Market-Logistics Objectives

Market-Logistics Objectives:- Many companies State their market-logistics objective as “getting the right goods to the right places at the right time for the least cost.” Unfortunately, this objective provides little practical guidance. No system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies large inventories, premium transportation, and multiple warehouses, all of which raise market-logistics costs. By redesigning its production assembly, medical manufacturer ConMed significantly increased productivity.  DELIVERING VALUE Nor can a company achieve market-logistics efficiency by asking each market-logistics manager to minimize his or her own logistics costs. Market-logistics costs interact and are often negatively related. For example: • The traffic manager favors rail shipment over air shipment because rail costs less. However, because the railroads are slower, rail shipment ties up working capital longer, delays customer payment, and might cause customers to buy from competitors who offer faster service. • The shipping department uses cheap containers to minimize shipping costs. Cheaper containers lead to a higher rate of damaged goods and customer ill will. • The inventory manager favors low inventories. This increases stock-outs, back orders, paperwork, special production runs, and high-cost, fast-freight shipments. Given that market-logistics activities require strong trade-offs, managers must make decisions on a total-system basis. The starting point is to study what customers require and what competitors are offering. Customers are interested in on-time delivery, supplier willingness to meet emergency needs, careful handling of merchandise, and supplier willingness to take back defective goods and resupply them quickly. The company must then research the relative importance of these service outputs. For example, service-repair time is very important to buyers of copying equipment. Xerox developed a service delivery standard that “can put a disabled machine anywhere in the continental United States back into operation within three hours after receiving the service request.” It then designed a service division of personnel, parts, and locations to deliver on this promise. The company must also consider competitors’ service standards. It will normally want to match or exceed the competitors’ service level, but the objective is to maximize profits, not sales. Some companies offer less service and charge a lower price; other companies offer more service and charge a premium price. The company ultimately must establish some promise it makes to the market. Coca-Cola wants to “put Coke within an arm’s length of desire.” Lands’ End, the giant clothing retailer, aims to respond to every phone call within 20 seconds and to ship every order within 24 hours of receipt. Some companies define standards for each service factor. One appliance manufacturer has established the following service standards: to deliver at least 95 percent of the dealer’s orders within seven days of order receipt, to fill them with 99 percent accuracy, to answer dealer inquiries on order status within three hours, and to ensure that merchandise damaged in transit does not exceed 1 percent. Given the market-logistics objectives, the company must design a system that will minimize the cost of achieving these objectives. Each possible market-logistics system will lead to the following cost: M T FW VW S where M = total market-logistics cost of proposed system T total freight cost of proposed system FW total fixed warehouse cost of proposed system VW total variable warehouse costs (including inventory) of proposed system S total cost of lost sales due to average delivery delay under proposed system Choosing a market-logistics system calls for examining the total cost (M) associated with different proposed systems and selecting the system that minimizes it. If it is hard to measure S, the company should aim to minimize T FW VW for a target level of customer service.

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