Part I Introduction
3.6 Logistics Strategic Decisions
As discussed in the previous section, depending on the type of business, logistics decision groupings are diverse. However, all of these decision categorizations com- prise the following three basic types of strategic decisions:
1. Customer service 2. Logistics network design
3. Outsourcing versus vertical integration
The following sections describe each of these logistics strategic decisions.
3.6.1 Customer Service
Customer service is the first and foremost class of logistics strategic decisions. As defined earlier, logistics involves delivering the right product to the right customer at the right place, at the right time, and with the right cost and quality. Therefore, customer service is the output of logistics.
Traditionally, businesses have determined their customer service based on what their customers want rather than what they really need. Identifying the customer’s need is the primary step in establishing a logistics system.
Two basic factors require a trade-off: cost and level of service. It is almost impossible to provide a customer-service plan that has an optimal costservice bal- ance [2]. Some businesses prefer a cost-minimization strategy, and some prefer a service-maximization strategy. In the former strategy, the company delivers the
same product but at a cheaper cost, whereas in the later strategy the company pro- vides products or services that no other competitors can give. Deciding on which to choose depends on the type of business, the products it offers, and the market it competes. These two approaches are usually discussed and compared as leanand agilestrategies.
Competitive strategies help an organization understand its competitors and the market in which it competes, so it can audit them and find existing gaps and oppor- tunities available to close gaps in customer requirements.
In general, a customer-service plan is divided into three phases [2]: pretransac- tion, transaction, and posttransaction.
The purpose of defining customer-service strategies is to provide customers with the services they need. This is usually done by defining theperfect orderconcept.
Christopher [8] has defined three elements for the perfect order: on time, in full, and error free.
Also, it is important to determine the necessary customer-service standard so that the performance can be measured and compared to the desired defined strategies.
3.6.2 Logistics Network Design
To achieve corporate strategies, an organization must ensure that its structure and flow of materials and information are appropriate. Therefore, logistics network (or, in some references, logistics channel) design is divided into two groups: the physi- cal facility (PF) network and the communication and information (C&I) network [9]. These decisions are critical because the largest part of invested capital belongs to them. Rushton et al. [2] have also included process and organizational designs in their logistics strategy, but in this section we only take a look at physical and infor- mation network strategies.
Physical Facility Network
Keep in mind that the physical facility location of logistics is not similar to the one in supply-chain management. Physical facility location is about determining the number, size, location, and necessary equipment of new facilities together with alteration of existed ones. In many facility location decisions, allocation decisions are now also included. The usual objective of such decision problems is minimizing total system costs, but some businesses, particularly those in public sectors, con- sider maximizing the service level or even balancing both objectives.
Facility location decisions are clearly made at the start of a business, but Ghiani et al. [6] say that these decisions should not be made only at the start but also with a long-term view in mind; system changes should also be reconsidered as business proceeds. The reasons are obvious: When facilities are located, products are allo- cated to retailers but when the demand trends change, so should the system.
Location problems are classified based on the following criteria [6]:
1. Time horizon (single period vs. multiperiod) 2. Facility typology (single type vs. multitype)
3. Hierarchy (single level vs. multilevel)
4. Material flow (single commodity vs. multicommodity)
5. Interaction among facilities (with interactions vs. without interactions) 6. Dominant material flow (single echelon vs. multi-echelon)
7. Demand divisibility (divisible vs. indivisible)
8. Influence of transportation on location decisions (location problems vs. location-routing problems)
9. Retail location (with competition vs. without competition)
The complexity of physical facility location problems has attracted lots of research, and many mathematical models have been developed. Single-facility location problem is one of the most basic problems of this kind. Some other famous mathematical models are median location problems, center location problems, covering problems, and hub location problems [10].
Communication and Information Network
The importance of an integrated communication and information system to success makes planning for such system a part of strategic decisions. These decisions are about the establishment and maintenance of an effective communication system and planning for information sharing throughout the system. Centralizing or distrib- uting the information, the technology used for such system, integration of the infor- mation flow (such as the use of enterprise resource planning, or ERP, systems), standardization of hardware, software, development environment, vendors, and the role of e-commerce are some of most important decisions made in this category [8].
Designing an integrated information and communication system means building an information-sharing system as well as programming an interorganizational col- laborative planning procedure [11].
3.6.3 Outsourcing versus Vertical Integration
Decisions related to outsourcing bring greater flexibility, lower investment risk, improved cash flow, and lower potential labor costs. Instead, the business might lose control over its process, might have long lead times or shortages, or choose the wrong supplier. Outsourcing decisions determine which functions should be outsourced, as well as the nature and extent of outsourcing agreements [12].
In contrast, decisions on vertical integration (also known as insourcing) have higher control over inputs, higher visibility over the process, and so on. However, more integration requires higher volume and higher investment, and there is less flexibility in using equipment. Vertical integration decisions include the nature of the integration, its direction (downward toward customers or upward toward suppli- ers), and its extent (which activities, parts, or components should be included).
When a firm is unable to build an item (especially a routine one) or is uncertain about the volume required and suppliers offer favorable costs or have specialized research on the job, then outsourcing the job to a third party seems the best choice.
Insourcing is preferred when the firm wants to integrate plant operations, needs to have direct control over production and quality, desires some secrecy, lacks reli- able suppliers, or has items or production technology that is strategic to the firm [12].
Since 1980, many firms have realized that they cannot do it all, so they have made use of outsourcing so that they can avoid parts or activities that do not have any prime competency and value for their business.