physical distribution & logistics management

7/21/2019 Physical Distribution & Logistics Management

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ISSN 0960-0035

Logistics management at the threshold of the new millennium

Guest editorDavid Pollitt

This issue ispart of acomprehensivemultiple accessinformationservice

International Journal ofPhysical Distribution &Logistics Management

Volume 28Number 31998

CONTENTS

Articles within this issue arealso published online at:http://www.mcb.co.uk/ijpdlm.htmalong witharchive material from 1989 todate (where available). Abstractsof articles in the field publishedin other high quality journals arealso provided, along with a sitelicence which allows multiplesimultaneous user access to theInternet pages of this journal.

A searchable CD-ROMcontaining archive materialfrom 1989 to date (whereavailable) is provided with thisjournal. A site licence alsoprovides multiple simultaneoususer access to journal pages onCD-ROM.

Internet OnlinePublishing withArchive, Accessto WiderLiterature andSite Licence

TheInternational Journal ofPhysical Distr ibution &

Logistics Managementispublished ten times a year intraditional paper format.Please note that two issues ofthe journal are bound togetherconsecutively within thesecovers. The contents of thisissue are detailed below.

Paper format CD-ROMArchive withSite Licence

Editorial___________________________________________ 167

Viewpoint _________________________________________ 168

SECTION 1: Far-East focus

Filling the logistics gaps in China__________________ 173

Braun muscles in on the Chinese market___________ 175

US firm slices food costs in Japan__________________ 178

SECTION 2: Supply-chain logistics

The perils of supply-chain logistics________________ 183

Improving the supply chain________________________ 186

IT and supply-chain management_________________ 189

The bullwhip effect in supply chains_______________ 192

Fixing the parts dilemma_________________________ 195

Meeting customer requirements throughtechnology_______________________________________ 198


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SECTION 3: Retail-industry logistics

Mail order wins consumers stamp of approval______ 203Retail industry prepares for home shopping_________ 205

The art and science of network optimization________ 208

SECTION 4: The information challenge

Logistics and electronic publishing_________________ 213

Corporate intranet strategies and beyond___________ 216

SECTION 5: The challenges aheadTransport and the community______________________ 221

Modern economies and the impact of increasedinteraction_______________________________________ 224

CONTENTScontinued


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Editorial

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EditorialWhither logistics? Two centuries ago, dramatic shifts in the economics oftransformation production and transportation brought about the IndustrialRevolution. Now the highly respected McKinsey organization predicts that anupheaval of equal proportions is about to be triggered by unprecedentedchanges in the economics of interaction the searching, coordinating andmonitoring that takes place when people and firms exchange goods, servicesand ideas. Logistics, then, will play an even more important role in the emergingeconomic system than it did in the last.

The McKinsey research is summarized in the final article of this special issueof the International Journal of Physical Distr ibution & Logistics Management.

The issue is special because it includes strategic briefings from the literature,conference presentations and reports covering logistics management. It departsfrom the journals usual practice of exploring issues in depth through learnedpapers. Instead, it highlights a range of key issues affecting practitioners andresearchers who wish to function effectively in the new millennium.

Abby Day, writer and consultant in strategy, marketing and informationmanagement, provides the opening viewpoint. She shows that logistics touchesevery part of the organization, fulfills the marketing promise and can help todeliver greater profitability. For such reasons, logistics simply must have itsplace on the boardroom agenda.

Many of the Far Eastern economies including the ones referred to untilrecently as the emerging tigers have taken a knock, of late. But their growthpotential in the medium to long term is enormous. Section 1 examines thevaried and uneven practice of logistics in Korea, China and Japan.

Section 2 considers methods of improving the supply chain, including thevital role of information technology in supply-chain management.

Information technology in the shape of the Internet also featuresprominently in Section 3, which examines new logistics in the retail industry.

The section highlights how logistics is affected by developments such as homeshopping, virtual shopping malls and armchair banking.

Finally, attention turns in Section 4 to more general applications of theInternet in the logistics field. This section includes an article whichdemonstrates how great is the opportunity which the Internet provides toreengineer both the supply and demand side of knowledge logistics or, putmore simply, publishing.

The McKinsey research concludes that doing business in a world of plentifuland cheap interactions will require new skills and new ways of thinking. Thosewho anticipate and understand the fundamental nature of the changes andreshape their business models will be best placed to exploit the opportunities.As in all major economic shifts, the successful innovators will be those thatdevelop the best understanding of the underlying changes, and act on it.

I hope that this issue of IJPDLMwill help you to achieve that end.

David PollittGuest Edi tor

International Journal of PhysicalDistribution & Logistics

Management, Vol. 28 No. 3, 1998,

p. 167. MCB University Press,0960-0035


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ViewpointGetting logistics on to the boardroom agendaOne of the most common complaints of logistics managers who try to get thingsdone is that no one else cares. They want to introduce new information systems,review transport arrangements, redesign packaging or further automate thewarehouse but no one seems to have the time or inclination to listen. Here,

Abby Day, writer and consultant in strategy, marketing and informationmanagement, explains why senior management support, particularly boardlevel support, is so important.

Logistics is all-encompassing throughout the organization. It includeseverything from the moment a product or service needs to be made, through toincoming raw materials management, production, finished goods storage,delivery to the customer and after-sales service. Indeed, the most commondefinition of logistics reflects this: a time-based activity concerned with theprofitable movement of information and materials into/through the

organization and out to the customer. Logistics spans everyones territory,although the accountabilities and responsibilities are not so clear. It is bestconsidered as an activity rather than a function.

Senior management support is needed for another reason: logistics is theessence of the organizations relationship with the customer the revenuegenerator. This is where the money comes from; it is the reason for being inbusiness. The marketing people have told the customer about the product andits benefits, and the promise is about to be delivered. It is what Jan Carlson atSAS describes as the moment of truth. Will the customer receive the product

or experience the service in the way he has been led to expect? Will thecompany make good its promise? Only the way logistics responds willdetermine this it makes or breaks the customer relationship. Even if theproduct is faulty, logistics will be held to account: was it a problem ofcomponent parts? Was it damaged in delivery? Was it past its sell-by date?

So, logistics touches every part of the organization and it fulfills themarketing promise. But there is one other reason for getting logistics on to theboardroom agenda profitability. Logistics costs, as a percentage of salesrevenue, vary widely depending on how you account for them whether youinclude all costs (even manufacturing), how you account for inventory of bothraw materials and finished goods, how overheads are determined. However onegoes about it, one cannot avoid the fact that they account for much, anythingfrom 10 to 70 percent depending on how they are added up. Therefore, anythingthat adds to or subtracts from the total has to be important, e.g. if packaging isredesigned to allow one more box per pallet, the difference would beconsiderable.

Day suggests that the view that managers are resistant to change is untrue.

It is not the change they resist, rather it is how change happens. When newinitiatives or proposals are not adopted it is usually because something has

International Journal of PhysicalDistribution & LogisticsManagement, Vol. 28 No. 3, 1998,

pp. 168-169. MCB UniversityPress, 0960-0035


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gone wrong in the process. No director is going to refuse to consider a great ideathat will make the company profitable on the grounds of resisting change.Logistics managers need to make senior managers care. This meansunderstanding the current status and the impact that the proposed changes willhave. Often, directors are only interested in a few issues (customers,competitors, costs) and developments in logistics should be seen in these terms.How, for example, will a new transport system improve customer relationships?Communication is important too: senior management will not be impressedwith jargon; keep it simple. It is also important to remember that change and

innovation involves risk. The goal is to minimize that risk in the eyes ofmanagement.

To sum up. You need the right people on your side: who are the decisionmakers? Who influences them? Make them part of your network. Devise astrategy to include those who are not already included and to nurture those whoare. Consider the key issues facing the board and note how logistics can respondto them. Ensure that proposals offer a strategic view that accounts for the waylogistics touches the wider organization. Consider how the project can be easedinto current operations and withdrawn if it does not work. Seek to reduce riskin terms of time, money and personal credibility. Finally, do not be afraid to giveup if all else fails. There is a fine line between conviction and obsession; thesuccess of all political ventures rests on timing.


