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 LOGISTIC  CONCEPT  How  do  you  develop  a  logistic  concept?      Learning  goals  

• To  understand  the  elements  of  the  logistic  concept;  • To  understand  the  cohesion  between  various  measures  in  developing  a  logistic  

concept  for  a  company;  • To  formulate  the  questions  that  need  to  be  answered  while  developing  a  logistic  

concept.      

   Every  year,  the  Logistic  Management  Cooperation    (vlm)  rewards  a  company  for  good  logistics.  This  company  needs  to  function  as  an  example  for  other  companies.  In  2006,  Heineken  received  the  award.    Previous  winners  were  DHL,  Centraal  Boekhuis,  Hema  and  Wehkamp.  In  2007  TomTom  WORK  was  given  the  prize.  Since  1999,  Heineken  has  worked  on  the  STARchain  project  for  better  logistics.  The  reason  to  start  STARchain  was  the  strongly  increasing  export  of  the  beer  Heineken  brews  in  Zouterwoude.  In  the  early  90’s,  the  export  consisted  of  only  half  of  the  volume  and  by  the  end  of  2006  export  already  formed  60%  of  the  volume,  with  a  large  contribution  to  the  profit  of  the  Heineken  NV.  However  the  logistics  were  not  able  to  follow  the  success  of  the  marketing  and  sales  of  Heineken.  The  availability  of  the  beer  was  bad,  the  beer  was  no  longer  fresh  enough  when  it  arrived  at  the  consumers  and  the  logistics  costs  increased  profoundly.    STARchain  formed  a  change  of  the  flow  of  goods  towards  the  largest  export  markets,  with  the  use  of  modern  ICT  and  a  clever  planning  of  the  flow  of  goods  from  the  brewery  in  the  Netherlands  up  to  the  Heineken  distribution  centres  in  the  export  markets.    ‘Premium’  brand  Heineken  now  also  has  ‘premium’  logistics.  The  new  logistic  organisation  is  capable  of  following  the  growing  export  of  Heineken.  Due  to  this,  advantages  are  obtained  in  the  flow  of  goods,  at  the  side  of  the  customer,  as  well  as  in  Heineken’s  own  distribution,  production,  purchase  and  sales.  In  the  project,  the  customer  was  central.  The  availability  and  freshness  of  the  beer  were  strongly  improved.  Now  that  the  logistic  organization  is  arranged  well,  In  the  future,  Heineken  will  be  able  to  further  involve  its  customers  in  the  logistics.  The  extra  costs  of  the  supply  and  the  new  distribution  centres  in  the  export  markets  are  earned  back  by  a  smarter  loading  of  the  transport  containers  that  are  spread  all  over  the  world.  Karel  Vuursteen,  the  CEO  at  that  time,  was  actively  involved  in  the  project,  took  care  of  the  decision  making  and  gave  the  STARchain  project  priority  within  Heineken.  The  support  of  the  CEO  is  an  example  of  a  good  involvement  of  the  top  in  a  logistic  project.  There  was  also  a  lot  of  attention  for  the  culture  and  the  change  management.  Heineken  has  shown  that  there  wasn’t  just  one  

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person,  but  an  entire  team  of  Heineken  people  responsible  for  the  success.  Heineken  has  shown  that  logistics  mainly  is  human  labour  and  that  only  a  top  team  can  achieve  the  highest  results.  The  successful  implementation  of  new  ICT  in  a  complex,  worldwide  organization  is  very  educational.  A  bold  approach  with  long-­‐term  efforts,  whereby  the  improvements  of  the  logistics  have  strengthened  the  success  of  the  Heineken  brand  in  the  market.        2.1   The  core  of  this  chapter    Logistics  are  quite  comprehensive.  The  example  of  price  winner  Heineken  shows  that  successful  logistics  require  customer  focus,  a  good  organization,  a  well-­‐thought  out  location  of  storage  points  and  distribution  centres,  cooperation  with  customers,  insight  into  the  costs,  modern  information  and  communication  technology  (ICT)  and,  not  in  the  least,  clever  employees.  Thus  an  approach  on  all  fronts.  Partial  solutions  are  symptom  treatment.  An  extra  helpdesk  helps  to  keep  customers  happy  for  a  little  while.  Increasing  stocks  means  a  higher  availability  of  products,  but  by  the  end  of  the  year,  there  will  be  no  money  left  for  the  really  important  investments.  That  special  order  for  which  the  entire  production  had  to  be  turned  upside  down  did  deliver  that  new  product  to  the  customers  in  time,  but  during  that  period,  the  other  products  were  not  available.    Or  the  urgently  created  products  were  delivered  by  the  transporter  days  too  late.    Logistics  require  real  solutions  and  thus  a  complete,  well-­‐structured  approach.  We  will  discuss  this  approach  in  this  chapter.  The  logistic  concept  is  presented  in  paragraph  2.2.  We  will  use  this  concept  in  every  following  chapter.  Therefore  we  will  end  this  book  with  an  extensive  case.  Every  part  of  the  logistic  concept  will  be  discussed  in  a  paragraph.  The  strategy  of  the  company,  to  which  the  logistics  need  to  be  fine-­‐tuned,  is  central  in  paragraph  2.3.  Subsequently  we  will  discuss  the  structure  of  the  flow  of  goods  (paragraph  2.4),  the  control  of  the  flow  of  goods  (paragraph  2.5),  the  information  and  communication  technology  (paragraph  2.6),  the  logistic  organization  (paragraph  2.7),  and  the  logistic  performance  indicators  (paragraph  2.8).  The  last  paragraph  discusses  how  the  logistic  concept  can  be  charted  in  practice.        2.2  Logistic  concept    This  book  assumes  a  complete  approach  with  the  so-­‐called  logistic  concept.  Applying  a  logistic  concept  offers  a  complete  approach,  whereby  the  entire  supply  chain  has  to  be  looked  at,  and  not  just  the  individual  chains  in  the  flow  of  goods.  Thereby  we  prevent  improvements  having  disadvantages  for  another  chain  further  in  the  logistic  chain.  It  offers  a  common  thread  for  a  change  plan,  whereby  you  can  work  from  step  to  step.  A  complete  

