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Competitive Advantage Through Logistics Business Essay

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Published: Mon, 5 Dec 2016

The assumption that good products will sell themselves is no longer acceptable and neither is it advisable to imagine that success today will carry forward into tomorrow. The concern of every manager who is alert to the realities if the marketplace, is to seek a sustainable and defensible competitive advantage.

According to Christopher (2011), the source of competitive advantage is found firstly in the ability of the organisation to differentiate itself, in the eyes customer, from its competition, and secondly by operating at a lower cost and hence at greater profit. Considering the basis of success in any context, Christopher (2011) advocates that, at its most elemental, commercial success derives from either a cost advantage or a value advantage or, ideally both. He further indicated that the most profitable competitor is any industry sector tends to be the lowest-cost provider or the supplier providing a product with the greatest perceived differentiated values.

Alan Rushton et al (2010) also indicated that a company may compete as a service leader, where it is trying to gain an advantage over its competitors by providing a number of key service elements to differentiate itself. Or it may compete as a cost leader where it is trying to utilise its resources so that it offers the product at the lowest possible cost, thus gaining a productivity advantage. Christopher (2011) concluded that successful companies either have a cost advantage or value advantage or a combination of the two at its best.

2.5.1 Cost Advantage

The main route to cost reduction was suggested traditionally to be through the achievement of greater sales volume and in particular by improving market share. Christopher (2011) argues that the blind pursuit of economies of scale through volume increases may not always lead to improved profitability. Christopher’s reason was that much of the cost of a product in today’s world lies outside the four walls of the business in the wider supply chain. Christopher (2011) further argued that it is increasingly through better logistics and supply chain management that efficiency and productivity can be achieved and hence significantly to reduced unit costs.

2.5.2 Value Advantage

A product or service may be seen as a ‘commodity’ and sale will tend to go to the cheapest supplier unless the product or service offered could be distinguished in some way from its competitors, (Christopher 2011).

It is therefore important to seek to add additional values to offer to mark out from the competition. Such value differentiation could be gained essentially through the development of a strategy based upon added values and this will normally require a more segmented approach to the market. Different groups of customer within the total market attach different importance to different benefits. The importance of such benefit segmentation lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments. Adding value through differentiation is a powerful means of achieving a defensible advantage in the market (Christopher 2011).

Another powerful and useful means of adding value is service. Christopher argues that it is becoming progressively more difficult to compete purely on the basis of brand or corporate image since markets are becoming more service-sensitive.

2.5.3 Combining Cost Advantage and Value Advantage

Successful companies often seek to achieve a position based upon both a cost advantage and a value advantage. Christopher (2011) examined the available options using the matrix below.

Figure 2.2 Logistics and competitive advantage

High

Low

Value AdvantageService Leader

Cost and Service Leader

Commodity Market

Cost Leader

Low High

Cost Advantage

Source: Adopted from Martin Christopher, Logistics and Supply Chain Management,2011 4th ed, p.7

He explained that companies who find themselves at the bottom left-hand corner of the matrix have no cost advantage as their products are indistinguishable from that of their competitors. The strategic options available are to either move to the right of the matrix to be a cost leader or upwards towards service leadership.

Cost leadership strategies have traditionally been based upon economies of scale gained through sales volumes. However, an increasing powerful route to achieving cost advantage comes not necessarily through volume and economies of scale but instead through logistics and supply chain management (Christopher, 2011) logistics costs in many industries and represent such a significant proportion of total costs that it is possible to make major cost reductions through fundamentally re-engineering logistics processes. The other way out of the “commodity” quadrant of the matrix is to seek a strategy of differentiation through service excellence.

Examples of how an organisation could compete as a service leader or as a cost leader were given by Rushton et al (2010) as shown in the figure below.

Value advantage achievement might include the provision of a specially tailored service or the use of several different channels of distribution so that the product is available in the marketplace in a number of different ways. It might include a guaranteed service level or a regular update on the status of orders. For a cost/productivity advantage, this may include a number of different means of cost minimization, such as maintaining very low levels of inventory and ensuring that all manufacturing and distribution assets are kept at a high utilization.

Figure 2.3: The Logistics implications of different competitive positions.

Cost and Service Leader

Cost Leader

Service

Leader

Commodity market

VALUE ADVANTAGE

Logistics Leverage Opportunities

Tailored Service

Distribution and Channel Strategy

Reliability

Responsiveness

Information

Flexibility

COST/PRODUCTIVITY ADVANTAGE

Logistics Leverage Opportunities

Capacity Utilisation

Asset Turn

Low inventory

Low wastage

SOURCE: Alan Rushton et al, The Handbook of Logistics & Distribution Management, 4th ed, 2010.

