Logistics/Supply Chain

Organization
A good organization structure does not by itself
produce good performance--just as a good
constitution does not guarantee great presidents, or
good laws, or a moral society. But a poor
organization structure makes good performance
impossible, no matter how good the individual
managers may be. To improve organization
structurewill therefore always improve performance.
Peter F. Drucker
Chapter 15
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 Organizing for Logistics/Supply
Chain Management

Organization design
Choices Organization scope
Positioning Intrafunctional

CONTROLLING
Interfunctional

ORGANIZING

PLANNING
Interorganizational
Structure for
Supply Chain
Performance

Partnerships & Collaboration

Information sharing
Alliances
Contracting

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 Objectives for Organization

Definitively defines responsibility, accountability, and

authorityessentials for good management
Collects people together in a meaningful way to
achieve the goals of supply management
Sets initial conditions so that proper cost tradeoffs
can be realized
Facilitates the implementation of plans as well as the
planning process
Aids administration
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 Activity Fragmentation
in the Supply Chain
Responsibilities
President
President

Marketing
Marketing Finance
Finance Operations
Operations

Distribution Cost of capital Supply

channels
ROI alternatives
Customer Inventory and supply
service carrying costs costs
Field Warehousing
inventories
Purchasing
Revenue Transportation
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 Activity Fragmentation
in the Supply Chain (Contd)
Objectives
President
President

Marketing
Marketing Finance
Finance Operations
Operations
More inventory Less inventory
Frequent & Long production runs
short production
runs
Fast order
processing Cheap order
Fast delivery processing
Field
warehousing
Less Lowest cost routing
15-5
CR (2004) Prentice Hall, Inc.
Plant warehousing
 Activity Fragmentation
in the Supply Chain (Contd)
Reasons for fragmentation
Lack of understanding of key cost tradeoffs
Traditions and conventions
Other areas considered to be more important to the
firm than logistics
Organization structure can be in an evolutionary state
Benefits of fragmentation elimination
Encourages important cost tradeoffs to be effected
Focuses on an important, defined area by top
management
Sets the structure within which control can take place
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 Organizational Choices
Informal structure
-Persuasion of top management
-Coordinating committees
-Incentive arrangements
-Profit sharing
-Cross charges
Semi-formal structure
-Matrix organization
Formal structure
-Line--creates value in products, therefore it has
operating status
-Staff--provides
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15-7
 Logistics Matrix Organization

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 Formalized, Centralized
Organization
Chief
executive
officer

Vice-president Vice-president Vice-president Vice-president

Finance Operations Logistics Marketing

Manager Manager
Procurement Warehousing and
materials handling

Manager Manager
Order processing Transportation
and customer and packaging
service

Manager
Inventory and
production
scheduling

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 Organizational Positioning
Line vs. staff
Line is a clean organizational form, but staff may be
preferred when:
-A line organization may cause unnecessary
conflicts among existing personnel
-Logistics activities are considered less critical than
selling, producing, or other activities
-Planning is relatively more important than
administration
-Logistics is treated as a shared service among the
product divisions
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 Organizational Positioning (Contd)
Decentralization vs. centralization
Decentralize for quicker and more customized response
to customer needs. Centralize to achieve economies of
scale.
Large vs. small company
Small firms are likely to have a centralized form, but
logistics activities are less clearly defined.
Manufacturing vs. service
Organization is likely to be directed toward the physical
supply side of the business. Distribution has been a
relatively neglected activity in service firms.
Administrative titles
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 Centralized Organization

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 Decentralized Organization

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

Seller
Seller

Carrier
Carrier

Buyer
Buyer

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 Interorganizational Mgmt (Contd)
Example
Suppose a supply channel is composed of two
membersa buyer and a seller. The buyer annually
produces D = 10,000 units of a product. The buyer
incurs an ordering cost of Sb = $100 when buying
from an upstream supplier. The buyers holding cost
for one item is Hb = $10 per year. Based on the EOQ
formula, the buyer prefers to place orders of the size:
2DS 2(10,000)(100)
Q * b
447 units
b H 10
b

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

2D(S S ) 2(10,000)(100 300)

Q* b s
894 units
c H 10
b

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 Example (Contd)
Total costs in the supply channel
14,000

12,000
Supply Chain cost
10,000
Cost, $

8,000
Sellers cost
6,000
Buyers cost
4,000

2,000
300 Qb500 700 900 1,100 1,300 1,500
Qc
Order quantity, units
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 Example (Contd)
Costs in tabled form

Buyers Supply Chains

optimal optimal
Q = 447 Q = 894
a
Seller $6,711 $3,356
b
Buyer 4,472 5,589
c
Supply Chain 11,183 8,945
a
TCs = SsD/Qs
b
TCb = SbD/Qb + HbQ/2
Potential benefit
c
TCc = (Ss + Sb)D/Q + HcQ/2 of $2,238

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 Example (Contd)
Conflict resolution
Formal transfer mechanisms
-Price adjustments
-Order-size minimums
Informal transfer mechanisms
-Power
Coercive power
Reward power
Training
Referent power
Use of buyers or sellers good name
-Trust
Communication
Sharing information
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 Alliances and Partnerships
Benefits
Reduced cost and lower capital
requirements
Access to technology and management
skills
Improved customer service
Competitive advantage such as through
increased market penetration
Increased access to information for
planning
Reduced risk and uncertainty
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 Logistics Activities
Where to Perform
Perform logistics
High

Seek a competent
partner activities in-house
to companys success
Importance of logistics

Low

Be a partnership
Outsource
leader

Low High

Companys logistics management competency

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 Alliance Choices
Logistics system sharing
3PLs
Partnering through collaboration

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