In this particular chapter, information is presented with the aim of providing a background in with regards to the topic on hand. This topic will include several aspects; background of the study, research problem, the aim and objectives of the study, hypothesis, problems and limitations of the study and definition of terms.
Background of the study is the general introduction to supply chain and logistic management and financial matters related to these management systems with relevant information regarding JJ food service as a distribution firm. The research problem provides the primary focus of the study which includes a wider range and detailed questions which needs to be answered through this study. The aim and objectives of the study provides the goals which are to be achieved at the end, although there are different methodologies engaged in answering the research problem that is mentioned. The research hypothesis is considered to be statements which are to be proven throughout the study using the congregated data. In the study statistical analysis will be used to create an easy understanding of the data. The definition of terms provides the technical concepts that are used within the study to provide an easier reference to understand how the information is used through the study.
Background of the Study
At the current time the Market conditions are far more dynamic than at any time in the past. Leaders and managers now have to think and act appropriately in order to minimize the harmful effects of the economic downturn on their organisation, in terms of both its performance and future growth. The importance of supply chain and logistics management has always been dependant on market conditions and the imperatives that drive organisations` strategic goals. The same could be said for today's dynamic market. The integration of logistics process has given birth to what we now describe as supply chain management. Supply chain management is the term used to describe the management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producers to final assemblers to distributors and ultimately to the consumers. In fact it often includes after-sales service and returns and recycling. Supply chain and logistics management have generated much interest in recent years for various amounts of different reasons. Many managers now realize that action taken by one member of supply chain can influence the entire profitability of other supply chains. Supply chain management typically involves coordination of information and materials among multiple firms. The cost of poor coordination can result in extremely high back fall in the firm. Therefore, managing supply chains and logistics effectively, is very important for managers to be able to make decisions about the balance between cutting expenses and continuing to provide better service for the end user. There have been many articles written on how to improve the efficiency in the supply chain through improving technologies and processes.
In this dissertation, impacts of well-managed supply chain and logistics activities are taken into consideration by executives to have enough faith to believe that supply chain and logistics management have as much value as sales and marketing. Effective and efficient supply chains and logistics operations have significant factors in organisations which affect overall and financial performance.
This topic has been chosen for many reasons. Firstly, managing logistics and supply chain processes are essential for companies to reduce unnecessary costs and to give best service to consumers. Secondly, managing delivery infrastructure during financial recession periods often proves its importance, because it provides valuable data by which is considered to have effective outcomes. During the recession period it is very vital for businesses to make stable decisions which will affect the companies' financial performance, therefore the act of cutting down on costs has to be carefully considered. Finally, keeping performance levels high during economic downturns can really help the companies, keep and attract their customers.
The term supply chain management varies in different forms, however in reality it is an extension of the ideas which have been developed from the nature of logistics. This is the major difference between supply chain management and traditional logistics. In this dissertation both management areas are examined in order to see how they differentiate, how they are connected to each other and in what cases they affect on firms financial performance and future growth.
The supply chain and logistics management can take many forms depends on the structure of the business. The concept for the food service industry is if you are out of stock, you are out of business. Therefore, the importance of getting products ordered, stored and delivered make supply chain management and logistics management very essential for a food service distributor. Most of the concept surrounding distribution is related to cost. Analysts and strategists are managers for supply chains and logistics operations who are able to balance the costs while maintaining a good level of performance.
The aim of this dissertation is to examine the differentials of supply chain and logistics managements that create various effects on firms' financial performance in a food service.
This study focuses on supply chain and logistics management activities, which are essential for companies` financial performance in both long and short term preparation. JJ food service is a food distribution firm which has managed to improve its financial performance and kept growing even during financial recession periods.
The specific research problems for this dissertation includes following questions:
- What is the importance of an effective supply chain and logistics management?
- How has the evolution in the market affected the supply chain and logistics management role?
- Does technology help the supply chain and logistics activities?
- How can functions be improved between operations and finance?
The Aim and Objectives of this Study
The aim of this study is to investigate the impacts of supply chain and logistics management on financial performance. In addition, it is very important to consider all issues of logistics and supply chain management related to financial performance to meet the research aim. Following research activities will be considered:
- To provide relevant and additional information, regarding supply chain management, logistics management, cost analysis and financial activities within organisations.
- To add existing body of knowledge.
- To investigate the relationship between logistics and supply chain management and company's financial performance.
- To investigate the value of supply chain and logistics management and how operations can be mapped with finance.
- To draw conclusion and provide specific recommendations regarding the relationship between supply chain-logistics management and firm's financial performance.
The Research Hypothesis
Hypothesis of this study are stated as follows:
- Supply chain and logistics management need to justify the cost of delivery. It is also necessary to measure the impact of these management activities on financial performance.
- The new system, Microsoft Dynamics AX (Axapta), has proven itself to be very efficient and a highly recommend technological tool in terms of getting products ordered, stored and delivered.
Definition of Terms
Microsoft Dynamics (Axapta)
Axapta is defined by Mourao and Weiner (2005) to be the "Microsoft's entry in the packaged business application market and it provides out-of-the-box functionality for managing your business or organisation, including modules for every business area, from supply chain management (SCM) and financials to shop floor control to warehouse management.