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approach  means  that  the  management  synchronizes  all  decisions  regarding  the  flow  of  goods,  the  planning  and  guidance  of  the  flow  of  goods,  the  supporting  ICT  as  well  as  the  organization.  Before  you  can  fill  in  the  logistic  concept,  the  goals  of  the  company,  the  chosen  strategy  and  the  to  be  derived  logistic  goals  have  to  be  clear.  This  is  a  task  for  the  management.  The  logistic  concept  is  not  finished  until  the  performance  indicators  by  which  the  management  can  follow  the  quality  of  the  logistic  performances  are  determined.  All  elements  constantly  have  to  connect  to  each  other.  By  this  we  find  out  the  coherence  between  the  various  solutions  in  developing  a  logistic  concept  for  a  company.  The  implementation  of  this  concept  determines  the  logistic  performances  and  the  profit  a  company  can  make  with  its  logistics.  Of  course,  the  way  the  logistics  are  arranged  has  to  suit  the  company’s  strategy.  Heineken  wants  to  put  an  exclusive  beer  into  the  worldwide  market  and  that  includes  special  logistics.  This  paragraph  explains  the  elements  of  the  logistic  concept.    

     Figure  2.1  Logistic  concept  (based  on  Van  Goor  and  Visser,  2004)    In  the  heart  of  the  logistic  concept  (see  figure  2.1)  we  find  the  four  elements.  Determining  for  the  implementation  of  the  concept  is  the  strategy  of  the  company;  the  logistics  need  to  contribute  to  reaching  that  strategy.  The  logistic  performances  are  measured  with  

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performance  indicators.  The  following  paragraphs  contain  the  questions  a  company  has  to  answer  for  each  element  of  the  logistic  concept.  The  logistic  concept  determines  whether  the  company  can  meet  the  expectations  of  the  customers  now  and  in  the  future.  The  transport  time  between  the  customer  and  a  distribution  centre  for  example  determines  how  fast  the  company  can  deliver.  And  the  logistic  concept  on  the  long  term  determines  the  costs  of  the  logistics  and  the  investments  the  company  needs  to  make.  The  company  establishes  the  cost  structure  for  various  years  as  soon  as  they  invest  in  factories  and  distribution  centres,  buy  software,  hire  staff  and  close  contracts  with  suppliers  and  service  providers.  An  incorrect  logistic  concept  means  that  the  company  cannot  compete  will  have  unhappy  customers,  and  high  logistic  costs.  The  following  example  of  Sony  Music  shows  this.    Sony  Music  in  Haarlem  In  1998,  Sony  Music  (now  part  of  Sony  BMG)  opened  a  factory  and  distribution  centre  with  a  total  of  23,000  square  meters  in  Haarlem.  An  investment  of  more  than  25  million  for  Sony  Music.  When  the  sales  of  CD’s  stagnated  due  to  increasing  piracy,  the  rise  of  iTunes  and  the  decreasing  popularity  of  Sony  artists  such  as  Michael  Jackson,  a  reorganisation  was  needed.  Therefore  the  distribution  centre  already  closed  in  2003.  The  production  of  CD’s  went  to  Sony’s  CD-­‐plant  in  Austria.  The  delivery  to  all  stores  in  the  Benelux  was  transferred  to  the  Sony  distribution  centre  in  France.  It  was  very  difficult  to  find  a  new  destination  for  such  a  special  building  as  that  of  Sony.  The  distribution  centre  therefore  stood  empty  for  a  long  period,  until  Ikea  took  over  the  distribution  centre  for  only  a  penny.  Not  without  problems,  by  the  way.  When  Ikea  fixed  its  eyes  on  Haarlem,  it  was  not  obvious  that  the  location  would  actually  come  about.  Normally,  Ikea  builds  in  accordance  with  its  own  demands.  The  Sony  building  was  still  brand  new  and  fortunately  could  be  adjusted  to  the  Ikea-­‐formula.  The  municipality  however  wanted  to  have  the  problems  with  the  traffic  examined  and  the  zoning  plan  needed  to  be  changed  because  retail  was  not  allowed  in  the  industrial  zone.  At  first,  the  other  companies  were  not  happy  with  the  arrival  of  retail  on  the  industrial  zone  because  of  possible  nuisance  of  visitors.  What  this  logistic  failure  has  cost  is  one  of  the  best  kept  secrets  of  Sony  Music.    The  concept  needs  only  one  correct  sequence.  That  is  not  entirely  true.  Some  companies  have  adjusted  their  strategy  based  on  the  possibilities  the  clever  structure  of  their  flow  of  goods  or  their  ICT  offer.  Amazon.com  first  started  selling  books  via  the  internet  and  when  everything  worked  correctly,  Amazon  added  toys,  games,  sports  articles  and  even  food.  The  cigarettes  and  confectionary  wholesaler  Lekkerland  already  had  all  gas  stations  as  its  clients.  With  the  rise  of  snacks,  sandwiches  and  telephone  cards  that  were  being  sold  in  gas  stations  Lekkerland  was  able  to  expand  its  service  to  new  products  and  new  customers.  Lekkerland  now  forms  the  ultimate  ‘Convenience  Company’.  The  modern  consumer  prefers  speed  and  convenience.  A  ready-­‐to-­‐eat  snack,  a  quick  cup  of  coffee,  a  can  of  soda  in  case  of  sudden  thirst,  but  also  batteries,  telecommunication  products  or  medicines  are  expected  to  be  part  of  a  convenience  store.  This  book  teaches  you  to  develop  a  good  logistic  concept  for  a  