It should also be emphasized that for many companies it is necessary to develop differently configured logistics structures to cater for the variety of service offerings that they need to provide (Rushton, 2011). That notwithstanding, a challenge to management is to identify the appropriate logistics and supply chain management strategies to position the organisation as the cost and service leader. As indicated by Christopher (2011), it is a position of some strength occupying ‘high ground’ that is extremely difficult for competitors to attack. Logistics and supply chain management therefore has the potential to assist organisations in the achievement of both a cost advantage and a value advantage.

2.6 STRATEGIC LOGISTICS PLANNING

Cooper et al (1992) defined logistics strategic planning as a unified, comprehensive, and integrated planning process to achieve competitive advantage through increased value and customer service, which results in superior customer satisfaction, by anticipating future demand for logistics services and managing the resources of the entire supply chain.

Logistics strategic planning is done within the context of the overall corporate goals and plan, and requires an understanding of how the different elements and activities of logistics interact in terms of trade-offs and the total cost to the organisation. Logistics can therefore best formulate its own strategy only by understanding the corporate strategy (Grant et al, 2006).

Studies by A.T Kearney (2004) noted an increase in the complexity of logistics and supply chain environments that necessitates a better planning by logistics professionals. They defined four (4) types of complexity in such environment as:

Market-facing with regard to product development and channel selection.

Internal operating decisions and practice.

External factors such as competitors and government.

Organisational factors such as corporate governance, IT and cross-functional capabilities.

Their believe was that organisations need to take a proactive role in the strategic logistics planning process in their companies, and differentiate their activities from a uniform and ‘predictable’ model to more responsive models in order to handle increasing complexity. Figure 2.4 below shows an example of how this could be done by organisations.

The Type 1 model focuses on a lean and efficient operation that is dominated by making products. The Type 2 model focuses on supplying complex products to specific requirements, with long lead-times, which require collaborative planning and supply chain partners. The Type 3 model focuses on maximizing efficiency to meet customer demands in terms of volume and mix, thus requiring flexibility and late configuration of finished goods (A.T Kearney, 2004).

Figure 2.4: Differentiation of Logistics and Supply Chains

Manage and ControlType 1:

Plan

Make

Procure

Distribute

Store

Type 2:

Manage and Control

Manage and Control

Procure

Plan

Distribute

Store

Make

Store

Make

Plan and

Procure

Distribute

Type 3:

Manage and Control

Distribute

Plan

Procure

Make

Store

Make

From uniform… … to differentiated

Source: Adopted European Logistics Association and A.T. Kearney, Differentiation for Performance; Excellence in Logistics 2004

2.6.1 Formulating the Strategic Logistics Plan

In their book “Fundamentals of Logistics Management”, Grant et al (2006) indicated that the development of the strategic logistics plan is dependent on the marketing, manufacturing, finance/accounting and logistics functional areas.

Marketing provides information about product or service offerings, pricing and promotion for each channel. This includes planned sales volume per month, type of customer, and regional areas; product introductions and deletions; and customer service policies for various types of customer and geographical area. Manufacturing provides information such as locations of current and planned production facilities, and planned volume and product mix for each site. When the same product is produced at multiple locations, logistics can determine how to serve each market most efficiently. Finance/accounting provides cost forecasts related to inflation rates and growth assumptions that need to be built into the planning process to project future costs, and as well the data for performing cost trade-off analysis. It is also responsible for capital budgeting, which determines the availability of capital to finance expenditures to improve logistics equipment and infrastructure.

Logistics itself provides data and analysis related to the existing logistics network to the other functions, including current storage and distribution facilities owned and rented, both at manufacturing locations and in the field; equipment and capabilities at each location; and current transportation arrangements between various channel members. Logistics must identify the costs associated with these activities and the various channels used and proposed.

Management needs to put the logistics plan into operation through the channel members it chooses. Channel members should be judged and selected according to predetermined criteria designed to meet logistics objectives, such as reliability, consistency, geographical coverage, variety of service offerings, use of information technology and cost.

2.6.2 Components of Strategic Logistics Plan

Stock and Lambert (1987) indicated that the strategic logistics plan should consist of the following:

A management overview, describing the logistics strategy in general terms and its relationship to the other major business functions.

A statement of the logistics objectives related to cost and service for both product and customer.

A description of the individual customer service, inventory, warehousing, order processing and transportation strategies necessary to support the overall plan.

An outline of the major logistics programs or operational plans described in sufficient detail to document plans, related costs, timing, and their business impact.

A forecast of the necessary workforce and capital requirements.