RouteNet (Distribution Resource Planning Software)
Baker B. (2006) defines DRP systems as they operate by breaking down the flow of material from the source of supply through the distribution network of depots and transportation modes. This is undertaken on a time-phased basis to ensure that the required-at the right place, at the right time, one of the classic distribution definitions. Integrated systems of this nature require complex, computerised information systems as their basis such as RouteNet. "RoadNet consent you to route and schedule your orders quickly and efficiently in a continuously changing environment. If you know what needs to be where and when, then RoadNet will tell you which of your vehicles to use to service which customer, at what time and in what order."
Cisco Mobile Sky Device (M3 Sky)
M3 Sky from M3 Mobile is a fully-featured PDA (Personal Digital Assistant) that runs a version of Microsoft Windows Mobile 5. The M3 Sky combines different technologies such as Bluetooth, GSM, GPS and GPRS.
RELATED LITERATURE REVIEW
In this chapter the existing literature is provided for a purpose of giving insights to what has been known, and what has been previously done in relation to the topic being discussed. There are several sections that are covered from different prospective and literature which are gathered from different authors. The sub-topic covered in this chapter includes supply chain management, logistics management and related financial performance in relationship to the mentioned management activities,
Supply chain management
In the times before the 1980s organisations were using terms such as "operation management" and "logistics". In early 1980s, the concepts of materials, transportation and distribution management began to combine into a single term: Supply Chain Management. In the late 1980s the term "supply chain management" has grown significantly and came into widely used in 1990s. According to Jayashankar et al. (1996) supply chain is to be a network of independent or semi-independent business bodies collectively responsible for procurement, manufacturing, and distribution activities linked with one or more families of related products.
After 1990s supply chain management has become one of the main topic and challenge facing all companies. Companies were believed that every product has its own supply chain; therefore supply chain management was getting more complicated. It is even more complex in reality, as each organization works with many different products-often thousand. Cohen. S and Roussel J. (2005) stated that now many companies have addressed major supply chain challenges through selection and implementation of ERP and APS tools such as SAP, Microsoft Dynamics and so on. They are finding that after implementation they are once again challenged with discovering and managing the core disciplines of supply chain management. The challenge of the next decade is to leverage the founding principles of supply chain management and move this management discipline forward.
Defining the Supply Chain Management
There are different definitions of supply chain management from different authors. Some definitions are offered below:
Stanley E. Fawcett, Lisa M. Ellram, Jeffery A. Ogden (2007) defines the supply chain management as managing the flow of information and materials from the suppliers` suppliers to customers` customers. From a practical point of view, managers associate Supply chain management with better shared resources, information exchange, and win-win relationships among the members of the chain. The job of the Supply chain manager is to find opportunities to work with customers and suppliers to reduce costs while improving services given. The mission is to use technology and teamwork to build efficient and effective processes that create value for the end customer." (Stanley E. Fawcett, Lisa M. Ellram, Jeffery A. Ogden, 2007)
"The definition of supply chain management is the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole." (Christopher M. 1998, p: 18)
The supply chain is not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customer themselves.
"The systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole." (Mentzer, DeWitt, Deebler, Min, Nix, Smith, and Zacharia , 2001, p: 8).
"Supply chain management is the integration of business processes from end user through original suppliers that provides products, services, and information that add value for customers." (Lmabert M. D, Stock M. J. and Ellram M. L., 1998, p: 504)
According to Hugos M. (2006) supply chain management is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served in lowest cost.
It must be identified that the concept of supply chain management is in fact no more than an extension of the logic of logistics. Logistics management is primarily concerned with optimising flows within the organisation supply chain management recognizes that internal integration by itself is not sufficient.
Supply Chain Management Activities
Planning and Forecasting
Every supply chain program starts with a plan. Planning gives the ability to forecast and analyze product demand, economic trends and customers' needs. According to Blanchard D. (2007) supply chain planning plans the assets to optimize the delivery of good and services and also balances supply and demand with the information from supplier to customer. Supply chain planning provides what-if scenarios that weigh real-time demand commitments when creating forecasts. And Hugos M. (2006) states that supply chain management decisions are based on forecasts which allow to define which products are required, how many of these products is to be called for, and when they are needed. The demand forecast is essential for companies to plan their operations and to work together among each other to reach market demand.
Purchasing and Procurement
In a definition provided by Waters D. (2003) purchasing is a mechanism to initiate and control the flow of materials through the supply chain and procurement is one of supply chain management activity that acquire all the materials needed by an organizations.
Procurement and purchasing are usually taken into same meaning. However, purchasing stands for the actual buying, while procurement has a broader meaning. Procurement includes different types of acquisition (purchasing, contracting, rental etc.) and also negotiating, agreeing terms, transport, materials handling, monitoring supplier performance, receiving goods from suppliers and warehousing.
Procurement is crucial for any organisation, if procurement is managed badly, for instance wrong materials are delivered to wrong place in wrong quantity and so on.
