Logistics—Essential to Strategy
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Logistical considerations have always played a strategic role in business. Among retailers and wholesalers, they transcend inventory management and transportation to include one of the most critical factors in business success—location in relation to markets or sources of supply. Among manufacturers, logistics concerns itself with matters as basic as plant location, sourcing of raw materials, and standards of customer service. In recent years, changes in the business environment have forced companies both large and small to pay particularly close attention to how this function relates to others. Government regulation, the health of the nation’s transportation system, energy restrictions, and technological developments all represent important considerations in the formulation of a business strategy. As the author shows in this article, many companies have responded to these challenges by developing competitive strategies based in part on such concepts as postponement and speculation, standardization, consolidation, and differentiation. These are companies in which management has conducted either formal or informal logistics audits, has redesigned systems to provide more effective support for corporate strategies, and has taken steps to ensure continued appraisal of opportunities over the long run.
Logistics can spell the difference between success and failure in business. For example, a few years ago a young engineer-entrepreneur began to build a company from scratch. His first product was liquid bleach. Actually, he didn’t know much about the business at the time. He knew that liquid bleach is nearly all water and that the U.S. market is divided among two large manufacturers, Clorox and Purex, and a number of smaller producers that sell branded and private-label bleach on a regional basis. He also knew that the market for private-label bleach in New England, where he wanted to be, was dominated by a manufacturer located in New Jersey.
So the entrepreneur decided to found a private-label bleach manufacturing company near Boston. This location provided his company with a distinct transport cost advantage over its chief competitor. But he didn’t stop there. He located his plant near a concentration of grocery chain retail outlets. This enabled him to sell his bleach under an arrangement in which retailers’ trucks were loaded with his bleach after making their retail deliveries and before returning to their respective distribution centers. Given this double cost advantage, he was able to go one step further. By adding other items to his product line, he was able to obtain efficient truckload orders from his retail chain customers.
Another new venture in which logistics plays a major role was set up by two honors students. On their graduation from business school, they devised an innovative, low-cost way to distribute a high volume of milk and other products. Building a retail “store” that consisted of a convenience-oriented self-service front end and a large truck dock in the rear, they have raw milk delivered by tank trucks and put into vats in the rear of the store. Milk and cream is then separated, homogenized, and bottled on site for sale direct to consumers at significantly lower prices than through traditional channels. Having expanded its line to include other food items often purchased in large quantities, this retailer now enjoys one of the highest sales-per-squarefoot ratios of any retailer in the United States and does a volume of sales through its relatively small outlet that many supermarket operators would be pleased to achieve.
Logistics-oriented strategies are also important in large companies. As an example, one of the world’s largest chemical manufacturers recently had to replace its ships. The ships carried materials in bulk from plants in the Caribbean to Gulf and East Coast ports for subsequent transfer to barges and rail cars for delivery to terminals at which customers’ orders were packed into containers for final delivery by rail and truck. Instead of merely replacing its ships with more modern versions of the same design, the company instead is converting its entire distribution system to one using containers.
This system requires that orders processed in Puerto Rico be shipped in containers that will be delivered direct to customers in the eastern United States by a combination of river barge, rail, and truck. As a result (1) repackaging at all inland terminals eventually will be eliminated, (2) material handling costs and capacities at Gulf and East Coast port facilities will be greatly reduced, and (3) because of the increased frequency of departures of ocean-going container barges from plants, orders will be delivered to customers with little or no increase in order response time and only a small increase in total inventory in the system. Because of the company’s sales volume, it is unlikely that competitors will be able to emulate the program even though their geographic production and transport patterns are similar.
What do these examples have in common? They all involve decisions that are long-term in their implications. All involve actions that are big-dollar in relation to the overall size of the companies in which they are implemented. All provide a competitive advantage that, unlike pricing or other actions, is hard for competitors to duplicate. And they all are based on nontraditional approaches to logistics, encompassing those activities that facilitate product movement and the coordination of supply and demand in accomplishing specified cost and service objectives, as suggested in Exhibit I.