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SECTION 1

Far-East focus

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 171-179.MCB University Press, 0960-0035


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Filling thelogistics gaps

in China

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Filling the logistics gaps inChina

Chinas unprecedented economic growth has strained its logistics infrastructureto the limit. The simple movement of goods is challenged by insufficient goodhighways, antiquated roads and ports, overstressed civil aviation, and thecountry suffers from an underdeveloped telecommunications network.

Transport and warehousing capacity has not kept up with the growth inconsumer demand, making it increasingly difficult for manufacturers andmarketers in China to get their products quickly, safely and reliably tocustomers. One industry estimate calls for more than $230 billion to be spent onbasic infrastructure investment over the next five years for the current level ofeconomic growth to be sustained.

The logistical challenge has been generally overlooked until recently.However, unless the problems are tackled, they could fundamentally block thesuccess of most large-scale investments in China. For companies able to fill the

logistics gaps the growth opportunities are enormous, according to LaurenceAlberts and Hugh Randall, of Mercer Management Consulting, and Guy Ashby,of Inchcape China Logistics.

Up until 20 years ago, manufacturing, distribution and commerce in Chinawere dominated by state-controlled production planning. In the late-1970s, thecountry launched a reform program that opened the doors for some elements ofthe supply chain to non-state and foreign enterprises. In 1992, this reformaccelerated under the guidance of the late Deng Xiao Ping: investments becamemore longer term, and shifted toward more capital-intensive projects involving

technology transfer and infrastructure improvement.But although some privatization of the economy has now occurred, logistics

remain largely state-controlled; for example, 90 percent of transport andwarehousing is still in the hands of state bodies. Wholesaling is undertaken byboth state and domestic private enterprises, and retailing is served principallyby state and collective stores, although a limited amount of foreign retailing hasrecently been introduced.

Despite some advances and reforms, several key issues affecting Chinaslogistics remain:

Participation of foreign distribution, warehousing and wholesalingproviders is still restricted, and allocation of capital to the warehousingsector remains a low priority.

Lack of coordination between the central and provincial governmentscontinues to be a problem, especially in seeking approvals.

The need for multiple approvals for most activities is still the norm.

As essential commercial legislation continues to develop and evolve,the importance of personal and business relationships remainsparamount.


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In such an environment of burgeoning demand, inadequate infrastructure andpredominantly state-controlled logistics resources, multinational firmsoperating in China face a number of barriers to logistics success. Limitedinfrastructure poses one key challenge: railway and quality trucking capacityare limited; waterway and coastal shipping links are not yet fully developed;and air links remain limited and expensive. Chinas sheer scale in itself presentsa formidable barrier the country has 350 cities with more than 200,000 people,with many more to be built over the next decade.

Legal and bureaucratic hurdles abound: navigating through the Chinese

bureaucracy and its licensing and approval procedures remains a difficult andtime-consuming task, complicated by rapidly changing rules. The time andresources needed to train staff to world-class quality methods addssignificantly to costs. Finally, understanding the Chinese culture poses one ofthe most perplexing barriers for many foreign managers. Developing a networkof guanxi, or relationships, is usually essential to penetrate bureaucraticwalls. Establishing and maintaining credibility is especially important asmistakes, especially those committed by foreigners, are not quickly forgotten.

Despite these barriers, China has a desperate and growing need for efficient,

reliable, high-quality logistics providers operating on a national level. Abroader and higher level of logistics-service performance is becoming ofincreasing importance; quality and value provided in transport andwarehousing are receiving greater attention.

The majority of foreign-owned plants are currently using non-integratedlocal systems for handling their distribution. However, a limited number offoreign service providers have been allowed to work with operators of localwarehouses and to commit some funding and technology to overcome currentlimitations.

Multinational corporations investing in China are often frustrated by thecountrys underdeveloped logistics capabilities. But for companies with atolerance for risk, logistics-improvement opportunities in China represent anenormous opportunity. While future economic progress is unlikely to besmooth, particularly following the death of Deng Xiao Ping, it is neverthelessexpected to strengthen overall. Living standards will continue to improve incoastal regions while accelerating inland; urbanization will also increasefurther.

Capital investment in infrastructure is likely to be outpaced by demand,despite the governments aggressive plans. As consumer demand acceleratesand becomes more sophisticated, requiring wider product ranges, higherquality and better service, the demand for improved logistics capacity andcapability will continue to rise.

In China, where economic growth has strained the logistics infrastructure tobreaking point, those foreign companies who can develop the means to deliverthe goods stand to gain substantial competitive advantage, enabling them togenerate real growth from this huge market. A successful growth strategy inChina will require understanding of current realities and the vision to help buildthe logistics infrastructure of the future.


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Braun muscles in on theChinese market

A company which has been manufacturing shavers in China for four years stillimports all the key components from Europe. Even most of the display boxesare shipped half way round the world to the Chinese plant. Now the firm isincreasing efforts to find local sources of supply.

Braun Electric (Shanghai) is a wholly-owned subsidiary of Braun, theGerman manufacturer of small electrical appliances. The electric shaver isBrauns core business, accounting for some 40 percent of sales and a vital shareof the companys profit.

More than $10 million has been invested in Braun Electric (Shanghai), whichtoday employs around 350 people. It produces three types of shaver, in morethan 20 different sub-types. The plant manufactures some 5,000 shavers a day,of which 30 percent are sold in China and the rest exported. Japan, Hong Kong,

Singapore and other Asian markets are served directly from Shanghai.Braun Electric (Shanghai) shavers use a minimum of 50 and a maximum of141 individual components and materials. The company buys most of theelectronic, metal and miscellaneous parts from its German headquarters, butthe plastic components are produced within the company.

It buys printed-circuit boards from Malaysia, motors and rechargeable cellsfrom Japan and most of its plastic materials from German and US chemicalmanufacturers in Hong Kong and Japan. Some electronic components resistors, capacitors and diodes are bought locally in China, from Sino-foreign

joint ventures and Chinese state-owned enterprises.Only 30 percent of the parts and materials used for production in China are

sourced in China. The company acknowledges that this figure is far too small,and wants to increase it step by step. Eventually, all resistors, capacitors, powercords, plastic and display material will be purchased locally. But key parts willcontinue to be shipped from Germany, where Braun headquarters investsheavily in new-technology development and testing.

The main advantages of greater local sourcing are:

(1) Just-in-time deliver y. Deliveries from Germany take up to three months toarrive. This makes the planning system sluggish and means that BraunElectric (Shanghai) cannot react to orders at short notice. Large stocks ofdisplay boxes and plastic raw material have to be kept in Shanghaiwarehouses. This creates overhead costs that increase total productioncosts.

This is a prcis of an article entitled Local sourcing in China: the case of Braun Electric

(Shanghai) Co. Ltd, which was originally published inAsia Pacifi c Business Review, Vol. 3 No. 3,1997. The author was Stefan H. Kaiser, of Durham University, UK.


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(2) Lower production costs. The company pays import duties on 30 percentof the goods it imports. Almost 28 percent of the total direct cost of theproduct is made up of import duties. Local sourcing could reduce this,and cut parts, materials and transport costs.

(3) Improved deli ver y and easier communicati on. It is in the nature oftransportation that goods sometimes get damaged and qualitystandards are not met. In such cases, there may be considerable benefitsif the supplier of materials is close to the manufacturing plant. Inaddition, large international suppliers of materials and parts often do notappreciate the needs of their customers. Braun Electric (Shanghai)recognizes that local suppliers, often solely serving the needs of theirlocal client, can develop a closer and more personal relationship withtheir customer.

(4) Foreign-exchange savings. Local sourcing helps to save foreign exchange.This is particularly important for Braun Electric (Shanghai), sinceachieving increased sales to the domestic market will be difficult as longas a balance has to be achieved on its foreign-exchange transactions.