Procurement and purchasing is essential and also responsible for a lot of expenditure. They are directly responsible for spending; relatively small improvement in these activities can give substantial benefits.
One of the main spotlight of supply chain management appears in manufacturing. Product design, manufacturing scheduling, facility management, order management are the main activities of manufacturing which is passing from customers back through supply chain and from supply chain to manufacturing.
Inventory and Warehousing
Waters D. (2003) point out that an inventory is a list of things held in stock. Regardless the fact that there are o lot of differences between a multi billion international retailer and a single one stop shop, in fact they opera2te on the same principles: if you are out of stock, you are out of business. "A warehouse management system controls, manages, and regulates the movement of goods within a warehouse or distribution centre. Typical features of a warehouse management system include inventory management, picking and put away, order visibility, and fulfilment." Blanchard D. (2007, p: 128)
Waters D. (2003) defines that transport is responsible for the physical movement of materials between points in the supply chain. Blanchard D. (2007) highlights that transportation is the lifeblood of any supply chain, however a company's logistics department tends to be an invisible link in that chain and transport is certainly one of its main components.
Blanchard D. (2007) states that on-time delivery is fundamental for supply chain management, and it's a key benchmark to achieve the perfect order. A perfect distribution network has to be built to give the best service to the customers.
The best-run organizations have developed their supply chains that extend from their customers' customers to their suppliers' suppliers.
In recent years, an increasing rate of globalization has changed the nature of organisations and also their supply chains. Products even different parts of a product are no longer produced and consume within the same country. This creates more complex supply chains, and therefore it also changes the requirements within supply chain management. This also affects the effectiveness of computer systems employed in the supply chain.
Globalization also brings foreign competition into markets that traditionally were local. Local companies are thereby forced to respond by improving their manufacturing practices and supply chain management. Fox M.S. (1992) states that market conditions force companies to reduce inventory levels and lead times and increase flexibility with maintaining high level of performance.
Issues in Supply Chain Management
Clasic logistics management objective is managing the activities to have the right product, in the right quantity, at the right place, at the right time and at minimum cost. On the figure below Newem-Workgroup creates four main areas for this objective within the supply chain management which are flexibility, delivery reliability, delivery time and inventory level.
Delivery reliability and delivery time directly link customer service, and highly depends on flexibility, and inventory level.
Supply Chain Management Drivers
Supply chain management activities are mentioned in previous section. There are main driver which coordinates all the activities in supply chain and main drivers of supply chain management are connected with the information chain among these drivers. Information is based on the decisions regarding the other four supply chain drivers. It is the connection between all of the activities and operations in a supply chain. It is clearer to see on the figure below how information drives other four. According to Hugos M. (2006) information is used for two main purposes in supply chain management:
- Coordinating daily activities related to production, inventory, location, and transportation. Supply chain management uses the available data which is gathered from these drivers to decide on weekly production schedules, inventory levels, transportation routes, and stocking locations.
- The information is used to make tactical forecasts to plan the setting of monthly and quarterly production schedules and timetables. Information is also used for strategic forecasts to plan decisions about whether to create new facilities, enter a new market, or exit an existing market.
The Impact of Supply Chain Management on Financial Measures
Profitability is the ultimate measure of business success. When we look at the basic financial figures that make up the various elements of profits we will realize that supply chain management without doubt has significant affect on financial measures. First of all, managing supply chain cost is half the battle in executing that mission. Supply chain management does indeed influence corporate value.
In the previous chapters affectivity of supply chain management activities on financial performance have been examined briefly. The topic of this chapter is to feature the effect of supply chain management on common financial indicators.
Balance sheet reports and the income statement are already recognized as indicators of an organisation's financial performance.
According to Stolowy H. and Lebas M. (2006), the income statement measures profitability by taking into account the revenues and expenses during a period of time. The income statement reports how the company's financial performance is achieved. We must also take into measure that it is useful to show the impact of supply chain management activities during a period of time from the perspective of sales and costs.
In a definition provided by Hales J. (2005) a balance sheet presents a financial status or net worth of a business. It shows the amount or balance between the assets and liabilities which will partly be based on the activities that are summarized in the income statement.
We will concentrate on these financial elements to explain the impact of supply chain management on financial performance.
The Impact of Supply Chain Management on the Income Statement
The main figure of the income statement is net income, which is obtained through the calculation of various figures; as it is seen from the table below operations, which are managed via supply chain activities directly, affect the figures on this table even though figures are not related to costs.
Effect of supply chain management on the income statement will be detailed in the following figures: sales, sales returns and allowances, cost of goods sold, operating expenses, interest expenses and income taxes.
The first component of income statement is sales. This depends on the operations which are managed mostly by supply chain activities. Camerinelli, E. (2009) lists the benefits, glitches, etc. of supply chain management activities on sales as follows:
- The first problem of the supply chain is known as "usual suspect" which occurs when a company runs out of inventory. When this happens, sales will be certainly affected negatively. The affect of this can be dramatic. A study has proven that when this happens this may affect the shareholders value up to 25 percent.
