Strategic Logistics Management - Decision-Making in Times of Great Uncertainty

Table of contents

List of abreviations

1 Introduction

2 Course of the analysis

3 Underlying concepts and definitions
3.1 Concept of uncertainty
3.2 Strategic planning as part of strategic management
3.3 Fundamentals of business logistics

4 Strategic logistics management under uncertainty
4.1 Uncertainty in the logistics environment
4.2 Strategic logistics plan development
4.3 Types of logistics strategies
4.4 Types of logistics organizations
4.4.1 General issues in the design of logistics organizations
4.4.2 Functional design strategies
4.4.3 Flow oriented design strategies

5 Conclusion and outlook

Appendix

References

List of abreviations

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Executive Summary

Over the last decades logistics has gained increasing visibility and importance within the global business world. Nowadays, logistics is regarded as a strategic capability and depicts a critical success factor for corporate performance which needs to be managed accordingly. Fuelled by major trends such as globalization, vertical disintegration and proliferation of outsourcing projects, logistics plays a boundary spanning role. Growing degrees of complexity and dynamism in the external environment have given rise to the uncertainty faced by logistics managers. Logistics decisions involve strategic invest ments with significant amounts at stake. Once taken, they are difficult to reverse. Fail ure to take uncertainty into account may result in suboptimal logistics decisions that jeopardize future success as they leave companies with burdensome structures which might no longer be adequate under changing environmental circumstances. Three means to respond to these challenges were identified during the course of the analysis.

Firstly, the integration of strategic logistics planning into the overall corporate strategic planning process provides a powerful mean to cope with uncertainty. An intensive analysis of logistics relevant issues in the external environment delivers sound informa tion to plan and prepare for change instead of simply reacting to changes. Within the context of corporate strategic planning interdependencies and relationships with other corporate areas can be uncovered and allow for establishing mutual understanding and alignment, which fosters integrated and coordinated decision taking that is to the benefit of the whole company.

Furthermore, a change in the underlying logic for formulating and selecting logistics strategies deems necessary. Whereas cost efficiency and differentiation through improved and high quality customer service still play a crucial role, a growing emphasis should be on more flexibility and agility to generate strategic options that can be exercised at a later point of the uncertain future.

Last but not least, changes in the way authority and tasks are distributed and structured in the logistics organization are necessary so that adaptations to the environment can occur at operational and strategic levels. It is suggested that a transition from the pre vailing mechanistic and rigid logistics organization towards organic and more adaptive design strategies can create an adequate organizational framework for logistics operat ing in the increasingly uncertain business environment of the present and the future.

1 Introduction

In the light of the ongoing globalization and evolution of today’s business world logis tics has gained significant visibility and is regarded as a critical link to improved corpo rate performance. The value of the global logistics market accounted for $591.1 billion in 2005 and is expected to further grow by 22.1% until 2010.¹ Apart from a constant pressure to reduce costs and improve efficiency, logistics increasingly serves as a dif ferentiating feature for products and an important lever for improving customer satisfac tion. Coordination with other departments also plays a crucial role. The increasing com plexity and dynamics of the business world did not leave logistics unaffected. Key driv ers of uncertainty include globalization of supply and customer bases, shortening of product life cycles, increasing competition and more demanding customers.² Thus, the challenge for logistics managers nowadays is to constantly balance a need to perform well on hard measures of performance, while responding to a constantly changing envi ronment.³ With respect to logistics increasing importance for corporate success, reacting to contingencies by crisis management and firefighting is no longer an option. Instead, logistics managers must proactively and strategically plan for the future and prepare for change.⁴

2 Course of the analysis

In order to correctly determine how strategic logistics decisions can be taken under un certainty, the basic underlying concepts will be explained to improve clarity. Firstly, uncertainty and a model for explaining and understanding it will be discussed. After wards, strategic planning (SP) and its most relevant elements such as environmental analysis and strategy are briefly reviewed. The introductory part is rounded off by a discussion of the fundamentals of business logistics. Apart from a definition, this part also discusses the evolution of logistics and the trends that led to its increased strategic importance. Having laid out the basic concepts, these will be applied to the fields of strategic logistics management in chapter four. Therefore, the uncertainty faced by lo gistics within the logistics environment is analyzed by the aforementioned model. Ex panding on these findings, the single steps needed for strategic logistics planning as a mean of formulating logistics strategies under uncertainty will be depicted. A special focus will be on integrating logistics activities and decisions within the context of cor porate strategy. Afterwards, different types of strategies will be classified. Furthermore, their suitability for dealing with uncertainty is assessed. In a final step, the paper will look at different forms of organizations for implementing strategy. Again, means for handling uncertainty will play a key role and be discussed in more detail. The paper concludes with a summary of the gained insights and a discussion of its implications for strategic logistics management.

