Logistics strategies within the corporate planning framework

Training future logistics managers: Logistics strategies within the corporate planning framework

Rao, Kant

Bose Corporation, the audio equipment company, has entered into partnerships with transportation carriers, suppliers of plastic and metal parts, and printing vendors in a program it refers to as JIT II.(1) Under this program, big volume improvements are front loaded for the supplier, resulting in the elimination of certain conventional sales and purchasing activities and leading to a more active involvement of the vendors’ in-plant representatives with Bose’s manufacturing operations. Recently, Xerox slashed inventories and related assets by nearly $1 billion by coordinating the product flow through its channel of supply and distribution.(2) Sears has contracted its LTL and intermodal transportation requirements to third-party logistics firms.(3)

As these examples suggest, logistics strategies are undergoing a transformation to a form more complex, longer lasting, less easily reversible, and having more at stake than ever before. This transformation has also been accompanied by greater visibility for logistics in the corporate executive suite. A recent CLM-Ohio State University report on strategic planning in logistics states that logistics is becoming an integral part of corporate strategic planning and that logistics is benefitting from recent emphasis on customer service and JIT systems.(4)

Given the on-going transformation of logistics strategies and the increased visibility of logistics, how can educators teach this subject to students, the logistics managers of the future? The premise of this paper is that logistics strategies can neither be taught nor understood by students without a framework that relates logistics to corporate strategy. To underscore this point, the authors use simulation courseware that leads students to adopt different logistics strategies for a hypothetical manufacturing firm–all successful as measured by long term financial performance–but each contingent on the chosen corporate strategy.

The objective of this paper is to describe the approach taken by the authors to instruct students in the art and science of logistics strategy. In the first half of the paper, the content of what is taught–the framework of corporate strategy and elements of logistics strategy–described. In the second half of the paper, the simulation courseware that implements this pedagogical approach is discussed in detail and its use through assignments and student presentations is described.

THE STRATEGY FRAMEWORK

Corporate Strategy

The subject material on corporate strategy can be divided into two parts: (1) elements of corporate strategy, and (2) the strategic planning process. Elements refers to areas of the business enterprise for which options are evaluated and decisions are made. For example, the decision to offer a particular set of products is a corporate choice falling into the line-of-business element. Certain other aspects of strategy are also better developed at the corporate level, through the CEO, the board of directors, and the senior executives. These policies set the tone for the enterprise and dictate the choices and evaluation criteria for more detailed decisions at the (lower) functional levels.

In addition to corporate policies which set the groundwork for functional strategies, the planning framework is also important. The planning process’s contribution comes from the integration it spawns and the learning process which it engenders within the firm. The planning process can play a very influential role in suggesting the type of strategies that might be fruitful because of the careful attention paid to the business environment during the planning process.

Elements of Corporate Strategy

The corporate strategic decisions fall into clusters that are referred to as elements in this paper. The key elements of corporate strategy consist of answers to the following questions:

* What lines of business should we (the firm) be in or exit? What product groups should we develop?

* What should be the geographical scope of our markets?

* What are our growth strategies and financial objectives?

* What commitments should we make to our stakeholders?

* What are our core competencies and capabilities?

Lines of Business. Decisions by AT&T to enter the computer business, Dow Coming to exit the silicone breast implant line of business, and attempts by television cable and local telephone companies to seek the ability to invade each other’s product lines are corporate strategic choices that will affect the companies involved for years if not decades. The input data for such decisions should come from all functional departments within the firm so that the ability to profitably manufacture, market, distribute, and finance the product line can be accurately assessed.

Geographical Scope. Decisions by Fujitsu to enter, abandon, and then reenter the supercomputer business in the U.S., Federal Express to cease serving Europe through its dedicated fleet, and Coors to enter the eastern U.S. market are also corporate decisions that have a heavy impact on logistics both in terms of sourcing capabilities and requirements, and also for distribution.

Growth Strategy. Firms may decide to grow by acquisition or through internally generated expansion. Acquisition may involve diversification or integration into related lines of business. Examples include conglomerates such as General Electric and ITT, integrated steel producers such as Inland Steel, and minimills such as Nucor.