- Supply chain problems can negatively affect sales growth when a company fails to switch from production to owned or contracted facilities located in markets that have high retail process for the products that are being produced. if a company wants to improve sales flows and supply a greater volume of products to customers showing high levels of demand, then the company must be flexible, responsive and reliable in the delivery of those products. Achieving this goal to a high standard is heavily dependent on the quality of supply chain operations.
- When a company fails to be flexible, this will affect the supply chains affectivity to respond to changes in the market when needed, this will cause latency in the speed of delivering goods to the consumer. If the supply chain is not reliable, a company will perform poorly and this might mean: not being able to deliver the right product to the right place, at the right time, in the right quantity, in the right packaging, with the right documentation and to the right customer.
- Supply chain management has a growing potential to be viewed as a front-line office tool. The supply chain can be critical in supporting the exchange of goods, information and funds. By taking in hand a study taken from General Motors that is in the automobile industry it showed that sales of $9 billion in parts and services contributed $2 billion in profits, on parallel to this car sales of $150 billion produced earnings of just $1 billion for the company. Service and support, therefore, are becoming just as important as the product itself. If the supply chain is to be at the heart of a company's service and support processes, then it must ensure that it does not fail to overcome the demands placed by the company's needs.
Sales Returns and Allowances
When we look into sales returns and allowances, it is easy to highlight another area where supply chain management must retain its strength. Camerinelli, E. (2009) mentions that one of the typical faults in supply chain management which impact on sales returns and allowances is delayed deliveries. Return of goods can happen for many reasons such as poor quality of product or service, incomplete or partial delivery of goods, incorrect quantities delivered or incorrect product attributes. These returns will eventually reduce total sales figures. If a company chooses to compensate the negative impact of these factors on customer satisfaction and loyalty by offering discounts or special prices, this will increase the allowance value and sales figures will be further eroded.
Cost of Goods Sold (COGS)
Another important component of income statement is cost of goods sold which represents the costs of resources consumed in manufacturing a particular product for sale, including the actual cost of materials and direct labour costs associated with getting the product into marketable condition. This component is directly related to supply chain operations because the activities and operations performed during the production are managed by supply chain activities. Camerinelli, E. (2009) lists the impacts of supply chain activities as follows:
- The purchase price of the goods or services negotiates between the purchasing department and the supplier's sales department. If an organisation separated purchasing from supply chain operations which focuses on cost of materials, it will not benefit from the organic and cross-departmental perspective that tries to connect supplier relationship management closely with the characteristics of an efficiently and effectively managed supply chain.
- The purchase price may often stands for only a part of the total cost. The final price paid for a product or service must take into account the purchase price plus the costs of all other activities along the supply chain. Those companies that achieve best practice in cost management take this into account and factor in all the costs associated not only with producing a product or service, but also with delivering it to their customers which are managed by supply chain activities.
- Supply chain processes, such as warehouse management, materials handling, manufacturing operations management, production forecast planning, delivery, returns and post-sales operations management should be supported with programmes that use stream-mapping models, value-added and other techniques to avoid additional loses that might occur due to mismanagement of the supply chain. Failing to run these programmes, for instance, might unavoidably affect direct labour expenses which comprise the other element of the cost of goods sold calculation. This confirms that the elements cost of goods sold calculation is directly related to supply chain management.
Operating expenses is the cost spent converting raw materials into sales in a specific time period. Administrative expenses, labor costs (both direct and indirect), marketing expenses, utility costs, etc. are all combined in operating expenses. Camerinelli, E. (2009) states that the supply chain management activities, which are registered under this heading usually occur in the back office. Operating expenses should all be taken into account so surprises or inexplicable hidden costs will be avoided. Failure to take into account of all these activities could potentially lead to harmful disruption. Camerinelli, E. (2009) has submitted that the most common activities of supply chain, which affects operation expenses, are as follows:
- One of the first back-office processes that must be taken into account to measure accurate operating expenses is the management of business rules during planning cycles. This refers to the process of establishing and maintaining support criterias for supply chain planning. When the demand planning function is made more reliable, the flow of business along the supply chain will be much more stable; consequently, the people responsible for running the supply chain will need less time to adapt to changes needed. This will cause in a more responsive supply chain, which means less time spent on tackling ideas. This is an example that was carried out by EyeOn, a consulting firm that specializes in the delivery of planning and control solutions to complex organisations. This research shows that an additional benefit of a more stable flow along the supply chain is reduced overtime in the production process.
- Another potential source of hidden operating expenses is the planning of total inventory limits, which includes raw materials, work in progress, and purchased finished goods. As investigations have been done to define an integrated supply chain transportation strategy by maintaining the data that characterizes the supply chain transportation requirements, there is significant potential to increase operating expenses.
- Another significant underestimated figure of operating expenses, which is directly affected by supply chain management activities, is the group of activities related to managing existing purchase orders or supplier contracts. These activities include processes such as the management of volume pricing, resolving problems and maintaining an exact picture of purchase orders or contracts.
- The factors mentioned above are linked the activities within the organization. Supply chain managers generally more focused on managing cooperation with external partners which will partly form day-to-day tasks such as collecting, maintaining information to support delivery planning, and delivery requirements to warehouse data, transportation data and so on.
