Objectives of Material Management System of M/s R.B Rai:-

To study the supply logistics: Procurement and Materials

To study Demand side logistics: Forecasting and Order Processing

To study Inventory Management and Control

To study storage facilities, Material handling equipment and packaging

Physical distribution transportation system

To study Change and transformation

To study building responsiveness

To study Faster innovation and creativity

INTRODUCTION OF MATERIAL MANAGEMENT SYSTEM

Materials management is the branch of logistics that deals with the

tangible components of a supply chain. Specifically, this covers the

acquisition of spare parts and replacements, quality control of purchasing

and ordering such parts, and the standards involved in ordering, shipping,

and warehousing the said parts.

It is a system of organizations, people, technology, activities, information

and resources involved in moving a product or service from supplier to

customer. Supply chain activities transform natural resources, raw materials

and components into a finished product that is delivered to the end

customer. In sophisticated supply chain systems, used products may re-

enter the supply chain at any point where residual value is recyclable.

Supply chains link value chains. Quality control is a process by which

entities review the quality of all factors involved in production. This

approach places an emphasis on three aspects:

1. Elements such as controls, job management, defined and well

managed processes performance and integrity criteria, and

identification of records

2. Competence, such as knowledge, skills, experience, and

qualifications

3. Soft elements, such as personnel integrity, confidence, organizational

culture, motivation, team spirit, and quality relationships.

The quality of the outputs is at risk if any of these three aspects is deficient

in any way.

Quality control emphasizes testing of products to uncover defects, and

reporting to management who make the decision to allow or deny the

release, whereas quality assurance attempts to improve and stabilize

production, and associated processes, to avoid, or at least minimize, issues

that led to the defects in the first place

The activities of sourcing, procuring and holding in readiness the raw

materials, components, sub-assemblies and packaging materials used by

manufacturing enterprises for production traditionally came under the

control of the executive responsible for production. From the early 1950s

through to the 1970s, production executives wielded considerable power

and authority in western manufacturing enterprises. These enterprises

focused on economical production, which often involved long production

runs of finished goods inventory.

In part, this was due to the difficulty of scheduling and controlling production

with mainly manual or rudimentary computer systems. Also, a focus on

lowest cost per unit of production dominated management thinking.

Frequently, this resulted in the cost of holding large finished goods

inventories being ignored or considered to be someone else's problem.

During the 1970s, improvements in mainframe computing power and the

introduction of smaller and cheaper mini-computers made the production-

planning task easier. Planning techniques such as Materials Requirements

Planning (MRP) and later Manufacturing Resource Planning (MRPII)

provided greater materials visibility to those charged with planning and

control of the production process. It also provided a relatively efficient

means of matching production requirements with finished goods inventories

and forecasts of customer demand for finished goods.

CHAPTER – 1

SUPPLY LOGISTICS: PROCUREMENT AND MATERIALS

1.1 Purchasing and procurement is the broad process that buys the

materials or services necessary for the organization’s production function to

meet customer requirements. Included in the process are activities like

identifying various suitable suppliers, purchasing from them, and monitoring

their performance. While this is defined very neatly in a few words, the

actual stages of the process can be quite extensive. For example, the

stages involved may include:

• identifying needs

• defining requirements for purchasing

• deciding if purchase is necessary or best option

• decide if purchase is to be existing commodity or made specifically.

• studying the market for suppliers and their market power; i.e., is the

market supplied by one, few or many suppliers

• listing all available suppliers

• selecting potential suppliers

• appointing suppliers

• receiving commodity or service

• Evaluating commodity or service received.

1.2 Warehousing and Storage

Warehouses are, typically, one storey facilities allowing for receiving,

storage, order picking and shipping of goods, providing at the same time

office and related space. They have an effective storage plan, use efficient

material handling equipment and information systems and make maximum

use of the height of the building.

Warehousing and storage can vary widely in what they provide, depending

on the commodity stored. On the one hand, there is the storage of iron ore

or coal. On the other, there is the warehousing of temperature and climate

sensitive goods such as foodstuffs, computers and pharmaceuticals. In the

logistics context, warehouses are points on the logistics chain where

commodities or goods are held before they are used in the next process or

consumed. Warehousing happens on both sides of the production function.

Raw materials can be stored in warehouses prior to use in manufacturing;

and finished product can be stored in warehouses before distribution to

retail outlets and other customers.

Figure 1 Warehousing and storage are usually required on both sides of

the production equation.

The main functions of warehousing or storage are:

• consolidation for onward transport

• product mixing for specific customer orders

• cross-docking (transferring goods from one to the other through the

warehouse) between suppliers and consumers

• Contingency stocks to overcome delays or peaks and troughs in the

normal transport chain.

Warehousing and storage costs can be quite high, depending on the level

of inventory that is being maintained and the nature of the material being

stored. Generally, the more valuable or perishable the commodity, the

higher are the costs. Organizations aim to reduce their costs as much as

possible. This is the main motivation to use JIT supply of goods for

production purposes.

The relationship between the level of inventory maintained and the amount

of transportation used is direct: the greater the amount of transportation, the

less need for inventory, and vice versa. The level of inventory is then

related to the amount of warehousing that is used. There are obvious trade-

offs to be considered.

If the inventory is required to be high, perhaps through unpredictable

delivery schedules or long distance of delivery, warehousing capacity and

usage has to be high. Warehousing costs go up with increased inventory

holding. At the same time, there are economies of scale in maintaining

large warehouses. Two warehouses of 50,000 square meters are more

expensive to operate than one of 100,000 square meters.