Exhibit I The Logistics Process
These are but three of a growing number of companies that place major reliance on logistics in their business strategies. In this article I shall explore the reasons behind the rebirth of interest in this method of developing competitive advantages, the common elements of successful logistics-oriented strategies, the questions to be asked in auditing the extent to which your management has taken advantage of opportunities for making logistics an integral part of its strategy, and the ways of factoring logistics into strategy formulation.
Growing Influence of Logistics
There are a number of reasons for the growing influence of logistics in business strategy. Included among these are:
1. An increasing number of alternatives for meeting cost and service standards—containerization, minicomputers, air freight, and worldwide satellite communications systems.
2. The threat of energy shortages. During periods of energy shortages, transport costs may figure more heavily in plant and warehouse location decisions. And the locations of retail facilities from resorts to department stores may be influenced more strongly by their proximity to major markets.
3. Closer scrutiny of the long-standing trend toward complex product lines. To a greater extent, the threat of material shortages is injecting logistics as opposed to marketing considerations into product-line decisions.
4. The recent emphasis on effective inventory management through wide swings in business cycles characterized by varying rates of increase in labor costs, fluctuating interest costs, and changing rates of sale. This pressure has been accompanied by the assumption on the part of management that developments in computer-oriented inventory control methods have more than kept pace with user needs—an assumption not always borne out in practice.
5. The increasing involvement of federal and state agencies in issues ranging from the seminationalization of a portion of the transportation network to the availability of advertised sale merchandise on the shelves of retail establishments.
All these pressures are leading many companies to reexamine their view of logistics. What types of responses have these pressures elicited?
Patterns in Uncommon Responses
The increased size and complexity of business operations combined with the application of problem-solving techniques and computer technology have made it possible for many companies to consider less common logistical responses to perceived competitive cost or service disadvantages. Among these are strategies that involve postponement and speculation, standardization, consolidation, and differentiation.
Postpone & speculate
Although they have done it intuitively for years, many companies are more systematically reviewing ways of postponing their commitment of resources to specific end products as long as possible in channels of distribution in order to reduce the risks of accumulating obsolete or unusable stocks. Others are willingly incurring the risks of speculation, involving the preparation of stocks in advance of need, in order to achieve economies of scale and lower the costs of production. Automobile manufacturers, for example, have pursued strategies of both postponement and speculation at different production and distribution stages.
Automakers practice postponement by operating market-oriented distribution centers at which relatively light manufacturing takes place. Although these facilities commonly are called assembly plants, they really are distribution centers equipped to receive orders, assemble automobiles to the individual desires of millions of prospective auto owners from stocks of standard components, and deliver individually designed autos to dealers and customers in a reasonable period of time.
Similarly, steel service (distribution) centers have become important distribution links for fabricated steel by bending, cutting, shaping, and even welding basic steel products to order. The wave of decentralized packaging of standard products shipped in bulk to distribution centers suggests that postponement will continue to be an effective means of providing a wide array of desired items from a smaller number of mass-produced and bulk-shipped finished components or ingredients.
In fact, postponement at one level in the distribution channel with an attendant decoupling of functions from those performed “upstream” has enabled automakers to enjoy the benefits of speculation from the mass production of a relatively small number of standard engines, bodies, and other major components, often at locations some distance from end markets. Steel manufacturers have been able to concentrate on mass production because of the growth of steel service centers. And canners of private-label food products process and pack their wares in “bright,” unlabeled forms for labeling-to-order in response to later orders from hundreds of retailers.
Standardize products
It stands to reason that standardization within product lines can reduce production costs, cut inventories, and increase field stock coverage while nevertheless providing the basis for differentiating end products. For example, General Motors is able to produce an endless number of lines, brands, and models of automobiles from its standard A, B, and C auto bodies.
Manufacturers of both consumer and industrial electronic products have created a standardized response to a variety of potential product failures by designing products around modules composed of several components. Given the failure of one or another of these components, the module composed of both operative and defective components can be replaced quickly and with little expertise.
In purchasing, a technique called value analysis has led on occasion to decisions to purchase fewer items and in larger quantities. This has resulted in price discounts and logistical savings that more than compensate for the application of standard components to tasks for which smaller, less-expensive components might be suited under programs not emphasizing standardization.
