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Logistics and the Extended Enterprise is the result of a four-year, $1 million research project devoted to the study of best practices in supply chain management—a necessity for companies that want to be competitive in a global business environment. Written by members of the University of Maryland's Supply Chain Management Center, this important book takes a first-of-its-kind look at supply chain and logistics/transportation management organization structure. It offers a paradigm for successfully implementing a ...
Logistics and the Extended Enterprise is the result of a four-year, $1 million research project devoted to the study of best practices in supply chain management—a necessity for companies that want to be competitive in a global business environment. Written by members of the University of Maryland's Supply Chain Management Center, this important book takes a first-of-its-kind look at supply chain and logistics/transportation management organization structure. It offers a paradigm for successfully implementing a global supply chain and explains the role logistics plays in enabling this approach.
The book answers the question of how organizations can best apply supply chain management practices to break down internal and external walls and become more effective extended enterprises, with a focus on lessons learned at some of the world's leading corporations. The authors gained first-hand insights into this subject through interviews, site visits, focus groups, and targeted surveys involving over 600 companies across a broad range of industries. This book summarizes their core research findings and conclusions, using case studies from such companies as Amoco, DuPont, Johnson & Johnson, UPS, Georgia Pacific, and others.
Logistics and the Extended Enterprise will provide the reader with both the conceptual and analytic tools necessary to manage a global supply chain and put a world-class logistics operation in place.
STRATEGIC CONCEPTS AND BEST PRACTICES.
Logistics/Supply-Chain Management: The Hub of the Extended Enterprise.
Logistics Best Practices.
Best Practices Companies in Action.
The Outsourcing Megatrend.
Outsourcing Best Practices.
APPLYING BEST PRACTICES TO YOUR COMPANY.
Assessing and Improving Your Supply Chain: A Self- Diagnostic Process.
Benchmarking for Better Results.
Moving Toward the Truly Extended Enterprise.
(NOTE: The Figures and/or Tables mentioned in this sample chapter do not appear on the web version.) Logistics/Supply-Chain Management: The Hub of the Extended Enterprise
Logistics/supply-chain management is the synchronized movement of inputs and outputs in the production and delivery of goods and services to the customer. In this integrative approach, a cross-functional senior management group coordinates physical and informational resources to optimize efficiency and effectiveness. It manages both the purchasing (or inputs) side of the resource stream, and the distribution (or outputs) side of the stream as a single integrated flow. This flow typically encompasses customer service, physical distribution, materials management, information management, and their related, highly complex subprocesses: order processing and order tracking, production planning and supplier management, purchasing, warehousing, transportation, and electronic supply-chain communications/payment systems. Taken together, total supply chain costs consume about 7 to 12 percent of corporate annual revenue across all industries. In one year alone (1997), U. S. corporations spent $862 billion on supply-chain activities, according to Cass Information Services' 1998 State of Logistics Report.
Today, senior executives in many industries are managing extraordinarily complex global supply chains that source raw materials from thousands of locations around the world and distribute finished products to thousands of other locations. Many of these executives have come to recognize that corporate capability in supply-chain management is an important lever of enterprise transformation. This critical coordination and value center can enable the enterprise to synchronize many simultaneously unfolding material and informational flows on a worldwide basis-and help the whole enterprise to contain costs through more efficient utilization of assets and greater overall productivity.
As a result, integrated supply-chain management is now at the epicenter of business transformation. It has been elevated to the position of a hub, a crosscutting communications and strategic control nexus encompassing the major functional areas of the organization and the extended enterprise. A recent survey conducted by the University of Maryland Supply Chain Management Center found that 20 percent of Fortune 500 companies now have chief logistics officers (CLOs) reporting directly to the CEO-clear evidence of this area's growing stature as a critical lever of corporate transformation.
Chief logistics officers (and the even more powerful next generation of vice presidents of supply chain that are succeeding them) are breaking down walls between internal functions or departments, as well as between the enterprise itself and key partners in the value chain (e.g., customers, distributors, suppliers, and carriers). The very term "extended enterprise" refers to breaking down a company's outer wall and extending its strategy, structure, and processes to its core partners. The goal is to get everyone in the extended enterprise onto a common platform of logistics transactions and information systems for greater interorganizational "seamlessness." This integration can result in significantly faster system response times to volatile changes in marketplace events and patterns of demand. By creating and managing a highly organized network of complementary companies across the supply chain, an extended enterprise can also rapidly build strategic effectiveness and wealth.