On the other hand, an increase in the number of warehouses would allow

an increase of production and a reduction in transport costs, reducing

overall costs. These costs will decrease as long as the inventory costs

remain lower than the cost of increased warehousing. Once that point is

reached, increasing the number of warehouses will result in an increase of

total costs.

This argument works effectively in reverse as well. Reducing warehouses

can also contribute to reducing overall costs through economies of scale

and focused transport movements. Better transport results in reduced

inventory costs.

The decision on the number of warehouses that a firm maintains depends

on the level of service it requires. If the warehouses are used for holding

goods that are then called upon to service customers quickly, particularly

those who require shipments in various locations and in small quantities, a

number of warehouses are obviously cost-effective. Another situation in

which large number of warehouses is recommended is when customers do

not allow sufficient lead time or demand is erratic.

1.3 Data and information System

The materials manager needs information like the identities of suppliers that

the organization uses, demand forecasts for production, existing and

desired inventory levels, production timetables or schedules and transport

routing. This mass of information cannot be beneficially processed without

the use of suitable systems. Numerous software packages are available for

specialized usage, tailored for specific branches of various industries. The

main benefit of modern and powerful packages is that they permit the

linking and using of information from different aspects of the material

management function.

The main issues in any management information system are the availability

of relevant information, its accuracy and the effective communication of this

for management purposes.

To provide ever increasing levels of customer service, organizations

depend on information, increasingly in real time, about their operations and

the location of the customer's consignment. From the organization’s own

perspective, data and information systems must serve useful corporate

aims like permitting inter- and intra-functional communications, processing

data into useful information, supporting the output of personnel in the

organization, creating a useful and easily accessible archive of information

and permitting the development/improvement of processes that constitute

the business. From the logistics perspective, the most important issue

remains being able to meet the needs of the customer in the pre-

transaction, transaction and post-transaction stages, support sales and the

accounting and finance functions.

Various information systems technologies are available today. These

include bar coding, electronic data exchange (EDI), data management

(including CD-ROM), artificial intelligence and expert systems and satellite

tracking.

1.4 Information systems in material management

Fundamentally, this is a system that links together the people, procedures

and the operations and provides pertinent information to the relevant

managers to support decision making. The main elements of the logistics

function can broadly be identified as materials management, market

information collection, management information and support systems, and

documentation. Good computer technology is essential to the effective use

of all these systems. Corporate management systems are incrementally

being amalgamated with logistics systems to provide effective overall

management. You can expect to see increasingly sophisticated information

systems being designed to:

• supply knowledge of customer needs and expectations

• reduce lead time in the performance of a service or in filling orders

• enhance the quality of data collected and information generated.

At the same time, there will be an emphasis on:

• developing employee acceptance of the new technology in order that

can be used effectively

• Constructing crosses functional and cross discipline teams in order to

enhance business performance.

Total quality management (TQM)

Short lead times to meeting the customer's orders have put a strong

emphasis on the production process in all areas of the organization. Most

attention has been focused on areas that have direct dealings with the

customer, such as transport. Leading logistics providers, like FedEx and

UPS, are making pick ups and deliveries in less than an hour from

notification. This impact on all parts of the organization in planning and

providing a highly responsive and reliable service. While internal systems

are being analyzed and refined, many organizations are turning to third

party providers who can meet specific requirements more cost effectively.

Quality Assurance

Quality assurance is today synonymous with the ISO 9000 series of

standards published by the International Organization for Standardization,

often incorrectly referred to as International Standards Organization, in

Geneva, Switzerland. These standards are used to control processes within

the firm as well as to demonstrate to others that there is a formal system for

developing, sustaining and managing the quality of the output.

1.6 Measurement and evaluation

Like all other processes, materials management must have proper systems

of control and measurement. To be able to control the process, it must be

properly measured. The firm must be able to collect data, identify each

stage of the process and make improvements. Typically, the stages to

identify and measure include:

• supplier performance, including the number of items

accepted/rejected, types of defects, efficiency of delivery

• inventory levels and inventory turn over, use of different types of

transportation

• material costs over time, comparing actual expenditure with forecast

spending, price effectiveness, cost savings and cost avoidance, new

work generated, work completed

• quality of supplier and finished product.

In the process of measurement, three critical variables exist. These are:

• the source and reliability of data

• the use of the data to generate useful information

• the purpose to which the data and information is being put.

The source and reliability of data is an important issue. Broadly, data can

be divided into two kinds - soft (personal service and customer satisfaction

ratings, for example) or hard (for example, product availability). Firm can

develop links and control variables that can impact on performance. These

can include differentiating between customer types, products, markets and

so forth.

1.7 MRP 1 and MRP 2

There are two kinds of MRP and the difference between them is important

to understand. MRP1 is materials requirements planning and MRP2 is

manufacturing resource planning. MRP1 is a production and inventory

control system that seeks to minimize inventories but retain sufficient

material for the production process. In addition, it helps in the planning of

manufacturing activities, delivery schedules and purchasing. When

production does not follow a constant pattern, e.g., when production is to

order, and demand for material is highly variable, MRP1 can improve

business results. The elements of MRP1 are shown in Figure 2

Figure 2 The MRP1 system

The disadvantages of the MRP1 system are obvious: It focuses on

reducing inventory, which can, in turn, raise total costs through increased

transport needs and unavailability of bulk discounts; and it does not cater

for supply interruptions.

MRP2 encompasses the whole range of activities involved in the production

process. In addition to the elements of MRP1, it has production planning,

resource planning, MRP1, shop floor control and purchasing. The system

was developed first by Oliver Wight and he classified it into four groups:

The benefits of the MRP2 system are again along the lines of those for

MRP1. They include inventory reduction, higher inventory turnover,

improved customer service, and reduction of costs. The following reading

discusses these systems and links them back to TQM.