Interest Expenses and Income Taxes
Interest expenses and income taxes seem to be affected by non-operational activities which take into account only financial activities. Some researchers such as Fawcett, Ellram and Ogden, (2007) suggest that there is a linkage between supply chain management and accounting, international tax law and corporate finance. However, none of the models proposed so far effectively consider the close coupling of production decisions with cash flow movements, royalty fees and dividend repatriations.
On the other hand, with a little bit of investigation we can see that if an organization carefully selects a location to run supply chain activities, it can potentially benefit from tax intensives and financial assistance for industry. Likewise Camerinelli, E. (2009) stated that supply chain decisions which are related the choices such as new machinery and equipment, inventory on goods in transit and raw materials used in manufacturing can also affect excise tax exemption.
The Impact of Supply Chain Management on the Balance Sheet
Having seen how the quality of supply chain practices can positively or negatively affect the principal elements of income statement, we can now look at how supply chain management impacts on the other key report used by the financial community, the balance sheet.
Even though management of supply chains affect on various balance sheet figures such as current assets, fixed assets, accounts payable, long term liabilities and so on, current and fixed assets will be detailed to see the effect of these managing activities on balance sheet report.
Stickney (at al 2009) defines that an asset is the future economic benefit that an organisation controls because of a past event or transaction. Anything that business owns and has a money value known as assets.
Current Assets: The first balance sheet determines the current assets which include cash as well as inventory.
The most important component of the current assets figure is inventory which demands closer attention in terms of how it is affected by the performance of the supply chain. One of the main
Inventory comprises the assets that are braded as part of the company's day-to-day business and inventory value as reported on the balance sheet, is usually the historical cost of fair market value, whichever is lower. This is known as the lower of cost or market rule. Inventory management is the process of developing and implementing inventory policies to service unpredictable customer demand given parameters such as service targets, budgets, out of stock probabilities and costs as well as demand fulfilment rates.
In many cases finished inventory is created too early in the supply process. It is the job of the supply chain manager to find ways of postponing completion of a product in order to reduce the total amount of inventory in the pipeline and improve the flexibility of the delivery process.
the first question to ask is what can go wrong in supply chain management that will affect inventory. There are many glitches that may occur, including:
- Excess time required to receive and process items in the goods inward department.
- Excess time required to move material in the company
- Delays in managing purchase and sales orders
- Excess time spent preparing merchandise
- Poor demand forecasts and planning
- Incorrect parameters used to establish stock levels
- Purchase goods based on price volumes instead of what is needed.
- No use of the postponement strategy
- Poor capacity planning.
- Lack of effort to increase the reliability of demand planning.
Fixed Assets: Fixed assets are the set of resources that have bearing on the financial wealth of the organisation, especially as they are used to keep a business running. Logistics by its very nature requires large number of fixed assets. Distribution centres require large amount of investment.
We must examine how potential disruptions in the supply chain can affect these fixed assets. Among the most issues are:
- Lengthy and ineffective implementation of a new warehouse management system.
- Missed consolidation of distribution centres.
- Inefficient review of the international distribution centre network to expand the number of facilities.
- creation of oversized infrastructure to support a multi-year expansion in domestic and international markets
- Location of facilities in new countries with no consideration of foreign-exchange risk.
Once again, the reverse logic applies that efficient supply chain management can optimize the availability and use if fixed assets.
Logistics Management and Distribution
In 2000 and beyond business organisations face many challenges as they endeavour to maintain or improve their position against their competitors, bring new products to marketplace and increase the profitability of their operations. This has led to the development of many new ideas for improvement, specifically recognised in the redefinition of business goals and the re-engineering of entire systems. Indeed, for many organisations, changes in logistics have provided the catalyst for major enhancements to their business. Leading organisations have recognised that there is a positive "value added" role that logistics can offer, rather than the traditional view that the various functions within logistics are merely a cost burden that must be minimized regardless of any other implications. Thus, the role and importance of logistics, once again, been recognised as a key enabler for business improvement. (Page 9-10)
Definition of Logistics Management
Logistics is the function responsible for the flow of materials from suppliers into an organisation, through operations within the organisation, and then out to customers.
What is logistics management in the sense that it is understood today? "There are many ways of defining logistics but underlining concept might be defined as follows: logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organisation and its marketing channels in such a way that current and future profitability are maximised through the cost-effective fulfilment of orders."(Christopher M. 1998, p: 4)
The council of logistics management defines the logistics management in the Fundamentals of Logistics Management book as "The process of planning, implementing and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements." (Lmabert M. D, Stock M. J. and Ellram M. L., 1998, p: 3)
"Logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of product and information through a business. Supply chain management builds upon this framework and seeks to achieve linkage and co-ordination between processes of other entities in the pipeline. Thus for instance one goal of supply chain management might be to reduce or eliminate the buffers of inventory that exist between organisations in a chain through the sharing of information on demand and current stock levels." (Christopher M. 1998, p: 17)
Activities of Logistics Management
Logistics management is responsible for the storage and the movement of the products. However, when we look at the movements of a product in an organization, it is obvious to see that as Waters, D. (2003) stated following activities are key logistics management activities.
