1. Logistics/Supply Chain Organization
A good organization structure does not by itself produce good performance--just as a good constitution does not guarantee great presidents, or good laws, or a moral society. But a poor organization structure makes good performance impossible, no matter how good the individual managers may be. To improve organization structure…will therefore always improve performance.
Peter F. Drucker
Chapter 15
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2. Organizing for Logistics/Supply Chain Management
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3. Objectives for Organization
Definitively defines responsibility, accountability, and authority–essentials for good management
Collects people together in a meaningful way to achieve the goals of supply management
Sets initial conditions so that proper cost tradeoffs can be realized
Facilitates the implementation of plans as well as the planning process
Aids administration
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4. Activity Fragmentation
in the Supply Chain
Responsibilities
President
Marketing
Finance
Operations
Distribution channels
Customer service
Field inventories
Revenue
Cost of capital
ROI
Inventory carrying costs
Supply alternatives and supply costs
Warehousing
Purchasing
Transportation
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15-4

5. Activity Fragmentation
in the Supply Chain (Cont’d)
Objectives
President
Marketing
Finance
Operations
More inventory
Frequent & short production runs
Fast order processing
Fast delivery
Field warehousing
Less inventory
Cheap order processing
Less warehousing
Long production runs
Lowest cost routing
Plant warehousing
15-5
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6. Activity Fragmentation
in the Supply Chain (Cont’d)
Reasons for fragmentation
Lack of understanding of key cost tradeoffs
Traditions and conventions
Other areas considered to be more important to the firm than logistics
Organization structure can be in an evolutionary state
Benefits of fragmentation elimination
Encourages important cost tradeoffs to be effected
Focuses on an important, defined area by top management
Sets the structure within which control can take place
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7. Organizational Choices
Informal structure
Persuasion of top management
Coordinating committees
Incentive arrangements
Profit sharing
Cross charges
Semi-formal structure
Matrix organization
Formal structure
Line--creates value in products, therefore it has operating status
Staff--provides assistance to the line organization
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8. Logistics Matrix Organization
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9. Formalized, Centralized Organization
Chief
executive
officer
Vice-president
Vice-president
Vice-president
Vice-president
Finance
Operations
Logistics
Marketing
Manager
Manager
Procurement
Warehousing and
materials handling
Manager
Manager
Order processing
Transportation
and customer
and packaging
service
Manager
Inventory and
production
scheduling
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10. Organizational Positioning
Line vs. staff
Line is a “clean” organizational form, but staff may be preferred when:
A line organization may cause unnecessary conflicts among existing personnel
Logistics activities are considered less critical than selling, producing, or other activities
Planning is relatively more important than administration
Logistics is treated as a shared service among the product divisions
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11. Organizational Positioning (Cont’d)
Decentralization vs. centralization
Decentralize for quicker and more customized response to customer needs. Centralize to achieve economies of scale.
Large vs. small company
Small firms are likely to have a centralized form, but logistics activities are less clearly defined.
Manufacturing vs. service
Organization is likely to be directed toward the physical supply side of the business. Distribution has been a relatively neglected activity in service firms.
Administrative titles
15-11
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12. Centralized Organization
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15-12

13. Decentralized Organization
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14. Interorganizational Management
Managing physical supply of vertically related, but legally separate firms.
An untapped opportunity because members work at cross purposes.
Cooperation and trust are the keys to benefits.
But, benefits may “pool” with one or a few channel members.
Redistributing the benefits requires:
Metrics to identify and measure potential benefits
Information shared among members to build trust
Methods for fair redistribution of the benefits
15-14
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15. Interorganizational Mgmt (Cont’d)
Typical interorganizational channel
Seller
Buyer
Carrier
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16. Interorganizational Mgmt (Cont’d)
Example
Suppose a supply channel is composed of two members—a buyer and a seller. The buyer annually produces D = 10,000 units of a product. The buyer incurs an ordering cost of Sb = $100 when buying from an upstream supplier. The buyer’s holding cost for one item is Hb = $10 per year. Based on the EOQ formula, the buyer prefers to place orders of the size:
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17. Example (Cont’d)
On the other hand, the seller produces to order whenever one is received from the buyer. The setup cost for producing a batch is Ss = $300 and the total annual setup cost (Cs) depends on the buyer’s quantity: Cs = $300D/Qb. Obviously, the more frequently the buyer places orders, the more setup costs are incurred by the seller.
If the channel is managed as a single entity, the order quantity to minimize channel cost is:
15-17
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18. Example (Cont’d) Total costs in the supply channel Q Q 2,000 4,000
6,000
8,000
10,000
12,000
14,000
300
500
700
900
1,100
1,300
1,500
Order quantity, units
Cost, $
Supply Chain cost
Seller’s cost
Buyer’s cost b Q c Q
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19. Example (Cont’d) Costs in tabled form Buyer’s Supply Chain’s optimal
Q = 447
Q = 894 a
Seller
$6,711
$3,356 b
Buyer
4,472
5,589 c
Supply
Chain
11,183
8,945
aTCs = SsD/Qs
bTCb = SbD/Qb + HbQ/2
cTCc = (Ss + Sb)D/Q + HcQ/2
Potential benefit
of $2,238
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20. Example (Cont’d) Conflict resolution Formal transfer mechanisms
Price adjustments
Order-size minimums
Informal transfer mechanisms
Power
Coercive power
Reward power
Training
Referent power
Use of buyer’s or seller’s good name
Trust
Communication
Sharing information
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21. Alliances and Partnerships
Benefits
Reduced cost and lower capital requirements
Access to technology and management skills
Improved customer service
Competitive advantage such as through increased market penetration
Increased access to information for planning
Reduced risk and uncertainty
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22. Where to Perform Logistics Activities
Perform logistics activities in-house
Seek a competent partner
High
Where to Perform Logistics Activities
Importance of logistics
to company’s success
Low
Be a partnership leader
Outsource
Low
High
Company’s logistics management competency
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23. Alliance Choices Logistics system sharing 3PLs
Partnering through collaboration
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