CHAPTER – 2

DEMAND SIDE LOGISTICS: FORECASTING AND ORDER

PROCESSIONG

2.1 Customer Order Processing

Order processing is the core of logistics activity. The receipt of the customer

order is the trigger that sets into motion all the logistics functions that

culminate in the delivery of the product to the customer. Of prime

importance to good order processing is a good flow of communications,

which binds the entire system together, supported by a suitable and

efficient management information system that allows the processing of

customer orders as well as collecting relevant information for management

decision making.

For Example:

As far as the firm is concerned, the time to fulfill the customer's order is

from the time the order is received and entered into their system till the time

it is shipped. From the customer's perspective, the time to fulfill the order is

from the time the order is sent till the time product or service is received.

2.2 Environmental scanning

Events and situations in the global, market or company environments will

have an impact on the efficient filling and dispatching of orders for

customers. Environmental scanning, therefore, is a logistics activity that,

done well, can enhance the order processing function. Moreover, such

events and situations can seriously affect all of the activities of a company,

and the logistics manager must be constantly aware of the nature of the

environment in which the business is operating and be ready to adjust

product movement as required.

2.2.1 The environments

The various environments, and their influences on operations, that the

logistics manager should be aware of include:

• the global, or macro, environment

• the competitive, or market, environment

• the firm, or micro, environment.

The global environment. The global environment is the one that sets the

tone for the wider operations of the industry. In recent times, the events of

September 11, 2001 have had a major impact on the global economy. This

influences the commercial activities of various organizations. Associated

with that has been the military and other activity in different parts of the

world, with knock-on effects on local enterprises.

For Example

In Australia , Ansett Airlines went bankrupt in October 2001. Coupled with

the effect of September 11 events, this had a major impact on different

industries. In Tasmania , tourism and seafood production suffered

particularly seriously. The double uncertainty of safety and lack of air

service kept many overseas holidaymakers away. The impact on the

hospitality and supporting logistics providers was severe. Many firms, such

as those that provided services and products to the airline as well as

downstream industries, ceased operations and/or went bankrupt. Others

laid off staff in large numbers and lost vast amounts of corporate

knowledge.

In other parts of the world, insurance premiums on cargoes to certain parts

of the world have been raised in response to perceived security of

operations. In addition, oil and commodity prices have varied in response to

market sentiments. All these and similar factors have a major influence on

the competitive environment within which firms operate.

2.2.2 Approaches to scanning

In the carrying out of the environmental scan, various approaches can be

adopted. Broadly, these may be listed as:

• formal research

• informal research

• casual information collection.

Formal research is carried out for a specific purpose with a specified

budget, following a predetermined plan and methodology, and with

outcomes in mind. Informal research is carried out in an unstructured way

but with a defined purpose. Casual information collecting on a topic or

areas is just that: it has no definition or structure and the information

collected is general rather than specific.

Finally, environmental scanning can be described as continuous, regular or

intermittent.

Information about the environment can be collected through various means,

including canvassing employees who interact with the customers, vendors

and sub-contractors or through consultants. Each of these will provide

information of different kinds, all of which should be used to substantiate or

counterbalance what is already known, as well as discover developments.

One of the important contributions environmental scanning makes is

towards making forecasts.

2.3 Logistics needs forecasting

In this section, we will succinctly discuss the importance of forecasting

logistics demand.

The need to know what quantity of any product or commodity will be

required is important because it affects all the processes involved in the

logistics chain, from

sourcing till consumption by the customer. For the purpose of logistics,

forecasting demand means defining all the requirements to make the

product reach the market. This includes forecasting the level of inventory to

be maintained, allocating money and material resources to various markets

that have to be serviced, and planning activities that will service the

demand. Underlying all this is the element of cost. While all the activities

named above must be carried out, that should be done at optimal cost.

In the context of logistics, forecasting is divided into three categories:

• Long range

Made for three or more years, these forecasts are strategic in nature.

They tend to be aimed at sections of the market and are linked to

capacity and cost. They usually address resource allocation and

identifying desired asset levels.

• Medium range

Made for between one and three years, these forecasts are usually

aimed at designing budgets and planning sales. They will also be

linked to cost but to specific products rather than market segments.

Most often, these forecasts tend to identify quarterly variables.

• Short range

Made for up to one year, these forecasts are operational in nature.

They address specific items and units.

2.4 Lead time components

From the perspective of the customer, lead time is the time between placing

the order and receiving the delivery. From the supplier's perspective, it is

the time between receiving an order and getting paid for it, that is, the

period for which cash is tied up, usually taken from the time materials were

purchased to produce the product to the time that the customer buys and

finally pays for. This concept is further explored in the following reading.

the purpose of defining lead time is, of course, to reduce uncertainty and

inventory (costs). For this reduction to be realised, variable demand as well

as demand that is consistent must be considered. When demand is

consistent, the lead time and quantity of product demanded are known.

Inventory needs to be maintained at cycle stock level . This means that if,

for example, the corner shop sells 20 pots of honey every fortnight,

regularly, then the beekeeper only needs to have 20 pots available every

fortnight. The lead time (fortnight) and demand (20 pots) is known.

No extra inventory needs to be maintained. When there is uncertainty in

demand or lead time, a safety stock needs to be maintained. The aim is to

cover short term variables that occur in demand or lead time.

2.5 Enhancing forewarning of demand

It is desirable to get as much forewarning as possible of customer's

demand to be able to bring the logistics lead time as close to it as possible.

There are two ways of doing this:

• Get information on customer needs faster, before orders are placed.

• Understand reorder points of customers, to pre-empt orders.