This chapter describes the evolution and characteristics of a well-designed, well-managed extended enterprise, and it reviews corporate experience in achieving progressively greater integration with internal departments, suppliers, distributors, and customers. In doing so, it provides a tool for assessing your own company's stage of supply-chain development. Finally, the chapter concludes with a discussion of future trends that will enable expanded integration and even greater competitive benefits.
EVOLUTION AND CHARACTERISTICS OF THE EXTENDED ENTERPRISE
While the extended enterprise model may seem revolutionary, major elements of it are not new at all. They hearken back over a century to another time of radical technological and economic change. In his 1922 text, The Industrial and Commercial Revolutions in Great Britain During the Nineteenth Century, L.C.A. Knowles described the role of logistics in wealth creation in ways startlingly similar to the situation today:
Mechanical and rapid transport (railways and steamships) not merely altered the relative value of nations and commodities but it promoted a commercial revolution in business organization. As traders could get goods swiftly and with absolute certainty, they no longer kept such huge stocks. They therefore needed less warehousing space and less credit from their bankers and were able to carry on business more economically.
This sounds very much like the just-in-time inventory management practiced today, just as Knowles' description of the telegraph-enabled extended supply chains of the late 1800s sounds much like today's emerging IT-enabled extended supply chains:
It is now possible to control world-wide interests as one great business undertaking. The result is the formation of combinations that make for efficiency in production and the control of waste. It is possible to specialize branch factories to a very high degree, and raw material bought in large quantities is bought cheaper and is easier and less costly to handle. These combinations can obtain lower railway rates for their large shipments. They are also able to distribute from the nearest place of business and so save the expense of long railroad hauls. Businesses of this magnitude, national and international in scope, could not be carried on without daily correspondence to keep the whole in touch. They are therefore dependent for their existence on telegraphs and telephones.
In the modern era, we can track the genesis of extended enterprise logistics to the early 1980s, when a new model of organization more appropriate for the hypercompetitive international marketplace began to surface. In the manufacturing sector, Japanese automobile makers began building factories with flexible automation capable of producing multiple types of products on the same production line. Instead of pushing large-volume, standardized production runs to reap economies of scale as was the common industrial practice in the West, Japanese firms engineered a lean and just-in-time manufacturing paradigm that sought big gains from economies of scope. The Japanese built fast-response production and logistics systems that could satisfy the pull of diverse and highly fluctuating international consumer demands.
A 1994 study by Nishiguchi found that Japanese auto manufacturers throughout the 1980s maintained inventory levels one-fifteenth the size of European auto manufacturers and one-quarter the size of U. S. auto manufacturers. They also used just-in-time deliveries with 12 and five times greater frequency respectively than European and U. S. auto makers.
Soon, lagging American car manufacturers began to emulate Japanese practice, ordering key suppliers to move within 50 miles of plants to create greater synchronization in production. General awareness rapidly increased in Corporate America, which rushed to establish new, more responsive business models that were highly integrated horizontally and vertically across internal departments and external suppliers.
More recently, Japanese and American auto companies have begun to extend this integration into the dealer-support end of their business, using electronic sales information to guide continual parts-replenishment strategies. Honda Corporation has led the way among Japanese multinationals by constructing an international logistics network that unites country-specific local car dealerships, regional parts warehouses, and corporate headquarters in Tokyo into a single information system. This approach enables the company to maintain extremely low inventory stocks and conduct its customer service operations on an extremely fast turnaround basis.
By the early 1990s, this new approach to management had spread well beyond Japan and beyond the manufacturing sector. Service hierarchies were also transforming themselves into flexible global networks through telecommunications and electronic links of all kinds with suppliers and customers. By the late 1990s, a great wave of manufacturing and service businesses were moving to "network" models of organization, and many companies were establishing corporate logistics/supply-chain management hubs to provide information, resources, and guidance to keep networks functioning on an optimal basis. For example, to leverage corporatewide relationships and support both internal and external operating units, Xerox created strategic shared-service hubs at corporate headquarters to support areas like purchasing and technology where economies of scale and knowledge still made a big difference.