However, the company has encountered problems in its attempts to increaselocal sourcing of parts and materials. First, local Chinese supplies do not alwaysmeet the companys high quality requirements. This is illustrated by the firmsattempts to buy display boxes from a state-owned company based in Shanghai.One batch would be satisfactory and the next would not. Braun Electric(Shanghai) has found that Chinese consumers pay more attention to price thanquality packaging. It therefore uses locally-supplied boxes (provided they are ofacceptable quality) for the Chinese market, and imports boxes from Germany

for shavers for export. But as Chinese customers grow more sophisticated, they,too, may come to find the boxes made in China to be unacceptable.If the purchasing manager successfully finds a potential local supplier of

parts or material, a sample is sent to Brauns research and developmentdepartment, in Germany, for testing. Following R&D approval, at least onesmall batch is sent for use in production in Germany. Only when the purchasingmanager gets the go-ahead from the manufacturing department in Germanycan he start to source the component locally.

A second problem of local sourcing in China is unreliable deliveries. The

managing director, Alfred Kunz, says that Chinese suppliers lack the disciplineto deliver on time. The worst offenders are state-owned enterprises. Their mainduty is not to make a direct profit, but to ensure maximum growth.

Braun Electric (Shanghai) has adopted various strategies to improve thequality and reliability of components and materials bought in China andto identify possible alternative sources of supply.

The Shanghai area of China does haveYellow Pageswhich can help in thesearch for suppliers, but the rest of China does not. General newspapers andspecific commercial and engineering magazines can also provide usefulinformation.


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The Braun Electric (Shanghai) purchasing manager has been working in theelectronic-component sourcing business for ten years, and is able to draw on hisexperience in this field. In particular, he attends exhibitions in Shanghai whichmight attract potential suppliers.

The firm has no formal collaboration with a local Chinese supplier. However,collaboration on an informal level does exist. The company gives materialsuppliers more than one chance to satisfy its requirements, and providesdetailed reasons for its dissatisfaction. This often involves sending experts tothe suppliers production sites. However, only limited direct training of local

suppliers takes place, because this is time-consuming.Braun Electric (Shanghai) can see potential benefits from entering more

formal collaboration with Chinese suppliers in future. This approach willgradually improve the quality of their products and delivery reliability. Equally,the number of Western suppliers following their clients to their production sitesis likely to increase. These trends will ease the ability of manufacturers to uselocal sources. Western multinationals manufacturing in China will increasinglybe able to cut their production costs and increase flexibility in planning andmanufacturing essential if they are to adjust production to the varyingdemands of the international market.


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US firm slices food costs inJapan

Mysterious, archaic, stubborn and anachronistic are just some of the adjectivesused in the West to describe the Japanese distribution system, in which a fewtrading companies and exclusive distributors play a gatekeeping role, often at

the expense of Western imports.But things are changing and with the new outlook have come growing

opportunities for Western firms. Mitsukoshi, the most prestigious of Japansold-time department stores, now buys clothing directly from abroad. The Isetandepartment store has started discount branches, offers catalog sales and buysdirectly from abroad. And the rising practice of buying goods over the Internetis also putting pressure on traditional Japanese suppliers.

Personal computer manufacturers like Dell and Gateway 2000 haveincreased their sales in Japan through direct sales to consumers. By producingonly on receipt of orders, they have eliminated inventory at the productionstage. As a result, they can offer products more cheaply. Japanese computermanufacturers have had to lower their own prices in response. Simple and shortdistribution channels are now a must for personal-computer sales in Japan.

The countrys largest home-electronics maker has also reduced its list ofaffiliated wholesalers by 75 percent over the last ten years, and similarconsolidation is under way in cosmetics retailing. Some 30 percent of Japaneseretailers now purchase from fewer firms than they did five years ago, and this

percentage is rising among supermarkets and convenience stores. Wholesalersare being replaced by manufacturers as the direct source of supply. The foodindustry illustrates the changes.

Most imported food traditionally has been brought into Japan through majortrading companies or specialty importers. It has then been sold to wholesalerswho, in turn, have sold it to secondary wholesalers or direct to major retailbuyers. Food manufacturers have offered incentives to retailers including, forexample, the practice of returning unsold products to the manufacturer. As aresult, retailers have been less motivated to innovate, monitor customer needs

or manage product ranges effectively. Rebates have been offered for activitiesthat US retailers would deem to be part of a normal business relationship.

These practices have been criticized by foreign importers as a major deterrentto entering the Japanese market, because they are costly to manage, introduceuncertainties into business calculations and cause difficulties in evaluatingprofitability and marketing tactics.

This is a prcis of two articles which originally appeared inFocus Japan, Vol. 24 Nos 7-8, 1997.

They were Ever-shorter channels: wholesale industry restructures and Fresh ideas fordistribution: Dole Japan transforms shopping and processing.


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However, major Japanese retail chains are now under increasing pressurefrom consumers who want food products at the same low price and high qualitythroughout the country. In response, Dole Japan Ltd, an affiliate of the US DoleFood Company, is streamlining its processing and distribution network.Anticipating a move in Japan towards US-style distribution, the company issetting up a national network of food-processing centers. It has also become thefirst foreign-affiliated firm to sign contracts for fresh vegetables with Japanesefarmers, who welcome the new ability to plan ahead and avoid risky marketfluctuations. By next year, Dole Japan will offer 30 items, from curry and stew

to stir-fry vegetables.Dole is also reducing the distribution costs of imported fruit and vegetables.

Under the traditional system, it costs about 1,000 yen to ship a 13kg box ofbananas to a Japanese port. Unloading the ship and clearing customs addsanother 200 yen. It then costs 100 yen to ship the bananas to a ripening facility,where ripening and other processing add a further 400 yen. Shipping to marketor other retailers costs another 100 yen. In total, according to Dole Japan, thecost of delivering bananas to a supermarket is between 1,750 and 1,900 yen abox.

Dole Japan eliminates first-stage trucking by locating banana-ripeningplants next to ports. In addition, the company has cut costs at the ripening stageto 200 yen per box by palletizing shipments and introducing the latest ripeningequipment from the USA. Combined, these measures cut the cost of finaldelivery to 1,500 yen a box.

The consumer movement in the USA and Western Europe was slow to takehold in Japan. The Japanese culture has included a willingness to shelter oneanother from outsiders and protect traditional ways. Quality and service have

been more important than price.Over the last three years, however, the Japanese have become more priceconscious. The reasons include reduced or less-certain incomes as overtime payhas fallen, and less lending by the banks. In addition, exposure to overseasmarkets and prices has taught the Japanese consumer that lower prices do notalways mean lower quality.

Japanese consumers still claim to make no compromise on quality. But inother respects, they appear to be growing increasingly like their Westerncounterparts. The days when Japanese consumers would pay three times as

much for domestic than imported rice, simply because it was seen to be in thenational good, are over. The opportunities for Western firms are increasing bythe day.


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SECTION 2

Supply-chainlogistics



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The perils of supply-chainlogistics

Many firms have responded to globalization by developing international supplychains. At the same time, many have also tried to implement lean-productionsystems: just-in-time (JIT) delivery, low inventories, zero defects, design for

manufacturing (DFM), flexible production in small batches and close technicalcooperation with suppliers. While many commentators have championed bothglobalization and lean production, there has been little investigation into theinteraction of the two, claims David Levy, assistant professor in the departmentof management at the University of Massachusetts, Boston, writing in theSloanManagement Review, Winter, 1997. Are the strategies compatible?, he asks.

Of course, managers are aware of the logistical problems involved inoperating international value chains long lead times, expensive air freight,high inventory, poor sales forecasting accuracy and significant delays in

resolving technical problems. Yet Levys research suggests that managersunderestimate the costs involved in lean production because they tend to planfor a relatively stable supply chain and dont fully appreciate the complex wayin which various disruptions affect a geographically dispersed chain.

JIT is a good example. Some Japanese companies require suppliers to makeseveral deliveries a day, each scheduled to arrive within a two-hour period; thisis clearly impossible if components are imported by sea. Freight connectionsare also less frequent to remote locations, and numerous shipments of small

quantities face high shipping rates. In addition, goods are subject tounpredictable delays because of bad weather, customs and documentationbureaucracy, and occasional strikes. As distance increases shipping times,higher inventories are needed to fill the pipeline. Many US companies haveattempted to implement JIT delivery from warehouses located near theirfactories, but this is not the same as true JIT delivery direct from the factory.

