Designing and operating a business logistics system: marketing strategy implications - Marketing Management

Having established the need for business logistics, we turn our attention to the design and operation of the system. Strategic marketing should be managed to gain maximum competitive advantage. However, planning, operation and control of business logistics is not a responsibility of marketing management. Its design and operation should be the responsibility of a business logistics or distribution manager. Managing business logistics includes how to calculate economic order quantities (EOQ), warehouse location models and identifying cost points which are often included in marketing texts, but these are not the task of marketing.

Nevertheless, the overall design, implementation and control of a business logistics system needs to start with the output of the system and what we want to achieve in this respect. The output of the system is customer service, and it is around customer needs for service that we need to start to design the ‘optimal’ system.

Starting with customer needs; the service output

In a marketing-oriented company, adoption of the marketing concept should commence with the design of a business logistics system by identifying the types and level of service from the system that customers desire and are willing to pay for. Starting with customer needs is not only consistent with a marketing-oriented approach that should pervade all business decisions, but also recognizes logistics as being a ‘demand generating’ tool.

When we consider service outputs from a business logistics function, we tend to think of factors such as speed of delivery, reliability of delivery and goods being delivered that are undamaged. These are important elements of customer service, particularly with the growth of lean manufacturing. However, there are a number of elements of customer service which the design and running of the business logistics system can affect. Ballou20 on the other hand, identifies possible service elements at the ‘pre-transaction’, ‘transaction’ and ‘post-transaction’ stages. Pre-transaction elements are associated with establishing good relationships with customers, e.g. written policy statements regarding delivery and associated conditions can be provided for every customer inquiry or when the order is initially received.

This covers aspects such as ordering and delivery and procedures for sending goods back. In this way, customers know precisely what they are getting in terms of logistical service. Transaction elements are those that are directly concerned with delivering the product to the customer, and affect things like lead times and order accuracy. Post-transaction elements affect the logistics support a customer receives after purchasing the product, and include elements of service such as return of faulty products, complaints and warranty provisions.

  • Order cycle time
  • Consistency of order cycle time
  • Availability of product
  • Order status information
  • Flexibility to handle unusual variations
  • Returns – damaged and surplus goods
  • Response to emergencies
  • Freedom from errors

Common measures of customer service

Common measures of customer service

In addition to service elements, individual industries and individual customers may have their own special service requirements. The strategic marketer must constantly search for innovative logistics service features that can provide a new competitive edge. Federal Express, Avon and the retailers B&Q and Argos are examples of companies that have carved out a profitable position in the market through innovative logistics programmes designed to give additional customer service. To illustrate how the business logistics system potentially impacts on customer service, we consider an example of one aspect of logistics service level, order cycle time, and illustrate how this might relate to some of the elements of the business logistics system and their design and management.

Order cycle and time (lead times)

We feel frustration when having selected a product and a supplier, placed the order and paid a deposit, we then have to wait weeks for delivery. Because of this, the length of time that elapses between an order being placed and the customer receiving the product or service (i.e. the lead time) can be a crucial element of customer service, especially in industrial markets. Decreasing order lead times is a source of competitive advantage. Say the average lead time in an industry is five days; determining that by decreasing this to two days would mean a significant competitive edge (i.e. customers would value this) what elements of a business logistics system might we potentially look to for us to decrease order lead time? There are areas we might consider to achieve this objective:

  • Inventory levels: We might seek to decrease order lead time by only keeping limited or possibly no stock; if we only produce to order, then clearly the order time is increased by at least the length of time of the manufacturing cycle. We can simply decrease order lead times by increasing inventory at appropriate points in the logistics system. This might be done at factory, wholesaler or retailer levels, or all three.
  • Order transmission: This affects order lead times through the length of time it takes for the supplier to receive the order. IT developments in business communications have made this less of a problem, but at the very least we need to ensure that there are no unnecessary delays in our receiving the order.
  • Transport: In relation to the mode and organization of transport used to deliver products to customers we might look to faster modes of transport, e.g. air freight instead of road, or we might increase the size of the fleet, or re-plan delivery routes. Many companies have developed systems for reduced lead times. Benetton for example have a system that enables them to gather data from their franchised outlets on a continuous basis with regard to what is selling. This data is analysed overnight and translated into a production schedule based on which products, colours, etc. of garments are selling. Benetton holds stocks of ‘grey’ finished material which can be quickly dyed in factories according to fashion demands. In this way Benetton are able to substantially reduce lead times required to respond to fashion and customer demand.

Elements of customer service

Elements of customer service

These are possible areas we might look to in a business logistics system to reduce order lead times. Having determined what the service level should be, we can proceed to design an appropriate system. The output of a logistics system is the service level the customer receives, but what steps should we take in implementing this and what are the considerations in designing the optimal business logistics system? The steps in this process, and we then examine each of these steps in turn.

Step 1 Establishing the importance of logistical service elements to customers

We have stated that the design of a business logistics system should start with customer needs with respect to service elements provided by the system. It is important to establish what these are, e.g. do customers require speedy delivery or is reliability of delivery more important? Do customers require flexibility in dealing with say, special orders, or do they require only standard products? Not only is it essential to establish customer service needs, but the relative importance attached to each need is required.

