The operation of organizations has evolved in the past years. The accessibility of global networks has instituted a new situation for these organizations in improving their market share and eventual profit making activities. Not only are these organizations subjected to a much higher and more cutthroat competition, they have to struggle to win every percentage of the market and acquire a competitive advantage. (1996, 360) Sustaining that advantage is similarly another issue that a firm should contend with. One process in which firms can sustain this advantage is by reducing costs in their operations. In the context of company operations, logistics bears one of the most important processes in the organization given the fact that it is in this process where the products and services rendered by the firm is conveyed within organization and to the buying public. (, 2004, 1) This study is going to look into the processes carried out by global firms in sustaining this advantage through the reduction of cost in their logistic systems. Specifically, the study will discuss the different process involving the logistic system and the methods in which these strategies are implemented. Discussions on the logistic system and the supply chain will be helpful in establishing the implementation of these cost reduction strategies in the global scale.
II. Logistic Strategies
The emergence of globalization has given businesses immense pressure. ( 2001, 43) And one factor that brought about this immense pressure is logistics. Logistics is characterized as the management of the process in which a raw material comes to an “ultimate consumer state.” (p 43) In looking at this definition, it appears that for companies who are dealing with a consuming public in the international scale, logistics may well be among the part of the operations that eats up the resources of the organization as a whole, (2001) even claimed in their study that 10-25% of an international sale is composed of the costs incurred in logistics. And with the struggle of organizations to develop and even acquire a larger market share, there is no doubt that the costs are considerably taking its ascent. The following parts will be discussing the strategies in logistic systems that will provide cost-reduction measures for organizations.
A. Inventory and Transportation Strategies
The management of inventories is considered as one of the most important elements in the operations of logistic systems. Proper and timely management of the inventory of the firm may lead to several advantages for the organization as a whole. According to (1995, 40), managing the inventory could create a lesser lead time on the part of the organization. This may be caused by the fact that managing an accessible stock of goods in the ultimate consumer state allows the company to keep these goods close to the consumers once the demand is created. In this manner, the level of service is improved. In the same manner, with a proper inventory management, the organization is compelled to establish a warehouse. With this, the company could deliver the goods in a more convenient manner by installing local warehouses as compared to delivering the goods straight from the company’s headquarters. ( 1990, 19) Transportation costs are thus reduced by significantly removing the expenses to freight of the products. Not only does the demand of customers are easily dealt with in this manner, the overall logistics cost is similarly reduced.
As a whole, inventor management uses the levels of stocks to control the operating cost such that it will not blow out of proportion. Moreover, not only does this permit an organization to closely monitor the changes in its expenses, it also allows a more consumer-responsive environment, particularly with the demands. The strategies connected to proper management of inventories are discussed below.
1. Direct Shipment
This type of inventory strategy allows the organization to deal directly with the consumers. This means that the goods are delivered straight from the manufacturer to the end-user. (, 2000, 1) in using this kind of strategy, the logistics expenses of the company are reduced in such a way that distribution channels are taken away in the delivery process. However, the use of such a strategy is not without its drawbacks. The issue in this technique is that it would only be beneficial for companies who sold perishable items or if the demand for the product is considerably high. The use of direct shipment places financial stress to the company considering the fact that in order to cover a large area, delivery vehicles should be purchased, and that entails huge amounts of capital. Moreover, the problem may similarly be with regards to the rate of delivery towards the end users. The delivery rate of a company using direct shipment may considerably differ from another company with a local warehouse.