Stakeholder Commitments. Many firms create certain expectations in the minds of their stakeholders, either explicitly through policy or implicitly through a history of actions. For example, shareholders may come to expect certain dividend distribution policies and levels of earnings growth; employees may come to expect job security, pension benefits, wage increases, and other aspects of worklife; and customers and suppliers may develop expectations of quality and reliability in various aspects of doing business with the firm. General Electric expects to be the first or second leading firm in market share in each market it serves, 3M expects a significant portion of its revenues each year to come from new products, IBM (until recently) had a no-layoffs policy.

Core Competencies. In a recent Harvard Business Review article, Hamel and Prahalad focused on core competencies which firms might have and which they can capitalize on to fuel their growth.(5) Examples include Honda’s competency in engines and power trains, Sony’s edge in miniaturization, and Toshiba’s in screen technology.

Core Capabilities. In another HBR article, Stalk, Evans, and Shulman argue that in addition to the core competencies that are rooted in technology and production skills, firms may also possess core capabilities derived in a basic understanding of and exploiting of key processes central to the firm’s business.(6) Examples include Wal-Mart’s capabilities in managing its cross-dock logistics, Honda’ capabilities in dealer management and product realization, and 3M’s capabilities in nurturing an innovative environment.

Exhibit 1 summarizes these elements of corporate strategy with additional examples. (Exhibit 1 omitted)

The Planning Process

The corporate strategy planning process typically starts with a vision, a mission statement, and a set of objectives that the firm wants to achieve to satisfy its stakeholders: customers, suppliers, employees, and shareholders. Next, the firm assesses the resources available to it by identifying its strengths and weaknesses, in both its internal operations and customer and channel relationships. In addition, the external threats and opportunities that will have an impact on company’s performance in the future are also pinpointed. Levi Strauss & Co.’s corporate and logistics strategy planning process illustrates this approach well.(7) Rushton and Shaw have described the overall planning process and some of the common pressures influencing logistics systems.(8)

In this analysis of strengths, weaknesses, opportunities, and threats (SWOT), the firm must detect both ongoing and potential changes in society which are relevant–including social, demographic, behavioral, and environmental changes–as well as both societal and governmental responses to these changes, such as adjustments in taxes, services, and regulatory policies. The market and the competitors are also, of course, studied to see how they might respond to the changes and where the company should position itself against the competitors in the market.

The external and internal environment analysis described above is sometimes referred to as environmental scanning. The company needs to know the environmental factors that are external to the company so that major strategies will anticipate and respond to environmental changes. It also needs to know the resources that are available to the company and use them efficiently and effectively to achieve the objectives. Usually the company’s strengths and weaknesses study will reveal its overall health condition in comparison to its competitors. Then an opportunities and threats analysis in the industry will show where the industry stands in the future. The social trends, consumption changes, demographic shifts, and technology advances are studied jointly and separately to gain insights of these changes. Further analyses may follow to see how these changes and their implications will affect the company’s bottom line performance.

Next, the company needs to develop several corporate strategies and make the strategic choice to pick up the one that best fits the company’s mission, the many objectives, and the operating environment. (These are discussed further below under elements of corporate strategy.) Later, functional strategies in marketing, operations, finance, and logistics are developed following the same process of developing the corporate strategy. The planning process keeps moving down to the company management hierarchy until all strategic, tactical, and operational plans have been developed to the formal extent necessary and appropriate. Exhibit 2 shows the process of forming a corporate strategy and functional strategies. (Exhibit 2 omitted)

The action plans are a result of the strategic thinking, and represent a feasible approach to achieving the objectives in a shorter term. They cover details in implementing the strategies, with a schedule indicating what and how much of each key resource is used by whom at what time. Action plans also close the loop in the strategic planning process by providing feedback and enabling corrective actions to be taken to respond to changes in the marketplace.

The decisions at the corporate level on the various elements of corporate strategy, coupled with the planning process, provide the framework within which functional strategies can be formulated and linked to each other. The relationships between corporate strategy and functional strategies are obvious and straightforward in most cases. For example, a corporate decision to manufacture multinationally or to source globally would lead to a different logistics network than otherwise. Similarly, a corporate decision to seek significant export sales would lead to greater attention being paid to aspects of international logistics.