The potential for product standardization represents an important element of “slack” in the productive capacity of many companies. As an illustration, after it had cut its product line in half late in 1973 in response to soaring demand and restricted capacity, one manufacturer of white papers found that it could achieve 116% of the theoretical capacity of its mills through reduced machine setups. This discovery has led to more stringent guidelines in this company for the evaluation of new-product proposals.
Consolidate services
For the most part, consolidation involves practices that encourage the simultaneous storage, long-haul transportation, or delivery of two or more products or orders to achieve economies of scale. It does not have to be achieved at the cost of reduced customer service. An example is that during the most recent recession many companies began to schedule orders for delivery on a once- or twice-per-week basis rather than whenever they were received. Suppliers could maintain speed of service for many customers under these programs by advising them of scheduled shipping dates so that those located in particular areas to which consolidated shipments were destined could time their orders to coincide with the schedules. This practice provided an acceptable level of service while maximizing use of limited fuel and lowering delivery costs significantly.
The use of shared or pooled services such as common carrier transport, shippers’ cooperatives, and public warehouses is another form of consolidation.1 Potential savings from the use of shared services have led many manufacturers to consider joint efforts with makers of complementary products requiring similar logistical efforts. In one case, a large manufacturer of grocery products recently sought out other companies selling products to identical kinds of customers to explore joint approaches to distribution for one of its product line’s “problem children,” a limited-volume item with somewhat distinctive distribution needs.
In another case, a pasta manufacturing company distributed its product daily in Manhattan by using trucks that could only be loaded partially because of the small number of deliveries possible in a given day in the city. Thus, it sought to find another grocery-product manufacturer desiring frequent deliveries in Manhattan for a joint distribution venture. And beer manufacturers in Canada have for some years maintained a joint venture for the retail delivery of their products. Many of these efforts have resulted from the realization that once a delivery vehicle stops, the costs of delivery are relatively insensitive to the size of the delivery.
Consolidation programs require products with homogeneous characteristics or logistics needs. Thus it is no surprise that the most successful consolidation programs undertaken with other manufacturers have been achieved in the distribution of product groupings such as frozen foods, drug products, and dry grocery products. Many of these programs have been able to reduce the actual costs of distribution beyond the field warehouse by as much as 40%.
Differentiate distribution
For some years, many managers intuitively have recognized potential economies from the differentiated treatment of various product-line items in their distribution. For example, using ABC inventory methods managers establish more restrictive inventory rules for high-value, low-sales-volume items than for others in a product line. This effort reduces inventory holding costs in relation to a given sales volume. It represents a way in which the “80/20” relationship can be used effectively as an integral part of a company’s strategy, as suggested in the sidebar, “How the 80/20 Relationship Applies to Logistics Strategy”.
How the ‘80/20’ Relationship Applies to Logistics Strategy
It is a well-accepted fact that a few employees file most of the labor grievances or experience most of the lost-time accidents, that a minority of policy holders file most of the insurance policy claims, and that a small proportion of product-line items produce a majority of the sales in most organizations. These “80/20” relationships can help management determine where the greatest opportunities for improvement in performance lie.
A few years ago I examined the inventory turnover rates (unit sales per year compared with average inventories in units) for a sample of fast-, moderately, and slow-selling items in a wide variety of manufacturing companies. The results, shown in Table A, suggest that items with the highest volume of unit sales turn over from two to eight times faster than those with the lowest volume of unit sales in the same respective product lines. Each of the companies surveyed used roughly the same inventory management and item location rules for all items measured within a particular line.
Table A Relationship between sales volume and inventory turnover rates Source: James L. Heskett, Nicholas A. Glaskowsky, Jr., and Robert M. Ivie, Business Logistics (New York: The Ronald Press Company, 1973), p. 457.
Thus a company with half of its stock tied up in items representing only 20% of unit sales and with its highest-sales-volume items selling four times faster than the lowest-sales-volume items has a great deal to gain by reducing inventories of slow-sellers to the point where their turnover rates approach those of fast-sellers. It can reduce inventories of its slow-moving items by 75%, for an overall reduction of 37.5%.