- Inward Transport (Moving materials from suppliers to organisation).
- Inventory management
- Warehousing and storing
- Order picking
- Materials handling
- Outward transport (Moving products from other organisation to the customers
- Physical distribution management (delivering finished goods including outward transport
- Recycling, returns and waste disposal (Reverse logistics)
"The role of logistics is changing from one of warehousing and transportation to one of providing an integrated set of services that delivers the right products, in the right quantities, in the right quality, at the right time- all for the right cost." (Roman L. W. and Michael W. M. 2005, p: 329-330)
It is now accepted that the need to understand and meet customer requirements is a primary focus for survival. At the same time, in the search for improved cost competitiveness, logistics management has been the subject of a massive renaissance.
Some activities such as third party operations, customer service management, production scheduling, sales forecasting and so on can be included the logistics activities dependent on the circumstances.
The Financial Impact of Logistics Management
As it is mentioned in previous chapters the concept of supply chain management is in fact no more than an extension of the logic of logistics. Affects of these management activities are so close to each other. Therefore, in this chapter affect of logistics management activities on financial performance which are mentioned will be an addition to previous discussion.
Logistics is not only essential it is also expensive. Organisations might reduce the overhead costs, however they are usually left surprisingly high logistics costs.
Not only is logistics essential, but it is also expensive. Organisations may reduce their overheads as much as possible, but they are often left with surprisingly high logistics costs. Unfortunately, it is difficult to put a figure to these, and there is a good deal of uncertainty in the area. Normal accounting conventions do not separate expenditure on logistics from other operating costs, and there is some disagreement about the activities to include. As a result, very few organisations can put a precise figure on their logistics expenditure, and many have almost no idea of the costs. Christopher M. (1998) describes the mission of logistics management: to plan and co-ordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible cost. Logistics must therefore be seen as the link between the marketplace and the operating activity of the business.
Logistics costs may exceed 25 per cent of the cost of doing business at manufacture level. Thus, a better management of logistics operations offer the potential of large savings which improves cash flow and return on assets.
Much of this chapter is gathered with the logistics issues which enable the maximisation of profit, the minimisation of costs. Logistics is an expensive function within an organisation. Thus, it will effect organisations overall performance directly.
Friedlob G. T. and Plewa F. J (1996) describes that Return on Investment is a key measure of success which is the ratio between the net profit and the capital employed in a business. It plays a major role for business. Logistics management can have a positive or negative impact on ROI in many ways. To improve organisation overall performance profits needs to be increased and capital employed needs to be reduced in the manner of ROI.
According to Croucher P., Rushton A. and Baker P. (2006) profit can be enhanced through increased sales, and sales profit benefits from the provision of high and continuous service levels. One of the main service levels mission is to achieve on time in full (OTIF) deliveries which is a key objective of logistics management activities. Logistics management activities are also crucial for cost effectiveness. For instance, costs can be minimized by reducing transport, storage and inventory costs, as well as increasing labour efficiency.
Logistics activities first affect the Return on Assets (ROA). Waters, D. (2003) describes elements which effect ROA as follows:
Fixed Assets: There are many fixed assets to be found in logistics operations such as depots, warehouses, and material handling equipments. The most important user of fixed assets which include property, plant and equipment is logistics. The amount, number and size of these fixed assets depend on logistics activities. Thus, management of logistics will affect ROA directly.
Current Assets: Less stock levels with more efficient logistics management reduce the current assets and also reducing the investment on stocks will increase the cash on hand and decrease the borrowing.
Sales: Logistics is one of the main activities to manufacture the product and make them ready for customers. Therefore, effective logistics can increase the sales by giving better management.
Profit Margin: With more efficient logistics management operations costs will be lower and that leads higher profit margin.
Price: More attractive products can have a premium price. Well-managed logistics activities can make that product easily available and give faster delivery.
All these components which are affected directly or indirectly by logistics management are the components of Return on assets. Consequently, they affect on other measures of financial performance, such as borrowing, share price, ROI and so on.
J. Mitchell currently has sales of £10 million a year, with a stock level of 25% of sales. Annual holding cost for the stock is 20% of value. Operating costs (excluding the cost of stocks) are £7.5 million a year and other assets are valued at £20 million. What is the current return on assets? How does this change if stock levels are reduced to 20% of sales?
Logistics has the combination of being both essential and expensive. It impacts customer satisfaction, the value of products, operating costs, profit. Waters, D. (2003) states some of the points about the importance of logistics as follows:
- It is expensive, with costs often forming a surprisingly high proportion of turnover
- directly affects profits and other measures of organisational performance
- has strategic importance with decisions affecting performance over the long term
- forms links with suppliers, developing mutually beneficial, long-term trading relationships
- can encourage growth of other organisations – such as suppliers and intermediaries
In conclusion, as it is seen logistics management is as important as supply chain management. It plays major role on financial figures.
According to Easterby at al (2008) there are various types of research methodology methods, however there are two contrasting research traditions highly as known such as positivism and social Constructionism.