Flexible manufacturing, the ability to customize a product, to produce toorder, or to shift quickly from production of one model to another on the sameline, also requires rapid delivery from suppliers. The ability to produce a wide

variety of products in smaller volumes reduces economies of scale anddiminishes the incentive for global production too. Lean-production methodsalso require close coordination with suppliers. While developments in IT haveimproved global communications, many managers and engineers still preferface-to-face contact.

Levys research focuses on printed circuit board (PCB) production at acompany called CCT. CCT was buying pre-specified fabricated boards fromexternal suppliers and assembling them in its own facilities. Yet CCTs globalsourcing strategy for finished computer systems made it almost impossible toimplement JIT delivery to the country of final sale. CCT usually shipped


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products from its three factories (in California, Ireland and Singapore) by seabecause of the high cost of delivery by air a policy which resulted inoccasional severe delays. Despite using sea freight as the primary mode oftransportation for finished systems, CCT often felt compelled to use air freightbecause of production delays and unexpected fluctuations in demand. This putup the cost to an average of about 10 percent of cost of goods sold. To put this inperspective, production costs in Singapore were estimated to be 7 to 10 percentless than in California. The cost of freight alone therefore wiped out thelocations cost advantage.

In the absence of true JIT manufacturing, accurate sales forecasting isimportant; it keeps inventories low without risking a loss of sales due to lack ofproduct. Unfortunately for CCT, the distance was causing problems here aswell. First, because of the long shipping time from its Singapore factory, CCTneeded to arrange production schedules and orders one or two months earlierthan similar schedules for the California operation. It therefore based theschedules and orders for the Singapore factory on sales forecasts further intothe future, thus reducing the likelihood of great accuracy. Distance alsoimpaired communications the accuracy of sales forecasts over the sameperiod was lower for countries remote from the corporate marketing andproduction scheduling departments in California.

Levy also maintains that the geographic dispersion of the supply chainreduces the effectiveness of DFM. The complex trade-offs involved in DFMmeant that a significant amount of face-to-face communication was important.An incident at CCTs plant in Singapore illustrates the danger of notcoordinating at the design stage. CCT had developed DFM guidelines to assurethat boards could be fabricated by at least two of CCTs PCB suppliers and then

assembled at any CCT plant. The Singapore plant sometimes strayed fromthese guidelines, and CCT managers attributed this to the infrequent personalcontact they had with the plant. In one case, the Singapore factory used PCBswith greater warp than the corporate guidelines allowed. When CCT decided toproduce the system in the USA, the boards could not be assembled on theCalifornian factorys existing equipment. The boards had to be redesigned at anestimated cost of $500,000. Distance also appeared to impair CCTs ability toresolve technical problems with suppliers differences in language, culture andtime zone caused delay.

Its a pretty gloomy picture. However, with regard to PCBs, CCT did achievesome success in implementing DFM and in achieving very high quality levels two important aspects of lean production which helped to stabilize the supplychain. It meant significant investments in travel, communications andtechnology during the early stages of new-product introduction, includingseveral lengthy trips abroad when each new PCB was introduced. But theinvestment appeared to pay off later when the product was in volumeproduction because the number of engineering change orders dropped anddefective products were reduced. Indeed, these achievements helped with theearly transfer of production to offshore plants.


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Before lean production, CCT had traditionally introduced new products in itsCalifornian plant to iron out production and quality problems. Defect levels onPCBs were relatively high during the first few months of production, and thecompany typically issued one or two change orders a month during the firstyear of production. CCT managers considered these to be very difficult toimplement at overseas plants, so the company waited a year or more for aproduct to stabilize before transferring production overseas. CCTs success withDFM helped to reduce the number of change orders on PCBs to two or threeduring the products lifetime (typically about two years). It was also moving

toward a target quality level of less than 400 defects per million PCBs.Managers soon felt they could introduce new products directly into overseasplants, avoiding the costs of transferring production in the middle of a productslife, and freeing up the US plant to concentrate on high-end products.

Levy asserts that managers must be aware of underestimating the costs ofoperating an international supply chain. They tend to plan optimistically for astable chain and do not anticipate the frequent disruptions. An internationalsupply chain is a dynamic system in which disruptions owing to qualityproblems, delayed deliveries, engineering change orders and poor salesforecasts interact with long lead times to create substantial costs.


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Improving the supply chainEuropean electronics industries have become leaner and fitter over the past fewyears and seen significant revenue growth. However, few companies shouldtake comfort in their performance because the industrys improvement was stillinsufficient to make them fully competitive with their US counterparts.

The latest annual survey of the industryStudy of Inventory Performance in

the Electr onics Industr y, conducted by consulting firm Pittiglio Rabin Todd &McGrath (PRTM), highlights that although inventory performance in theEuropean electronics industries has improved more than in the USA and Japan,this comes at the expense of gross margins and still leaves them growing slowerthan US companies.

The study summarizes the performance of more than 300 publicly held,technology based companies over the past five years by region Europe, theUSA and Japan and by six industry segments: telecommunications,computers, aerospace and defence, industrial equipment, components anddiversified. To support its inventory analysis, it also considers revenue growthand gross margin as indicators of general business health. Both indicators arehigher in Europe than Japan as it emerges from recession, but still lag behind abuoyant USA.

Therefore, while European companies in the study have grown by almost 19percent, this is compared to US companies 55 percent growth and Japans 2percent shrinkage. Similarly, several waves of restructuring and productivityimprovement have helped US companies maintain their gross margins, while

those in Europe and Japan declined. The median US company now enjoys grossmargins over 10 percent higher than its European and Japanese counterparts.

Insufficient improvementIn some specific inventory performance areas, the report found that Europeancompanies had outperformed both their US and Japanese rivals. For instance,European companies reduced their inventory days of supply, while those inother regions increased. They also reduced their cash-to-cash cycle time (ameasure of effective management of working capital) by five days, while the

figures for the USA and Japan remained constant. Yet, despite theseimprovements, Europes smaller and more fragmented geographic marketscontinue to create challenges in inventory management which leaves Europetrailing both the USA and Japan in all key metrics other than asset turns.

European industr y findings by segment

Computer companies retained their strong leadership in inventory-managementperformance. They held considerably fewer days supply of inventory thancounterparts in other sectors. This achievement was made in the face of asignificant erosion in unit margins arising from abundant worldwide production


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capacity, and slower than expected demand toward the end of the year, whichforced manufacturers to cut prices and concentrate their product ranges.Aerospace and defense companies significantly improved their performance,

continuing a transition to increased accountability from customers. Thetraditionally poorest inventory performer is rapidly catching other segmentsand returning to rapid revenue growth.

Stable inventory performance among telecommunications companiesconcealed an underlying struggle within the European telecomms market.Explosive growth for equipment providers arising from continued

deregulation, companies increasing global presence, and popularization ofmobile telephony has placed an enormous pressure on the total supply chain.This was particularly visible with respect to widespread shortages in severalkey components, which restricted equipment manufacturers ability to balanceeffectively supply and demand associated inventories.

Steady inventory performance has been maintained within the industrialequipment sector, as companies strengthen revenue growth to 8.7 percent, at theexpense of gross margins which drop below 30 percent. Inventory turns andcash-to-cash cycle time remained static.

For component companies inventory was brought back into line after 1994,when volatile demand in the telecomms and personal-computer segmentscaused performance to dip. Companies used their low reliance on memoryproducts to avoid the late 1995 slump in other regions. Revenue growth ratesdecreased but remained over 10 percent, while gross margins remained above25 percent. Inventory turns increased from 3.7 to 4.7 and cash-to-cash cycle timereduced by 27 days to 108 days.

The diversified segment showed the greatest improvement during the studyperiod, and in all metrics measured. The US companies still performed at a

higher level but their advantage is diminishing.European companies must now, more than ever, transform their operations

if they are to remain competitive, says PRTM director Gordon Stewart. Ourexperience working with European companies suggests they can join theleaders in their industries worldwide.