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company,  step  by  step.  The  following  paragraphs  describe  the  elements  of  the  logistic  concept    THE  LOGISTIC  CONCEPT  DETERMINES  WHETHER  CUSTOMERS  ARE  SATISFIED  AND  IT  DETERMINES  THE  COSTS  FOR  SEVERAL  YEARS    2.3  Strategy  and  logistics    Good  logistics  support  the  strategy  of  the  company.  The  management  determines  a  strategy  on  the  level  of  the  complete  company  (for  example  stability,  growth  or  shrinkage)  and  subsequently  on  the  level  of  every  business  unit  within  the  company.  The  business  unit  is  an  independent  unit  of  a  company,  with  its  own  strategy.  (Smaller  companies  often  have  only  one  business  unit  and  thus  just  one  strategy).  Philips  has  three  product  divisions,  each  with  their  own  strategy,  namely  the  product  divisions  ‘Lighting’,  ‘Consumer  Products’  and  ‘Medical  Systems’.  The  strategy  determines  how  the  business  unit  needs  to  compete  in  the  markets  it  is  active  in  and  thereby  eventually  also  the  contribution  the  logistics  have  to  make  in  that.  A  business  unit  firstly  has  to  know  its  competitive  advantage.  Competitive  advantage  is  what  distinguishes  the  business  units  from  other  companies.  The  company  does  something  that  other  companies  can’t  do,  or  the  company  does  it  better.  The  advanced  information  system  of  the  American  store  chain  Wal-­‐Mart  enables  the  company  to  control  its  supplies  and  purchases  better.  Wal-­‐Mart  has  turned  this  into  a  price  advantage  for  its  customers.  EasyJet  has  a  competitive  advantage  because  this  airline  gives  its  passengers  what  they  want,  namely  cheap  and  uncomplicated  flying.  Without  free  snacks,  frequent  flyer  miles  or  favourite  chairs  on  board.  You  can  read  more  about  strategy  in  the  books  on  management  and  organization.    Every  company  needs  customers  in  order  to  survive  and  make  profit.  Companies  need  to  offer  value  to  attract  and  maintain  customers.  Van  Goor  and  Visser  (2004)  provide  three  competition  strategies  for  this,  namely  cost  leadership,  differentiation  and  focus.  Success  is  determined  by  choosing  the  right  strategy.  This  is  a  strategy  that  connects  to  the  strong  competitive  points  of  the  company  and  the  market  the  company  is  active  in.  But  what  if  you  can’t  choose?  There  can  only  be  one  cost  leader  and  differentiation  is  not  possible  for  many  companies  either.  Van  Goor  and  Visser  therefore  add  a  fourth  strategy,  namely  the  integration  strategy.  Porter  (1992)  calls  this  an  impasse  most  companies  work  with  anyway.  Retailers  such  as  Carrefour,  Jumbo,  Albert  Hein  and  Edah  work  from  an  integration  strategy.  Those  companies  have  arranged  their  logistics  in  such  a  way  that  they  can  adapt  to  various  wishes  of  critical  consumers  against  the  best  possible  costs.  They  integrate  their  commercial  and  logistic  goals.    Strategy  and  logistics  at  supermarkets  

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Dutch  supermarkets  are  strongly  competing.  Laurus,  the  parent  company  of  among  others  Edah,  Super  de  Boer  and  Konmar,  almost  succumbed  to  the  ambitious  plans  to  convert  all  stores  to  the  Konmar  formula.  In  the  eyes  of  the  consumers,  Albert  Heijn  was  becoming  too  expensive.  To  win  back  the  lost  market  share,  Albert  Heijn  started  a  price  war.  Laurus  almost  collapsed  to  this  price  war.  Jumbo  was  the  laughing  third  party.  With  low  prices  and  a  large  assortment.  For  bulk  shopping  you  go  to  Aldi  and  trifles  are  bought  at  Albert  Heijn.  Still,  Aldi  and  Lidl,  with  their  super  low  prices,  are  not  the  only  supermarkets  that  have  profited  from  this.  Nationally,  Jumbo  is  not  a  large  supermarket  chain,  but  in  just  a  few  years,  their  market  share  grew  to  almost  5%.  Their  formula  is  simple.  The  low  prices  of  a  boxes  shop  and  the  service  and  offer  of  the  better  supermarkets.  The  Brabant  family  company  is  opening  stores  throughout  the  entire  country.  In  2007  Jumbo  had  100  stores  and  more  than  1  million  euros  of  turnover.  Jumbo  not  only  has  its  clever  strategy  to  thank  for  its  success.  Jumbo  had  the  advantage  of  the  momentum.  Jumbo  provides  a  logistic  work  of  art.  Only  fully  loaded  trucks  are  allowed  to  drive  from  the  distribution  centre  in  Veghel  to  the  stores.  Store  managers  are  expected  to  keep  the  logistic  costs  as  low  as  possible.  Supermarkets  that  want  to  keep  their  prices  low,  of  course  also  have  to  keep  their  costs  low,  if  they  want  to  make  some  money.  And  this  is  difficult  when  you  want  to  offer  a  complete  assortment.  Other  than  at  Aldi  and  Lidl,  empty  shelves  are  taboo  at  Jumbo.  This  concept  works  well  at  high  turnovers  per  square  meter.  Jumbo  does  everything  to  keep  its  turnover  per  square  meter  high.  Price  and  service  alone  are  not  enough  for  this.  The  customer  also  needs  to  be  able  to  quickly  find  the  products  on  their  grocery  list.  Therefore  Jumbo  does  not  have  long  aisles,  but  islands  and  short  cuts.  So  if  customers  forget  something,  they  don’t  have  to  walk  all  the  way  back  and  end  up  in  long  queues  with  other  shopping  carts.  In  addition  to  clever  logistics,  Jumbo  also  tries  to  reduce  costs  another  way.  For  offers  you  will  search  in  vain.  Namely  Jumbo  guarantees  to  be  the  cheapest.  The  customer,  who  finds  a  certain  product  costing  less  at  a  different  supermarket,  will  get  the  product  for  free.  And  if  you  don’t  have  offers,  you  don’t  have  to  put  out  as  much  adverts  either.  The  core  of  the  message:  cheaper,  fresh  really  is  fresh,  service  with  a  smile,  for  all  your  products.  Make  sure  the  customer  is  not  annoyed  by  anything  and  they  will  come  back.  For  example,  quick  shopping  is  commended  with  the  rule  that  the  fourth  person  in  the  queue  will  get  his/her  products  for  free.  Jumbo  invariably  has  a  high  ranking  in  the  ranking  list  of  market  researcher  Gfk.  The  German  supermarket  Aldi  is  a  real  price  fighter.  Aldi  does  this  by  purchasing  big,  offering  only  a  low  level  of  service  and  working  as  cheaply  as  possible  in  the  stores,  logistics  and  transport.  Aldi  radiates  low  prices  in  everything.  It’s  the  layout  of  the  stores  where  customers  can  get  their  articles  right  from  the  boxes  themselves,  while  these  boxes  are  still  on  the  pallets  they  were  transported  on.  No  superfluous  luxury  thus  is  one  of  Aldi’s  ten  commandments.  This  also  doesn’t  include  an  excess  of  cash  registers  to  keep  the  waiting  time  to  a  minimum.  Aldi-­‐customers  know  that  waiting  is  part  of  the  deal.  The  customers  are  even  happily  waiting  in  line  because  they  see  it  as  proof  of  a  cheap  operating  company  that  recharges  the  lack  of  