The relationships between corporate and functional strategies could also be more subtle, however. Stalk, Evans, and Shulman in the previously referenced article argue that Wal-Mart’s success comes from its corporate focus on “capabilities-based competition.” This in turn leads to certain logistics strategies that are difficult to execute and implement. Wal-Mart facilitates these functional strategies by investing, as a corporate strategic decision, in satellite-based communication systems, a proprietary transportation system, extensive training, and numerous other supporting infrastructure investments affecting its business processes and organization practices.(9)

The implication, then, is that logistics managers must be well attuned to their firm’s corporate strategies and to its key business processes and practices. Experience and insight are necessary to develop good judgment about what logistics strategies are likely to work and succeed within this larger framework.

Logistics Strategy

Functional strategies must be developed within the framework of corporate strategy where decisions are made about lines of business to pursue and geographic markets to enter, based on core competencies and capabilities, which will meet stakeholders’ expectations and provide the desired pattern of growth. Logistics strategies must not only consider these overarching corporate-level considerations but also take into account relevant functional strategies, particularly in terms of manufacturing capacity available and the product-price-promotion mix.

The growing visibility of logistics is at least partly due to the pervasive nature of logistics’ interaction across the functional spectrum of the firm. The challenge to logistics managers is how to develop a coordinated logistics approach in this environment–and the answer increasingly is a method referred to in the literature as supply chain management.

The management of the logistical supply chain as an integrated system has long been advocated by academics as well as by other students and practitioners of the logistics concept. The term “supply chain” as used here denotes the channel of firms and intermediaries through which a product (or group of products) moves from the original sources of its basic raw materials through conversion/manufacture and then distribution in its finished form to the ultimate consumers. Thus it supersedes the logistical operations of any one firm. The concept is closely related to the channel of distribution, but that term typically connotes the chain for finished goods only, with a strong emphasis on marketing, as opposed to logistical, issues. We will use the term “logistics system” to indicate the specific set of fixed facilities (of suppliers, producers, and customers) and the transportation and information processing/transmittal choices linking those fixed facilities used to implement the supply chain concept. There have been no definitive studies either determining the exact circumstances under which integrated supply chain management is clearly superior to other alternatives or measuring the extent of that superiority. However, several studies have shown that managing inventories independently and/or with simplistic decision rules at each of the various points in the chain leads to higher inventories or dysfunctional fluctuations in demand at upstream (supplying) locations than would be the case when coordinating techniques are employed.(10)

In any case, it is an article of faith among logistics professionals in general that integrated supply chain management will result in logistical performance in the channel of distribution (or supply) superior to that of channels not employing such integrating approaches.(11) The means for achieving integration typically involve the sharing of information, particularly with regard to projected demands and planned production. In addition, integration requires a comprehensive look at all of the critical elements (see Exhibit 3). (Exhibit 3 omitted) The discussion below describes these elements first and then presents a model for their integration.(12)

Customer Service Levels. This element involves determining the appropriate levels of customer service for the appropriate product-market combination. In order to evaluate strategic options, it is necessary to survey and study customers, determine opportunities for differentiation, identify and benchmark the performance of competitors, and define the best network options and associated costs of offering various levels of service. Xerox has been cited as a firm that decided to make field service its competitive advantage to replace its expired patent rights.

Channels of Supply and Distribution. How many channel members should there be and what should be the working relationships with them? Pursuing total quality management (TQM) and JIT, many firms have moved to reduce the number of suppliers, carriers, and distributors/dealers they do business with and bolster their relationships with those remaining, often entering into long term contractual and partner shipping arrangements. 3M is one of the few firms to formalize this strategy, calling it its “Channel Approach.”(13) Under this approach, 3M has identified five logistics channels to serve 90 separate businesses, with teams established to develop customized logistics strategies for each channel.

Facility Locations. What raw material supply sources, supply consolidation points, distribution facilities, field service centers should be part of the logistics network and what should be their capabilities? Answering these questions involves close liaison with manufacturing and marketing departments so that the whole supply chain is working in a satisfactory manner.

