Logistics and Supply Chain Management
Consequently, supply chain management is an Important recess In all businesses, and If managed effectively, can give companies a competitive edge. However, it often requires a lot of time and resources. Businesses that manage the entire supply chain in-house will usually find this process almost Impossible, especially when supply chain management Is not a core competency of the firm. Therefore, a third party logistics provider (PL) can take the pressure off these companies and allow them to focus on what they are good at. They can offer greater flexibility and access to more advanced supply chain technology.
However, this does not mean companies can simply take the back seat. Businesses that are successful work together with their supply chain partners In a close relationship. Only then do they realizes the full potential of a PL. 2. 0 Introduction and Background Supply chain management Is a considerable source of competitive advantage In the global marketplace and is recognized as a key business driver by top managers (Mentor, 2004). In competitive markets like the consumer electronics industry, there is a growing need to reduce costs and retain customer satisfaction (Silver, 2005).
Consequently, it Is vital that the electronics firm effectively manages Its supply chain
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If logistics is not the firm’s core competency, he decision to contract with a PL is an attractive alternative to keeping the process in-house (Dean, 2009). The choice between in-house and contract distribution is entirely strategic and both options present advantages and disadvantages for the electronics firm (Dean, 2009). The decision to outsource however has gained much more popularity in previous years as businesses have been driven towards greater flexibility and less risk (Dean, 2009).
The need to reduce costs has become vital for the survival of many businesses and it remains by far the key driver of a company’s supply chain strategy (Silver, 2005). The electronics firm has previously relied on pals to manage its supply chain but is now considering moving the entire process in- house. This raises the question as to which strategy is most desirable for achieving the firm’s ultimate goals in providing high customer service levels and securing long- term profitability.
This report will discuss the impact that bringing its supply chain in- house will have on the business. It will be argued that although in-house supply chain management has its advantages, the costs involved in bringing the entire process in-house far outweighs these advantages. Consequently, the electronics firm would not pursue this strategy but rather, the firm should incorporate a mixture of in-house and contract distribution. The firm should also develop a stronger relationship with its supply chain partners so that they thoroughly understand the company’s needs. 3. Literature Review In the consumer electronics marketplace, increasingly global competition has encouraged manufacturers to focus on their core competencies, such as product design and development (Mason & Cole, 2002). Mentor (2004) argues that no matter how large a firm is, in a globalizes world, it lacks the total resources and requisites for success. Supply chain management is a complicated process which is enhanced by globalization and communications technology (Coyly et al. 2008). Many businesses have no experience or expertise in logistics operations (Baxter, 2006).
Managing the transition from a PL to an in-house operation is a long and challenging process, with little or no external support, and the penalties for mistakes could be extremely high and damaging to the performance of the firm (Baxter, 2006). The time and resources required to set up and manage an in-house distribution centre will likely divert the firm away from its core competencies. More and more activities are being shifted to the warehouse (Malta & Dehydrators, 2005). Consequently, managing a warehouse is very expensive and requires a significant amount of resources and labor (Fear, 2000).
Warehouses of consumer electronics companies have to support highly variable customer demand, therefore the firm will have to rely on temporary workers (Malta & Dehydrators, 2005). Harry Drachma, executive vice president of USC Logistics, argues that these workers are often less is critical (Fear, 2000). He also suggests that the price tag for additional equipment, such as forklifts, will be ‘hard to swallow and that building enough in-house capacity to handle peaks in demand could push distribution costs disproportionately high (Fear, 2000).
As electronics are constantly evolving and retailers are continually expanding their product lines, there will be a greater need for workers and warehousing space in the future (Vega, 2004). Customers continue to demand more from warehouses. They are expected to handle more than 99 percent of all transactions perfectly and react immediately to special requests (Malta ; Dehydrators, 2005). Therefore, the time needed to find, train and effectively manage a empowers workforce, along with increased costs and demands from customers, will place enormous pressure on the firm.
This will likely distract the firm from its core competencies, thereby reducing its competitive edge. Despite the high fixed costs of warehousing, the major advantage of bringing this process in-house is that it gives the company greater control of its inventory, which reduces the risk of poor management and decreased quality (Focus, 2004). However, working with a PL still means the firm should be carefully documenting processes, benchmarking costs and establishing metrics to measure success (Turtleback, 2008).
Advances in information technology have allowed greater visibility of warehousing data and through internet links, the firm can check and track inventory and can confirm receipts (Fear, 2000). According to Bruce Manta, vice president of operations for ADS Logistics Management Services, many businesses now work in a partnership with a PL. “We want to treat your business as if it’s our own,” says Manta (Turtleback, 2008). As a result, businesses will often employ a logistics manager to work directly with the PL so that information, including the company’s goals and strategy, can be shared in a structured way (Turtleback, 2008).