How can this be done? One way is to reduce inventories of slow-moving items at all locations at which they are stocked. This, of course, greatly reduces the availability of each item and the overall service level.
An alternative is to concentrate all available stocks of slow-moving items at a single location. This requires only one reserve stock for unusually large customer demands and offers greater control over a greatly reduced inventory. In effect, this approach creates a higher volume of sales per stock-keeping unit location (SKUL) for each item by reducing the number of locations at which stock-keeping units are maintained.
Some of the savings in inventory provided by a differentiated approach to the location and availability of slow-moving items can be devoted to providing a higher level of in-stock coverage for fast-moving items. As a result, such efforts might produce a profile of coverage and location such as the one shown in Table B.
Table B Differentiated service levels
This type of differentiation recognizes that customers hold varying levels of expectations. Fast-moving items often are standardized models or parts that customers expect will be in stock and supplied rapidly. Slow-moving items often are odd-sized or nonstandard items for which many customers will expect to wait longer periods of time.
As one appliance retailer told me, “If manufacturers would recognize the fact that customers expect to wait up to six weeks for nonstandard appliances with unusual features, they could save a lot of money. Instead, they provide the same level of service on orders for all items in the line.”
Of course, this philosophy has to be applied selectively, depending on the characteristics of a particular product line. Certain automotive parts, for example, call for a high level of service regardless of sales volume because they are critical in the repair of idle equipment. Differentiation in this type of business may have to be based on categories of items measured in terms of both unit sales volume and the criticality of the part.
However, it is possible to achieve a required service level for low-volume critical parts using high-speed communication and transportation methods instead of a large number of market-oriented inventories. The added amounts spent for these methods often are more than offset by (1) the reduced costs of carrying inventory at one as opposed to many locations, (2) increased sales achieved by the creation of one central backup stock capable of providing a higher level of in-stock availability than could be achieved by means of decentralized inventories, and (3) greatly reduced costs of communication otherwise required by searches through many decentralized stocks to find the desired item.
Given the increasing number of logistical choices available to competing companies, opportunities for the development of more extensive programs for differentiated product distribution present themselves. As an illustration, several years ago a major farm equipment manufacturer, confronted with a growing line of replacement parts and with deteriorating service to its dealers and customers, revamped its parts distribution strategy.
Up to that time, its logistics system for parts consisted of a mail and phone order program in which a dealer would contact the manufacturer’s nearest regional parts depot of 12 located throughout the United States. Regional depots would either fill all or part of an order and refer the remainder to a sister depot, which might or might not have those items that were found to be out of stock at the first location.
The weekly update of regional depot inventories often produced inaccurate knowledge of inventory availability on the part of order takers. So-called “standard” orders were shipped to dealers by surface methods. Dealers could designate emergency orders, which were then shipped by the fastest method with transportation costs billed to the dealer. One indicator of the ineffectiveness of the system was that a growing proportion of orders were emergencies.
As a result of its review, the company decided to reduce the number of items stocked in its regional depots and to create a complete stock of all items at a master depot located near Chicago. A real-time method of inventory accounting was created. Electronic terminals were provided for many dealers. On receipt of an order, a regional depot would ship those high-sales-volume items in its stock by surface methods to its dealer. Items not in stock were ordered from Chicago. These items were packed immediately for next-morning shipment by air in containers destined for each regional depot.
As a result of this program, dealers were assured of nearly complete order availability in a short period of time; reductions in inventory holding costs more than compensated the company for increased transportation costs; and customer goodwill improved significantly. In fact, the manufacturer gained a reputation throughout the industry for having an outstanding parts supply program achieved by means of a differentiated distribution system.
While postponement and speculation, standardization, consolidation, and differentiation are all means of achieving strategic competitive advantage, a conscious program of review must be maintained to ensure that they are not overlooked in formulating strategy.