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quick  service  in  its  prices.  Aldi  stipulates  this  on  its  website:  “We  save  on  everything  that  makes  products  more  expensive.  Our  stores  are  not  too  big,  our  offer  is  not  too  wide,  and  our  products  are  displayed  sober.  Our  logistics  are  extremely  rational”.    The  strict  choice  of  assortment  however,  plays  mostly  into  the  hands  of  Aldi  being  a  price  fighter.  Aldi  wants  as  few  comparable  products  as  possible.  Customers  cannot  compare.  There  are  no  various  types  of  brands  of  cheese.  There  are  no  A-­‐brands  or  B-­‐brands  with  different  prices.  This  lack  of  choice  pays  off.  On  the  one  hand  it  is  useful  purchase-­‐wise,  because  bulk  purchasing  of  one  and  the  same  product  only  produces  more  purchase  discount.  On  the  other  hand,  it  retains  the  consumer’s  feeling  that  everything  is  cheap.    Strategy  and  logistics  Cost  leadership  strategy  is  aimed  at  lowering  the  costs  in  all  processes  and  thus  also  in  logistics.  By  reaching  the  lowest  possible  costs,  the  company  is  able  to  strive  for  a  bigger  profit  then  accustomed  in  the  field  of  business.  For  logistics  this  means  that  it  is  arranged  against  costs  that  are  as  low  as  possible.  A  large  influence  of  the  logistics  on  commercial  decisions  is  a  logical  result.  This  influence  can  relate  to  the  reconstruction  of  the  assortment  or  handling  logistic  performances  on  the  edge  of  acceptableness.  Logistics  and  production  in  this  strategy  are  dominant  over  sales.  Good  examples  are  the  food  stores  of  Aldi  and  the  flights  at  EasyJet.  Differentiation  strategy  aims  at  offering  unique  products  and  services  in  such  a  way,  that  the  company  clearly  distinguishes  itself  from  the  competition.  This  distinction  could  manifest  itself  in  design,  brand,  service,  prestige,  technology  or  an  exclusive  commercial  distribution  channel.  A  higher  price  is  offset  by  different  characteristics  of  the  product  or  the  service.  With  differentiation  strategy,  the  sales  function  is  more  important  than  for  example  logistics,  purchase  or  production.  A  good  example  is  electronica  producer  Bang  &  Olufsen  and  in  the  United  States,  Heineken  also  chose  differentiation  strategy.  Focus  strategy  is  aimed  at  obtaining  a  cost  advantage  or  a  differentiation  advantage  in  a  small  segment  of  the  market  and  by  that,  not  for  the  market  as  a  whole.  Managers  choose  a  small  market  segment  and  do  not  make  an  effort  to  serve  the  rest  of  the  market.  The  yearly  ‘Welcome  to  the  future’  dance  fest  in  Het  Twiske  focusses  on  a  very  small  group  of  fans  of  techno  and  minimal  dance  music.  The  integration  strategy  combines  the  characteristics  of  cost  leadership  and  differentiation.  Companies  strive  for  a  –  in  the  eyes  of  the  customer-­‐  high  quality,  against  as  low  as  possible  costs.    Applying  this  strategy  is  only  possible  when  there  is  a  complete  control  of  the  costs  in  all  fields.    While  at  cost  leadership,  the  highest  power  lies  at  cost  influencing  departments,  at  an  integration  strategy,  the  departments  of  manufacturing,  sales  and  logistics  have  to  work  together  closely.  Only  a  perfect  synchronisation  between  the  departments  can  result  in  the  low  costs  that  are  so  typical  for  this  strategy.  Many  companies  use  this  strategy,  for  example  Coca-­‐Cola,  Philips  and  Air  France-­‐KLM.  To  distinguish  themselves,  EasyJet  and  Ryanair  have  chosen  cost  leadership.    From  strategy  to  concrete  logistic  goals  

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Subsequently,  the  management  needs  to  translate  the  chosen  strategy  into  concrete  logistic  goals  for  the  external  logistic  performances  and  for  the  internal  logistic  efforts.  The  external  logistic  performances  are  derived  from  the  customer’s  expectations,  which  are  discussed  in  chapter  3.    Examples  of  concrete  goals  for  the  external  logistic  performances  are:    

• The  delivery  time  to  customers:  making  deliveries  to  important  customers  in  the  Benelux  within  24  hours  and  to  other  customers  within  48  hours;  

• The  reliability  of  the  delivery:  delivering  a  minimum  of  98%  of  the  orders  on  time;  • Faults  in  the  delivery:  maximum  of  0.2%  faults  in  order  rules;  • The  installation  of  products:  99%  of  the  new  ADSL-­‐connections  need  to  work  within  8  

office  hours;  • Information  regarding  the  delivery:  a  question  of  a  customer  regarding  the  delivery  

of  products  needs  to  be  immediately  answered  on  the  telephone,  in  case  of  questions  via  the  website  by  email  within  2  hours.  Or,  a  quotation  for  a  mortgage  needs  to  be  sent  through  email  within  1  day;  

• The  helpdesk:  95%  of  inbound  phone  calls  need  to  be  answered  within  1  minute;  • The  waiting  time:  Check-­‐in  of  a  passenger  at  Schiphol  can  take  no  longer  than  15  

minutes.  Or  the  waiting  list  for  youth  care  is  4  weeks  maximum.    Examples  of  goals  for  the  internal  logistic  efforts  are:    • The  logistic  costs  are  not  allowed  to  amount  to  more  than  6%  of  the  turnover;  • The  maximum  supply  of  much  sought  after  products  is  2  weeks,  for  less  often  

requested  products  this  is  4  weeks;  • The  capacity  of  certain  means  of  production  needs  to  be  used  90%;  • The  supply  differences  in  the  distribution  centre  in  one  year  are  not  allowed  to  be  

more  than  1%  of  the  value  of  the  stock.    

