10 Investing in process excellence yields greater benefits

Fig. 1.10 Investing in process excellence yields greater benefits

This is not to suggest that product innovation should be given less emphasis – far from it – but rather that more emphasis needs to be placed on developing and managing processes that deliver greater value for key customers.

We have already commented that product life cycles are getting shorter. What we have witnessed in many markets is the effect of changes in technology and consumer demand combining to produce more volatile markets where a product can be obsolete almost as soon as it reaches the market. There are many current examples of shorten- ing life cycles but perhaps the personal computer symbolizes them all. In this particular case we have seen rapid developments in technology that have first created markets where none existed before and then almost as quickly have rendered themselves obsolete as the next gener- ation of product is announced.

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Such shortening of life cycles creates substantial problems for logis- tics management. In particular, shorter life cycles demand shorter lead times – indeed our definition of lead time may well need to change. Lead times are traditionally defined as the elapsed period from receipt of customer order to delivery. However, in today’s environment there is

a wider perspective that needs to be taken. The real lead time is the time taken from the drawing board, through procurement, manufac- ture and assembly to the end market. This is the concept of strategic lead time and the management of this time span is the key to success in managing logistics operations.

There are already situations arising where the life cycle is shorter than the strategic lead time. In other words the life of a product on the market is less than the time it takes to design, procure, manufacture and distribute that same product! The implications of this are consider- able both for planning and operations. In a global context the problem is exacerbated by the longer transportation times involved.

Ultimately, therefore, the means of achieving success in such markets is to accelerate movement through the supply chain and to make the entire logistics system far more flexible and thus responsive to these fast-changing markets.

Globalization of industry

A further strategic issue that provides a challenge for logistics manage- ment is the continued trend towards globalization.

A global company is more than a multinational company. In the global business materials and components are sourced worldwide and products may be manufactured offshore and sold in many different countries, perhaps with local customization.

Such is the trend towards globalization that it is probably safe to forecast that before long most markets will be dominated by global companies. The only role left for national companies will be to cater for specific and unique local demands, for example in the food industry.

For global companies like Hewlett Packard, Philips and Caterpillar, the management of the logistics process has become an issue of central concern. The difference between profit and loss for an individual prod- uct can hinge upon the extent to which the global pipeline can be optimized, because the costs involved are so great. The global company

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seeks to achieve competitive advantage by identifying world markets for its products and then to develop a manufacturing and logistics strategy to support its marketing strategy. So a company like Caterpillar, for example, has dispersed assembly operations to key overseas markets and uses global logistics channels to supply parts to offshore assembly plants and after-markets. Where appropriate, Caterpillar will use third-party companies to manage distribution and even final finishing. So, for example, in the US a third-party company in addition to providing parts inspection and warehousing attaches options to fork lift trucks. Wheels, counterweights, forks and masts are installed as specified by Caterpillar. Thus local market needs can be catered for from a standardized production process.

Globalization also tends to lengthen supply chains as companies increasingly move production offshore or source from more distant locations. The impetus for this trend, which in recent years has acceler- ated dramatically, is the search for lower labour costs. However, one implication of these decisions is that ‘end-to-end’ pipeline times may increase significantly. In time-sensitive markets, longer lead times can

be fatal. ‘Time-based competition’ is an idea that will be returned to many times in later chapters. Time compression has become a critical man- agement issue. Product life cycles are shorter than ever, customers and distributors require just-in-time deliveries and end users are ever more willing to accept a substitute product if their first choice is not instantly available.

The globalization of industry, and hence supply chains, is inevitable. However, to enable the potential benefits of global networks to be fully realized, a wider supply chain perspective must be adopted. It can be argued that for the global corporation competitive advantage will increasingly derive from excellence in managing the complex web of relationships and flows that characterize their supply chains.

Downward pressure on price

Whilst the trend might not be universal there can be no doubting that most markets are more price competitive today than they were a decade ago. Prices in the high streets and the shopping malls continue to fall in many countries and upstream of the retail store the prices of

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components, raw materials and industrial products with some excep- tions follow the same downward pattern.

Whilst some of this price deflation can be explained as the result of normal cost reduction through learning and experience effects, the rapid fall in the price of many consumer goods has other causes. Figure

1.11 shows the comparative rate at which VCR and DVD player prices fell in the UK market. The striking feature is that whilst it took 20 years for a VCR to fall in price from £400 to just over £40, it took only five years for a DVD player to fall by the same amount. The same phe- nomenon is apparent in markets as diverse as clothing, home furnishings and air travel.