EPOS. This is seen to work very efficiently in various supermarkets where

electronic point of sale (EPOS) systems are installed. The electronic till is

linked to the inventory level and sensitive data monitoring identifies

customer behaviour. If articles are being purchased faster than normal,

reorder points are adjusted to prevent stock out situations. Getting such

information allows the supplier to be prepared for changes in orders and be

able to source supplies in time. Buyers and sellers both gain form the

exchange of such knowledge. The logistics system becomes much more

responsive. Markets are becoming more time and price sensitive. Both

sides of the demand have to be addressed - not just cheaper but also

quicker!

ERP. A more recent development has been the emergence of enterprise

resource planning (ERP). This system records all transactions, produces

and executes orders and follows payments. In other words, it can schedule

all procurement and distribution activities. ERP is based on computing and

IT for data collection and information processing. The databases required

for making the best use of the potential of ERP are enormous.

Organization-wide computing and data collecting functions are linked into

the system and this data can be shared with suppliers and customers.

One of the perceived shortcomings of ERP is that it can get too accounting

oriented, that is, companies can get too focused on the savings in money

terms rather than on wider improvements of operations. In addition, ERP

packages are often customized for specific organizations. This has a cost

attached to it, although the resulting savings may far exceed this initial cost.

The personnel who use this system will have to be suitably trained as well.

CHAPTER – 4

INVENTORY MANAGEMENT AND CONTROL

Introduction

At the outset, let us clarify some terminology. All firms hold stocks of some

goods that they keep in storage until needed. The level of stock held varies

from firm to firm but, on average, it would not be too inaccurate to say that

20% of the annual turnover would be the amount of stock a firm holds in

some sort of storage. As you can imagine, this can be a big investment.

Much work has been expended in trying to reduce this and to not have

capital tied up in stock which is not in the process of being turned to

income. The move is towards lower levels of stock and shorter lead times,

as discussed in the last chapter.

So, stock is goods that are held in storage until they are used.

To keep track of what is held in stock, an inventory is taken of all these

goods and their quantities. An inventory is, therefore, a list of all the stock

. Very often, however, the terms stock and inventory are used

interchangeably. We must understand the meaning of the terms quite

accurately, as well as the fact that they are used frequently to mean each

other. When we talk of inventory management, we are talking about

managing all the stock that is recorded in the inventory of a firm.

3.1 Basic concepts and rationale for inventory holding

Stockpiles of raw material, processed material, semi-finished material,

finished material, spare parts, consumables, etc. that appear at various

points in a logistics channel are termed inventory. Inventory holding is a

basic of business, as it is of life. We see inventory holding all the time.

Animals do it as a normal function of their lives. Humans do too. Weekly

shopping for food and other household needs is an example. We maintain a

stock of goods that we think we will consume in a certain period in the

future. The rationale includes standard consumption, abnormal

consumption through expected or unexpected visitors, and allow for

considered unforeseen events. As uncertainty increases, higher stocks

result and can be the strength of an organization in being able to meet

customer needs in such conditions. Benefits from holding inventory are that:

• supply and demand can be smoothed

• abnormal consumption can be accommodated

• irregular supplies can be accommodated

• savings can be made from large purchases

• savings are made when price increases are expected

• stockpiled products might not be produced any longer, but might still

be required occasionally in the marketplace

• there is a reduction in transport costs through bulk buying

• there is security at times of emergency.

Inventory is, therefore, integral to the generic cycle of logistics from

procurement to consumption:

• Place an order with a supplier.

• Take delivery when it arrives (after lead time, studied in previous

chapters).

• Check, sort and store.

• Internal demand draws upon this stock.

• When stock falls to re-order point, another order is placed.

Inventory is a cushion between the distribution and consumption processes.

It absorbs the lead time factor as well as any errors that may exist in the

forecasting process. Buying in bulk often leads to economies of scale and

cheaper quotes. Inventories also act as a balance between supply and

demand.

3.2 Inventory costs

Inventories, therefore, are useful tools in the logistics chain, and there are

good reasons for them being there. However, they must be carefully

managed, because they also represent a significant cost. Keeping low

inventories and risking a stock out can be very expensive, for example. A

stock out occurs when there is a buyer for an item but the item is no longer

available. Custom will be lost in these circumstances, perhaps never to be

regained.

On the other hand, inventories, although usually shown as assets, are,

nevertheless, money tied up in material which is sitting in stock, not being

processed or having value added, and not with the customer, earning

payment. Maintaining inventories of increasingly processed stock is

incrementally costly. The decision that a firm has to make is whether it is

worthwhile locking up this capital in stock or investing the same money

elsewhere to get better returns.

3.2.1 Managing inventory costs

'The benefits of smart inventory management'. This short reading covers the wide range of topics that we will touch upon in this chapter. As such, it is a good introduction to our discussion to follow.

Broome, JT (1999), 'The benefits of smart inventory management', Nation's Business , June 1999, pp18 - 19.

From this basic understanding, we come to some important questions that an organization must address:

• What should be stocked? • When should orders be placed for more stock? • What quantity should be ordered?

The most fundamental is the first question. The answer is not straightforward.

Because stock outs are expensive, there is a risk-averting tendency in managers, which often leads to tendency to overstock. When overstocking is identified, stocks are often drastically cut and the process starts all over again. Deciding upon the timing and size of re-orders fixes the level of stocks, the amount of money tied up in inventory, the risk involved in maintaining the inventory and the service that can effectively be provided to the customer.

Holding a high level of stocks is costly. The trade-off then has to be made between lowering the level of stock, thus reducing costs, and sacrificing some of the benefits of a high level of stock. If the lower level of stock leads to a stock out, will that be acceptable? If operations have to be rescheduled due to a lack of some component in inventory, will that be acceptable occasionally?

