Logistics is a necessary function for all companies. No business can live without it. Companies that do not do it well, in fact, threaten their very survival. Companies that recognize and manage the trade-offs by measuring total cost can extend this “systems” thinking to the larger environment, the supply chain in which they operate. In the absence of integrated logistics and total cost perspective, the logistics wastes are inevitable.
Similar to all living things, organizations are impacted by natural laws. Among natural laws are growth, variation, change, balance, and cause and effect. Although no law is more or less important, the law of cause and effect is of interest to the supply chain professional. In essence, cause and effect relates to three critical points:
- An action today will create one or more effects in the future.
- The future effect caused by an action today will generally be felt and managed by someone other than the creator of the action.
- The future effect caused by an action today could be felt tomorrow or years later, depending on the significance of the action.
2. Supply Chain Management – Systems Thinking
A closer look at these points shows that quality decisions (actions) cannot be made without considering their short- and long-term impacts (effects). In other words, we need to stop making decisions in a vacuum. Decision making in a vacuum is a sign of well-entrenched, functional barriers. It is vital that professionals take into consideration how the organization works as a system. Each decision will impact the future and will reach across functional divides. This demonstrates the need to be proactive and manage decisions that impact the system. As well, we need to ensure that measurement systems describe the global impact of prior decisions and guide decision making. The quintessential example of systems thinking is, in fact, an integrated supply chain.
3. Supply Chain Management – Total Cost
The much talked about but rarely managed, concept of total cost has its roots in systems thinking. For example, ill-conceived purchasing decisions today result in increased warehousing costs six months from now and inventory obsolescence two years from the original purchase. Unfortunately, because the ultimate effects take two years to be realized, the root cause will go unseen and unmanaged.
Logistics has inherent dynamics that make the concept of total cost confusing and frustrating. The main perplexing dynamic is a result of the less than obvious relationship between visible operations costs and inventory carrying costs. As well, organizations need to manage the concept of explicit costs as compared to implicit costs. Typically most operational costs are explicit, whereas many inventory carrying costs are implicit.
Explicit costs are defined as historical costs or actual costs that are tangible and visible on a firm’s financial statements. With respect to logistics, these costs can be seen in items such as storage, transportation, and material handling costs including personnel, warehouse, and explicit freight costs.
Implicit costs are those cots that do not involve actual payment by a company, but do represent lost opportunity that results from allocating money in one area, thus abandoning other potential investments and projects. The opportunity cost of such decisions results in lost profits that an abandoned project may have returned on the invested capital.
Total cost analysis requires cross-functional cooperation and high-level understanding of the issues because there may be instances where one area should increase its costs in order to reduce overall system costs.
To manage to total cost will require excellent coordination and horizontal integration inside the firm.
4. Supply Chain Management - Coordination
Supply chain management is about working the levers of a company and getting them in sync with the levers of trading partners in the supply chain. Manipulating the levers of the outside parties will only get you so far, and the gains may not be sustainable if you are unwilling or unable to work the levers within your own four walls. That is why the change must come from within the company first and then transcend to the up- and downstream parties. It is no coincidence that the leaders in supply chain management tend to be companies that have strong cultures that emphasize cohesive, coordinated action. They also tend to be companies that others, including their own suppliers and customers, look toward for leadership, making it viable for integration to occur at the cross-enterprise level.
Supply chain management, where the levers at work in your company match up with the levers at work in trading partner companies. When you do this, you are essentially putting the environment to work in your favor rather than working against it. And it is through this level of coordination that your supply chain can outpace the supply chains of rivals.
Summarized from the book Lean Six Sigma Logistics: Strategic Development to Operational Success written by Thomas J. Goldsby and Robert O. Martichenko.
Posted by LeanCor Supply Chain Group
LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.Facebook LinkedIn Twitter Google+