Logistic  goals  need  to  be  derived  from  the  corporate  strategy  and  need  to  be  SMART.  SMART  means  Specific  (the  goal  needs  to  be  unambiguous),  Measurable  (under  which  measurable  terms  or  form  has  the  goal  been  reached),  Acceptable  (will  the  target  group  and/or  the  management  accept  this  goal),  Realistic  (the  goal  has  to  be  obtainable)  and  Time  bound  (when  does  the  goal  have  to  be  reached).    2.4  Structure  of  the  flow  of  goods    

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The  flow  of  goods  of  the  cardboard  factory  in  the  previous  chapter  begins  with  the  transport  of  raw  material  from  the  suppliers  to  the  cardboard  factory.  The  raw  material  is  collected  and  stored  in  a  warehouse.  Subsequently,  in  the  factory  the  raw  material  is  processed  into  cardboard.  The  ready-­‐to-­‐use  products  are  stored  in  the  warehouse.  Later,  the  products  are  transported  from  the  warehouse  by  truck  when  the  customer  needs  them.  A  truck  transports  the  products  to  the  customer.  The  customer  order  penetrates  into  the  finishing  operation  during  which  the  customer  creates  a  customer  specific  product  from  the  cardboard.    The  structure  of  a  flow  of  goods  has  three  pillars:  the  first  pillar  is  ‘transformation’.  This  is  a  change  of  goods  in  terms  of  matter  and  functionality.  In  understandable  language  this  is  called  production/manufacturing.  The  company  takes  the  raw  material  and  turns  it  into  a  working  product.  Just  like  at  home,  when  you  are  making  hodgepodge  (Dutch  hutspot)  in  the  kitchen  with  potatoes,  unions  and  carrot  as  your  raw  material  (including  of  course  the  gas  you  use  to  cook  on).  The  second  pillar  is  ‘stabilisation’.  This  is  a  change  of  time.  We  call  this  storage.  You  usually  buy  your  groceries  during  the  weekend,  when  you  have  the  time  for  it.  And  you  don’t  make  the  hodgepodge  until  Wednesday.  Or  maybe  you  also  make  the  hodgepodge  during  the  weekend,  and  store  it  in  the  freezer  until  you  are  going  to  eat  it  on  Wednesday.  The  third  pillar  is  ‘translation’.    This  is  a  change  of  place.  This  is  just  transport.  You  buy  the  raw  material  for  your  hodgepodge  and  bring  it  home  in  your  cycle  bag.  Based  on  these  pillars,  the  company  creates  a  flow  of  goods.  In  that,  the  company  has  many  options  to  choose  from.  Are  you  manufacturing  in  Europe  or  in  China?  How  many  distribution  centres  do  you  have,  or  maybe  you  deliver  to  your  customers  straight  from  the  factory?  Do  you  do  all  this  yourself  or  do  you  outsource  part  of  the  flow  of  goods?  Another  part  of  the  structure  of  the  flow  of  goods  is  the  demand  for  the  best  push-­‐pull  boundary  in  the  flow  of  goods.  The  push-­‐pull  boundary  is  the  place  that  points  out  how  far  upstream  in  a  logistic  chain  a  customer  order  penetrates  into  the  purchase  process,  manufacturing  process  or  distribution  process.  We  will  further  elaborate  this  in  chapter  5.    

All  choices  regarding  the  flow  of  goods  have  immediate  large  consequences  for  the  costs  of  the  company.  In  addition,  these  are  choices  the  company  cannot  just  change.      

The  demands  that  are  required  from  logistics  are  constantly  changing.  Various  elements  of  logistics  can  be  adjusted  in  a  relatively  short  term.  New  ICT  systems  for  example  can  be  realized  within  a  few  months.  Adjusting  the  structure  of  the  flow  of  goods  however  is  more  difficult.  Setting  up  a  factory  or  a  distribution  centre  or  organizing  a  move  cannot  be  done  overnight  and  closing  a  factory  or  distribution  centre  is  difficult  as  well.  Therefore  it  is  

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necessary  to  look  further  ahead  and  to  let  the  locations  of  the  factories  and  distribution  centres  connect  well  to  the  company’s  expectations  for  the  future.  Only  then  can  be  prevented  that  the  wrong  choices  in  factories  and  distribution  will  form  an  obstacle  for  the  logistics  in  the  future.  The  previous  example  of  Sony  Music  speaks  volumes.  In  both  the  distribution  logistics  as  well  as  the  production  logistics  we  see  changes  in  the  structure  of  the  flow  of  goods.  Customers  are  expecting  an  ever  better  and  faster  service.  ‘Next  day  delivery’  often  forms  the  standard.  In  addition,  goods  ever  more  often  have  to  be  delivered  within  a  narrow  time  frame.  This  means,  not  ‘sometime  during  the  next  day’  but  ‘tomorrow  between  9.00  and  9.30  hours.’  Ten  years  ago  it  was  normal  for  companies  to  have  a  national  distribution  centre  for  local  customers  in  every  country.  Nowadays  companies  deliver  to  all  European  countries  from  a  central  distribution  centre.  However,  with  the  increasing  fuel  rates,  more  traffic  and  European  regulations  that  limit  the  driving  times  of  chauffeurs,  it  is  no  longer  possible  to  serve  all  European  customers  from  this  one  distribution  centre  against  low  costs.  The  combination  of  a  larger  market  field  within  Europe  and  the  demand  to  have  things  delivered  faster,  makes  regional  distribution  networks,  with  regional  distribution  centres  (RDC)  an  ever  more  often  chosen  solution.  A  distribution  centre  then  serves  a  couple  of  European  countries,  for  example  the  Benelux  and  Germany.    

