Cover Story: Logistics: Your Next Source of Competitive Advantage

Your competitiveness is driven by those mega-tonne monsters on the highways. And by the science of logistics, which gets those trucks on the road-and your products to the shops, your components to the plants, and your services to your customer. BT presents the lessons in logistics management for the 21st Century Corporation.

Night after night, the headlights signal the journey. Stacked atop those monsters of metal that traverse the land through asphalt highways are those objects that can sharpen or blunt your-and your rivals'-competitive advantage in a second. As you slumber, the trucks-and planes and ships-deliver the products churned out by your factory, the components turned out by your vendors, the machines assembled at your plant, and the raw materials quarried from the mines to the places where they matter the most.

That's your logistics at work. Doing what the Ohio (US)-headquartered Council Of Logistics Management defines as ''...the process of planning, implementing, and controlling the effective flow and storage of goods, services, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.'' Even in today's wildly unpredictable corporate context, it retains the precision of its roots: the military. For the armed forces, logistics is all, referring as it does to the complete system of moving, supplying, and quartering troops and the resources they need: guns, ammunition, food, water, medicines, and tents. For business, as with armies, logistics can make all the difference between success and failure for the simple reason that this is where strategies are applied, supported, and tested in the field. Your competence will lose its core; your quality, its totality; and your customers, their satisfaction, if your logistics cannot deliver.

THE LOGISTICS OF DELIVERY

Synergising distribution and transportation with other links of the logistics chain is vital for its vertical integration. Take the case of Compaq, which outsources its logistics from Federal Express. As the latter discovered, the company's cycle-time between dealer-orders and dealer-receipts ranged between a competitiveness-killing 30-40 days. The primary reason for this was multiple-point sourcing of components, which were assembled in a central warehouse in Europe before the workstations were despatched to the dealers on a freight-on-board basis. And transportation from the warehouse to the outlets was the dealer's responsibility. This unwieldy chain-spanning the sourcing points, the factory, the warehouse, the geographical hub, the distributor, and the customer-was raising costs.

So, Federal Express overhauled the system extensively. In the new chain, the assembled products are sent to its own distribution centre directly from the factory, and then sold to dealers on a cost-insurance-freight basis, with the supplier paying for insurance and freight as per the terms of an agreement, with direct delivery to them at no additional cost. Sales data is fed into the system to tailor manufacturing to demand. An e-mail track-and-trace system covers the entire order-to-delivery spectrum. The 6-month-long project has resulted in a dramatic reduction in cycle-time to 10 days. The future model, to be implemented by end-2000, envisages door-to-door delivery to customers with direct on-line linkage being provided to them, which will result in an order-to-delivery cycle of no more than 6 days. Smart logistics means fast work!

Does that mean parity is all that logistics can serve up? That good logistics is a necessary, but not a sufficient, pre-condition for triumphing in the marketplace? That it is conspicuous only by its absence, and not by its presence? Far from it. In fact, precisely because the 21st Century Corporation will operate in global markets at the speed of thought, and with high degrees of customisation, logistics could well emerge as one of the handful of crucial differentiators that can offer value to the customer. Points out Jacques Creeten, 35, Country Head (India), of the logistics operator Federal Express: ''The new models of conducting business pre-suppose globalisation through connectivity, the deregulation of economies and markets, and the digitalisation of technology, which makes integrated logistics a strategic weapon.''

Strategy guru Michael Porter acknowledged as much when he assigned in-bound logistics-spanning sourcing and procurement-and out-bound logistics-post-manufacturing delivery into the channels-to 2 out of the 5 links on the value chain from which companies can derive their competitive advantage. Now, the newest genre of corporations-those doing business in the Netspace-are demonstrating it too. For e-tailers who offer customers the opportunity to browse their virtual shops and place orders on-line, for instance, the key to customer delight lies in delivering their orders quickly and accurately.

Companies like Rediff.com-which e-tails books, music, apparel, and gifts-are investing heavily in building a logistics infrastructure for sourcing products ordered by customers-from manufacturers, distributors, or brick-and-mortar retailers-and delivering them. Both companies use the services of the logistics specialist, Blue Dart Express, and acknowledge that the efficiency of this delivery-mechanism will either make or mar their fortunes. Agrees Ajit Balakrishnan, 49, CEO, Rediff.com: ''Having an effective delivery-system and efficient delivery service-providers is crucial.''