The relationship between data and theory has been argued by philosophers. Failure to think through philosophical issues such as this can seriously affect the quality of management research, and they are central to the notion of design (Easterby at al 2008, p: 56)
"The key idea of positivism is that the social world exists externally and that its properties should be measured through objective methods, rather than being inferred subjectively through sensation, reflection or intuition" (Easterby at al 2008, p: 57). The view that provides the best way of investigating human and social behavior originated as a reaction to metaphysical speculation. (Aiken, 1956)
Positivism has been chosen as the philosophy of the research to meet the research objectives.
This study involves a combination of deductive and inductive approaches, which is known as 'abductive' approach. The abductive approach stems from the insight that most great advances in science neither followed the pattern of pure deduction nor of pure induction (Kovacs & Spens 2005).
Wass & Well, (1994) stated that based on the literature review, it can be shown that there might be a possible relationship between Logistics and Supply Chain Management and financial performance of the company. Hence, the deductive approach will be adopted in this research. It is clear that the major strengths of the deductive approach are its testability against empirical data by using statistical techniques and its generalisability.
Strategies for research are as followed: experiment, survey, case study, action research, grounded theory, ethnography and archival research. Some of these clearly belong to the deductive approach, others to the inductive approach. However often allocating strategies to one approach to the other is unduly simplistic. (Sounders at al 2009)
A case study will be employed in the research. The main strength of case studies lies in their capacity to explain the presumed causal links in real-life interventions (Bryman 1988). The other distinctive application of case study is to describe an intervention and the real-life context in which it occurred (Yin 2003, p: 15). Clearly, this research strategy fits particularly well with the research inquiry mentioned above. The single case study here can be viewed as the representative or typical case which is believed to be typical of many other organizations in the same industry (Yin 2003, p: 40).
In order to meet the research objectives, it is essential to select the research methods. Mainly, this part includes information about data collection and data analysis.
Based on the major methodological issues associated with existing research, the data will be largely collected through three chief sources, namely:
- Academic literature,
- Semi structured interview and self-completion questionnaires,
- Company document analysis.
These triangulation methods have been seen to help in cross checking the findings from each of the methods used, thus contributing to a greater reliability and validity of results (Silverman 2000). However, the main drawback of triangulation is that it may not be suitable for further replication, as it is costly and time-consuming (Cassell& Symon, 1994). The main strengths and weaknesses associated with each research methods therefore will be examined below in order to provide a sound explanation of the specific selection of research methods.
Secondary data collecting will help to understand the effectiveness of logistics and supply chain management.
Semi structured interview and self-completion questionnaires will help to show how company manage these activities and how they improve their financial performance by doing effective logistics and supply chain management. Owing to the limitation of survey methods, semi-structured interview provide a richer source of data for understanding peoples' view, experience and perceptions (Kvale, 1996). As one of my research inquiries is 'explanation', the use of semi structured interviews is viewed as the right approach for this type of inquiry and it fits all within the realism paradigm used in this study. In addition, the use of semi structured interviews in this research may also explore and explains themes that will merge from the questionnaires
The potential of using company documents is considerable. Firstly, it helps the researcher to look more closely at historical process and development in organization (Cassell and Symon, 1994). Secondly, they can provide information on issues that might be normally fairly inaccessible through other methods. Thirdly, they can check the validity of information deriving from other methods and supplement other sources of information. Finally, they can contribute a different level of analysis from other methods (such as the official policy and practice) (Bryman, 1988). However, the main weakness of using such secondary data would be that gaining access to some kinds of data might be of great difficulty, especially when it might contain sensitive information (Anderson, 2003).
In this resource we will have huge Qualitative data which refers to all non-numeric data or data have not been quantified and can be a product of all research strategies. (Saunders et al 2009)
To analyze the data, a short list will be made which includes data from online questionnaire to complex data such as transcript of in-depth interviews or entire policy documents. Qualitative data analysis procedures help researcher to develop theory from data. They include both deductive and inductive approaches and range from the simple categorization of responses to processes for identifying relationship between categories (Saunders et al 2009)
Sounder is stated ethics as the "norms or standards of behavior that guide moral choices about our behavior and our relationships with others". In this work the researcher will follow the ethical principles and will get necessary approval from company to build this work.
Limitations of Research
Even the researcher assembles perfect time schedule there will be some unexpected delays during research period. Another limitation of research without doubt is collecting company's confidential data. Companies do not share their confidential data such as long term strategies, objectives or goals with people from outside. To access this confidential data as an ethical concern the researcher must guarantee that this kind of data will not be using instead of research matters. The researcher will use some helpful way to overcome this barrier. Following actions which will be taken will help the researcher.
- Setting goals and planning
- Proper timescale
- Attainable deadline
- Be organized and sensible to time
- Balance between social life and study
DATA ANALISIS AND PRIMARY RESEARCH
JJ Food Service Limited History
In 1982 Mustafa Kiamil and his wife, Owners of the JJ Food Service Limited, launched first Jenny's restaurant. They came into the industry with the experience gained by running a chain of restaurants in London, After 28 years Jenny's sits over 50 restaurants. From this background Mr. Kiamil found himself a good position to offer a solution to others who were struggling to find anything they need from one stop shop so JJ food service was born in Hornsey in 1988 and started trading as a food service distributor. In food service industry as a leading organization JJ Food Service has been distributing frozen, chilled and ambient foods as well as catering dis-posables and cleaning materials to High Street Caterers for over two decades. The timeline below shows some milestones in JJ's journey so far:
JJ moved to a new 14,000 Sq ft warehouse in Tottenham.