   Local  distribution  structure    Central  distribution  structure  Increasing  Regional  Distribution    Figure  2.2:  Different  structures  of  distribution  logistic  flow  of  goods    Central  distribution  of  spare  parts    An  example  is  Scania  that  has  chosen  Belgium  as  location  for  its  worldwide  distribution  centre.  After  an  international  reorganization,  this  Swedish  manufacturer  of  trucks  has  decided  to  bring  together  the  distribution  centre  for  spare  parts  in  Belgium  in  only  one  distribution  centre.  Scania  Parts  delivers  parts  for  trucks,  busses  and  industrial  engines.  Its  assortment  consists  of  65,000  different  parts.  Every  year,  6  million  order  rules  are  processed  

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for  1,500  customers  in  80  countries.  A  team  of  320  employees  takes  care  of  fast,  frequent  and  reliable  deliveries,  24  hours  a  day,  7  days  a  week.  Scania  customers  expect  a  high  level  of  logistic  service.  Not  only  Scania  has  chosen  a  central  distribution  centre  in  Belgium.    The  companies  Agfa  and  Nike  also  chose  Belgium.    Production  The  structure  of  the  flow  of  goods  not  only  changes  in  the  distribution  of  the  end  products.  Concentration  also  plays  a  role  in  production  logistics.  Ever  less  but  larger  factories  are  serving  ever  larger  regional  markets.  In  production,  large  shifts  are  visible  in  worldwide  flows  of  goods.  The  most  visible  developments  are  the  fast  rising  countries  in  Asia,  Central  Europe  and  Eastern  Europe.  Bicycle  manufacturer  Batavus  in  Leeuwarden  is  having  the  production  of  frames  executed  in  China,  Taiwan  and  Japan.  The  styling  and  painting  of  the  frames  proceeds  in  the  Benelux  enabling  them  to  play  into  the  customer  demand  at  the  last  minute.    The  move  of  the  production  of  copiers  by  Xerox  to  the  Ukraine  and  Mexico  almost  cost  600  employees  in  Limburg  their  jobs.  Campina  is  concentrating  the  production  of  fresh  dairy  in  the  Netherlands  in  Rotterdam,  Maasdam  and  Eindhoven.  Other  production  locations  of  Campina  are  closed.  We  will  come  back  to  this  in  chapter  5.    2.5  Logistic  planning  and  control    Planning  has  everything  to  do  with  reaching  goals.  In  order  to  reach  these  goals,  managers  contemplate  on  what  has  to  happen,  and  on  what  is  needed  to  make  this  happen;  you  can  compare  this  to  navigating.  The  same  applies  to  logistics.  From  a  chosen  flow  of  goods,  the  question  needs  to  be  answered  how  –  in  line  with  the  goals  of  the  company-­‐  the  goods  find  their  way  to  the  customers,  through  the  chain.  This  is  the  control  of  the  flow  of  goods.  Logistic  control  can  easily  be  explained  with  the  concept  of  the  control  circle  of  Deming  (see  figure  2.3),  which  we  regularly  use  in  this  book.  The  control  circle  includes  the  aspects  of  plan,  do,  check  and  act.  A  good  control  prevents  unnecessary  and  overlapping  activities.  The  Deming  control  circle  is  cyclic.  After  Plan-­‐Do-­‐Check-­‐Act  follows  the  next  cycle  of  Plan-­‐Do-­‐Check-­‐Act.    

   Figure  2.3  Deming  control  circle    Plan  Plan  involves  policy  and  planning.  For  logistics,  a  policy  is  needed  that  results  in  a  number  of  basic  rules,  norms  and  goals.  For  example,  policy  which  states  that  the  capacity  needs  to  be  

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used  at  all  times,  98%  of  the  orders  have  to  be  delivered  on  time  and  complete,  a  network  printer  needs  to  be  repaired  within  4  hours  after  the  malfunction  is  reported,  a  request  for  welfare  needs  to  be  treated  within  2  weeks,  a  Heineken  beer  in  the  United  States  needs  to  be  fresh  or  new  products  have  to  be  introduced  in  all  distribution  channels  within  3  months.  Examples  of  strategic  and  tactical  decisions  are  determining  logistic  goals  as  derived  from  the  corporate  strategy,  determining  performance  indicators  for  the  logistics,  setting  up  the  logistic  concept  and  determining  the  necessary  capacities  in  the  flow  of  goods.  Planning  leads  to  operational  planning  decisions  regarding  the  activities  that  have  to  be  carried  out  and  the  synchronization  of  those  activities,  in  order  to  lay  a  basis  for  the  control  of  those  activities.  For  example,  when  does  which  activity  has  to  start?  In  order  to  make  decisions,  it  is  necessary  to  collect  the  right  information.  For  example  the  information  about  the  flow  of  goods,  the  product  structure,  norms  for  processing  times  and  information  of  customers  and  suppliers.  In  creating  the  plan,  previous  information  about  order  quantities  and  historical  sales,  but  also  future  aimed  information  such  as  sales  expectations  and  information  regarding  available  distribution  and  production  capacities  and  capacities  of  suppliers  are  also  used.  Up-­‐to  date  information  is  also  needed,  about  for  example  stock,  staffing,  planned    maintenance  on  machines,  and  running  orders  in  production,  purchase,  sales,  installation,  and  repair.  These  decisions  result  into  an  operational  planning  such  as  assortment  planning,  production  planning,  a  sales  prediction,  a  distribution  planning,  a  purchase  planning  and  the  financial  budget.    Do  Based  on  the  planning,  subsequently  the  operational  activities  in  the  flow  of  goods  are  executed  and  employees  take  decisions  about  the  concrete  implementation.  This  involves  for  example  accepting  a  customer  order,  the  installation  of  a  product  at  the  customer,  the  sequence  in  which  orders  are  collected  in  the  distribution  centre,  and  the  quality  checks.    Check  and  Act  During  the  implementation,  circumstances  can  lead  to  things  not  going  as  planned  or  not  leading  to  the  planned  results.  This  happens  for  example  because  of  disruptions  at  the  suppliers  or  in  the  production  process  or  an  unexpected  increase  in  the  sales,  like  when  diet  guru  Sonja  Bakker  promoted  egg  cakes  (Eierkoeken  in  Dutch).  The  company  had  to  make  adjustments  in  order  to  keep  realizing  their  goals.    