That goes for your company too, whether you operate in the real or the virtual world. And whatever your chosen management tool for excellence-TQM or J-I-T, Lean or Customisation-logistics is key to its success. Affirms G. Raghuram, 40, Professor (Public Systems Group), Indian Institute Of Management, Ahmedabad: ''All activities linked to movement and storage have become crucial to decision-making.''

With infotech-specifically, Web-based networking, and Enterprise Resource Planning (ERP)-enabling companies to manage their entire value chain on-line, the information required by your logistics people is no longer at a premium. With a single keystroke, they can find out exactly how much of what is needed, where, and when, eliminating guesswork. Thus, the focus has shifted to meeting the needs revealed by this information with superb logistics operations.

Simultaneously, the emergence of costing tools-like Activity-Based Costing-are showing how key logistical activities can be leveraged to control costs. And, of course, the globalisation of markets is making delivery difficult, further pitchforking logistics into the top tier of strategic concerns. Concludes Clyde Cooper, 42, CEO, Blue Dart Express: ''Logistics is actually the key determinant in the price-value equation today.''

Given its close linkages to the rest of the company, it would be tempting to think of logistics as extending across your entire value chain, connecting your customer to your business strategy. It would also be dangerous-since that might underplay the importance of operational efficiency in logistics management.

Sure, that logistics cannot deliver results unless you have read your markets right, forecast your demand accurately, aligned your manufacturing to your sales, and harmonised your supply chain to your production needs is obvious. After all, no matter how efficiently your logistics people deliver 532 units of your products on Friday to your 26 selling-points across the country, just as you instructed them to, if those selling-points actually needed 239 or 892 units instead-and on Wednesday, not Friday-such operational excellence will contribute nothing to business success.

That doesn't make it the job of logistics to map your markets, or predict demand patterns, or innovate on product design, or, indeed, determine your business strategy. Those are activities that have to be performed for their own sake. However, that doesn't mean, either, that there are distinct hand-offs between operations like purchasing, manufacturing, and distribution on the one side, and logistics on the other, with one department saying: ''Here's what I need from my vendors, or delivered to my customers-now it's upto you to do it.'' S0, it is upto your logistics people to do that at the lowest cost, the highest speed, and the maximum accuracy. However, you must also allow your logistics to take certain crucial decisions that affect the rest of your operations.

For instance, the location of your factory-if it is a new one-and of your depots will largely be determined by logistics issues. So will the choice of location of your vendors. So will the level of service you will provide to different kinds of customers and intermediaries. Points out Douglas Lewis, 54, Vice-President (Sales & Marketing), DHL (Asia Pacific & the Middle East): ''Logistics solutions, provided according to the strategic needs of the business, may even become de facto business solutions.'' In short, your logistics will not operate on operational efficiency alone, but will also demand a strategy aligned to your business objectives. BT unravels the vital links in your logistics chain.

First and foremost, the functional aspects of your logistics have to be more efficient than those of your competitor's. Or else, no matter how well you have read your market and integrated your value chain to its needs, it is your rival's products that will be available on shop-shelves for customers to buy. Here, the solution lies in configuring your transportation-facilities in a way that raw materials, components, and sub-assemblies-the purview of in-bound logistics-as well as the finished products-where out-bound logistics come in-are delivered where required, when required, and in the quantity required, with the least use of cost- and time-resources. Explains G. Sundar Raman, 43, Vice-President (Supply Chain), Godrej-GE Appliances: ''The idea is to help the supply chain become more efficient and responsive, and to make the company capable of responding to the changing demand-cycles at minimum cost and time.''

There are many questions that remain to be answered at this stage. What form of transportation-road, rail, sea, river, or air-is ideal for each delivery? How big should the fleet of vehicles you are using be? How can you plan your vehicles' routes to optimise the distances they travel without compromising on delivery schedules? How do you prevent damage, pilferage, and lost cargo? Details Rajesh Achanta, 32, Associate Director, Procter & Gamble (P&G), who spearheaded a supply chain efficiency drive in his company: ''You will need to tackle issues like streamlining the number of stock-points and vendors, reducing inventory based on consumer-pull, and rationalising delivery based on customer-demand and price-realisation, including direct delivery to key retailers.''