Factoring Logistics Into Strategy
To employ logistics as an effective competitive lever and as a significant component of strategy, management must take two actions. First, it must adapt logistics programs to support ongoing corporate strategies in the short term. Second, it must factor logistics into the design of business operating strategies on a continuing long-term basis. Steps necessary to ensure this include the performance of a logistics strategy audit, possible logistics system redesign, and the maintenance of procedures to ensure continued attention to logistics as an integral element of corporate strategy.
Strategy audit
A first step in achieving this objective can begin immediately in the form of an audit to explore strategic questions such as the following.
1. What levels of service (a) do our customers expect? (b) do our competitors provide?
Factors influencing answers to these questions include the degree of loyalty that customers exhibit in the purchase of the company’s products and of its competitors’, the criticality of the company’s products to customers, the influence of its service on sales, and the costs of supplying varying levels of service. As I mentioned in the ruled insert, customer expectations and competitive levels of service may vary from product to product and from one geographic area to another.
It is not surprising that perhaps the highest levels of product support services are provided by manufacturers who maintain ownership of products they distribute. Revenues of the Xerox Corporation, largely derived from royalties assessed on each page of copy produced by its machines, immediately reflect machine downtime.
As a result, Xerox’s army of service personnel has reached division size (about 12,000) and its parts distribution system has received a great deal of scrutiny in its effort to maintain a service program that can put a disabled machine anywhere in the continental United States back into operation within three hours after it ceases production.
At a time when their technological leadership is being threatened by expiring patents and eager competitors, companies like Xerox and IBM may well have to rely on their service programs to maintain the strategic advantage that they have enjoyed in their respective industries for years.
Wholesalers and retailers must ask themselves the same questions. Answers may lead to alterations in buying and stocking policies as well as in warehouse and store location. For traders and manufacturers alike, service goals will influence inventory levels and locations as well as transport and customer order processing methods employed.
2. How do competitors achieve the service levels that we think they achieve?
Answers to this question require the preparation of a competitive product flow plan, based on information about competitors’ plant locations, production strategies, warehouse locations, and methods of transportation. Most if not all of this information exists in the collective, unrecorded knowledge of members of the organization who spend a great deal of their time in the field in contact with customers and others. It need only be collected and organized in a systematic fashion.
There is little reason today why a competitor’s logistical product flows and attendant costs cannot be simulated in the same manner as those of in-house logistics operations. In an informal poll of logistics managers in attendance at a professional seminar, I found that managers from about 15% of the companies with representatives at the meeting already collect these data on an informal basis. Information of this type is important in responding to the next two questions.
3. Through how many outlets should we distribute our products? Of what type? Where?
Retailers have long since identified location as a major element of service and sales in their businesses. The area from which a retail outlet draws its business depends on the type of goods sold, the size of the store, the degree to which competing stores sell identical or comparable merchandise, and the importance associated with the purchase of its products by consumers. These factors determine the density of retail locations and the geographic intensity with which various types of retail goods are offered for sale.
The number and type of wholesale outlets for a product are determined by customer service needs ranging from those associated with sales assistance to product availability. Some wholesalers may concentrate on promotional effort while performing no logistical (product stocking) function, leaving it to retailers or manufacturers to supply the latter.
Among manufacturers, there has been a general reduction in the number of warehouses through which products of any one company are distributed. This probably has resulted from a combination of factors, including increased attention to costs of distributing through too many warehouses, improved methods of order processing and transportation, and a vastly improved highway system, which has extended the territory that can be served from a given warehouse location.
4. Are our plants located and focused properly to support corporate strategy?
By definition, a plant location becomes outdated before the paint is dry on the facility. This question of location becomes important only when an existing location is at such odds with the company’s logistical needs that economic savings from a move are more than enough to compensate for the economic and psychic costs of the move.
Of greatest interest in the logistics study audit, however, is the extent to which the location of producing facilities can provide the very core of a corporate strategy, as in the case of the private-label bleach manufacturing business cited earlier. Production processes that rely heavily on ubiquitous raw materials such as water will require market-oriented facilities. Those involving large weight reductions (as in the production of metal from ore) will logically be located near sources of raw materials. Those requiring large sources of inexpensive power (such as the smelting of aluminum from alumina) may obtain competitive advantage by locating producing facilities near such power sources.