   Demand  for  egg  cakes  increases  after  advice  Sonja  Bakker  

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After  weight  consultant  Sonja  Bakker  recommended  the  egg  cake,  the  demand  for  egg  cakes  has  increased  enormously.  Manufacturer  Vast  Banket  in  Middelstum  has  gone  from  twelve  hours  per  day  to  three  shifts  and  is  now  even  operational  on  weekends.  After  the  recommendation  of  Sonja  Bakker,  egg  cakes  form  30%  of  the  profit.  This  is  twice  as  much  as  before.  In  2006,  the  company  realized  a  turnover  of  20  million  euro.  Vast  Banket  was  able  to  handle  the  increasing  demand  for  raw  materials  and  staff,  but  packaging  threatened  to  become  a  problem.  These  packages  are  created  in  Italy,  after  which  a  Dutch  company  prints  them  with  the  right  Albert  Heijn,  Super  de  Boer  or  other  logo  for  Vast  Banket.  The  package  stock  turned  out  to  be  too  small  and  the  Italian  company  has  a  delivery  time  of  six  weeks.  In  addition,  both  Albert  Heijn  and  Super  de  Boer  want  to  play  into  the  craze  by  putting  the  egg  cakes  on  offer.  Vast  Banket  has  already  let  its  customers  know  that  they  may  only  be  able  to  deliver  the  egg  cakes  in  blank  bags  with  a  label.      

‘Perfect  preparation  prevents  poor  performance’.  Everything  in  logistics  falls  or  stands  with  planning  and  control.    2.6  Logistic  ICT    Success  in  the  market  depends  on  information  superiority.  This  is  the  level  to  which  information  can  be  collected  faster  or  processed  faster  than  an  opponent  can.  This  is  mainly  important  in  logistics.    The  planners  in  the  cardboard  factory  in  chapter  1  need  a  lot  of  information  about  the  name-­‐address-­‐residence  of  the  customer,  specifications  of  the  products,  the  amount  of  products  the  customer  has  ordered,  the  raw    material  that  is  needed  to  create  the  cardboard,  which  suppliers  provide  the  raw  material  by  which  delivery  time,  the  transport  capacity,  the  information  about  leaves  of  the  employees  in  the  factory  and  the  distribution  centre,  reservations  on  stock,  information  about  overdue  payments  of  customers,  the  capacity  of  the  cardboard  machine,  norms  for  production  times,  planned  maintenance  of  the  cardboard  machine,  other  orders  that  have  already  been  planned  on  the  cardboard  machine,  the  information  to  create  shipment  documents,  the  amount  of  available  fork  trucks  at  the  distribution  centre  and  the  available  locations  in  the  distribution  centres  to  store  the  product.  In  short,  a  lot  of  information  is  needed  for  the  logistics.  Therefore  in  chapter  7  we  will  spend  a  lot  of  attention  on  the  ICT  support  that  is  needed  for  this.    The  rise  of  the  in  the  previous  chapter  discussed  integrated  logistic  chain  and  virtual  networks  create  a  need  for  a  better  information  processing  capacity  for  the  ever  larger  information  flows  and  the  demand  for  real-­‐time  information  to  support  logistic  decisions  regarding  the  logistic  chain.  In  technological  field  a  lot  of  progress  has  been  made.  Computer  components  are  becoming  faster,  smaller  and  sounder.  Computers  more  often  work  in  networks  with  faster  connections  whereby  the  information  processing  capacity  increases.  Satellites  provide  a  worldwide,  wireless  communication  

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network.  ICT  has  vastly  changed  the  way  people  are  communicating.  Enterprise  Resource  Planning  systems  (ERP)  form  the  core  of  the  ICT  at  companies.  Firstly,  companies  strive  for  internal  improvements  with  ERP.  In  logistics,  the  weak  link  has  shifted  from  internal  to  external.  Cooperation  between  suppliers  and  purchasers  sets  high  demands  on  communications.  Logistic  cooperation  practically  is  only  possible  through  ICT.  The  required  communication  between  the  partners  in  the  logistic  chain  is  almost  impossible  to  be  processed  manually.  The  high  frequency  and  the  large  volume  of  the  communication  can  only  be  processed  fast  and  flawless  when  it  is  done  automatically.  The  example  of  the  American  army  shows  what  happened  when  the  ICT  for  logistics  was  arranged  well  yet.      Well-­‐aimed  logistics  in  the  American  army  The  advance  of  the  American  army  to  Bagdad  was  possible  because  of  the  use  of  advanced  RFID  (radio-­‐frequency  identification)  in  the  supply  of  goods  to  the  deployment  area.  By  using  so-­‐called  Total  Asset  Visibility,  the  planners  always  know  exactly  where  on  land,  at  sea  or  in  the  air  the  containers  with  munitions,  fuel  and  brown  beans  are.  The  defence  logistic  chain  thereby  is  completely  transparent.  Operation  Desert  Storm  was  a  ‘strategic’  success  but  a  logistic  nightmare.  More  than  half  of  the  eighty  thousand  containers  that  were  being  shipped  from  the  US  to  the  Middle  East  had  to  be  opened  –  often  multiple  times-­‐  to  see  what  was  actually  in  them.    Because  ‘container-­‐diving’  wasn’t  always  done  as  thoroughly,  some  soldiers  had  breakfast  three  times  a  day,  and  some  got  three  lunches.  Containers  with  munitions  also  needed  to  be  opened  to  see  which  bullets  and  grenades  exactly  were  in  them.  Tens  of  thousands  of  containers  were  sent  back  unopened  after  Operation  Desert  Storm.  Due  to  the  long  supply  lines,  the  logistics  of  Operation  Iraqi  Freedom  were  even  more  complex  than  those  of  the  previous  Gulf  War.  Every  day,  an  average  60  million  litres  of  diesel,  one  million  litres  of  water,  four  thousand  tons  of  munitions  and  330,000  meals  were  shipped  from  Kuwait  to  Bagdad,  through  the  supply  line.  The  large  difference  between  Desert  Storm  and  Iraqi  Freedom  is  that  the  American  army  has  switched  from  the  ‘just-­‐in-­‐case’  to  the  ‘just-­‐in-­‐time’  principle  for  all  logistic  operations.  To  reach  complete  transparency  in  the  flow  of  goods,  the  American  ministry  of  defence  introduced  a  system  based  on  RFID-­‐technology.  By  that,  defence  staff  with  the  correct  access  rights  can  consult  a  database  that  shows  where  in  the  world  all  270,000  containers  of  the  American  armed  forces  are  located  and  what  is  in  them.    