Allocations. Coupled with the facility element above, these strategies involve the best use of the facilities. In other words, how should raw material supplies be best allocated and deployed to meet manufacturing needs and how should plant output be allocated to distribution centers and eventually to customer locations?

Inventories. What should be the inventory management system, how much inventory should be carried, of what products, and where should they be carried? Traditionally, inventories have served a buffer function to smooth seasonal peaks in demand and provide for production economies. As the hidden cost of large inventories has become better known, there has been a move to reduce these assets, requiring a much more coordinated operation to manage product and goods flows. Practices such as postponement, standardization, and speculation can still be useful when viewed in a systems context.

Transportation. What modes of transportation to use, what carriers and shipment sizes and who should make the transportation decision, shippers or receivers? Deregulation has opened this area as a major opportunity for cost savings and quality improvement.

Information Management. What planning, operational, and control systems are appropriate, and what type of telecommunication systems are needed to track product flows throughout the logistics pipeline? The rapid growth of barcoding and other forms of automatic identification, electronic data interchange (EDI), and imaging facilitating transaction processing and communications as well as sophisticated decision support and expert systems for planning attest to the significant role of this strategic element.

Organization. The proper motivation, delegation of authority and responsibility, and organization of logistics personnel, in terms of line and staff and the degree of centralization vs decentralization, are important issues to be addressed for a well functioning logistics operation. The interrelationship of the logistics organization to the rest of the firm is also critical. Some firms, such as Sony Corporation of America, have established their logistics organization as a separate enterprise (in Sony’s case. its Logistics Services Company), which renders services in a fashion not unlike a third-party logistics provider.(14)

The Hierarchical Model

The authors’ approach to teaching students how to develop logistics strategies consistent with corporate objectives, as well as to achieve integration across the logistics elements, is through a concept referred to as the hierarchical model. This model goes beyond strategic planning and bridges into strategic management–that is, aspects of directing and controlling in order to implement strategic plans. The first two levels of the model deal with designing and optimizing the logistics system, while the next two levels deal with aspects of planning, directing, and controlling logistics transactions and flows.

The hierarchical model is based on the premise that the planning and control process follows a top down approach in which decisions are made by the various levels of management, with higher level decisions circumscribing the range of choices available for lower level decisions. Thus strategic resource decisions–such as building new plants or revamping the distribution system to offer higher levels of service–are made by top management, often with the use of appropriate computerized decision support systems. Operational planning decisions–such as how much of a given product group to produce by month for the next twelve months given the available resources anticipated in the strategic plan–are made by upper middle level managers. And day-to-day scheduling decisions are made by first- and second-level supervisors within the resource availabilities and constraints provided by operational plans. A schematic of the process is shown in Exhibit 4. (Exhibit 4 omitted)

In Exhibit 4 the activities are indicated in rank order (from strategic activities at the top to day-to-day operations at the bottom), the suggested frequency with which they are performed, and the approximate time horizon covered by the plans at each stage. Typically this process must be performed for each strategic business unit–separately if they are truly independent or jointly where there are common suppliers, customers, or production/distribution of resources. Obviously this process is related closely to the typical planning and control process described in the manufacturing literature.(15) However the approach here is broader in that customer service issues, and the entire supply chain and associated resource needs are considered explicitly. The manufacturing literature generally takes customer service levels and the broader issues of the supply chain management as given in their prescriptions for the manufacturing planning process.

TRAINING IN LOGISTICS STRATEGY FORMULATION AND MANAGEMENT

Having described the authors’ view of how corporate strategy and functional strategies are linked and how the hierarchical model can assist students to appreciate the manner in which logistics planning can be comprehensive and integrated with flow planning, the paper now delves into the methods of instruction. The primary mode of instruction is a simulation courseware.

The use of simulation for pedagogical purposes is, of course, not a new concept, In the logistics field, there are several general- and special-purpose simulation programs that have been widely used, including the Stanford Business Logistics Game,(16) Michigan State University’s Distribution System Simulator,(17) Industrial Dynamics,(18) BLAST,(19) and others.(20) The courseware described in this paper has some objectives in common with these other simulators: provide users insight into logistics tradeoffs, network design, and network operation. A further objective of this courseware is to show the interdependency between logistics and the rest of the corporate planning and decision framework.