The degree to which plants are focused on the production of one or a limited number of products in a larger product line may be influenced by the economies of scale in production, the extent to which production can be concentrated in a small number of product modules or components for subsequent assembly to order, and the overall volume of demand for the output of one plant from a given customer. An examination of the benefits of a focused production strategy may require an analysis of the logistical costs of mixing (assorting) required by focused plant operations as opposed to the costs of small shipment and mixed shipment transportation and handling required by an unfocused plant production strategy. This leads naturally to the next question in the audit.
5. Where is our company on the logistics life cycle for all or a portion of its business?
A manufacturing company may begin its life cycle by scheduling small quantities of production at a single facility for local or regional distribution. As sales volumes increase, more efficient production and shipment quantities are achieved, reducing costs of logistics in the cost profile of the company. At this point, additional plants may be established, each of which may be focused on a portion of the product line. Sales territories are extended. Logistics networks become more complicated, often involving the operation of large numbers of market-oriented warehouses to minimize the cost of delivering small orders. Product-line extensions and customer orders of increasing size may, at some point, permit the mixing of carload and truckload orders at locations intermediate to plants and markets through the use of distribution centers, such as those established by General Foods.
With the continued growth of individual customer orders, it may once again become possible to ship directly from plants to customers, as in the initial stage of the company’s life cycle. But this time the shipments may comprise single products moving in vehicle-load quantities.
Each stage of the logistics life cycle may require different manufacturing policies, plant and warehouse locations, and transportation and order processing methods. Awareness of the logistics life cycle can reduce the lag between needs produced by changes in corporate strategy and appropriate logistical responses.
6. Have we taken advantage of the full potential for postponement and speculation, standardization, consolidation, and differentiation in our logistics programs?
Opportunities associated with these strategies were discussed earlier.
7. To what extent have we assured ourselves that our strategy meets desired levels of costs and services where it counts most, to the end-user?
Earlier I described a logistics program that improved one farm equipment manufacturer’s ability to respond to its dealers’ needs for replacement parts and that enabled the company to establish a reputation for logistics leadership. Recently a competing manufacturer decided to measure the level of service delivered by its own much-maligned system and that provided by the well-publicized system of its competitor.
Its survey revealed that end-users perceived no significant differences in the levels of service delivered by the two systems. Puzzled by these results, the study team decided to investigate comparative dealer practices as well. This investigation revealed that its competitors’ dealers had come to rely on the company’s excellent system so heavily that they had reduced their inventories of spare parts below the levels required to maintain a high level of service to customers. The concerned manufacturer’s dealers, on the other hand, had experienced such poor support from their supplier that they maintained a much larger stock of parts on their premises, thus taking up the slack in the system.
This suggests the need to ask the next question as part of the audit.
8. To what extent have we employed “channel vision” in determining who should do what, when, where, and how in our channels of distribution? Have we taken steps to ensure that all parties carry out their functions as planned?
A good example of “channel vision” is provided by Theodore Levitt’s description of the Honeywell Tradeline program, implemented several years ago.2 At that time the company was distributing its 18,000 separate catalog parts and pieces through 100 company warehouses to some 5,000 distributors, few of whom carried adequate replacement parts stock. Distributors instead were relying on Honeywell to maintain their inventory. As a result, the manufacturer was losing a lot of business and so it devised the Tradeline program.
In essence, the program transformed the inventory maintenance function to distributors through (1) redesigning original equipment with standard, interchangeable parts, some of which were compatible with competitors’ products, (2) closing all Honeywell field parts warehouses, and (3) requiring distributors to maintain full stocks of all Honeywell replacement modules. Although Honeywell lost most of its distributors in implementing the Tradeline program, the stronger ones who remained formed the nucleus of a group that helped Honeywell achieve rapidly increasing sales in the years following initiation of the program.
In this way, Honeywell was better able to control the level of service and sales to its end-customers.
9. What implications do technological trends have for our company?
In my previous article, which I referred to earlier, I suggested that the rate of technological change in logistics may not keep pace in the intermediate-term future with that of the recent past. However, logistics is a technology-prone activity.