A logistics financial statement detailing operating costs, capital requirements, and cash flows.

A description of the business impact of the logistics strategy, in terms of corporate profits, customer service performance, and the impact on other business functions.

2.6.3 Developing the Strategic Logistics Plan

According to Grant et al (2006), the development of a strategic logistics plan requires the following:

A thorough grasp and support of corporate strategy and supporting marketing plans in order to optimize cost-service trade-offs.

A thorough understanding of how customers view the importance of various customer service elements and the performance of the firm compared with its competitors.

Knowledge of the cost and profitability of channel objectives.

Stock and Lambert (1987) stressed that when the overall corporate strategies and marketing plans have been determined, the logistics planner must evaluate basic alternatives and recommend the system configuration that satisfies customer requirement at lowest total cost. This implies, the process must begin with identifying and documenting customer service goals and strategies. The collection of such information is achieved through logistics audit.

2.6.4 The Logistics Plan

The logistics plan starts with a definition of customer service goals and strategies (Stock and Lambert, 1987). This will determine inventory goals and deployment strategies, warehouse strategies and programs, transportation strategies and programs and order processing strategies and programs.

The factors that must be evaluated to determine the most efficient and effective logistics strategy include: customer service requirements, variability of demand, number and location of warehouses, material handling methods, the frequency of replenishment, shipment size, modes used, order cycle times and total costs (Stock and Lambert, 1987).

Stock and Lambert (1987) finally summarised the logistics planning process in terms of 11 major steps as follows:

Initiate and plan the process.

Evaluate the current logistics activities.

Identify product manufacturing requirement.

Determine the impact of business growth.

Develop a profile of competitive logistics networks.

Develop customer service requirement.

Rationalise the logistics network.

Review and recommend improvement.

Formulate performance measurement and service levels.

Review and recommend steps to improve organizational responsibilities.

Document the plan and prepare an implementation plan.

2.7 LOGISTICS PERFORMANCE MEASURES

The logistics function has long been under pressure to demonstrate its contribution to organizational performance (Rutner and Langley 2000). Consequently, research in logistics has examined the influence on organizational performance of high-performance logistics practices and capabilities. For instance, previous research has shown that excellence in performing logistics activities and capabilities is associated with superior organizational performance (Lambert and Burduroglo 2000; Lynch, Keller, and Ozment 2000).

With the increasing awareness of the strategic implications of logistics (Cheng and Grimm 2006; Stank, Davis, and Fugate 2005) and the growing awareness of the benefits of leveraging logistics to increase customer value (Mentzer and Williams 2001; Stank et al. 2003), measuring the performance of logistics has become a high priority (Griffis et al. 2007). Understanding logistics performance has long been of interest to logistics researchers and has been conceptualized and empirically tested in a variety of ways (Enslow et al. 2005).

Traditional logistics performance measures include “hard” measures such as service, cost, and return on assets or investment (Brewer and Speh 2000; Morash, Dröge, and Vickery 1996) and “soft” measures, such as managers’ perceptions of customer satisfaction and loyalty (Chow, Heaver, and Henriksson 1994; Holmberg 2000). More recently, some have maintained that logistics performance measures be linked to corporate strategy (Lambert and Pohlen 2001; Zacharia and Mentzer 2004) and more explicitly incorporate customers’ perspectives (Brewer and Speh 2000; Mentzer, Flint, and Kent 1999).

Mentzer and Konrad (1991) defined logistics performance as effectiveness and efficiency in performing logistics activities. Langley and Holcomb (1992) extended this definition by adding logistics differentiation as a key element of logistics performance because the value customers receive from logistics activities also serves as an indicator of logistics performance. They contended that logistics could create value through efficiency, effectiveness, and differentiation. For instance, value can be created through customer service elements such as product availability, timeliness and consistency of delivery, and ease of placing orders. If logistics can create value through the inimitability of its logistics activities, a firm may be able to differentiate itself from its competitors.

In summary, virtually all of the diverse logistics performance criteria presented in previous literature can be subsumed under the dimensions of effectiveness, efficiency, and differentiation. Therefore, the cumulative evidence of previous research suggests that logistics performance is multi-dimensional and is defined as the degree of efficiency, effectiveness, and differentiation associated with the accomplishment of logistics activities (Bobbitt 2004; Cameron 1986).

Logistics management plays a vital role in supply chain management and the fact that competition is currently viewed from a supply chain perspective, this thesis will look at logistics performance measures in the broader perspective of supply chain management.