Prior to students’ exposure to this courseware, they are instructed through two other means: lectures and case studies. The lectures involve assigned readings in both corporate strategy and logistics strategy and instructor presentations on the subject matters previously described. The strategic planning process and the hierarchical model are also described and illustrated. These lectures and readings then lead into case studies exploring some elements of strategy in depth.

Case Studies

The case studies are used in two ways. First, one case is drawn from logistics literature to demonstrate the formulation or application of some specific logistics strategy. For example, the 1991 fall semester saw the use of the Lotus Development Corporation case, which focused on channel issues and strategies.(21) The case describes the founding of the company and key corporate responses to the business environment it faced following the introduction of its successful spreadsheet software but prior to the introduction of WINDOWS from Microsoft. Logistics strategies in terms of channel interfaces with software wholesalers and dealers and customer service issues are explored in the case and related back to the corporate strategy and the business environment.

The second use of case studies is a logistics article that summarizes seven cases in different industries, each involving different product and industry profiles and each pursuing a different logistics option to accomplish the company’s objectives.(22) This article focuses more on the context of the strategic logistics decisions, lines up the logistical alternatives, and through this process establishes linkages between the two.

In summary, both of these sets of cases, coupled with the lectures and reading assignments, prepare students for the simulation courseware that is administered during the last six weeks of the course. The MAS case, programmed in FORTRAN, simulates the long term operations of a logistics system under a wide variety of configurations and conditions. It calculates total logistics costs, net profits, and customer service performance for any configuration provided by the students. Students may change the markets served; the location of DCs, plants and their capacities, and supply points; modes of transportation and shipment sizes; the levels of forecast accuracy; the two flow planning methodologies (DRP, Reorder Point); the set inventory availability targets; and a linear programming subroutine that performs allocation tasks. This section describes the courseware in greater detail and the subsequent section delves into how this courseware is used to instruct students in logistics strategy.

MAS Manufacturing produces a line of household cleaners, chemicals. and associated accessories in Denver, Colorado. These products are currently sold in the West and Midwest, but not on the East Coast. Founded in the early 1950s, the company has had its ups and downs as it has struggled toward stable. profitable growth. The CEO recently asked her top managers to consider the best way for the company to “bring our growth under control so we can increase profits and return on investment.” A meeting called by the CEO to discuss this issue leads, to an interchange between the department heads shown in Exhibit 5. (Exhibit 5 omitted) MAS Manufacturing’s existing logistics network and the optional additions to that network are shown in Exhibit 6. (Exhibit 6 omitted)

Products and Markets. The MAS line of household cleaners and chemicals is sold in 27 Western and Midwestern states, primarily through grocery and discount channels. The company has no direct sales force, but rather uses food brokers to sell to customers on a commission basis. Ten district sales managers are located around the market, each supervising several brokers. While the company promotes sales in a variety of ways, its primary promotional expenditures are devoted to television, with spot ads on afternoon soap operas and late night news programs.

On the average, the products sell to the grocery and discount chains for $32.00 per case (or $2.00 per pound), FOB destination. There is one price for each item throughout the market. Demand is seasonal, with the peak occurring during the spring cleaning season. Students are given the percentage of annual demand shipped from distribution centers each period, and annual demand forecasts by metropolitan area.

The Distribution System. Because of the large number of LTL shipments to customers (shipments are generally between 1000 and 5000 lbs.), and the long from distribution centers each period, and annual demand forecasts by metropolitan area.

The Distribution System. Because of the large number of LTL shipments to customers (shipments are generally between 1000 and 5000 lbs.), and the long distances to be covered, MAS has several distribution centers. These are located in Los Angeles, Denver, (separate from the plant–the plant does not make LTL shipments to customers due to the limited loading area), Dallas, Chicago, and Detroit. The latter was added recently in an effort to get closer to K-Mart headquarters and increase shelf space in those stores. There is some evidence that this strategy has led to higher sales in Michigan and Ohio.