Both needs and relative importance may vary between different industries, different customers and for different products supplied to the same customer. Such differences can be used to segment and target markets where the basis of segmentation is differences in sensitivity to different service levels. Here car companies like Nissan, Toyota and Honda demand deliveries to be made within time windows of four hours or less.

Step 2 Establishing current company and competitor performance with regard to service elements

The next step is to establish how well the company and its competitors are performing in areas of logistics services seen as important by customers. Underperformance will result in lost sales. There are significant marketing opportunities available to a company that is able to improve service performance. In assessing competitor performance we also need to look at areas where we are significantly outperforming our competitors to assess whether or not our extra performance justifies the additional cost of providing it.

Step 3 Determining costs and benefits of making changes to current company performance in levels of logistical service: profit maximization

Before we make decisions about specific objectives for service elements and design of the logistical system to achieve them, we need to assess likely costs and benefits and profit potential associated with different service levels. This brings us to an important point about the overall design of the

Step 1

Establish the importance of the various logistics service elements to customers

Step 2

Establish current company and competitor performance with regard to these service elements

Step 4

Establish specific objectives for areas and levels of company logistical service performance

Step 3

Determine costs and benefits of making changes to current company performance in these areas and potential new service elements for profit maximization

Step 5

Plan, implement and control business logistics systems to achieve objectives with respect to service level performance at lowest total cost logistics system. Improvements in these services are likely to be costly. In determining the appropriateness, or otherwise, of current logistical services and any proposed changes, we need to assess the impact on company profits.

The optimal logistics system is not likely to be one that operates at lowest cost, as we may lose too many sales, nor is the optimal system likely to be one that generates greatest demand, as these sales will probably be generated at too great a cost. The best system generates maximum profit where the logistics contribution is maximized. The notion of optimizing profit contribution. We see that maximum contribution is obtained neither at the lowest nor the highest service levels.

Too low a level of service and we lose revenue; too high and we incur too high costs for extra revenue generated. In theory, maximum contribution is obtained where the marginal cost of additional service levels is equal to the marginal revenue generated by these additional service levels. In reality, deriving the revenue curve with respect to different levels of service can be difficult. Nonetheless, steps of identifying customer service requirements and current company/competitor performance in this area should give some indication of likely responses to increases/decreases in service levels.

Designing the business logistics system

Designing the business logistics system

In practice the system should be designed from a demand perspective. Following earlier analysis of customer needs, we should define service level objectives based on the role we have determined for logistical services in overall competitive strategy. The design of the total logistics systems should be aimed at delivering this pre-determined level of logistical services at minimum cost.

Step 4 Establishing specific objectives for areas and levels of logistical services

Overall objectives for logistical service levels need to be translated into specific objectives for the various areas of logistical service. Possible customer service elements have been outlined in Tables

Contribution vs. revenue and costs

Contribution vs. revenue and costs

Step 5 Planning, implementing and controlling the logistics systems

From a marketer’s perspective, planning, implementation and control of logistics is paramount in providing the level of service support needed for customers. This involves purchasing, inbound transport, production, planning, inventory control, warehousing, order processing and outbound transport. Even though customer and market needs must be paramount when designing a logistics system, this can only be achieved through expertise in functions like materials management and production planning and control. In addition, we need to consult channel members and suppliers. We should note that continued operation of an effective logistics system requires ongoing information from sales and marketing including sales forecasting, customer feedback and competitor information.

Of all the elements of the marketing mix, perhaps the ‘place’ element requires more inter- and intra-firm communication and co-ordination than any other.

Having established what types and levels of customer service the logistics system is to provide to support a competitive market strategy, the task of the logistics manager is to provide this at minimum cost. Here it is important for the marketer to understand and recognize the existence of ‘trade-offs’ between the elements of the logistics system. We have already come across the notion of a trade-off, but in this case it is for the system as a whole where the costs of the total system are traded off against revenue.

In planning and operating the system the logistics manager must make trade-offs between individual elements of the system to achieve the desired levels of customer service at minimum cost. This requires what logistics planners refer to as a ‘total cost approach’ that recognizes interdependence between the demands of logistics activities, e.g. minimizing costs in one area like inventory may lead to more than proportional increases in another, say transport. Effective planning, implementation and control of the business logistics system is greatly enhanced by the introduction of a service policy and quantified service standards.

Again, these need to be determined on the basis of customer and market needs. Service policy should include written statements concerning levels of customer service in the form of promises to customers which the company will fulfil. These can represent both a powerful promotional tool in helping to secure and keep customers, and a way of informing staff about the role and value of a logistics service in overall company and marketing strategy.

Policy statements may be relatively simple, such as ‘all orders received by noon will be shipped the same day’ or more elaborate, covering in detail factors such as time, condition of goods, order communication and service contingencies. The policy statement may then be translated into detailed operating standards for the logistics system. In turn, these standards form the basis of the logistics control system, against which logistics inefficiencies and service problems can be quickly addressed.

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