Today, supply-chain management, with its tendency to span functional boundaries and interact with many internal and external players, has become the driving force in the effort to create the extended enterprise. The supply-chain organization acts as the body of the enterprise, generating the dynamic energy and direction needed for the extended-enterprise network to operate efficiently and exchange inputs and outputs within its systemwide borders. It also acts as the mind of the extended enterprise, with computer software tracking the expanding physical production/distribution network map and applying optimization principles to restructure and streamline the network. Finally, at a more profound level, the supply-chain organization acts as the corporate survival instinct, with physical and informational supply lines branching out to secure vital corporate inputs like underground roots searching out water.
Typically, the logistics/supply-chain organizational hub has capabilities in customer order management, intermodal and international transportation management, information/data networking across the supply chain with vendors and customers, and performance/metrics management. It sells its services to the operating business units, and the units contribute to the budget of the logistics shared service on a utilization basis. In return, the units get purchasing discounts, lower operating costs, and higher levels of service from outside logistics/supply-chain actors than they could attain by operating alone.
The greater synchronization of production, distribution, and customer order management activities often brings dramatic gains. Work in process and finished goods inventory are slashed; order-to-delivery cycle times are compressed. In fact, best-in-class leaders in supply-chain management can have a 50 percent cost advantage over median competitors. According to a 1997 supply chain benchmarking study, conducted by The Performance Measurement Group, a subsidiary of global management consulting firm Pittiglio Rabin Todd & McGrath (PRTM), best in class companies:
FUTURE TRENDS IN SUPPLY-CHAIN MANAGEMENT
Full-spectrum visibility and real-time management of increasingly complex, high-velocity operations will be landmark practices of supply-chain management in the twenty-first century. These practices are already taking shape in organizations of all kinds.
For example, Ford Motor Company has opened its intranet to core suppliers so they can access real-time information on inventories in Ford plants and warehouses and engage in continual replenishment supply relationships. This intense logistics coordination is enabling suppliers to send a shipment of car seats packed so precisely that blue seats can be uncrated at the seat-installation station on the assembly line just as blue cars reach that station.
Or take the tactical control centers of the U. S. Army. At these centers, a logistician faces a wraparound 3D-control panel that provides "complete situational awareness." This panel shows the position of the tanks and soldiers on the battlefield. It shows-with total real-time visibility-supplies and material flowing into the frontlines of battle from regional theater locations and from staging areas around the world. It uses computer technology to locate additional suppliers instantly as needed and arrange new orders.
Using such state-of-the-art technology, the military is creating a network-centric global logistics environment characterized by unprecedented speed and agility. Perhaps this endeavor will spin off revolutionary new technologies and modes of management practice to the private sector in the years ahead. The military, which gave birth to the science of logistics in the Industrial Age, could well define the new supply-chain management paradigm of the Information Age.
We are only beginning to understand the revolutionary potential of these accelerating developments in supply-chain management. In fact, as we survey the millennial landscape, we can start to identify a whole series of converging forces and newly emerging capabilities that will surely shape the way extended-enterprise supply chains develop in the future. These include:
MANAGEMENT BEST PRACTICES ARE EVOLVING
The combined effects of the above trends will be profound, and will surely accelerate the growth of logistics/supply-chain management as the organizational hub of the global extended enterprise. Based on these trends, we believe that managing the extended enterprise will increasingly focus on these three domains of best practice:
IMPROVING YOUR COMPANY'S SUPPLY-CHAIN COMPETENCE
To create and manage an extended enterprise for competitive advantage, senior management must begin by addressing the challenges of segmenting and focusing the supplier base and establishing strategic partnerships. Key alliances include those with core materials and components suppliers, transportation suppliers, warehousing and distribution center service providers, and third-party logistics companies, who provide supply-chain system modeling and optimization strategies and management assistance packages to implement improvements. These relationships will form the bloodlines and oxygen flow of the extended enterprise.
Senior management must also focus attention on aggregating demand across all purchasing units into corporatewide buys, gaining marketplace leverage, centralizing negotiations with the universe of core materials suppliers and service providers, and extracting greater compliance with corporate supply-chain price, quality, and order/delivery cycle requirements. This is the beginning of the extended enterprise. Through these early alliances, companies learn how to cultivate relationships across the supply chain, exchange transaction data, and leap forward into valuable collaborative planning/forecasting across the chain.
The supply-chain management practices that this book elaborates can help companies develop the capabilities they will need to survive and prosper in the twenty-first century. Providing an overview of potential supply-chain improvements, Chapter 2 describes the best practices that have helped today's most successful extended enterprises achieve competitive superiority.