Investments in technology often yield handsome returns, suggesting continued efforts of significant magnitude.
Research expenditures today may be reasonably good predictors of the direction of technological development. Because the government plays such an active role in funding research into logistics technology, government budget allocations may provide clues for strategic planning. For example, it is a pretty good bet that a larger proportion of attention will be devoted to the development of methods and energy sources providing for the uninterrupted flow of goods at any cost rather than to the most cost-effective technologies. As environmental constraints close in on us, larger shares of effort will be redirected in this manner. To the extent that they favor one method of transportation over another, technological developments may raise logical questions about the proper orientation of a company’s facilities in relation to those of its competitors.
10. What implications do regulatory trends have for us?
In the past, much regulatory activity in the field of logistics has been of an economic nature, particularly associated with transportation rates and operating rights. The recent ground swell of support for economic deregulation of various aspects of logistics has been accompanied by more laws stipulating noneconomic restrictions concerning matters as diverse as housekeeping procedures in the maintenance of sanitation standards in warehouses (with at least one chief executive indicted under this law) to restrictions on the movement of hazardous materials.
The future may bring even more attention to matters of a more strategic nature, including the legality of certain geographic practices that discourage freight-on-board (as opposed to destination- or market-oriented) pricing. In several instances, the Federal Trade Commission has even become interested in the quantities of advertised merchandise maintained in stock in support of special promotional efforts.
11. Does our logistics strategy support our corporate strategy? To what extent should our strategy be logistics-oriented?
On what markets and market segments does the corporate strategy rely most heavily? Is this reflected in the program of differentiation (if one exists) practiced in the corporation’s logistics efforts?
Does the corporate strategy envision important compromises in, for example, the decoupling of manufacturing processes to achieve lower costs through the creation of larger in-process or finished product inventories? Will the logistics system accommodate this strategy?
What does the financial plan imply for the ownership of transport equipment, warehouses, inventories, and order-processing and other communication facilities?
Does the relative importance of logistics cost or service levels in the total “package” offered to customers suggest an important means for differentiating the company from its competitors? To what extent can the ideas suggested earlier be applied to accomplish this in formulating corporate strategy?
System redesign
A strategic audit may reveal so much conflict between corporate strategy and logistics methods that a logistics system redesign is called for. While the audit may provide some of the data necessary for the preparation of a systems analysis effort dealing with specific customer service standards, product flows, and the like, other questions will have to be answered to supply the information needed for system redesign. Such questions, along with techniques for system redesign, have been described extensively in these pages and elsewhere.3
This is not to suggest that the impact of a strategy audit will be only on the design of the logistics system. It should also lead to the establishment of a vehicle to ensure continued attention to the potential for achieving strategic advantages through logistics when corporate strategy is being formulated or altered.
Longer-term actions
The strategy audit and any resulting logistics system redesign or corporate strategy adjustment will serve to bring logistics efforts into alignment with corporate needs in the short term. Unless some formalization of the process takes place, however, there is little guarantee that logistical considerations will continue to be taken into trương mục in the strategy formulation process. The examples that I cited at the outset of this article serve to suggest ways by which this may be accomplished.
First, top management holds nearly all of the cards in the process. Managers responsible for various logistics functions have not, in the course of their work, had access to the goals and strategies formulated by top management. Quite appropriately, their goals and views have been relatively short-range and nonstrategic in nature. Ironically, they have participated least in decisions that have had the greatest long-run impact on their performance, as suggested in Exhibit II. All of this indicates that if a vehicle is to be found to raise logistical considerations to an appropriate level of awareness in the strategy formulation process, top management will have to take the initiative.
Exhibit II Participation in strategic decision making
Second, entrepreneurs have formulated some of the most remarkable logistics-oriented business strategies. The entrepreneur wears so many hats that he or she embodies the wedding between top management and logistical considerations in the strategy formulation process. But what of the large corporation in which organizational differentiation necessarily has created both specialized responsibility and a widening gulf between top functional logistics management? Here the experience of the large chemical manufacturer may be enlightening. This producer carefully maintains a liaison between functional and long-range planning personnel. Members of logistics groups in operating divisions that are responsible for shorter-range planning and for maintaining an awareness of current problems are kept informed of those elements of corporate strategy that might influence their thinking. Conversely, a member of the corporate long-range planning group purposely maintains both an acquaintance with trends in the logistics “environment” and a line of communication with members of the logistics planning groups found in the operating divisions of the company as well as at the corporate level.