The distribution centers are resupplied primarily by rail in order to reduce transportation costs. Rail carload rates are available at 50,000 and 90,000 pound minimums. Truckload rates are available at 24,000 and 40,000 pound minimums. Examples of these rates–both to some of the existing DC’s and to possible new DC’s–are given to the students. Also shown are typical public warehousing charges paid by MAS, and freight rates to metropolitan areas.

The inventories at the distribution centers are controlled by means of reorder points. The reorder point (ROP) for an item is that item’s safety stock plus the demand expected during the resupply lead time. The general rule the company has been following is to set the safety stock equal to one and a half times the demand expected in the period. The lead time for rail resupply is generally considered to be two weeks. Thus the ROP is set at about two periods’ worth of sales for each item at each location. Whenever an item’s inventory level at a DC reaches its reorder point, a resupply is requested from the factory warehouse. In order to fill a carload, other items close to their ROP may be added to the shipment. Students have the option of switching from ROP to a Distribution Requirements Planning (DRP) method of operation, in which case the courseware automatically develops time phased flows and feeds them to the production scheduling module.

Production. While the vice president for manufacturing indicated that the plant capacity at the Denver location is close to 27 million pounds of product per year (see Exhibit 5), that assumes 7 days a week, 24 hours a day operation (21 eight hour “turns” per week). In general, the plant can turn out 25,000 pounds of product in an eight hour work turn, allowing for standard preventive maintenance procedures. Adding afternoon, midnight, and weekend turns increases many of fixed and variable costs of production. This is due to wage premiums required for extra shifts and weekends, as well as the increased wear on the equipment. Denver production economics are given to the students, including both fixed and variable costs of operation.

It is also possible to purchase some adjoining land and expand production operations in Denver. The expansion would involve not only new facilities, but also some revamping of the old facilities. The overall result would be to reduce variable costs by $.02 to $.03 per pound. Students are shown the projected economics of any Denver expansion.

After a good deal of study, six sites have been selected as potential locations for a new plant in the East. These are: Covington, Kentucky; Parkersburg, West Virginia; New Kensington, Pennsylvania; Allentown, Pennsylvania; Richmond, Virginia; and Raleigh, North Carolina. Any new plant will use new technology, so that even though Eastern labor costs may be higher than those in Denver, less manpower will be used. The estimated economics for each new plant site are given to the students for three sizes of plant. The capacity figures are based on 15 work turns per week.

Also located at the Denver plant is a warehouse for holding raw materials and finished goods. The finished goods stored there consist of stocks used for replenishing the distribution centers, and stocks resulting from production smoothing. It is possible to reduce the investment required for expansion of the Denver plant to $450,000 (and fixed costs to $100,000) if the finished goods section of the plant warehouse is eliminated. In this case, production would be allocated to the distribution centers as it comes off the production line. It is undecided whether to include a plant warehouse in any new Eastern plant. The costs of operating the Denver plant warehouse (and the associated sunk investment allocated to it) are given to the students as are the projected costs and investments for any of the six new plant locations.

Purchasing and Supply. The raw materials for the company’s cleaners come primarily from petrochemical producers located along the Gulf Coast. At least one supplier is also available on the West Coast near Los Angeles. In addition, several of the suppliers operate water-supplied terminals on the East Coast and in major cities along the Mississippi and Ohio Rivers.

Prices are quoted either FOB the refinery or FOB the terminal point. They are competitive for the most part, with any differences partially reflecting varying degrees of quality and delivery performance. The materials can be received in 24,000 and 40,000 pound truckloads, and 50,000 and 90,000 pound carloads. The material prices and freight charges for the major supply sources are given to students both for the existing plant in Denver as well as a potential future plant in the eastern United States.

Making Decisions. The simulation is designed to highlight the effect production and logistical decisions can have on corporate strategies and operating performance. Even though certain aspects of the business have been held invariant (such as pricing and promotion), students find themselves concerned about marketing issues–such as market penetration and customer service–and about financial performance. Students see that their decisions do have an important impact, and can work for or against the marketing and financial objectives, and are contingent on the overall strategies at the corporate level. To do the planning, students (organized into teams of 4 to 6) configure a market/logistical system which will be simulated for a year on the computer. (The courseware can conduct simulations for 10 years beyond the base year, with built-in changes in demand and other parameters.) At the end of the year the results–sales, profits, investment, and customer service–are printed out for each team, broken out by manufacturing/logistics facility and market area. Students typically run several simulations for each of the two assignments, which are described later.