JJ acquired a freehold 6 acre site in Enfield, Acquisition of Cranley Juice sand JJ launched VIVAT Spring Water.
JJ HQ opened for business in a new purpose built Distribution Centre in Enfield, incorporating a Vehicle Maintenance Unit for our new fleet of trucks.
JJ launched the Letsdough Bakery brand.
JJ joined the British Frozen Food Federation (BFFF). JJ was honoured at the Annual Cart Marking Ceremony.
JJ achieved the CMi Technical Standard for Wholesaling, Storage and Distribution (Higher Level). JJ bought Falcon Fast Food, Doncaster. JJ won The Credit Suisse National Business Award 2005, with MD Mustafa Kiamil named as the UK Entrepreneur of the Year.
JJ Enfield was certified by Lloyds Register Quality Assurance (LRQA) to the Quality Management System Standard ISO9001: 2000. JJ opened its Birmingham Distribution Centre. 2007 JJ Doncaster and JJ Birmingham were certified by Lloyds Register Quality Assurance (LRQA) to the Quality Management System Standard ISO9001: 2000.
JJ Enfield launched its Counter Collection Service. JJ achieved Environmental Management System ISO 14001:2004. JJ achieved Lloyds Register Quality Assurance, ISO14001 certification. JJ Enfield launched its Level 2 Food Safety Training Program to customers. JJ celebrated its 20th Anniversary. JJ opened its Manchester Distribution Centre. JJ opened its Basingstoke Distribution Centre.
JJ launched its Online Ordering Service. JJ launched its Fresh Fruits Range. JJ introduced its Driver Hand-Held Invoicing System which done away with the need for printed documents. JJ acquired a freehold 4 acre site in Sidcup. JJ acquired a freehold warehouse in Exeter. JJ converted its first Diesel Powered Vehicle to a Zero Emissions Electric Vehicle.
JJ will open depots in Sidcup and Exeter. JJ will seek to acquire a depot in any UK city with a population over 100,000. JJ will convert more Diesel Powered Vehicles to Zero Emissions Electric Vehicles.
("JJ") is a leading organization in the Food Service Industry that has been distributing frozen, chilled and ambient foods as well as catering dis-posables and cleaning materials to High Street Caterers for over 20 years. JJ also offers marketing, retailing, dis-tributing, and Cash & Carry services for a wide range of food and catering products. It has five different locations across the UK, including its head office in Enfield, Middle-sex, and is continuing to expand its operations along with its already winning yearly turnover of 130 million pounds. JJ also has a commitment to excellence and, as such, was awarded the Grocer Gold Award as a Wholesaler of the Year for 2009.
JJ Food Service continuously engaged in activities for the purpose of expanding its operations. Even in recession period the firm has grown both sales and profit by managing the activities efficient and effectively among operations, bringing forward new information and communications technology advances and so on.
Financial Figures of JJ Food Service
Supply Chain and Logistics Management in JJ Food Service
Cisco Hand Device
Some time ago, JJ Food Service decided to automate its methods for capturing a range of data relating to the truck-based deliveries it makes from its distribution centres. Previously, most of this data collection had been carried out manually, using paper-based processes. However, this proved to be a slow and cumbersome procedure.
IT Manager, Rif Kiamil, explains: "We realised that our systems didn't really show us what was happening in a key part of our company's activities. We wanted a better system that would provide us with real-time data relating to deliveries on the road. We also wanted to improve the efficiency with which we picked and handled our stock - and to boost our productivity in terms of the deliveries."
The company started looking at the options available. One of its key criteria was to source equipment that would be really reliable. "We've seen too many mobility projects fail as a result of poor and unreliable hardware and software," says Rif. Ultimately, their search led them to Spirit Data Capture, an independent consultancy that acts as a distributor for a range of leading brands.
"Spirit were able to source some unique hardware offerings that no-one else in the UK could offer," adds Rif. One of these solutions was the M3 Sky from M3 Mobile – a fully-featured PDA (Personal Digital Assistant) that runs a version of Microsoft Windows Mobile 5. The M3 Sky incorporates some impressive technology – including Bluetooth, GSM, GPS and GPRS. Rif continues: "It offered us the reliability we were seeking, it was nice and compact and was competitively priced."
The new devices were subsequently given to all of JJ Food Services' delivery drivers. They are now being used for a wide variety of applications, ranging from proof of delivery and providing invoices at the point of delivery through to internal product auditing and stock checks. They also enable the system to track the positions of each of the vehicles during deliveries and will eventually be used to help the drivers to navigate to their destination.
PRESENTATION AND ANALYSIS OF FINDINGS
CONCLUSIONS AND RECOMMENDATIONS
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