The aim is to minimize overall cost, and the control of inventory is vital. Being vital, it has become subject to rigorous attention on the part of not only managers, but academics in the field of business. The lowest overall cost must define the various elements we have mentioned above - stock levels, amount of capital tied up in inventory, and the level of customer service that is acceptable.

Kilty, G (May 2000), 'Inventory management within the supply chain', Hospital Material Management Quarterly

, pp18 - 24.

In this reading, the writer identifies the need to study the entire chain of

events from procurement to distribution. In other words, the total cost must

be the focus of study to reduce inventory costs. Basically, inventory holding

costs can be divided into the following broad categories:

• the cost of buying one item, i.e., the purchase price

• the cost or re-ordering the item, i.e., order preparation, follow-up,

receipt of item, transport costs, quality check, and sorting

• the cost of storing the item for a given period of time

• the stock out cost.

The last one is the most complicated, possibly the highest cost, because it

involves the estimating of externalities and knock-on effects, including loss

of customer, disruption to operations, cost of overcoming these and so

forth.

Re-ordering. Looking at the first three items, we need to consider the cost

of ordering small and frequent deliveries of items against large and

infrequent ones. The small deliveries obviously cost less in direct terms but

may cost more in indirect terms when the cost of reordering and transport

etc are included. So, the frequent deliveries will have low inventory costs

but high processing costs. The reverse is true in the large deliveries but

infrequent ordering situation. In logistics related literature, we come across

a term economic order quantity (EOQ). EOQ is expressed as

Placing an order. Now that the optimum order size is decided, the next

question is: when should a re-order be placed? This depends on two

variables that we have pointed out in the last chapter - lead time and

demand. If demand remains fairly predictable, the re-order should be

placed when lead time will equal to zero stock. The new stock will then

arrive just as the existing stock is finishing. In practice, this accuracy of

prediction and consumption is the elusive grail. Organisations, therefore,

maintain a safety stock. Re-order then occurs when existing stock reaches

a level which is:

demand in the lead time + safety stock

This situation can be expressed diagrammatically, as shown in your

textbook in Figure 10-8 A basic pull inventory control model for a

replenishment part .

In the drive to solve the problems of lead times and re-order points, some

work has been done to identify best ways to control and reduce inventory

costs. One such process is a classic one - statistical process control ,

devised to solve quality problems in 1931 by Shewart. This process is

widely discussed in quality related literature but it is interesting to read its

application to the logistics context and to optimising inventory holding.

Pfhol, H-C, Cullmann, O and Stolzle, W (1999), 'Inventory management statistical process control: Simulation and evaluation', Journal of Business Logistics , vol 20, no. 1, pp 101 - 120.

Let us now step back and look at the two types of inventory controls described in the text.

3.2.2 Push and pull control methods

Push inventory control (pp340 - 342) is fairly straightforward and is based

on the fact that the product has to be stored at supplying points after

production.

The study gets a little bit more elaborate when we start looking at the Pull

Inventory Control (starting from page 342). It is useful to work through the

worked examples and calculations and understand how the process is

conducted. You will see, for instance, how a reorder point is established,

with an example given on page 340. This example is carried forward in

other places to illustrate the issues of data inaccuracies and non-

instantaneous re-supply.

The next section in the text, advanced pull inventory control , takes you

to further practical complexities that can be expected to occur in normal

operations. These take into account the concept of total cost and service

levels.

4.3 Types of inventory

Push and pull inventories are two of the main types. In this section, we will

overview the various other types of inventory that are commonly discussed

in logistics parlance.

Replenishment: This is inventory that is held for the normal process of

meeting demand in normal conditions. This occurs when demand and lead

times are accurately known. When this happens, no added level of stock

needs to be held. Sometimes this inventory is called 'cycle stock'.

Pipeline: Described well in your text on page 374, this is stock that is in

transit between one place and another. Cargo carried on ships is often

pipeline or in-transit stock.

Safety: This is the inventory maintained when there is uncertainty, e.g., in

lead time or demand or a combination of both. This inventory is sometimes

called buffer stock. We have studied aspects of it in the previous section,

when making calculations in the pull system.

Speculative: This inventory is held as an asset to be benefited from later.

Examples include bulk buying and receiving rebates or holding stock to

cover expected shortages of material or labour. Ships are sometimes

known to carry cargo between countries that they have carried in the

opposite direction earlier. This is also speculative holding and subsequent

trading on the world market. Another form of speculative inventory is

seasonal purchase of stock to be used or traded later in the year when

availability is poorer.

Obsolete: This is stock for which demand no longer exists. This can be true

for the whole company or for just one holding location. If it is for just one

location, this stock is usually transferred to where it can be used.

3.4 Inventory management

Inventory means various things to various people, even within one

organisation. The inventory manager sees it as his responsibility; the

purchaser sees it as stock that is available to him; the materials manager

sees it as something that he needs to maintain at certain levels; the

accountant sees it as dollars. For all of them, dynamic inventory control

gives real data on which they can base their decisions. Scanning an item at

the time of sale provides information on consumption, available stock, any

necessary adjustments to existing processes of re-ordering, moving over-

stocks to places where demand is high. Electronic point of sale (EPOS)

systems are widely used to provide such dynamic management but they

should be regularly reconciled with the actual holdings to adjust for

damage, theft or other inaccuracies that might creep into the system.

ABC classification. One of the basic principles in inventory management

is ABC classification, based on the Pareto principle, which says that 20% of

the product generates 80% of the sales. The ABC classification system is

described with an example in your text. Basically, the principle it follows is

this: the top 10% of the items are placed in class A, the next group in class

B and the slowest in class C. Each group is handled separately, keeping in

mind their particular market characteristics.