2.8 SUPPLY CHAIN PERFORMANCE MEASUREMENT

2.8.1 Definition and Scope

The main objective of performance measurement is to provide valuable information which allows firms to improve the fulfillment of customers’ requirements and to meet firm’s strategic goals (Chan, 2003). It is therefore important to measure how effectively the customers’ requirements are met and how resources are efficiently used to reach a certain level of customer satisfaction (Neely, Gregory, & Platts, 2005). Supply chain performance management is a system of measures to evaluate the effectiveness and efficiency of organizational structures, processes and resources not only for one firm but also for the entire supply chain (Hellingrath, 2008). It provides some basis for understanding the whole system, influence the behavior and supply information about the performance of the supply chain participants and stakeholders (Simatupang & Sridharan, 2002). Developing and using performance measures is an essential function of management (Fredendall, 2001). The usage of performance measurement systems also supports the objectives of transparency and a mutual understanding of the whole supply chain (Simatupang & Sridharan, 2002).

2.8.2 Supply Chain Controlling

One of the main tasks of supply chain controlling is to implement a common knowledge and understanding of the processes in the whole supply chain (Otto & Stölzle, 2003). The phrase ‘supply chain controlling’ indicates the construction and steering of the interactions within the whole supply chain by using adequate controlling concepts (Hellingrath, 2008).

The objectives of supply chain controlling can be divided into direct and indirect objectives. The direct objectives focus on the performance measurement of processes and resources, while the indirect objectives concentrate on more strategic objectives, such as competitiveness or gaining market shares (Westhaus, 2007).

Considering this brief description it is seen that supply chain controlling includes the strategic objectives of companies, while supply chain performance measurement focuses on effective and efficient operations only. Therefore supply chain performance measurement could be seen as an element to support the supply chain controlling objectives. Supply chain controlling defines the strategic objectives of the supply chain performance measurement systems. In this master thesis supply chain performance measurement will be seen as an element of supply chain controlling. The concept of supply chain controlling covers all aspects of trying to control, measure or evaluate the performance in a complete supply chain on the strategic, tactical or operational levels (Seuring, 2006).

2.8.3 Supply Chain Monitoring

Theory states that the performance of supply chains should be monitored providing cost measures and non-cost related measures (Gunasekaran, Patel, & Tirtiroglu, 2001). The central concept to monitor the supply chain and achieve higher visibility is called supply chain monitoring (Hultman, Borgström, & Hertz, 2006). Hultman et al. (2006) define supply chain monitoring as the effort of actors in a supply chain to manage and control visibility of information regarding flows of products and services in different levels and directions in a supply chain. The central key of a supply chain monitoring system is the exchange of information in form of standardized data between all the participants of the chain (Hultman et al., 2006).

Therefore supply chain monitoring focuses on sharing information and data among the entire supply chain, while supply chain performance measurement is directly connected with specific goals, such as achieving effectiveness and efficiency. In general it can be seen that the three approaches of supply chain controlling, supply chain performance measurement and supply chain monitoring build up on each other.

These approaches can be related to the different strategic, tactical and operational levels in supply chain management. On the strategic level, supply chain controlling focuses on the entire supply chain and the controlling of the objectives of the whole supply chain. The tactical level is covered by supply chain performance measurement measuring the effectiveness and efficiency of resources and processes based on the strategic objectives of the supply chain. And last, on a more operational level, the supply chain monitoring concept is based on the exchange of information and data. In sum, supply chain controlling is the main phrase for measuring the performance of a supply chain, including or using the other two approaches. Therefore logistics and supply chain performance measurement, which will further be researched in this thesis, is a substantial element in controlling and managing a supply chain.

2.8.4 Internal Supply Chain Performance Measurement

Internal supply chain performance measurement primarily focuses on such measures as lead time, fill rate or on-time performance (Lambert & Pohlen, 2001). These measures are generated within a company and do not evaluate the whole supply chain. It is for this reason why this literature seeks to address performance measures holistically and not restrictive to logistics performance measures. Taking only one company into account can lead to situations where seemingly good measures lead to inappropriate outcomes for the entire supply chain (Coyle et al., 2003).

The central roles of these internal supply chain performance measurement systems are highlighted by Chan et al. (2006) as measuring the performance of business processes, measuring the effects of the companies’ strategies and plans, diagnosing of problems, supporting decision-making, motivating improvements and supporting communication within a company.

Furthermore, Chan et al. (2006) criticized such traditional roles of performance measurement as short-term and finance oriented, lacking strategic relevance, strong internal focus, avoiding overall improvements, inconsistent measures and the quantification of performance in numbers. Bearing these roles of internal performance measurement and the connected criticism in mind, it becomes obvious that these internal performance measurement systems cannot be adapted to external performance measurement systems, measuring the entire supply chain. Therefore in modern environment it has become necessary to develop external supply chain performance measurement systems which extend the limited scope of single companies and their individual functions (Coyle et al., 2003).