While it would be tempting to start with a clean slate, picking the locations of your plants and warehouses on the basis of current and future requirements, chances are that your company is already locked into a grid of factories and depots that were created in the past. So, your delivery infrastructure must conform to it even as it factors in dynamic demand.

There are always options: do you use a hub-and-spoke system, or point-to-point delivery? Or is it better to use service routes, where a truck covers several other points between point A and point B? Do you schedule your fleet to move all the time, or only when the load is above a threshold level? None of these decisions can be taken unless you know what your company's delivery proposition-cheaper or faster-is. Obviously, it isn't enough to just ask the right questions.

To get the answers, the logistics leaders run algorithms simulating the output under varying inputs. Taking the plant and market locations as fixed, they run various permutations and combinations of fleet-size, route-planning, and even locations of depots and suppliers, when necessary, to work out the optimum solutions. Also factored in are issues like scheduling of drivers, the size of individual trucks and trailers, layout of warehouses, frequency of delivery, and degree of unpredictability et al. Only from these exercises do the logistics leaders manage to work out how to maximise their results with the least resources, duplication, and redundancy.

That was the case with, for instance, Jindal Vijayanagar Steel. As soon as the organisation began the production of hot-rolled and cold-rolled steel coils at its new plant in August, 1999, CEO Sajjan Jindal decided that J-I-T delivery to customers would be one of his USPs. ''We have taken on the responsibility of supplying at the time and place specified by the buyer-on a J-I-T basis,'' avers Jindal, 36. Enter logistics. The company uses a fleet of 50 hired Volvo trucks, each of which is capable of carrying 60 tonnes (since the average coil weighs 20 tonnes). For optimum utilisation, these trucks are run round the clock, with drivers relieving one another every 8 hours, at specific locations on different routes.

Naturally, this means that every truck has to traverse a route that passes through these substitution-points. In terms of distance, that may, sometimes, mean a detour although the locations have already been identified on the basis of the most-travelled routes. However, even this short delay is worth it because the alternative for the trucks would be to take long halts while their drivers rest. The company's estimates show that it has slashed travel-times drastically. Claims Ravi Uppal, 42, Managing Director, Volvo India: ''Our experience shows that such a tactic reduces travel-time by a minimum of 50 per cent.'' Benefits like these are just what excellent logistics operations can deliver.

Understanding the configuration of your delivery channels is crucial for outward logistics, in particular. Only after your logistics people have computed just how much value each of your distributors and retailers are offering to you will they be able to optimise the ways to service these nodes on the distribution link of your value chain. The idea is to ensure that the resources allocated to servicing a distributor or retailer is proportional to the value-financial, tactical, or strategic-that he holds out for the company. Argues Hirjee Nagarwalla, 44, CEO, Nagarwalla Consultants, which strategises on logistics and delivery solutions: ''A company must look at value being generated from each selling-point before it decides on the level of service or resources provided.''

That's just what the German logistics services-provider, Logistic, did for a liquor company in the country, which uses an extensive fleet to service smaller towns and villages. Logistic classified its client's retailers on the basis of product-movement, margins, and price-realisation. It then worked out a servicing frequency based on these figures so that retailers offering higher margins and guaranteed sales were serviced more regularly than those with lower yields or irregular demand-patterns: daily versus weekly, or even fortnightly. Of course, it also had to optimise the routes to service the largest possible number of retailers on every run besides working out the minimum size of a consignment. Explains Christian Schmidt, 33, Partner, Logistic: ''The cornerstone of the new system was optimising deliveries based on economic trade-offs, which brought down transportation-costs by 50 per cent. It also allowed customisation, and direct supply to key customers.''

Nagarwalla Consultants has done the same for Dabur's distribution system for its Real fruit juice-a perishable product, which makes logistics all the more crucial-linking delivery to price-realisation. With demand leaping up, thanks to aggressive marketing, the delivery system for Real had gone haywire. Says Nagarwalla: ''With no demand-mapping possible, wrong parcel-sizes were being despatched, resulting in either under- or over-supply.'' In short, a marketer's nightmare.

At that point, Dabur had been servicing its dealers once a month, delivering a fixed number of units-arguing that this would reduce costs-but passing on the problems of holding inventory to reluctant distributors and retailers. Under the new system, it switched to varying delivery-frequencies-ranging from weekly to monthly-depending on the value of sales being generated by each dealer. Crucially, the solution came from logistics-not marketing-because, although the logic was available to the latter, only the former could make it work.