Use of the MAS Simulation Courseware

The MAS simulation case is used in two phases. In the first phase, students retain the current network but alter operating policy elements. These elements include inventory availability levels at each location, safety stock of raw materials and finished goods at plants, transportation modes and shipment sizes used, production capacity adjustment, forecasting and inventory planning methodologies used, and the mix of procurement from raw material sources. This exercise allows them to see how efficiently the existing logistics system can operate.

Students learn during this phase that it is possible to fine tune the logistics operation through a better forecasting process and the substantial reduction of inventories. The benefit of this phase is primarily in understanding the tradeoffs within logistics among such various elements as customer service, transportation choice, production scheduling, and inventories.

In the second phase of the case study, students make strategic decisions, altering the logistics structure over a five- to ten-year time frame. They can change the number and location of plants, and distribution centers, enter or close markets, and expand production capacity of plants. Since the courseware does only simulation, it does not produce an optimal solution. However, via comparison of alternate runs, it shows students the sensitivity of performance to changes in strategic variables.

Students learn during this second phase that it is possible to succeed with different logistics networks and strategies depending upon what the corporate policies are regarding its scope of business, success being measured in terms of profit and return performance over at least a five-year period.

A natural question that arises is whether learning is enhanced with the use of this courseware. The authors have reported elsewhere the results of a preliminary evaluation of the benefits of this courseware used in three separate sections of the course taught by different instructors. In all three cases, there was an extremely favorable response from students to the hands-on experience obtained with the courseware.(23)

SUMMARY

In the past few years, many companies have recognized the strategic value of logistics and used it as a source of savings as well as a source of service advantage. Logistics’ role in the overall corporate strategic framework has become more prominent as firms have attempted to cut costs and become more competitive without sacrificing service. The increasing attention to time-based and capabilities-based strategies has elevated the role of logistics managers in the strategic context.

In this environment, the challenge facing instructors in logistics is how to make logistics students–the managers for the future–both well versed in elements of logistics strategy as well as better attuned to the overall corporate strategic framework. The authors’ approach has involved a mixture of lectures, assignments, and case studies as well as a capstone simulation courseware.

This paper has also described a hierarchical model approach used to instruct students in the integration of the various elements of logistics strategy. Finally, the paper has shown how a simulation courseware, MAS SIMULATION, enables students to obtain hands-on experience in making strategic decisions and observing their impacts over a long term.

NOTES

1 David L. Sparkman, “Forging a New Kind of Shipper-Carrier Partnership,” Transport Topics, 24 Feb. 1992, p. 7.

2 Jonathan L. S. Byrnes and Roy D. Shapiro, “Intercompany Operating Ties: Unlocking the Value in Channel Restructuring,” Harvard Business School Working Paper No. 92-058, 1992.

3 Joseph Bonney, “Sears Hires Another Third Party,” American Shipper 31 (Oct. 1991): 42.

4 Martha C. Cooper, Daniel E. Innis, and Peter R. Dickson, Strategic Planning for Logistics (Oak Brook, Ill.: Council of Logistics Management, 1992).

5 Gary Hamel and C. K. Prahalad, “The Core Competence of the Corporation,” Harvard Business Review 68 (May/June 1990): 79-91.

6 George Stalk, Philip Evans, and Lawrence E. Shulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review 70 (March-April 1992): 57-69.

7 Robert M. Amos and John Serlin, “Strategic Logistics Planning,” Annual Conference Proceedings (Oak Brook, Ill.: Council of Logistics Management, 1991), pp. 99-121.

8 Alan Rushton and Richard Saw, “A Methodology for Logistics Strategy Planning,” International Journal of Logistics Management 3, no. 1 (1992): 46-62.