Best Buy, a consumer electronics firm in the US, entered into a partnership with Koch Logistics and has become very successful ever since. Kennel Jorgensen-Johnson, Transportation and Logistics Manager for Best Buy, suggests that the company’s success is due to the strong relationship it has with Koch Logistics. “They understand our business and keep current on what our company is doing,” Regions-Johnson, 2011). Therefore, outsourcing warehousing does not mean the firm loses total control of its supply chain.
The best PL relationships are strong and equal partnerships where both companies can work gather to solve problems (Turtleback, 2008; Cain, 2009). The advantage of using pals over in-house distribution is that they provide greater flexibility and access to more advanced supply chain technology (Bujumbura, 2008). Instead of operating out of a single warehouse, outsourcing to pals means the firm can operate from a number of locations. The demand for consumer electronics is variable and hard to predict, due to short product life cycles and increased product diversification (Chine et al. 2010).
Consequently, the role of the warehouse is changing as warehousing becomes more strategic (Churched, 2009). Warehousing must be flexible to cater for changes in the market, customer requirements or unforeseen shifts in the supply chain (Dean, 2009). In-house warehousing cannot provide the firm with the flexibility that pals can offer. A PL plays an important role in implementing form postponement, an operations design principle that more companies are turning to under the effect of that companies defer their commitment of resources to a specific end-product in the manufacturing and distribution process for as long as possible (Trenton, 2011).
This reduces the cost of excess inventory. By bringing warehousing in-house, the firm ill convert its variable costs into fixed costs (Bujumbura, 2008). Consequently, if there is less demand for products, the firm may find it is paying for space it does not need. On the other hand, if there is greater demand, the firm may find it does not have the required space. By utilizing a PL, the firm only pays for the space it needs, which changes with demand fluctuations (Dean, 2009). The firm also has access to the latest in supply chain technology that might be unaffordable in-house.
Many pals use warehouse automation to meet growing demands and shrinking time frames (Bujumbura, 2008). This reduces the risk of stock-outs. Therefore pals clearly offer the firm greater benefits in terms of their flexibility and technology. Today’s consumer culture will not tolerate hand-me-down designs or excessive delivery times (Mentor, 2004). By utilizing pals, the firm can focus on its core competencies rather than being tied down with the complexities of supply chain management. Managing the supply chain in-house will incur huge financial costs, which will put the firm at risk.
In order to keep up with customer demands and remain competitive, the firm needs to take advantage of the value of pals. . 0 Recommendations With ever-increasing demand for Just-in-time deliveries, 24-hour distribution and accurate co-ordination of supply chains, it is almost impossible to manage logistics without outside support (Hoses, 2001). Therefore, managing the supply chain solely in-house is not a practical decision for the consumer electronics firm. Consequently, it is recommended that the firm continues to outsource distribution to pals.
However, the firm should modify its supply chain strategy in order to ensure high customer service levels and long term profitability. To achieve its goals, the company should allow the path taken by Best Buy and Dell Computers in the US. Both companies have undergone a shift in supply chain strategy and have become very successful as a result. In order to focus on the customer, Best Buy and Dell Computers have moved from a ‘push’ strategy to a ‘pull’ strategy which focuses on customer needs (Global Logistics and Supply Chain Strategies, 2006).
No longer does Best Buys supply chain simply ‘push’ high volumes of product out of the factories and into the stores. Now, it emphasizes agility, responsiveness and accuracy, pinpointing smaller floor-ready liveries to meet the changing desires of specific customer segments (Cottrell, 2006). Dell Computers’ Just-in-time strategy ‘pulls’ parts from suppliers Just as they are needed for production. This ensures customers get what they want and also reduces excess inventory, thereby reducing unnecessary costs (Minoan, 1997).
Therefore, the electronics firm should adopt this strategy in order to achieve high customer service levels and reduce excess inventory within the supply chain. The success of Best Buy and Dell Computers has been largely influenced by strong connections with supply chain partners. According to Keith Maxwell, vice president of Dell Computers, pals must understand the business, otherwise companies end up creating buffers that translate into inventory (Minoan, 1997). The electronics firm should work in closer between them. After all, the outsourcing process is a matter of trust and relies on a strong relationship (Calculative, 2010).
Robert A. Willet, chief executive officer for Best Buy International, says that “by working together with our partners, we take the cost and time out and we pass on the benefit to the customer, who is the ultimate beneficiary’ (Global Logistics and Supply Chain Strategies, 2006). To achieve the success of Best Buy and Dell Computers, the firm should strive towards agility and flexibility within its supply chain. This can only be achieved if the PL thoroughly understands the company’s goals and strategies. The electronics firm should also consider reducing the number of stocking locations and increasing the size of the remaining warehouses.
These warehouses should be positioned closer to the firm’s customers (Malta & Dehydrators, 2005). This will decrease both warehousing and transportation costs. Consequently, the firm should bring outbound transportation n-house in order to reduce costs and improve customer service. Advantages of bringing transportation in-house are flexibility that comes from not having to operate within a contract and a good deal of loyalty, which comes from working for a particular brand Sack, 2008). In-house transportation allows the firm to reach its customers on a face-to-face level, which will significantly increase customer service levels.