3 Underlying concepts and definitions

3.1 Concept of uncertainty

Uncertainty as part of contingency theory is described as a state of the environment in which more things can happen than will eventually happen.⁵ Environment is defined as the totality of physical and social factors taken into consideration by individuals during decision making in organizations. Depending on the location of these factors relative to the boundaries of the decision taking organization, they are part of either the internal or the external environment. Key sources of uncertainty are lack of clarity of information, insecurity of causal relations, length of feedback loops before results become apparent and the inability to assign probabilities to the effect of a distinct factor.⁶ Thus, informa tion and its counterpart uncertainty are driving forces for the effects the external envi ronment takes on an organization’s internal environment.⁷ Duncan suggests a model of complexity that builds around the two constantly changing dimensions dynamism and complexity. Dynamism describes the stability and frequency with which decision fac tors alter over time and whether new distinctive factors arise that change the scope of the internal and external environment relevant for decision taking. The second dimen sion complexity refers to the number and similarity of interactive factors considered important for decision taking. Further, Duncan found evidence that it is more dynamism than complexity that impacts uncertainty.⁸ According to Emery and Trist, companies that operate in such dynamic and complex environments can no longer rely on mere tactics. Even though uncertainty can be reduced by thorough analysis, a residual uncer tainty will always remain that companies need to respond to by strategies to assure sur vival in their environment.⁹ Noteworthy, residual uncertainty is not binary assuming there is a completely certain or completely uncertain future is wrong. As a matter of fact different levels exist that differ by the amount of possible scenarios. At the lowest level, a single forecast describes a clear enough future. Advanced levels contain discrete and distinctive sets of scenarios or a whole range which is dependent on a limited number of characters. Uncertainty in its most extreme form does not even allow for identifying potential range of futures since the influencing variables cannot be adequately captured. Residual uncertainty usually evolves from higher to lower levels of uncertainty over time.¹⁰

3.2 Strategic planning as part of strategic management

It has become apparent that uncertainty poses a serious challenge to organizations. They can no longer respond to changes with simple tactics, but need to plan in advance the what, who, how and when of future actions. Strategic planning (SP), as a tool to bridge the gap from the present to the uncertain future, attempts to answer three questions of “Who are we?”, “Where do we want to be?” and “How are we going to get there?” by spanning across the three levels of normative, strategic and operative management.¹¹

Starting off at the normative level, organizations define who they are and where they want to be in the future as part of their organizational evolution and goal development to assure future survival. Visions serve as a lodestar that describes the general long term direction by depicting a rich and textual image and character that the organization de sires to establish in the future. They set the corporate philosophy and define organiza tional values and the attitude of the organization towards its external environment.¹² While visions are concerned with corporate philosophy, missions as their extension deal with corporate politics. Externally focused in nature they define and articulate the firm’s unique purpose and scope of its operations in product and market terms.¹³ They state, orient and describe the means and tasks the organization will use to capture the potential described in the vision. Vision and mission are further processed into a written “Leit bild”¹⁴ clearly defining the field of action, values and a code of conduct. The mission statement thus differs from vision and mission as it describes more than only a desirable future but also a technologically and logically feasible future.¹⁵ Important to the further SP process, it channels all further activities occurring at the strategic and operative management level.¹⁶

Whereas the “who” and “where” of the organization’s future were dealt with at the nor mative level, the strategic path for the whole organization (“how to get there”) is de fined at the strategic management level, which is concerned with creating, exploiting and maintaining success potentials for the firm. Strategy concretizes vision, mission and mission statement. It “emerges as a mediating variable, which defines the relationship between the organization and its environment” and is “the means by which the firm de velops and utilizes its internal competencies and resources to take advantage of envi ronmental opportunities or reduce the impact of externally imposed threats.”¹⁷ This definition smoothly blends the two prevailing but opposing market and resource based perspectives of strategy since it takes both the internal and external environment as de termining inputs into account. The market based view of strategy focuses on factors external to the firm such as market conditions and competition. Both factors and conse quently the strategy itself are subject to five market forces. These forces include threats of new entrants and substitution, rivalry within the industry and supplier and buyer power. Companies must identify and select an attractive industry to develop a strong competitive position according to one of the three generic strategies of differentiation, cost leadership or focus. In this perspective strategy results from the external environ ment and is applied in the firm (outside in perspective).¹⁸ In contrast to the aforemen tioned strategy model, the resource based perspective sees a firm’s internal resources and capabilities as the critical link to strategic competitiveness. By developing and lev eraging resources, capabilities and competencies that are unique, value adding, costly and difficult to imitate for competitors, firms succeed in the market place. Strategy thus builds around the firm’s internal environment and is applied to the external environment (inside out perspective).¹⁹