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More  cooperation  between  suppliers  and  purchasers  means  more  information-­‐exchange,  speed,  and  accuracy  of  communication.  Logistic  ICT  goes  beyond  company  walls.    2.7  Logistic  organization    Logistics  are  mainly  human  labour.  There  is  not  one  package  that  decides  to  go  to  the  customer  all  by  itself  now  does  it?  That  package  will  only  move  when  people  take  logistic  decisions.  The  successive  operations  in  creating  and  providing  a  product  or  service  have  a  natural  coherence.  All  steps  in  the  flow  of  goods  namely  are  necessary  to  have  raw  materials  and  parts  eventually  end  up  with  the  customer  as  complete  product.  However,  the  decisions  regarding  that  flow  of  goods  in  the  logistic  chain  are  divided  to  companies  and  within  those  companies  they  are  divided  to  departments  such  as  sales,  production  planning,  purchase,  maintenance,  service  and  transport  planning  and  subsequently  to  individual  employees.  This  division  of  decisions  breaks  the  natural  coherence  and  means  that  interrelated  decisions  always  need  to  be  synchronized.  In  logistics  we  see  functions  arise,  that  carry  the  complete  responsibility  for  flows  of  goods  from  purchase,  through  production  and  distribution  up  until  return  logistics  in  one  company.  This  is  the  logistic  department  with  a  logistic  manager.  We  will  pay  attention  to  this  in  chapter  9.  

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 A  happy  customer  above  all  requires  involved  employees  who  take  the  right  decisions.  Their  decisions  determine  success  or  failure.  Because  a  package  doesn’t  decide  to  go  to  a  customer  all  by  itself  now  does  it?    2.8  Logistic  performance  indicators    To  measure  is  to  know.  This  applies  to  logistics  as  well.  The  most  important  reason  for  logistic  performance  measuring  with  performance  indicators  is  supporting  and  preparing  management  decisions.  A  well-­‐constructed  system  of  performance  indicators  leads  to  better  decision  making.  In  order  to  gain  an  insight  into  the  logistic  performances  it  is  necessary  to  compare  the  information  with  norms  and  goals.  With  performance  indicators,  the  external  performances  of  a  company  towards  its  customers  as  well  as  the  internal  efforts  can  be  followed.  One  level  deeper  we  can  see  and  examine  how  these  performances  come  about  and  how  the  internal  processes  proceed.  Partners  in  the  logistic  chain  of  course  have  to  use  the  same  performance  indicators  to  be  able  to  asses  each  other  well.  Chapter  9  presents  a  framework  for  drawing  up  logistic  performance  indicators.    2.9  The  approach  in  practice    You  now  know  the  elements  of  the  logistic  concept.  You  can  use  this  to  chart  the  current  situation  in  conversations  with  employees  within  the  company.  You  have  these  conversations  with  managers,  but  also  with  employees  who  do  the  real  work.  Once  you  have  charted  the  concept  you  ask  a  couple  of  employees  from  the  company  whether  you  have  understood  the  current  situation  correctly.    What  do  you  chart?  For  every  element  of  the  logistic  concept  you  will  now  be  given  a  few  questions  as  a  checklist  for  the  conversations  in  the  company.    Checklist  strategy  and  logistic  goals  

• What  is  the  competition  strategy  of  the  company?  • Do  the  logistic  goals  connect  well  to  the  corporate  strategy?  • What  are  the  concrete  goals  for  the  external  logistic  performances  and  the  internal  

logistic  efforts?    Checklist  structure  of  the  flow  of  goods:  

• What  is  the  structure  of  the  flow  of  goods  from  the  suppliers  via  the  production  and  distribution,  via  purchasers  up  to  the  consumer  (and  the  possible  return  flows?  Point  out  the  places  where  production,  storage  and  transport  take  place.  

• Which  part  of  the  flow  of  goods  is  arranged  on  the  basis  of  real  customer  orders?  

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And  what  part  of  the  flow  of  goods  is  arranged  on  the  basis  of  the  expected  demand?    Checklist  logistic  control  

• How  is  a  demand  forecasting  for  the  flow  of  goods  drawn  up?  • How  are  purchase  plans,  production  plans  and  distribution  plans  made?  • Is  the  planning  shared  with  suppliers,  customers,  logistic  service  providers,  and  so  

on?    Checklist  logistic  ICT:  

• What  is  the  ICT-­‐support  for  the  plan,  do,  check  and  act  of  the  flow  of  goods?    Checklist  logistic  organization:  

• Which  logistic  decisions  does  the  company  make  on  a  strategic,  tactical  and  operational  level?  

• What  is  the  division  of  these  decisions  in  the  organization?  Who  takes  which  decisions?  

 Checklist  logistic  performance  indicators  • What  are  the  performance  indicators  for  the  logistics?  • How  does  assessment  and  evaluation  of  the  performance  indicators  take  place?  • Which  performance  indicators  are  shared  with  customers,  suppliers  and  logistic  

service  providers?