Supply Chain Management by W. M. J. Hugo

Author:W. M. J. Hugo
Language: eng
Format: epub
Publisher: Van Schaik Publishers
Published: 2017-02-01T16:00:00+00:00

The basis of the integrated logistics management concept is total cost analysis, whereby the total cost must be minimised while achieving the desired customer service level. This is important within the logistics function, for example minimising the total costs of transportation, warehousing, inventory, order processing and information systems, and lot quantity cost, while achieving a desired customer service level, and through integration, with other functions within the organisation. Therefore instead of seeking to minimise individual costs, certain trade-offs must be made in order to make good holistic decisions that will increase customer service and decrease costs overall.

Fawcett, Ellram and Ogden (2007: 78) note that “decisions made in one area affect performance in other areas”. For example, when the marketing function promises delivery of a product without verifying inventory and production status, production and / or logistics may have to perform expensive expediting activities. When purchasing opts for the lowest-priced component without analysing the supplier’s quality and delivery capabilities, purchasing costs may decrease, but production costs may rise. Trade-offs permeate decision-making. Although managers recognise many obvious conflicts, many remain unseen. This is because the consequences of many decisions occur in a distant part of the organisation or after a time delay. Managers must identify consequences and make all relevant trade-offs visible. Only then can managers determine how to optimise systems-wide results. An analysis of total costs helps to identify and evaluate the trade-offs.

If organisations do not have an integrated approach, logistics can be a fragmented and uncoordinated set of activities spread throughout the organisation with individual functions, budgets, priorities and measurements. Therefore an unintegrated approach, for example to logistics costs, leads to attempts to reduce specific costs within the logistics function, which may not be best for the system as a whole and may lead to greater total costs.

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