Coming back to the SP process, strategies need to be developed once goals at the normative management level have been set. Strategies are crafted from the results of the analysis of the internal company environment and the external environment as a step of the SP process.²⁰ Consequently, sub strategies are selected for functional areas such as logistics and finally implemented and carried out at the operational level. SP as an ongoing and open loop process also controls and reviews strategies to determine whether the process has to be reinitiated to respond to changes in the environment that might have occurred in the meantime.²¹ This fuels strategic thinking by triggering discussions that lead to mutual understanding and new insights.²²

3.3 Fundamentals of business logistics

Logistics management has undergone a paradigm change over the last decades and evolved from a stand alone function seen as a mere cost area to a strategic weapon en tailing more duties and activities than ever before.²³ This evolution becomes apparent in the definition provided on the homepage of the German council of logistics (BVL). It states that logistics encompasses the holistic planning, operating and execution of all flows of information and goods of companies and supply chains, which significantly impact a company’s bottom line results. Expanding on this definition, the council of supply chain management professionals sees logistics management as part of the supply chain management process that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information be tween the point of origin and the point of consumption in order to meet customers’ re quirements.²⁴ Logistics provides the link between marketplace and supply base.²⁵

Logistics costs still make up a big part of company wide expenditures that are worth being tackled to improve bottom line results. They represent the second biggest posi tions in the corporate profit and loss accounts after cost of goods sold and, depending on the industry, make up 5 to 8% of total costs.²⁶ Moreover, logistics has emerged as a key differentiator, value adding activity and satisfier of customer requirements.²⁷ Especially in maturing industries, where products are turning into commodities due to homogene ity in features, quality and price, logistics has become an essential part of the product strategy that provides an envelope around the product and creates customer value by offering convenience, reliability and support.²⁸ As a customer interface, logistics man agement impacts customer satisfaction and buying behaviours.²⁹ This trend was further accentuated by the emergence of time based competition and potent global players that challenge incumbents in their home markets.³⁰ Noteworthy, logistics capabilities have become increasingly critical to overall firm success.³¹ The globalization of the business world has further added to the strategic importance of logistics management: Interna tional purchasing along with the internationalization of sales and production has become a matter of economic necessity in numerous industries increasing the geographic scope and interrelatedness of corporate decision.³² These trends are expected to further con tinue in the near future.³³

4 Strategic logistics management under uncertainty

4.1 Uncertainty in the logistics environment

Strategic logistics management is concerned with focusing corporate resources in a way that achieves maximum value added customer benefits within the logistics environ ment.³⁴ The logistics environment as a sub environment of the competitive environment portrays the range of logistics related choices that are available to a firm.³⁵ Noteworthy, the change in business logistics did not leave its direct environment unaffected:

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¹ Cf. Datamonitor (2006), pp. 9 16.

² Cf. Bernard, J. L. L. /James, M. M. (1994), pp. 35 36; Rushton, A. /Saw, R. (1992), pp. 46 47.

³ Cf. McGinnis, M. A. /Kohn, J. W. (2002), p. 2.

⁴ Cf. Lambert, D. M. /Stock, J. R. (1982), p. 27.

⁵ Cf. Brealey, R., et al. (1999), p. 211.

⁶ Cf. Duncan, R. B. (1972), pp. 314 317; Lawrence, P. /Lorsch, J. (1967), pp. 4 8.

⁷ Cf. Dill W. et al (1962) as quoted in Downey, K. /Slocum, J. (1975), p. 570.

⁸ Cf. Duncan, R. B. (1972), pp. 314 317, 320, 325; Downey, K. /Slocum, J. (1975), p. 573; Daft, R. L. (2004), pp. 152 153.

⁹ Cf. Emery, F. E. /Trist, E. L. (1965), p. 23; Litschert, R. J. /Bonham, T. W. (1978), p. 217; Courtney, H. (2001), pp. 15 33.