By this means, a member of the logistics planning group was able to sense the need and appropriate timing for the proposed system that required a major revision in the business strategy employed by one of the corporation’s divisions. Because of the open lines of communication between long-range planning, logistics planning, and operating managers within the division, it was possible to “sell” the concept both to the division management and to top management.
Given the focus of attention among larger companies on the reorganization of management for logistics activities in recent years, a growing number of companies have staffed their logistics-oriented departments with managers capable of being included in the process of formulating strategy in this manner.
Finally, those companies that have achieved some success in structuring some part of their strategies around logistical considerations have, in many cases, been the same ones that have (1) staffed senior positions in logistics with individuals capable of being promoted to general management positions, (2) viewed logistics as an important step in a program to produce well-rounded general managers, and (3) looked to logistics to provide its share of general managers along with marketing, finance, production, engineering, control, and other major functions.
It is no surprise that members of general management at companies such as PPG, Eastman Kodak, Xerox, General Foods, and Johnson & Johnson have consistently maintained a high level of awareness of the potential for developing competitive strategies based to a substantial degree on logistical considerations.
Corporate Strategy of the Future
If the arguments for the systematic consideration of logistics in formulating corporate strategy in a healthy company primarily serving domestic markets are not sufficiently appealing, there are compelling reasons for considering them more seriously in the future. The reasons include a decline in the growth rate of domestic markets, large incremental costs of energy, and an increasing emphasis on multinational markets in corporate strategies.
Rapid corporate growth conceals many blemishes of poor decision making and operating inefficiencies. And while individual organizations will continue to wax and wane in the future, in general there will be fewer growth opportunities on which to rely in a stable population increasingly concerned about its consumption rates. This will lead to a shift from emphasis on growth per se to what might be called the quality of earnings, obtained through the prudent control of costs required to serve relatively slow-growing markets and sales bases. Logistical considerations will weigh heavily in programs designed to improve the quality of earnings.
There is little doubt now that the most rapidly growing cost of doing business in the foreseeable future will be that of energy. Inevitable energy allocation and conservation programs will involve significantly higher costs of one sort or another. Energy-intensive activities of transportation and materials handling will represent increasingly important methods of gaining competitive advantage in costs and of improving the quality of earnings. The most effective means for obtaining such results will not be through tactical decisions such as a shift from one method of transportation to another. Rather, strategic facility locations, for example, will be primary determinants of the quality of earnings produced from logistics cost advantages.
With the inevitable slowing of certain domestic markets, U.S. producers will look abroad to a growing involvement in multinational business. To the extent that this will involve importation and exportation of goods, whether as part of an export program or as a truly multinational production and distribution strategy, multinational business can be much more logistics-intensive than can domestic business.
Attention to logistics can support expanded product lines in good times or provide a basis for gaining a competitive profit edge during periods of slow growth. Whether the goal is increased market shares or increased profits from existing or smaller market shares, logistics considerations can be basic to these accomplishments. If, as many have predicted, general management inevitably will have to spend an increasing proportion of its time dealing with low-or no-growth situations, it is not too early to put in place a process to ensure that logistical considerations will not be overlooked in formulating strategy.
1. Walter F. Friedman has described many of these services in Physical Distribution: The Concept of Shared Services (Thinking Ahead), HBR March–April 1975, p. 24; for a discussion of other examples, see my article, “Sweeping Changes in Distribution,” HBR March–April 1973, p. 123.
2. Theodore Levitt, “Production-Line Approach to Service,” HBR September–October 1972, p. 41.
3. See, for example, John F. Magee, “The Logistics of Distribution,” HBR July–August 1960, p. 89.
A version of this article appeared in the November 1977 issue of Harvard Business Review.