Vice-president Finance Operations Logistics Marketing Manager Manager Procurement Warehousing and materials handling Manager Manager Order processing Transportation and customer and packaging service Manager Inventory and production scheduling CR (2004) Prentice Hall, Inc.

10. Organizational Positioning • Line vs. staff • Line is a “clean” organizational form, but staff may be preferred when: • A line organization may cause unnecessary conflicts among existing personnel • Logistics activities are considered less critical than selling, producing, or other activities • Planning is relatively more important than administration • Logistics is treated as a shared service among the product divisions CR (2004) Prentice Hall, Inc.

11. Organizational Positioning (Cont’d) • Decentralization vs. centralization • Decentralize for quicker and more customized response to customer needs. Centralize to achieve economies of scale. • Large vs. small company • Small firms are likely to have a centralized form, but logistics activities are less clearly defined. • Manufacturing vs. service • Organization is likely to be directed toward the physical supply side of the business. Distribution has been a relatively neglected activity in service firms. • Administrative titles 15-11 CR (2004) Prentice Hall, Inc.

12. Centralized Organization 15-12 CR (2004) Prentice Hall, Inc.

13. Decentralized Organization 15-13 CR (2004) Prentice Hall, Inc.

14. Interorganizational Management • Managing physical supply of vertically related, but legally separate firms. • An untapped opportunity because members work at cross purposes. • Cooperation and trust are the keys to benefits. • But, benefits may “pool” with one or a few channel members. • Redistributing the benefits requires: • Metrics to identify and measure potential benefits • Information shared among members to build trust • Methods for fair redistribution of the benefits 15-14 CR (2004) Prentice Hall, Inc.

15. Seller Carrier Buyer Interorganizational Mgmt (Cont’d) Typical interorganizational channel CR (2004) Prentice Hall, Inc.

16. Interorganizational Mgmt (Cont’d) Example Suppose a supply channel is composed of two members—a buyer and a seller. The buyer annually produces D = 10,000 units of a product. The buyer incurs an ordering cost of Sb = $100 when buying from an upstream supplier. The buyer’s holding cost for one item is Hb = $10 per year. Based on the EOQ formula, the buyer prefers to place orders of the size: CR (2004) Prentice Hall, Inc.

17. Example (Cont’d) On the other hand, the seller produces to order whenever one is received from the buyer. The setup cost for producing a batch is Ss = $300 and the total annual setup cost (Cs) depends on the buyer’s quantity: Cs = $300D/Qb. Obviously, the more frequently the buyer places orders, the more setup costs are incurred by the seller. If the channel is managed as a single entity, the order quantity to minimize channel cost is: 15-17 CR (2004) Prentice Hall, Inc.

18. 14,000 12,000 10,000 Cost, $ 8,000 6,000 4,000 2,000 Q Q b 300 500 700 900 1,100 1,300 1,500 c Order quantity, units Example (Cont’d) Total costs in the supply channel Supply Chain cost Seller’s cost Buyer’s cost CR (2004) Prentice Hall, Inc.

19. Example (Cont’d) Costs in tabled form Buyer’s Supply Chain’s optimal optimal Q = 447 Q = 894 a Seller $6,711 $3,356 b Buyer 4,472 5,589 c Supply Chain 11,183 8,945 aTCs = SsD/Qs bTCb = SbD/Qb + HbQ/2 cTCc = (Ss + Sb)D/Q + HcQ/2 Potential benefit of $2,238 CR (2004) Prentice Hall, Inc.

20. Example (Cont’d) Conflict resolution • Formal transfer mechanisms • Price adjustments • Order-size minimums • Informal transfer mechanisms • Power • Coercive power • Reward power • Training • Referent power • Use of buyer’s or seller’s good name • Trust • Communication • Sharing information CR (2004) Prentice Hall, Inc.

21. Alliances and Partnerships Benefits • Reduced cost and lower capital requirements • Access to technology and management skills • Improved customer service • Competitive advantage such as through increased market penetration • Increased access to information for planning • Reduced risk and uncertainty CR (2004) Prentice Hall, Inc.

22. Perform logistics activities in-house Seek a competent partner High Where to Perform Logistics Activities Importance of logistics to company’s success Low Be a partnership leader Outsource Low High Company’s logistics management competency 15-22 CR (2004) Prentice Hall, Inc.

23. Alliance Choices • Logistics system sharing • 3PLs • Partnering through collaboration CR (2004) Prentice Hall, Inc.