New forum for changeHowever, the need for companies to transform their supply-chain performanceis not restricted to the electronics industry. Nor is the fact that, to make effective

improvements, companies need to use hard data to evaluate and control theirbusiness processes, and use regular global benchmarking to establish anystrategic and operating performance gaps.

The recent European launch, by PRTM, of the supply-chain council (SCC),and its supply-chain operations reference model (SCOR), may now provideEuropean companies, across all industrial sectors, with a way to establish thiscrucial information and learn best practice.

Originally formed in April 1996 in the USA, the SCC was initially aconsortium of 70 major world-class businesses. During last year the SCC hasdeveloped a framework, SCOR the first cross-industry framework for


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evaluating and improving enterprise-wide supply-chain management. Since thelaunch, in collaboration with PRTM and Advanced Manufacturing Research(AMR), of SCOR in the USA, 140 more companies have joined the SCC.

Following its official European launch, it is expected that around 70 Europeancompanies from manufacturers, logistic/distribution service providers andsoftware-solutions suppliers will become members of the European arm of thisworldwide forum. According to PRTM, the companies that are participating,including Rolls-Royce, GPT, Apple Computer, Nokia, Glaxo, Rank Xerox, TNT,Guinness and Zeneca, are getting involved in the SCC because they want to

understand and use SCOR in global supply chain applications.

Transforming through common evaluationThe importance of supply-chain optimization has long been understood bysuccessful, well-managed companies, explains Stewart. But until now, thesheer diversity of both third-party distributors, providers of logistics andservice, and the complexity of the supply-chain process itself, have all beenobstacles to companies agreeing on a common supply-chain model to allow anysort of meaningful comparison.

The SCOR model can now be used to address this issue, as it has beendesigned to enable companies to communicate, compare and learn fromcompetitors and companies both within and outside their industry. Its keycomponents are:

Standard descriptions of the process elements that make up complexmanagement processes.

Benchmark metrics used to compare process performance to objective,

external points of reference. Descriptions of best in class management practices.

Mapping of software products that enable best practices.

By effectively bringing together terminology, major supply-chain processes andperformance indicators, the model provides manufacturers, suppliers,distributors and retailers in any area of industry with the necessary guidance toevaluate the relative effectiveness of their supply chain. It will also assist in theidentification, targeting and measuring of specific process improvements. In

this way, claim PRTM, it presents manufacturers and their supply-chainvendors with the means to improve performance to world-class levels.

Crucially, major supply chain software vendors, such as Oracle and SAP,have agreed to adopt SCOR as the basis for future software development.

SCOR is a major accomplishment for industry, said SCC advisory-boardmember Richard Beck, director of supply chain reengineering at CompaqComputer Corp. Dozens of manufacturers have pooled their real-world supplychain experiences to build a flexible framework and common language that canhave a dramatic impact on companies ability to improve the supply chain, bothinternally and among supply chain partners.


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IT and supply-chainmanagement

Many global manufacturing companies are involved in implementing newinformation systems and technology for supply-chain management. Initialapplications include financial systems, production planning, distribution and

inventory management systems. Most will take four-to-five years to implementand cost millions of dollars in direct expenses. When asked about the impact ofthese projects, managers usually say their companies will be more customer-responsive, more cost-effective and better able to share consistent and accurateinformation across functions. Although this long-term view of investments in ISand IT sounds reasonable, managers need to ask whether these approaches areappropriate says Donald Marchand, professor of information management andstrategy at IMD in Lausanne, Switzerland.

Most companies are beginning to face hyper-competition, where firms

position themselves against one another in an aggressive fashion, as opposed tomoderate competition where firms are positioned around each other. Withmoderate competition, barriers are used to limit new entrants and sustainableadvantage is possible so long as industry leaders cooperate to restraincompetitive behavior. However, hyper-competitive firms (where customerloyalty is challenged continuously and where organizations must transformtheir capabilities and processes to match or exceed those of competitors) areconstantly seeking to disrupt the competitive advantage of industry leadersand create new opportunities.

In hyper-competitive markets, the pursuit of four-to-five-year reengineeringapplication software and database projects is questionable, as firms arecontinually changing their strategic capabilities in small 6-12-monthincrements; short-term changes which permit new bases for profitability andgrowth. T hese modular and flexible changes in processes, informationmanagement and application systems not only allow more rapid and flexibleimplementations, but also enable firms to undo or unlearn approacheswhich no longer offer competitive potential.

The operational focus of supply-chain management projects may also be atissue in moderate versus hyper-competitive markets. In the former, investing inupstream projects (new financial systems, production planning or inventorymanagement systems) may offer substantial benefits, including consistentinformation sharing and improved cross-functional cooperation. In hyper-competitive conditions, the focus needs to be on process and informationsystems with high return-on-investment and added customer value. Theoperational focus will shift to the demand side and emphasize customerinteraction, account management, after-sales service and order processing. Tosustain competitive advantage in hyper-competition, a firm may seek to


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eliminate the need for detailed management reporting and controls, or marketforecasts and production plans. Instead, a firm can substitute real-time, onlineproduct movement information from its dealers and retailers or simplifycontrols and management reporting by delayering the organization andempowering employees to improve process quality continuously.

In addition to selecting the right processes and information flows toautomate, managers must also consider the impact of the ways in which theyare automated. The trade-offs and choices related to information management,IS and IT are different under conditions of moderate versus hyper-competition.

In moderate competition the focus is usually on achieving consistent datadefinitions among disparate functions and removing unnecessary costs ofpaper handling, inefficient software applications and labor. Supply-chainmanagement improvements are directed at making the supply-chainrelationship faster and more consistent, and lowering the cost of workingcapital by using inventory as the buffer of the last rather than the first resort. Inhyper-competition, the focus is on creating value primarily by improvinginformation use and quality in customer data, after-sales service and orderfulfillment, and only secondarily by defining more consistent information forupstream processes.

In no other area of supply-chain management has there been such dramaticshifts during the 1990s as in the domain of software applications. The changeshave occurred on two levels. First, over the last ten years, package softwareofferings for manufacturing companies have evolved as a major growth market.Firms now offer packaged software on mainframe or more distributedplatforms such as the AS 400. Also, there has been significant growth in newfirms which offer software packages on client/server platforms with versions of

the UNIX operating system. Second, for most of the 1990s and earlier decadesof predominantly mainframe-based computing, the dominant paradigm forimplementing software was based on the waterfall approach, where acomplex linear process was launched to specify client needs followed by thedevelopment of applications software over four-to-five years. Such projectsoften led to very high failure rates of 80 percent or more.

However, over the last five years this paradigm has begun to be challengedby companies which provide more adaptable software on lower-cost platforms,and/or by companies whose speciality is rapid application software

implementation on a fixed-cost, fixed-time basis. The latter companies usuallyemphasize the customer value side of the supply chain and focus onimplementing systems in 6-12 months. They also attempt to share the risks oftime and cost overruns with their clients. Clearly there are significantalternatives for manufacturing companies. General managers in hyper-competitive markets are no longer restricted to software application changes intheir supply chain which are not consistent with their competitive needs forrapid, high quality and lower-cost information systems.

Most large manufacturing companies are trying to leverage their supplychains on a global, regional and local basis simultaneously. A firm can enjoy the


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cost reduction and value-creating advantages of consistent computer platforms,operating systems, etc., and still tailor software application packages forlocalized content where necessary. At the same time that these firms havemoved to client/server technology and more robust voice, data and videonetworks, they have also instituted standards for IT infrastructure. Thus, theyhave sought to globalize infrastructure and lower costs as a percentage of saleswhile implementing applications software rapidly in their supply chainsregionally and locally.

Many leading manufacturers are committing millions of dollars to IS and IT

projects whose benefits will take four-to-five years to reap, if at all. More thanone large manufacturing company in Europe has committed 200-300 milliondollars on integrated, supply-chain management projects whose implementationrisks are high and whose business paybacks are perhaps low for the hyper-competitive markets of the late 1990s. Fast, flexible and modular softwaresystems and databases will differentiate manufacturing companies over thenext two-to-four years in hyper-competitive markets. Those companies whoenter into IS and IT projects with the wrong competitive assumptions may findthat their approach has become a competitive disadvantage. They will havecreated significant business risks at precisely the time when their competitorsare creating value with customers through rapid, focussed and continuousimprovements in supply-chain core processes and information flows.