The next reading illustrates the use of the ABC classification and shows

how that can be used to better the returns on investment.

Petry C (June 2001), 'Key calculations for effective inventory control',

Metal Center News, pp. 1 - 33.

Very rarely can a logistics manager look at all his inventory and keep visual

track of it. Often, inventory of large organisations is spread out all over the

world, some of it in the 'pipeline' mode in transit on ships, aircraft, or on

various land transport modes. To be able to effectively manage his

inventory, the manager has to maintain records that can be adjusted

continually to replicate sales, purchases, deliveries and so forth.

The basic form of record keeping is the scratch-in, scratch-out method in

which each item is added or deleted manually. Clearly, this is not practical

in most operations these days and sophisticated computer systems are

used to perform essentially the same function, but with much more

functionality added in the form of inputs and available outputs.

3.4.1 Inventory management systems

Bjork R (December 2000), 'Inventory management systems', Internal

Auditor , pp40 - 44.

This paper focuses not only on the management of inventory but also on

how the organisation runs its business. The point is made that, regardless

of the systems used, it is the people who make the systems work.

Tracking procedures become more important when inventory is spread over

many points. In organisations that have global operations, this can be seen

to be crucial to their functioning effectively. Even for operations that are

much smaller in scale, inventory management systems play a crucial role

that underpins the commercial success of the organisation. In the aviation

industry, for example, inventory is maintained at various points around the

globe but can be accessed from any location. On the other hand, small

businesses that have a few outlets only can decide to pool inventory for all

outlets in one place and manage it centrally. Some items in the inventory

are easier to track because regulations require that they be suitably

numbered and identified (pharmaceuticals, vehicles, spare parts for

machinery are examples) but other items (clothes, for instance) may not be

so formally tracked. Such items are then tracked by the organisation's

inventory management systems.

Bar coding. Historically, supermarkets have been taking the lead in

developing responsive inventory management systems. When Toyota were

devising their JIT system, they studied the processes of supermarkets

carefully to see what lessons could be learnt. The most frequently used

method of inventory management in supermarkets is bar coding. Bar codes

are commonly based on the universal product code (UPC). If you consider

the usual experience of supermarket shopping, you see that the customer

collects their purchases and goes to the checkout where the items are

scanned. If there is a supermarket store card in the name of the customer,

this is scanned first. This links the customer to the purchase that is being

made. The information is recorded in a computer that provides the checkout

operation with the price, any tax, any special offers that may apply, and any

regulatory restrictions that may be in place. It provides the total cost of

purchase and prints out the receipt.

On the other side of the transaction, the system is recording particular

customer preferences and shopping patterns, as well as the items that have

been removed from the inventory. In this way, bar codes help to monitor

stock levels and instigate re-order procedures. The result of using bar

codes is efficient movement of stock from supplier to customer and a drop

in the amount of stock that has to be stockpiled. When allied to a customer

card, a large amount of data on the customer can be maintained which

helps when designing promotions aimed at specific groups of customers.

Bar codes use the thickness and separation between bars to code

information. The scan can read the full information in very quick time.

Generally, bar codes are mono-dimensional, which limits to some extent the

amount of information that can be stored in the code. There is a move

towards the use of two dimensional codes, e.g., with UPS. The drawback of

these is that they must be scanned in two dimensions for all the information

to be read.

Increasingly, containers are tracked through terminals by scanning the

barcodes on them as they go on their journey, often without stopping at the

gate. This speeds up movement of cargo while maintaining track of their

movement.

Wireless tracking. Sometimes called radiofrequency identification (RFID),

this method uses small transponders and readers that are linked to an

information management system. This allows the tracking of a large range

of items. The technology is applied in a wide range of logistics operations,

from automatic handling in terminals and warehouses to production line

functions. The versatile nature of this technology permits its application in

areas which can be unfriendly to human presence, such as, toxic

environments, heat and other micro atmospheres which can degrade

human performance.

The fundamentals of the working of this technology are that the transponder

responds to a signal from an antenna and sends back a signal. This

information can be merely recorded or rewritten into another function and

exchanged with a control or activating system. This allows operations in the

dark, permits automation in a wide range of activities and keeps operating

costs low and tracks tagged items in real time. Incrementally, this

technology is replacing bar codes.

Global positioning systems (GPS). These systems use an array of

satellites to produce very accurate location coordinates. GPS is widely used

to track vehicles, ships, aircraft, containers, and shipments. The use of this

system allows, in conjunction with the organisation's management

communications systems or the Internet, the availability of real time tracking

and location of items or shipments. The widespread use of this technology

has made it a base technology for managing the logistics chain.

4.4.2 Computers and inventory management

Computing power remains the platform on which all modern inventory

management systems depend. Special software is constantly being

developed and integrated to manage inventory; and computing hardware

provides more and more effective computers on which to run the software.

When bar coding, for example, RFID and GPS are linked together with a

wider management system, and a streamlined logistics management

process evolves. Within this process specific components can be identified

for which specialised software is used. Examples include warehousing

management systems, terminal operations management systems, yard

planning and control systems, equipment control systems, vehicle booking

systems and so forth. With suitable software, communications between the

various nodes of the logistics chain (warehouses, terminals, workers,

planners, etc.) is maintained by the use of radio signals. The labour

intensive practice of updating information has been replaced with

technology that carries out the mundane tasks of counting, recording and

transmitting information.

