15-1
Logistics/Supply Chain Organization
Chapter 15CR (2004) Prentice Hall, Inc.
A good organization structure does not by itself produce good performance--just as a good constitution does not guarantee great presidents, or good laws, or a moral society. But a poor organization structure makes good performance impossible, no matter how good the individual managers may be. To improve organization structure…will therefore always improve performance.
Peter F. Drucker
15-2
Organizing for Logistics/Supply Chain Management
CR (2004) Prentice Hall, Inc.
OR
GA
NIZ
ING
CO
NT
RO
LL
ING
PL
AN
NIN
G
Organization scope• Intrafunctional• Interfunctional• Interorganizational
Structure forSupply ChainPerformance
Organization design• Choices• Positioning
Partnerships & Collaboration• Information sharing• Alliances• Contracting
OR
GA
NIZ
ING
CO
NT
RO
LL
ING
PL
AN
NIN
G
Organization scope• Intrafunctional• Interfunctional• Interorganizational
Structure forSupply ChainPerformance
Organization design• Choices• Positioning
Partnerships & Collaboration• Information sharing• Alliances• Contracting
15-3CR (2004) Prentice Hall, Inc.
Objectives for Organization
•Definitively defines responsibility, accountability, and authority–essentials for good management
•Collects people together in a meaningful way to achieve the goals of supply management
•Sets initial conditions so that proper cost tradeoffs can be realized
•Facilitates the implementation of plans as well as the planning process
•Aids administration
CR (2004) Prentice Hall, Inc.
Activity Fragmentation in the Supply Chain
PresidentPresident
MarketingMarketing FinanceFinance OperationsOperations
•Distribution channels
•Customer service
•Field inventories
•Revenue
•Cost of capital
•ROI
•Inventory carrying costs
•Supply alternatives and supply costs
•Warehousing
•Purchasing
•Transportation
Responsibilities
15-4
CR (2004) Prentice Hall, Inc.
Activity Fragmentation in the Supply Chain (Cont’d)
PresidentPresident
MarketingMarketing FinanceFinance OperationsOperations
•More inventory•Frequent &
short production runs
•Fast order processing
•Fast delivery•Field
warehousing
•Less inventory
•Cheap order processing
•Less warehousing
•Long production runs
•Lowest cost routing•Plant warehousing
Objectives
15-5
15-6
Activity Fragmentation in the Supply Chain (Cont’d)
Reasons for fragmentation
•Lack of understanding of key cost tradeoffs
•Traditions and conventions
•Other areas considered to be more important to the firm than logistics
•Organization structure can be in an evolutionary state
Benefits of fragmentation elimination
•Encourages important cost tradeoffs to be effected
•Focuses on an important, defined area by top management
•Sets the structure within which control can take placeCR (2004) Prentice Hall, Inc.
15-7CR (2004) Prentice Hall, Inc.
Organizational Choices
•Informal structure-Persuasion of top management-Coordinating committees-Incentive arrangements-Profit sharing-Cross charges
•Semi-formal structure-Matrix organization
•Formal structure-Line--creates value in products, therefore it has
operating status-Staff--provides assistance to the line organization
CR (2004) Prentice Hall, Inc.
Logistics Matrix Organization
Tra ffic& w areh ou s in g
C u s tom erservice
S a lesfo recas itn g
M a rke tin g
In ven to rym an ag em en t
A ccou n tin g& in fo rm ation
p rocess in g
F in a n ce
P rod u c tionsch ed u lin g
Q u a lityassu ran ce
P u rch as in g& m ate ria ls
m an ag em en t
P ro d u c tio n
P re s id e n t
Fun
ctio
nal a
utho
rity
Project authorityLogistics\SC coordinator
Tra ffic& w areh ou s in g
C u s tom erservice
S a lesfo recas itn g
M a rke tin g
In ven to rym an ag em en t
A ccou n tin g& in fo rm ation
p rocess in g
F in a n ce
P rod u c tionsch ed u lin g
Q u a lityassu ran ce
P u rch as in g& m ate ria ls
m an ag em en t
P ro d u c tio n
P re s id e n t
Fun
ctio
nal a
utho
rity
Project authorityLogistics\SC coordinator
15-8
15-9CR (2004) Prentice Hall, Inc.
Formalized, Centralized Organization
Vice-presidentFinance
Vice-presidentOperations
ManagerProcurement
ManagerWarehousing andmaterials handling
ManagerOrder processing
and customerservice
ManagerTransportationand packaging
ManagerInventory and
productionscheduling
Vice-presidentLogistics
Vice-presidentMarketing
Chiefexecutive
officer
15-10CR (2004) Prentice Hall, Inc.
Organizational Positioning
•Line vs. staff
Line is a “clean” organizational form, but staff may be preferred when:
-A line organization may cause unnecessary conflicts among existing personnel
-Logistics activities are considered less critical than selling, producing, or other activities
-Planning is relatively more important than administration
-Logistics is treated as a shared service among the product divisions
CR (2004) Prentice Hall, Inc.
Organizational Positioning (Cont’d)•Decentralization vs. centralization
Decentralize for quicker and more customized response to customer needs. Centralize to achieve economies of scale.