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The bullwhip effect in supplychains

There is a well-known game in which students, managers and analysts play theroles of customers, retailers, wholesalers and suppliers of a popular brand ofbeer.

In the beer game the participants cannot communicate with one anotherand must make order decisions based only on orders from the next downstreamplayer in the supply chain.

The ordering patterns share a common, recurring theme: the variabilities ofan upstream site are always greater than those of the downstream site.

It is a simple, yet powerful illustration of the bullwhip effect, or, as it isknown in some industries, the whiplash or the whipsaw effect. Distortedinformation from one end of a supply chain to the other leads to demand ordervariability. These are amplified as they move up the supply chain.

It is a problem that has become familiar to many firms examining orderpatterns. At Procter & Gamble, for example, logistics executives looked at orderpatterns for a best-selling product, Pampers. They were astonished by thedegree of variability in distributors orders but when they looked at theircompanys orders of materials to suppliers, the swings were even greater.

The factors causing these phenomena have been investigated by Hau L. Lee,V. Padmanabhan, and Seungjin Whang. Writing inSloan Management Review,Spring 1997, they acknowledge that amplified order variability in the beer

game model might be attributed to irrational decision making. But they believethis view is false; rather, the bullwhip effect is a consequence of players rationalbehavior within the supply chains infrastructure.

In view of this, companies wanting to control the bullwhip effect have tofocus on modifying the chains infrastructure and related processes rather thanthe behavior of decision makers. In other words, the problem lies with thesystem.

The writers see four major causes of the bullwhip effect. Understandingthem helps managers to design and develop strategies to counter it.

Demand forecast updatingEvery company in a supply chain usually does product forecasting, often basedon the order history from the companys immediate customers. In the beergame, when a downstream operation places an order, the upstream managerreadjusts his or her demand forecasts and, in turn, the order placed with thesuppliers of the upstream operation. This signal processing is a majorcontributor to the bullwhip effect.

As one remedy, demand data at a downstream site could be made available tothe upstream site. Both sites would be able to update forecasts with raw data.


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More radically, the upstream site could control resupply from themselvesdownstream.Another approach, favoured by Apple, involves bypassing the downstream

site. The computer company sells directly to customers without going throughthe reseller and distribution channel. As a result, it can see demand patterns forits products.

Improvements in operational efficiency can also help to reduce the highlyvariable demand due to multiple forecast updates. Just-in-time replenishment istherefore also effective.

Order batchingCompanies often batch or accumulate demands before issuing an order. Insteadof ordering frequently, they do it weekly, biweekly or monthly. This periodicordering amplifies variability and contributes to the bullwhip effect.

The relatively high cost of placing orders and replenishing is one reason thatorder batches are large or order frequencies low. The use of an electronic datainterchange can reduce the cost of paper work in generating an order. Nabiscohas used a computer-assisted system and found that customers order more

frequently as a result.Transportation costs are another factor behind large order batches.

Customers find it economical to order full truckloads of one product eventhough this leads to infrequent replenishments from the supplier. Somemanufacturers are inducing distributors to order assortments of differentproducts. The result is higher order frequency for each product, unchangedfrequency of deliveries to distributors and preserved transportation efficiency.

Another option is the use of third-party logistics companies. By consolidatingloads from multiple suppliers located near each other, a company can realize

full truckload economies without the batches coming from the same source.

Price fluctuationForward buying, items bought in advance of requirements, accounts for 80percent of transactions between manufacturers and distributors in the USgrocery industry. Price fluctuations, the result of special promotions such asdiscounts, encourage this process. Customers purchases do not reflect theirimmediate needs; they buy in bigger quantities and stock up for the future.

When the products price returns to normal, the customer stops buying until

it has depleted its inventory. The buying pattern therefore does not reflect theconsumption pattern, and variation of buying quantities is much bigger thanvariation of consumption rate.

The simplest way to control the bullwhip effect created by this process is tostabilize prices, by reducing both frequency and level of wholesale pricediscounting. A uniform wholesale pricing policy can help. In the US groceryindustry, Procter & Gamble moved to an everyday low price, reducing list pricesby 12 to 24 percent and slashing promotions to trade customers. In 1994, itreported highest profit margins in 21 years and showed increases in marketshare.


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Rationing and shortage gamingWhen product demand exceeds supply, manufacturers often ration the productto customers. The tit-for-tat response from customers is to exaggerate realneeds when they order. Later, when demand cools, orders disappear andcancellations pour in. The effect of this extremely common gaming practice isthat customers orders give the supplier little information about real demand forthe product. The financial consequences in terms, for example, of unnecessarycapacity increases can be severe.

There are several ways to eliminate gaming. Suppliers facing a shortage can

allocate in proportion to past sales records, rather than on orders. They canshare capacity and inventory information and work with customers to placeorders well in advance of the sales season. Finally, the generous return policiesoffered by manufacturers aggravate gaming. Penalties will discourage thepractice.

These four major factors indicate that the bullwhip effect rises from rationaldecision making by members in the supply chain. Companies can counteractthe effect by thoroughly understanding its underlying causes. The choice forcompanies is clear: either let the bullwhip effect paralyze you or find a way to

conquer it.


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Fixing the parts dilemmaIn more than 50 years of making electronic equipment, Tektronix the Oregon,USA-based manufacturer of measurement, color printing and networkingproducts had accumulated approximately 600,000 part specifications,maintained electronically and in paper drawings. Of these, 160,000 wereconsidered active parts used in existing products. However, as with mostcompanies, many of these parts had duplicate or very similar capabilities andwere costing unnecessary time and money in procurement, inventory controland management costs. In addition to monitoring part usage for inventory andmanaging part data for retrieval, the company also recognized the need to builda preferred parts list to optimize its part procurement process.

The objectivesThe company, therefore, embarked on a preferred-parts (preferred-supplier)initiative that included three objectives:

(1) shorten time to market by increasing parts reuse and establishingrelationships with preferred suppliers;

(2) reduce complexity in designs by reducing the number of unique parts innew designs, reducing duplicate part creation and improving quality;and

(3) reduce cost by using preferred suppliers, leveraging volume from fewersuppliers and reducing maintenance costs.

The companys aggressive goal was to have 80 percent of the components usedin new products come from a list of only around 5,000 preferred parts. Toachieve this meant that all existing parts needed to be analyzed to identify theapproximate preferred parts, and to make it easier for a design engineer tolocate existing components, the database had to be searchable by comparabledesign attributes and other data. Tektronix estimated that creating a softwareprogram to accomplish these tasks would take 50 percent of ten engineers timefor 15 months, at a cost of $360,000.

At this point the company had already invested a significant amount of

money in an effort to create a master database for all design parts. Thisrelational database included extensive information on every inventory part,searchable by part number, but it did not have the capability to conduct a metricsearch for the part based on attributes such as temperature, voltage, tolerance,etc.

The solutionHowever, rather than having to write new code internally, Tektronix cameacross CADIS Inc. The then-new company was emerging with a parts-management expert system (CADIS-PMX). Tektronix made the decision to


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short-circuit its internal efforts and partner with CADIS. The result is a systemwhereby PMX acts as the parametric search index to Tektronixs largerrelational database. This approach helped the company accomplish several ofits goals:

The systems built-in legacy process was used to translate data on160,000 active parts into the knowledge-based schema in just a fewmonths.

The intuitive graphical user interface (GUI) made it easy for Tektronix to

establish a list of preferred parts and suppliers, in addition toconsolidating parts data for easy access.

The expert system also enabled Tektronix to develop the custom partsschema engineers sought, so they could search for parts according toattributes.