2.8.5 External Supply Chain Performance Measurement

Performance measurement systems are seldom connected with overall supply chain strategies, lack balanced approaches to integrate financial and non-financial measures, lack system thinking and often encourages local optimization (Gunasekaran et al., 2001). Due to increasing requirements of supply chain management it is necessary to explore suitable performance measures and how accurate performance measurement systems can meet the need of support in decision-making and continuous improvement in supply chains (Chan et al., 2006).

Taking these challenges and the fact that more and more firms recognize the potential of supply chain management into account, it becomes obvious that there is much request for supply chain performance measurement systems for the supply chain as a whole. The existing performance measurement systems in supply chain environment often fail to fulfill the needs due to the different vertical and horizontal influences in supply chains (Chan et al., 2006).

2.8.6 Supply Chain Performance Measurement Systems

Neely, Gregory & Platts (2005) defines performance measurement system as the set of metrics used to quantify the efficiency and effectiveness of actions. Supply chain performance measurement systems put more emphasis on the two distinct elements of customers and competitors than internal measurement systems do. Truly balanced performance measurement systems provide managers with information about both of these elements (Neely et al., 2005). According to Neely (2005), performance measurement systems consist of three levels:

The individual performance measures.

The set of individual performance measures; the performance measurement system as an entity.

The relationship between the performance measurement system and the environment within which it operates.

2.8.7 Supply Chain Operation Reference Model (SCOR)

The SCOR is a tool which offers the opportunity to describe a complete supply chain (Becker, 2005). SCOR has been developed by the Supply Chain Council (SCC), to implement a standard when modeling complete internal and external supply chains (Weber, 2002). The main objective of the model is to describe, analyze and evaluate supply chains (Poluha, 2007). The idea behind the model is that every company or supply chain can be described with some basic processes. The SCOR-model offers a detailed description, analysis and evaluation of a supply chain for the physical, information and financial flows. A main emphasis of the model bothers on the information flow.

The model can be used to consider the entire supply chain from the supplier’s supplier to the customer’s customer. Hence it is necessary to describe all involved participants of the supply chain with standardized criteria. The criteria are process types, SCOR-processes and the different hierarchy levels.

The criteria process types is separated in planning, executing and enabling processes and is used to ensure the overall connection towards the SCOR-processes (Bolstorff et al., 2007). The reason is that this way a more transparent documentation of the physical, information and financial flows becomes possible. For further documentation the model also separates the following company functions or SCOR-processes (Bolstorff et al., 2007):

Plan. The SCOR-process includes all planning issues from strategy to operational manufacturing planning

Source. All purchasing activities are summarized here.

Make. This process focuses on the production, while also including quality check-ups or the ordering of materials, for example with a Kanban-system.

Deliver. This SCOR-process is very comprehensive and complex since it combines many different functions such as sales, finance and distribution.

Return. The process return considers all retour products which are defect or have been broken. The element is seen twice for each company, since return can be from customers or can be for suppliers, if they do not deliver the required standard.

With this classification of process types and SCOR-processes it is possible to easily standardize the documentation of completely different companies. The objective is to allow companies to communicate and cooperate easily; however the separation of processes is not enough. To achieve its objectives the SCOR-model includes hierarchy levels which enable the user to analyze specific processes or the complete supply chain. After the framework of the model has been described, it needs to be shown how this model can help to measure the performance and how a performance measurement system is included to analyze and improve a supply chain.

The SCOR-model is also called ‘Process Reference model’, since it combines such well known concepts as business process reengineering, benchmarking and best-practice approaches (Bolstorff et al., 2007). The business process re-engineering aims to document actual processes and set new ambitious objectives for the processes. The benchmarking concept actually includes the significant performance measurement system of the model. All the processes receive figures which enable the comparison with other companies (Poluha, 2007). The SCOR-model therefore helps to document, analyze and evaluate the entire supply chain.

2.9 SUMMARY

CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction

This chapter focuses on the research method employed in generating the empirical data on the research topic. The research approach and design would be outlined after which a brief description of the study setting would be made. This will be followed by a description and rationale for sample site selection and further indicates the population and sample setting for the study. The method and procedures used in the data collection, processing and analysis will also be presented after which the ethical considerations that influenced the study would be mentioned. Finally the instrument used to determine the validity and reliability of study including all limitation and delimitation would be highlighted.

The research methodology employed also took into consideration the research problems including the research questions that required answers to achieve the research objectives. The research problems and issues that were discussed in the study were as follows:

Competition threats from other troops contributing


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