2. Warehousing
One of the more traditional methods in inventory management is warehousing. (, 1991, 316) In this method, a huge area is utilized to stock the products made by a company. The moment the order arrives from the headquarters specific items are recovered, packed and eventually delivered to the consumers. With this traditional method, the company is required to set aside a huge portion of the company fund in the operations of the warehouse. A huge amount it goes to the inventory costs and labor costs incurred in the warehouse operations. The following discussion will take into consideration the two types of warehousing techniques.
a) Centralized Warehousing
This method of warehousing involves a single warehouse serving the entire market. ( 9) With this information, one could surmise several implications of using the centralized system. First, there may possibly be more lead time from the manufacturer to the consumers as compared to the decentralized system. Similarly, in considering the system’s required economies of scales, the centralized type of warehousing entails a much larger one. This means that the expenses that are used to operate the entire warehouse facility would considerably be much lower as compared to operating several small local warehouses. With regards to the transportation costs, the centralized system will most probably entail a much lower cost in terms of the transportation of goods from the factories to the central warehouse. On the other hand, the company will have a problem on the delivery of the products from the warehouses to the end-users considering the possibility of it incurring a much higher cost.
b) Decentralized Warehousing
This system is characterized by small warehouses located in specific regions to which the company covers. (, 9) In employing such a system, the company is much closer to the end-users. This means that the lead time in terms of satisfying the demand of the consumers is much shorter in this system. Given the fact that the company has to operate several warehouses, the cost of operating such facilities would entail a much larger sum in this system. However, this drawback may be considered compensated by the rather much lesser cost that the company will incur in terms of its outbound transportation activities. This means that the company will not only promptly be able to satisfy the demands of the consumers they have the luxury of saving precious financial resources.
3. Just-In-Time Inventory
In this inventory method, the company is required to use crossdocks in their operations. (, 1991, 316) These are facilities where the company’s merchandise is shipped directly to the end-users. In this manner, the said product only spends a short time in the said facility, which in turn eliminates the costs provided by storage and order-picking. The problem in this method is that companies using it should ensure that the demand on a certain product will not be highly volatile. Moreover, in looking at the process involved in this system, it appears that the method will only be effectively implemented on products that could be easily handled. Highly fragile products and even bulky ones may pose several issues in this context. Nevertheless, there have been several companies that have claimed of the effectiveness of the JIT method. (, 1991, 316)
B. Logistic Execution Systems (LES)
This is a fairly new type of logistic system that seeks to reduce the operation costs of the company. (2004, 3) indicated in his paper that the said system emerged from the Warehouse Management Systems in the 1970s. The said system has spawned from the materialization of highly automated warehouses. Subsequent developments in the market have similarly led this system into the 1980s by using barcodes to track down their materials and even more advanced software to handle the logistics of the organization. The 1990s, provided the stage where this system actually became among the more established logistic systems particularly in managing the data and flow of material from the supply chain of the organization.
The use of automation is the key to the success of the implementation of this system. Functional areas such as receiving, storage, inventory management, order-picking, and shipping has acquired great improvements from the logistic execution system. The data from these activities are used in such a way that the movement of a company’s merchandise is taken to full advantage. As stated in the work of (2004, 6), the implementation of the said system will reduce several setbacks in warehouse operations such as damage, lost stock, search times, human error, and utility costs.
III. Supply Chain Management
Another element of the logistic system is the management of the company’s supply chain. In recent years, models on improving this part of the operations of companies have been noted in organizational literature. One such model is the supply chain management model. The said model intends to speed up the flow of goods, information, and capital from the company to the consumers. ( 2001, 22) Goods in this context are characterized by the merchandise sold by the company while the flow of information denotes the speed of transfer of data particularly with regards to the orders from the market and demands from the consumers. With the use of supply chain management, the company is able to monitor the flow of these elements from their part to the consumers and back. (p22)
To a certain extent one main feature of the model is the capability of the company to manage the costs. As stated by (2001, 22) 10-15% of the sales in most industries is composed of the management of a company’s supply chain. However, the emergence of technology has improved the reliability of the cost management function of supply chain management. ( 2001, 14) The use of electronic commerce and other forms of communication through wireless means have made the world of shippers, suppliers and customers closer to the company. However, the use of technology in this kind of model may similarly pose some drawbacks for the organization. First, possibility of security breach is imminent through the use of wireless communications. Similarly, finding the necessary individuals to employ, particularly those who satisfies the necessary skills needed to do the job may be considerably difficult.
IV. Purchasing and Supply Management Implementation (PSM)
V. Conclusion
- Meet consumer expectation (, 2001, 43)
- third party logistics (, 1995, 188)
- Information management systems
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