The largest part of the implementation, two to three months, was spentcapturing legacy data and setting up the knowledge base. The entire processwas complete and operational within six months. This enabled Tektronix to

deploy its preferred-parts program a year sooner than originally expected.Although everyone in the company can view the knowledge base on a read-

only basis via client server and intranet access, its parts-search capability isused mostly by engineers. In particular, the knowledge base is most helpful tonew engineers who are not familiar with the intelligent part-number systemthat Tektronix previously had in place. New engineers can search for parts withwords that describe the attributes they need. The only users who have seemedto have a problem with the new systems GUI are the veteran engineers, who

have most of the part numbers they use embedded in memory. The companyadmits that the older ASCII tools are much faster to use if you already know thepart number. Therefore the use of the GUI technology has required a bit of acultural shift, but the long-run benefits are expected to far outweigh theadoption hurdles.

An advantage with the system is its cross-functional capability to shareinformation. Tektronix purchases scores of parts from National SemiconductorCorp. every year. Since National now has its entire catalog of products indexed

on its Web site, Tektronix can link its knowledge base via a universal resourcelocator (URL) to this Web site to retrieve National parts data instantly. Soinstead of Tektronix having to maintain data sheets and specifications, theynow link to data that are always maintained and always kept current atNational. The company is also gradually loading other URLs into its databaseas other companies make their databases available on the Web.

The resultsSince the August 1994 implementation of the system, with a knowledge base of

160,000 active parts, Tektronix has reduced its inventory of parts to 112,000 a


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net reduction of 48,000 part numbers. This process eliminated more than 30,000duplicate parts, saving the company $8 million in carrying costs alone.Equally important, the company has insured that the problem of duplication

stays solved. An engineer who wants to release a new part is expected toresearch the part through the system. A component engineer will review arequest for a part by conducting a search, denying the request if the searchturns up a match or close match. If the search produces nothing, then theattributes applied to the process define the new part for release. Interestingly,parts reuse and database research serve as factors by which engineers are now

evaluated. This is intended to help engineers focus on the high value items thatwill differentiate a new product.

The company also has a bill of materials review process that checks to seehow well the company is performing in relation to the usage of preferred parts.Tektronixs performance against that check has improved dramatically, movingcloser toward its target of 80 percent. Now, statistics reflecting bill of materialsreview get high-level visibility and have become a part of the monthly reportingprocess.


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Meeting customerrequirements through

technology

Global competition has simultaneously reduced product lifecycles, increased

cost competition and highlighted the need to differentiate products. In response,many companies are placing greater focus on satisfying the needs of individualcustomers and reacting rapidly to market forces. Thus, mass customization, theproduction of highly customized goods at mass-production prices, has becomethe new paradigm spreading across a whole spectrum of manufacturingdisciplines and products.

The resultant process reengineering of design, manufacture, marketing andsales, that is proving a necessity if companies are to meet this goal, has alsohighlighted the potential benefit of applying various technologies in helping to

reduce costs, shorten lead times and improve communication throughout theentire supply chain. According to Charles Carson, of Cincom Systems (UK) Ltd,one such tool is the sales-configuration system. This helps automate the keyprocesses of selling and product configuration.

Traditionally, sales and product configuration are viewed as discretedisciplines performed by salespeople and product engineers respectively. Thesalesperson identifies a customers requirement and then liaises with productengineers and production planners to produce a product configuration andquotation. Unfortunately, this process is both time consuming and error prone,with a high potential for miscommunication of requirements andmisinterpretation of product information. The resultant inefficiency can be verycostly, as research has proved. According to Advanced ManufacturingResearch Inc. (AMR), companies typically lose 2-3 percent of revenue in reworkand penalty costs due to errors in the initial product configuration.

Not only can the successful adoption of sales-configurator systems overcomethese losses, explains Carson, but the subsequent improvement in responsetimes in matching products to requirements allows companies to quote for an

increased volume of business if presales activities are currently a bottleneck.And, by moving from a make to forecast to a configure to order paradigm,massive reductions in inventory costs are generally achievable. Moreover, sales-configurator implementation also provides a unique opportunity to redefinehow a company interacts with its customers and distributors, developing closerrelationships which can be the foundation for repeat business.

Sales configurators can address the problems of miscommunication andmisinterpretation by capturing the configuration rules from the productspecialists and putting them in the hands of sales personnel dealing directly

with the customer. An effective sales configurator will allow the incorporation


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of product-selection criteria associated directly with customer requirements toensure that product options can be selected or excluded based on conditions ofusage.

As with many emerging technologies, product development has evolvedalong a number of different paths, and in this case configuration products canbe typically categorized into one of four general solution methods: features andoptions, rules-based, knowledge-based and constraints and resources (a subsetof knowledge-based).

Each approach has its own strengths and weaknesses, observes Carson.

However, the potential previously attributed to sales configurators would onlyrealistically be achievable by either a knowledge- or constraint-based system, ora hybrid of these two. These apply the technologies of artificial intelligence tothe problem of product configuration. They share many of the samecapabilities, and are more suited to the complex product-configuration needs.

Combined with the progress of configuration technology, not only havedevelopments in network communications and the emergence of highperformance PCs made it easier to move configuration away from back officecentral systems and out to the sales staff and distributors, but nomadic sales

staff now have the ability to produce high quality quotations and graphicaloutput face-to-face with the customer using powerful multi-media laptops.Also, the emergence of the Internet as a means of global communication isfurther revolutionizing how information is communicated and how businesstransactions are conducted. Therefore, although some aspects of configuration(e.g. technical detail) may still be conducted centrally on local area networks(LANs), the desired mechanism for sales configuration may now be throughnomadic sales staff, remote distributors or by allowing customers to self-

configure their own products.For example, for many salespeople, every prospect has different usagerequirements for their companys product. In terms of forklift trucks, thevariables include materials, loads, height displacements, dry or wetenvironments and warehouse layouts. Instead of using bulky product catalogsand price lists, and thumbing through the technical detail to try to match thecustomers requirements and budget, with a sales-configurator system itbecomes possible for the salesperson to simply type the requirements into alaptop. The system will automatically present or select the valid options. The

customer can then view his forklift from the illustration library on the portableCD-ROM and get an immediate priced quotation for either purchase or rental.

Then, the next time the salesperson dials into the headquarters system,orders and inquiries for the last few days are automatically transferred into thecentral planning and manufacturing systems, and the latest product optionsand prices loaded into their PC.

By providing distributors (at home or abroad) with a new sales configurator,the supplier enables the distributor to configure product requirements forspecific customer orders. The system automatically validates the usage

requirements and translates them into product codes. Regular weekly orders


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can then be sent as product codes with required quantities through the Internetdirectly to the suppliers order-processing system. The supplier re-processes theproduct codes in a factory phase of the sales configurator to produce thekitting list of standard assemblies required to meet the order. Assembly andshipment can be within days. Every month, the supplier sends an electronicupdate via the Internet with the latest products and options for the salesconfigurator. In such a case, make to stock becomes a thing of the past, andconfigure to order a reality!

Similarly, rather than making regular customers wait to see a salesperson

to discuss new-product requirements and then wait again to receive aspecification and valid quotation for a new order, with a new sales-configuratortool the customer can configure their own reorder. The requirements can then besent as a sales order to the supplier using EDI through the Internet. Moreover, ifregarded as a valued customer, the company may also be authorized to priceand self-invoice using the sales configurator. Every quarter, the supplier justissues a new CD-ROM with the latest options and prices. Overall, the systemenables administration costs and lead times to be reduced considerably for bothcustomer and supplier.

As Carson concludes, these examples are not visions based on futuretechnology. Instead, they are representative of how an increasing number offorward-thinking organizations are using current technology to achieve ormaintain a competitive advantage in the vital process of selling.


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SECTION 3

Retail-industrylogistics



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Mail order wins consumersstamp of approval

Western companies and individuals tired of the constant bombardmentof direct mail might wish they could move to Japan, where the Japan DirectMarketing Association (JDMA) reports that businesses and households receiveonly a tenth the amount of direct mail delivered in the USA.

But direct marketers themselves will be attracted by figures which show thatthe average direct-mail response rate in Japan at about 3 percent is morethan twice the level in the USA.

Asahi Bank Research Institute predicts that mail-order sales in Japan willgrow by an average 5 percent a year in the next five years, topping the rate atdepartment stores and other large retailers, and reaching 2.63 trillion yen by theyear 2000.

