Corporate and Logistics Strategies: A Total Cost Approach

Posted on Oct 17, 2024 in Economy

Chapter 2 Summary

Corporate Strategy

First, define company objectives: profits, growth, market share, survival, social responsibility, etc. Then, consider the components of a strategy: customers, suppliers, competitors, and the company itself. Analyze the needs, strengths, weaknesses, orientations, and perspectives of each component. Brainstorm potential niche options and formulate specific strategies. Corporate strategy guides functional strategies, encompassing manufacturing, marketing, logistics, and finance. Consider external factors: economic, regulatory, technological, and competitive.

Logistics Strategy

Selecting a logistics strategy requires the same creative process as corporate strategy. Innovative approaches can create a competitive advantage. A logistics strategy has three objectives:

  1. Cost Reduction: Minimize variable costs associated with movement and storage. Maximize profits by minimizing costs, such as storage location and alternative transportation.
  2. Capital Reduction: Minimize investment in the logistics system. Examples include direct shipping, public warehouses, and external logistics providers.
  3. Service Improvement: Recognize that revenue depends on the level of logistics service. Higher revenues can offset increased costs. Develop a service strategy that surpasses competitors. Start with business goals and customer service requirements.

Logistics Planning

Levels of Planning

Logistics planning addresses when and how to move products efficiently through the logistics channel. It occurs at three levels:

  1. Strategic Planning: Long-term planning with a horizon greater than one year.
  2. Tactical Planning: Intermediate-term planning, typically less than a year.
  3. Operational Planning: Short-term, often hourly or daily decisions.

Main Areas of Logistics Planning

Logistics planning covers four main areas:

  1. Customer service levels
  2. Location of facilities
  3. Inventory decisions
  4. Transportation decisions

Customer service results from strategies in the other three areas. These areas are interrelated and should be planned as a unit.

  1. Customer Service Objectives: Low service levels allow centralized inventories and cheaper transport. Logistics costs increase with higher service levels. Set appropriate customer service standards.
  2. Facility Location Strategy: Determine the number, size, and location of facilities and allocate market demand. Consider all product movements and costs. Seek low-cost or maximum-utility allocations.
  3. Inventory Decisions: Manage inventories through allocation strategies at entry and departure points (replenishment rules). Company policy affects facility location decisions.
  4. Transportation Strategy: Select mode, shipment size, route, and schedule. These decisions depend on distances between stores, customers, and plants, affecting store locations and inventory levels.

Conceptualizing the Planning Program

View logistics planning as a network of arcs (goods movement) and nodes (storage points). Nodes represent temporary stops before reaching stores or consumers. Multiple arcs between nodes represent transport options, routes, and products. An information flow network parallels the product flow network. Information flows upward while products flow downward. These networks form a logistics system.

The Total Cost Concept

Logistics system design involves cost equilibrium analysis. Cost balancing recognizes conflicting cost patterns of company activities. Manage this conflict by balancing activities for collective optimization. Consider direct and indirect costs when selecting transportation services. Choose the lowest total cost. Manage conflicting logistics costs in a coordinated manner. For example, higher customer service levels reduce lost sales but increase service costs.

The total cost concept applies to internal company issues and logistical problems. Decisions within a distribution channel can affect another company’s logistics costs. The total cost concept balances all conflicting costs affecting a logistical decision.