Intelligent transport systems (ITS). Intelligent transport systems are

complex IT related technologies applied to various transport and logistics

functions. They include traffic, transport and commercial vehicle operating

systems using powerful computing and control functions like collision

avoidance, ground sensors to maintain track of movement, video camera

linked vehicle management, electronic guidance systems, automatic vehicle

location and GPS. This is new technology that is making inroads into

warehousing and terminal operations. The ability to implement these

systems is controlled not by what is technologically possible but by what

government policies will allow and social tolerances to technology will

accept. The use of these technologies is expected to contribute to greater

reliability in the logistics chain and reduce costs to users as well as

management.

The integration of the various technologies is contributing strongly to overall

management of the logistics chain. New opportunities for conducting

operations are offered and are being used. The capacity and productivity of

operations are being consistently improved as are the time and cost of

operations.

4.5 Inventory management and business success

Healy, J (February 2001), 'Using inventory management to maximise

profit', The Motion Systems Distributor , pp31 - 33.

Business success, in the current context, is having the right product

available at the right time in the right place in the right quantity. With this in

mind, some factors that indicate the effectiveness of inventory management

can be identified:

1. Customer satisfaction: Finding out whether customers are satisfied

with the current level of service provided is one indication of the

effectiveness of the management of inventory. This factor can be

explored through tracking customer loyalty, repeat orders, order

cancellation, incidence and frequency of stock outs, and general

relationship with suppliers and sub-contractors.

2. Expediting orders: The more often this occurs, the clearer the

indication that the inventory management system is not being

effective. Reordering may not be occurring at the correct levels of

stock or lead times are not being realistically built into the reordering

process. The fundamental issue here is that the stock is not available

when it is needed.

3. Inventory turnover: Annual revenue from stock divided by value of

stock indicates the level of inventory turnover. While high inventory

turnover indicates a good management of stock, it can also result in

some items being not available when needed. For this reason,

inventory turnover must be measured for individual items or locations,

rather than through the whole spread of operations.

4. Inventory and sales: As sales increase overall, the level of inventory

held should decrease if the management of inventory is working as it

should. The holding of stock must not be higher than the sales of that

stock. When demand for specific items increases, it is often more cost

effective to improve delivery processes and improve order processing

than increase stock held in reserve.

CHAPTER – 4

STORAGE FACILITIES, MATERIALS HANDLING EQUIPMENT AND PACKAGING

Introduction

In the previous chapter you were introduced to the topic of warehousing

and storage. The first part of this chapter focuses on the management of

warehouses and distribution centers. This is essential for cost reduction and

productivity of integrated logistics. There is also a brief explanation of

warehouse information systems which are absolutely essential today for

proper management of a warehouse. The second part of this chapter

discusses the concept of material handling which is related to the

movement of raw material, inventory and finished product within a facility

structure. Closely related to material handling is correct packaging which is

the last topic discussed in this chapter.

4.1 The management of warehouses and distribution centres

4.1.1 Storage alternatives

The main functions of a warehouse or distribution centre are outlined in

subsection 2.1.2 of chapter 2. There are four basic alternative methods of

financial and legal arrangements associated with the storage of goods:

owning, renting, leasing or storing in transit (Ballou 2004, p.479). Obviously,

the costs relating to the storage system are very important for any

organisation. Depending on these it may decide to use one of three types of

warehousing: private, public or contract.

A private warehouse , as the name suggests, is owned by the firm

producing or owning the goods. There are several advantages which the

firm expects out of the capital investment in the space. These are listed on

page 479 of your text. Basically, this type of warehousing offers better

control, lower costs and greater flexibility compared to rented warehouse

space. Also, there is the tax advantage of depreciation.

However, because of its high fixed costs, the efficient, profitable use of a

private warehouse needs a constant product throughout to make it a viable

proposition.

A public warehouse rents out storage space to individuals or firms. It offers

a wide variety of services including packaging, inventory maintenance, local

delivery and consolidation. A firm can gain several benefits by using public

warehousing, the most obvious one being that it does not need to tie up a

sizeable amount of money in capital investment. Public warehouses can be

classified into a number of groups which are listed on page 480 of your text.

These offer storage space for commodities, bulk products, reefer,

household goods and general merchandise.

The third type is contract warehouse, which is a specialised form of public

warehousing. It provides its clients with customised services, thus allowing

them to concentrate on their speciality. In essence, contract warehousing is

a type of third party integrated logistics organisation usually providing a

'higher level of quality' than a public warehouse. The On-Line warehousing

facility operated for Mars in Ballarat is a good example of contract

warehousing. It is specifically built and is operated to handle Mars's

products (candy) and some of their raw bulk material

(Bloomberg, Murray & Hanna 1998).

4.1.2 Warehouse design

Whatever method you choose, consideration of warehouse design is

essential. The five interrelated factors which need to be considered when

designing a warehouse or renting an existing warehouse are:

• land and building

• management and staff

• storage and handling equipment

• computer and software

• operating methods and procedures

Each of these factors must be considered in a systems and total cost

approach, for each has the ability to affect the others (Bloomberg, Murray &

Hanna 1998).In countries like Australia, where land costs are not high,

single storey warehouses are preferred because they allow for straight line

flow of products. In countries like Japan , Singapore and Hong Kong ,

where land costs are exorbitant, multi-storey storage facilities are very

common. Prior to designing a warehouse, the material handling system

should be selected so that the storage facilities are designed around it.

Also, the entire cubic space of the warehouse should be fully utilised.

Kum, KY (2000), 'Managing a single warehouse, multiplier retailer

distribution center', Journal of Business Logistics, vol. 21, no.2,

pp. 161-172.