•Large vs. small company
Small firms are likely to have a centralized form, but logistics activities are less clearly defined.
•Manufacturing vs. service
Organization is likely to be directed toward the physical supply side of the business. Distribution has been a relatively neglected activity in service firms.
•Administrative titles15-11
CR (2004) Prentice Hall, Inc.
Centralized Organization
Staff &counsel
Analysis
Accounting
Finance DivisionA
Sales &marketing
Transportation
Order entry& processing
Inv. mgmt & prod. scheduling.
Warehousing &materials management
Logistics\SC Operations
DivisionB
Research &engineering
Purchasing
Generalmanagement
Staff &counsel
Analysis
Accounting
Finance DivisionA
Sales &marketing
Transportation
Order entry& processing
Inv. mgmt & prod. scheduling.
Warehousing &materials management
Logistics\SC Operations
DivisionB
Research &engineering
Purchasing
Generalmanagement
15-12
CR (2004) Prentice Hall, Inc.
Decentralized Organization
Staff &counsel
Analysis
Accounting
Finance DivisionA
Sales &marketing
Transportation
Order entry& processing
Inv. mgmt & prod. scheduling.
Warehousing &materials management
Logistics\SC Operations
DivisionB
Research &engineering
Purchasing
Generalmanagement
Staff &counsel
Analysis
Accounting
Finance DivisionA
Sales &marketing
Transportation
Order entry& processing
Inv. mgmt & prod. scheduling.
Warehousing &materials management
Logistics\SC Operations
DivisionB
Research &engineering
Purchasing
Generalmanagement
15-13
CR (2004) Prentice Hall, Inc.
Interorganizational Management
•Managing physical supply of vertically related, but legally separate firms.
•An untapped opportunity because members work at cross purposes.
•Cooperation and trust are the keys to benefits.
•But, benefits may “pool” with one or a few channel members.
•Redistributing the benefits requires:
-Metrics to identify and measure potential benefits
-Information shared among members to build trust
-Methods for fair redistribution of the benefits15-14
15-15CR (2004) Prentice Hall, Inc.
Interorganizational Mgmt (Cont’d)
Typical interorganizational channel
SellerSeller
BuyerBuyer
CarrierCarrier
15-16CR (2004) Prentice Hall, Inc.
Interorganizational Mgmt (Cont’d)
Example
Suppose a supply channel is composed of two members—a buyer and a seller. The buyer annually produces D = 10,000 units of a product. The buyer incurs an ordering cost of Sb = $100 when buying from an upstream supplier. The buyer’s holding cost for one item is Hb = $10 per year. Based on the EOQ formula, the buyer prefers to place orders of the size:
units 44710
)100)(000,10(22*
b
b
b H
DSQ
CR (2004) Prentice Hall, Inc.
Example (Cont’d)
On the other hand, the seller produces to order whenever one is received from the buyer. The setup cost for producing a batch is Ss = $300 and the total annual setup cost (Cs) depends on the buyer’s quantity: Cs = $300D/Qb. Obviously, the more frequently the buyer places orders, the more setup costs are incurred by the seller.
If the channel is managed as a single entity, the order quantity to minimize channel cost is:
units 89410
)300100)(000,10(2)(2*
b
sb
c H
SSDQ
15-17
15-18
Example (Cont’d)Total costs in the supply channel
2,000
4,000
6,000
8,000
10,000
12,000
14,000
300 500 700 900 1,100 1,300 1,500
Order quantity, units
Cos
t, $
bQcQ
Supply Chain cost
Seller’s cost
Buyer’s cost
CR (2004) Prentice Hall, Inc.
15-19CR (2004) Prentice Hall, Inc.
Example (Cont’d)
Buyer’soptimalQ = 447
Supply Chain’soptimalQ = 894
Sellera
$6,711 $3,356Buyer
b4,472 5,589
Supply Chainc
11,183 8,945aTCs = SsD/Qs
bTCb = SbD/Qb + HbQ/2
cTCc = (Ss + Sb)D/Q + HcQ/2Potential benefit
of $2,238
Costs in tabled form
15-20CR (2004) Prentice Hall, Inc.
Example (Cont’d)Conflict resolution
•Formal transfer mechanisms-Price adjustments-Order-size minimums
•Informal transfer mechanisms-Power
›Coercive power›Reward power
Training›Referent power
Use of buyer’s or seller’s good name-Trust
›Communication›Sharing information
15-21CR (2004) Prentice Hall, Inc.
Alliances and PartnershipsBenefits
•Reduced cost and lower capital requirements•Access to technology and management
skills•Improved customer service•Competitive advantage such as through
increased market penetration•Increased access to information for planning•Reduced risk and uncertainty
CR (2004) Prentice Hall, Inc.
Wh
ere
to P
erfo
rm
Lo
gis
tics
Act
ivit
ies
Low High
Low
Hig
h
Company’s logistics management competency
Impo
rtan
ce o
f lo
gist
ics
to c
ompa
ny’s
suc
cess
OutsourceBe a partnership
leader
Seek a competent partner
Perform logistics activities in-house
15-22