¹⁰ Cf. Courtney, H., et al. (1997), pp. 68 71; Courtney, H. (2003), pp. 15 22.

¹¹ Cf. Bleicher, K. (1994), pp. 25 27; Cooper, M. C., et al. (1992), pp. 2 3; Bea, F. /Haas, J. (1997), pp. 61 62; Kreikebaum, H. (1997), p. 37; Farjoun, M. (2002), p. 561; Kahalas, H. (1977), p. 78; Ireland, D. /Hitt, M. A. (1992), p. 36; Andersen, T. J. (2000), p. 185; Ackoff, R. (1970), p. 2; Ang, J. S. /Chua, J. H. (1979), p. 101; Drucker, P. F. (1959), p. 239; Andersen, T. J. (2000), pp. 188 196; Payne, B. (1957), p. 96; Miller, D. /Friesen, P. H. (1983), p. 223.

¹² Cf. Levin, I. M. (2000), p. 95; Bleicher, K. (1994), pp. 101 104; Al Laham, A. (1997), p. 99; Gausemeier, J., et al. (1996), pp. 36 37; Grant, R. M. (1991), p. 116.

¹³ Cf. Ireland, D. /Hitt, M. A. (1992), p. 35; Pearce, J., II /David, F. (1987), p. 109; Bleicher, K. (1994), p. 191; Christopher, M. (2005), p. 262.

¹⁴ The German term „Leitbild“ will be translated as mission statement. Noteworthy, there exists a differ ence between mission and mission statement.

¹⁵ Cf. Hungenberg, H. /Wulf, T. (2004), pp. 61 63; Gausemeier, J., et al. (1996), pp. 47 52.

¹⁶ Bleicher, K. (1994), p. 191.

¹⁷ Litschert, R. J. /Bonham, T. W. (1978), p. 213; Cook, as quoted in Litschert, R. J. /Bonham, T. W. (1978), p. 214.

¹⁸ Cf. Porter, M. E. (1998), pp. 1 16.

¹⁹ Cf. Barney, J. B. (2001), pp. 643 647; Farjoun, M. (2002), pp. 561 566; Stalk, G., et al. (1992), pp. 57 69; Hamel, G. /Prahalad, C. K. (1996), pp. 243 261; Grant, R. M. (1991), pp. 117 119.

²⁰ Cf. Grant, D., et al. (2006); p. 385.

²¹ Cf. Bloech, J., et al. (1994), p. 5.

²² Cf. Cooper, M. C., et al. (1992), p. 9.

²³ Cf. Baumgarten, H. (2001), pp. 2 4; Stank, T. P. /Daugherty, P. J. (1998), pp. 75 78; Langley, J. C. J. (1986), p.7; Cavinato, J. L. (1999), p. 180; Olavarrieta, S. /Ellinger, A. E. (1997), p. 569.

²⁴ Cf. Lambert, D. M., et al. (1998), p. 3.

²⁵ Cf. Christopher, M. (2005), p. 15.

²⁶ Cf. Ballou, R. H. (2004), p. 14; Straube, F., et al. (2005), p. 8.

²⁷ Cf. Langley, J. C. J. (1986), p. 2; Cavinato, J. L. (1999), pp. 167 170.

²⁸ Cf. Stank, T. P. /Daugherty, P. J. (1998), pp. 74 75; Fuller, J. B., et al. (1993), pp. 87 88; Langley, J. C. J. (1986), p. 2.

²⁹ Cf. Stank, T. P. /Daugherty, P. J. (1998), pp. 74 76; Lambert, D. M., et al. (1998), p. 6; Göpfert, I. (2001), p. 132.

³⁰ Cf. Stalk Jr, G. (1988), p. 41; Baumgarten, H. (2001), p. 4; Persson, G. (1991), p. 1.

³¹ Cf. Mentzer, J. T., et al. (2004), p. 613; Bowersox, D. J., et al. (2000), p. 75.

³² Cf. Langley, J. C. J. (1986), p. 9; Lambert, D. M., et al. (1998), p. 6 ; Ballou, R. H. (2004), pp. 15 19; pp. 382 383.

³³ Cf. Baumgarten, H. (2001), pp. 10 13, 25.

³⁴ Cf. Bowersox, D. J. /Daugherty, P. J. (1995), p. 67.

³⁵ Cf. Stock, G. N., et al. (1998), pp. 39 40.