The ability to offer products at low prices has been key to previous growth inmail-order sales. But there are limits to how far growth can be sustained by lowprices. Future growth will be helped greatly by increased consumer knowledgeof products. More customers are now happy to buy goods through catalogs, andadvances in telecommunications and home-delivery services are expanding thecustomer base.

One new route is television shopping. JDMA points out that TV-shoppingsales rose from 5.9 percent of all mail-order sales in 1990 to 7.4 percent recently.Convenience is the key to this growth. Consumers relaxing at home can watchas products are introduced on television, then order by telephone or fax. Despitetheir notoriety in the West, infomercials do provide detailed explanations ofproducts in an easy-to-understand way. With the number of television channelsset to rise, more growth seems certain.

A TV-shopping program was launched in Japan four years ago. It is acooperative venture between Mitsui and the US National Media Corporation,relayed by 27 terrestrial stations, a satellite channel and a cable station. All theproducts featured are imports, mainly from the USA. Items otherwiseunavailable in Japan are popular, especially car-care and personal-fitness goods.

Mail-order sales were formerly limited to low-price daily necessities. But the

sales have now spread to jewelry, brand-name accessories, travel,entertainment, insurance and fresh food.Otto-Sumisho, a joint venture between Sumitomo and the worlds largest

mail-order company, Otto Versand of Germany, was set up more than ten yearsago. Today, its products range from womens fashion to furniture and fromoutdoor clothing to kitchen utensils.

World-famous designers create brand-name products exclusively for Otto-Sumisho. It is also aggressively introducing high-quality foreign products like

This is a prcis of an article entitled Mail-order innovations: convenient new media expandmarket, which was originally published inFocus Japan, January 1998.


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LOreal cosmetics. Otto-Sumisho has even formed a joint-venture company withUS outdoor-clothing company Eddie Bauer. To keep prices relatively low, and topreserve a US flavor, it imports and sells American products withoutmodification for the Japanese market. All the creative work for Otto-Sumishocatalogs is done overseas, to underline the international image.

The policy of unconditionally accepting the return of any product has woncustomer confidence in Otto-Sumisho, and earned much repeat business. Thefirm earned 35.1 billion yen in 1996-97.

Lands End Inc., a major US mail-order company selling mainly casual

clothing, set up Lands End Japan in 1993. Its quintessentially-Americanproducts are a hit with Japanese consumers, and sales have climbed rapidly. Thecompany has invested heavily in service improvements. It set up a new deliverycenter in 1996, expanded its business hours to between 7.00 am and 10.30 pm in1997, and has recently begun mail-order sales of childrens products.

One advantage of mail order is that it makes available in rural areas productsthat otherwise could be bought only in urban centers. Foreign computermanufacturers such as Dell Computer and Gateway 2000 pioneered direct salesof personal computers in Japan. Other foreign and domestic manufacturers and

large-volume retailers are now following suit.Direct-mail sales of office supplies are also expected to rise sharply. AskulCorporation, a subsidiary of office-equipment maker Plus, expanded thenumber of products it sells by 40 percent last year, and extended the hours of itsnext-day delivery service. Askul was spurred by intensified competition, withforeign-affiliated stationery-store chains entering Japan and speciality-stationery stores starting mail-order sales.

The Business Co-op, established two years ago by the Pasona Group,Mitsubishi and others, has embarked on a new type of mail-order selling to

corporate clients. Last year it linked with credit-card company Million CardService to begin catalog sales of office supplies over the Internet. The BusinessCo-op now offers Internet purchasing of travel tickets, hotel reservations andinclusive tours. Prices can be as much as 35 percent below recommended retailprices. Consumers welcome such 24-hour services, which let them not only buyproducts but also reserve airline or other tickets, and hotel rooms.

JADMA reports that 36.4 percent of mail-order products are clothing, 20.7percent are furniture, home electronics or other household goods and 15.1percent are correspondence courses. Recently, however, the share held by travel,

insurance, finance and other services has reached 2.9 percent, and furthergrowth is expected.

Among imports, almost half of mail-order products sold in Japan areclothing, around a quarter are furniture, home electronics or other householdgoods and 13.3 percent are clothing accessories and sundries. Moreover, almost65 percent of JADMA member companies plan to increase their sales ofimported goods over coming years.

Compared to markets like the USA, there is still plenty of scope for mail-order sales to expand in Japan. That bolt-hole for Westerners sick of their daily

diet of junk mail, e-mail and faxes may not be open for much longer.


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Retail industryprepares forhome shopping

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Retail industry prepares forhome shopping

Such is the speed of new technological advance that most of us are becomingattuned to the arrival of new developments which will supposedly help toimprove our lives. Interactive home shopping (IHS) is one of them.

Telecommunications giants such as Time Warner are funding more than adozen tests of their proprietary systems, and major retailers such as JCPenneyand Wal-Mart are among the thousands of retail home pages that can beaccessed through the Internet. Although in its infancy, IHS is likely to changethe way in which people shop as well as the structure of the consumer goodsand retail industries.

According to a Marketing Science Institute report, In teracti ve HomeShopping and the Retai l Industr y, projections about the diffusion of IHS arepretty breathtaking. Forecasts of IHS sales range from $5 billion to $300 billion

by the year 2000. In contrast, current sales are barely perceptible. Sales over theInternet in 1995 were estimated at only $0.02 billion (compared to $0.8 billionthrough CD-ROM catalogs). All electronic sales are dwarfed by noninteractivehome shopping formats such as television home shopping ($5 billion) andconventional catalogs ($60 billion). Moreover, all nonstore channels account forless than 8 percent of US retail sales, which is less than Wal-Marts 1995 in-storesales of $94 billion.

While optimistic projections about electronic shopping are not anchored by

the status quo, demographic and cultural trends suggest that IHS has a brightfuture. Succeeding generations will be increasingly comfortable withcomputers, and computers themselves are taking on the everyday status ofhousehold appliances. Penetration of home computers is projected to reach 60percent by the beginning of the millennium. Integrated computer/television setsare nearing commercialization, as are low cost information appliancesdesigned specifically to surf the Net. User interfaces are becoming more friendlyand more intuitive with the emergence of voice-based interaction.

IHS differs from traditional shopping channels in terms of the quantity andquality of information offered to consumers. Although IHS does not allow directproduct experience it does compete favorably for search attributes. Theseinclude:

a greatly increased number of offerings;

an efficient means of screening offerings;

unimpeded search across stores and brands;

memory for past selections, which can be used in simplifying

information search and purchase decisions.


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IHS has the potential to increase price competition across retailers. For thoseretailers who cannot compete on cost of goods sold, survival may depend ondeveloping advantage in terms of:

distribution efficiency;

assortments of complementary merchandise;

collection and use of customer information;

presentation of information through electronic formats;

unique merchandise.However, IHS will not threaten all retail formats or even all competitors withina format. Some retailers will be relatively immune to the threats of IHS andothers may prosper. Indeed, the Marketing Science Institute claims that whileIHS has the potential to exert a dramatic impact on the retail industry, this willonly occur if the IHS systems provide superior benefits over existing retailformats, such as the opportunity for consumers to search across a broad rangeof alternatives. Current shopping over the Internet does not provide suchbenefits because Internet retailers are preoccupied with the potential of IHS to

intensify price competition and are configuring electronic marketplaces topreclude much comparison shopping. But in the long run, technological andmarket forces can be expected to thwart retailers efforts to isolate themselves.

The suitability of different types of merchandise will be driven by deliverycosts, the consumers need for immediacy and the degree to which electronicretailers can provide pre-purchase information that predicts consumptionsatisfaction. As with successful catalog retailers, successful IHS retailers willovercome the direct-experience limitations of IHS by presenting information

that predicts satisfaction to a degree that more closely approximates or evensurpasses in-store observation and trial. Technology may play a key role byoffering testimonials from other buyers, video information about the experienceyielded by a product, or saved information about brand/size combinations thatfit specific members of the household. A lternatively, for experiencedconsumers, brand name alone may suffice to predict satisfaction.

Insofar as IHS technology makes it easier to compare alternatives on quality-related search attributes, it will bot

physical distribution & logistics management

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