9 Same reference as Note 6.

10 For some examples over the last few decades, see Jay W. Forrester, “Industrial Dynamics,” Harvard Business Review 36 (July-August 1598): 37-66; Alan J. Stenger and Joseph L. Cavinato, “Adopting MRP to the Outbound Side–Distribution Requirements Planning,” Production-Inventory Management 4 (1979): 1-14; Fred Glover, G. Jones, D. Karney, and J. Mote, “An Integrated Production Distribution and Inventory Planning System,” Interfaces 10 (November 1979): 21-35; and E Matthew Stenross and Graham J. Sweet, “Implementing an Integrated Supply Chain,” Annual Conference Proceedings (Oak Brook, Ill.: Council of Logistics Management, 1991), pp. 341-352.

11 For instance, see Alan Braithwaite and Martin Christopher, “Managing the Global Pipeline,” International Journal of Logistics Management 2, no. 2 (1991): 55-62.

12 James R. Stock and Douglas M. Lambert, “Becoming a ‘World Class’ Company With Logistics Service Quality,” International Journal of Logistics Management 3, no. 1 (1982): 73-80.

13 Elizabeth Canna, “In-House Contract Logistics,” American Shipper 1 (Oct. 1991): 44.

14 American Shipper, “Sony’s Logistics Services Company,” 31 (Oct. 1991): 49-50.

15 See for example, Thomas E. Vollman, William L. Berry, and D. Clay Whybark, Manufacturing Planning and Control Systems, 2nd ed. (Homewood, Ill.: Richard D. Irwin, 1968), pp. 1-26, 34-37, 645-651; and H. C. Meal, M. H. Wachter, and D. C. Whybark, “Materials Requirements Planning in a Hierarchical Planning System,” International Journal of Production Research 25 (July 1987): 947-956.

16 Clay D. Whybark and Karl M. Ruppenthal, The Stanford Business Logistics Game (Stanford, Calif.: Stanford University, 1963).

17 Michael M. Conners, et al., “The Distribution System Simulator,” Management Science 18 (April 1972): B429-453.

18 Jay W. Forester, “Industrial Dynamics: A Major Breakthrough for Decision Makers,” Harvard Business Review 36 (July-August 1958): 37-66.

19 T. C. Harrington, D. M. Lambert, and J. U. Sterling, “A Business Planning Model That Integrates Marketing and Logistics,” Educators Conference Proceedings (Anaheim, Calif.: Council of Logistics Management, 1990).

20 David Ronen, “LSD–Logistics System Design Simulation Model,” Educators Conference Proceedings (Boston, Mass.: Council of Logistics Management, 1988).

21 V. Kasturi Rangan and Douglas R. Scott, Lotus Development Corporation–Channel Choice: Direct vs. Distribution, Harvard Business School, Case 9-587-078, 1986.

22 Kant Rao, Alan J. Stenger, and Richard R. Young, “Corporate Framework for Developing and Analyzing Logistics Strategies,” Annual Conference Proceedings (Oak Brook, Ill.: Council of Logistics Management, 1988), pp. 243-262.

23 Kant Rao, Alan J. Stenger, and Haw-Jan Wu, “Integrating the Use of Computers in Logistics Education,” International Journal of Physical Distribution Logistics Management 22, no. 2 (1992): 3-15.

ABOUT THE AUTHORS

Kant Rao is professor of business administration at Penn State. He was formerly deputy secretary in the Governor’s office of budget for the Commonwealth of Pennsylvania and prior to that in the Pennsylvania Department of Transportation. He served as resident summer fellow from 1990-94 in corporate strategy at the Consolidated Rail Corporation and has also worked for the Foxboro Corporation.

Alan J. Stenger is associate professor of business logistics at Penn State. He received a B.S. in mathematics and an MBA degree from the University of Michigan, and a Ph.D. from the University of Minnesota. He was previously manager of distribution planning for consumer products at the Dow Chemical Company, and has consulted with a wide variety of firms in logistics planning and inventory management. His current research focuses on the means for achieving truly integrated logistics and supply chain processes.

Haw-Jan Wu is assistant professor at Whittier College in Whittier, California, and a doctoral candidate in business logistics at Penn State University.

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