4.1.3 Productivity associated with warehousing

In today's business setting, most firms dealing with integrated logistics are

conscious of measuring warehouse performance because it directly impacts

on their profits. In terms of productivity measures (ratios), there are three

basic approaches. The first is productivity , which is defined as the ratio of

real output to real input. An example of this is the number of cases handled

per labour hour. The second productivity measure is called utilisation

which is defined as the ratio of capacity used to available capacity. This

could refer to the amount of space used by pallets, the number of employee

hours logged to those available or even the amount of cubic space used

relative to that available. The final measurement is performance which is

the ratio of actual output to standard output. Examples could include cases

or orders picked per hour compared with what was planned and equipment

hours run compared to what was planned (Bloomberg, Murray and Hanna

1998).

Ackerman (1983) identified the following important areas for improving

warehouse efficiency:

• Improving forecasting accuracy

• Freeing up labour bottlenecks

• Reducing the amount of product handling

• Improving the product packaging

• Smoothing out the variations in product flow in the warehouse

• Installing improvement targets

• Decreasing the distances travelled in the warehouse

• Increasing the size of the units handled

• Constantly seeking round trip opportunities

• Improving the cube utilisation in the warehouse.

4.1.4 Warehouse information systems

Information technology (IT) has provided to the warehousing process

several benefits, such as improved customer service, efficient operations

and lower costs. These benefits flow from a warehouse's various IT

interfaces in receiving, storing, shipping, order processing, packaging and

quality control. Some of the IT used in warehouses today are electronic

data interchange (EDI), automatic data collection (ADC) and radio

frequency (RF).

Electronic data interchange refers to the exchange of machine-readable

data in a standard format between workstations that belong to different

firms engaged in the integrated logistics process. Effectively, EDI creates

paperless transactions and this has several advantages as compared to the

traditional paper-based method.

Automated data collection uses computer technology to capture data

using machine-readable bar codes and scanners. This has potential

benefits ranging from lower inventory costs to better overall quality control

in the warehouse.

Radio frequency is comprised of terminals, network controllers and radio

frequency units. The terminals can be hand held, vehicle mounted or fixed

collectors of data. The radio frequency units are transmitters/receivers that

communicate with the terminals. A RF system is a series of antennas

placed under

the roof of the warehouse (Bloomberg, Murray & Hanna 1998). This system

when used in the warehouse has several benefits, some of which are

increased productivity, decreased errors, better utilisation of space, better

control of stock rotation and improvement in overall customer service.

Kiefer, AW & Novack, RA (Spring 1998), 'An empirical analysis of

warehouse measurement systems in the context of supply chain

implementation', Transportation Journal, pp.19-27.

4.2 Materials handling

4.2.1 Objectives of material handling

Coyle, Bardi & Langley (1996) enumerate the following general

objectives of materials handling:

1. Increased effective capacity of warehouse. Many warehousing

facilities waste much space by not storing goods as high as possible.

Warehouse managers must focus on cubic space, not just on floor

space.

2. Minimisation of aisle space. The type of materials handling equipment

a company uses will affect aisle width. For example, forklift trucks

very often require turning space and so they may necessitate much

wider aisles than are required by other types of materials handling

equipment.

3. Reduction of the number of times product is handled. Usually,

products are received in a warehouse and placed in a storage area

before being moved to an order selection area to be 'picked' and

made up into orders. Finally they are moved to ready them for

shipment to customers. This process involves several unavoidable

movements. However, in some warehouses, goods are moved

several times in each area and this additional handling causes

inefficiency. Hence, the materials handling system should be

designed so that movements to, within and from a warehouse are

minimised.

4. Development of effective working conditions. The materials handling

equipment, while enhancing productivity, should simultaneously

minimise danger to workers operating them and also to workers in the

vicinity.

5. Reduction of movements involving manual labour. The system should

be designed in such a way as to eliminate as much as possible short

distance warehouse movements which are repetitive, monotonous

and involve heavy manual labour. This objective suggests that

companies should automate warehouses as much as possible.

6. Improvement of logistics service. Materials handling equipment

improves efficiency by making the logistics system respond quickly

and effectively to plant and customer requirements.

7. Reduction of cost. Effective materials handling can contribute to cost

minimisation by increasing productivity and also by more efficient

space utilisation.

4.2.2 Materials handling systems and equipment

There are three types of materials handling systems: manual, mechanised

and automated. The choice of a particular system will depend on various

factors such as physical structure of the warehouse, types of materials to

be handled, types of movements and of course the initial capital outlay. The

objective of the materials handling manager is obviously to ensure that

materials must be in the right place at the right time and in the right

quantity.

Manual materials handling systems are labour intensive and lead to

inefficiencies in space utilisation and product movement. Examples of these

systems are low racks, drawers, bins, manual and gravity flow conveyors.

Mechanised materials handling systems such as the forklift truck and

pallets, towlines, cranes, storage rack systems and wheel conveyor have

replaced much of the labour intensive handling, thereby dramatically

increasing efficiency.

Automated materials handling systems are more sophisticated and more

efficient than either of the previous two.

These systems use carousels, optical scanners, item picking equipment,

automatic storage and retrieval systems, high-rise rack systems, automatic

guided vehicles (AGV) and robots. Although these are highly productive,

some companies refrain from using them because of their high initial costs,

their requirement for special types and sizes of facilities and lack of back-up

systems in case of failures.

4.2.3 Materials handling productivity ratios

The efficiency and productivity of a particular materials handling system can

be calculated and therefore demonstrated by the use of materials handling

productivity ratios. These ratios are:

1.

2.

3.

4.

5.

6.

Maloney, D (October 2001), 'Achieve', Modern Material Handling, pp.

38-43.

4.3 Packaging

4.3.1 The role of packaging

Packaging of goods serves the following purposes:

• It provides information about the product the package contains. This

is a marketing function which provides information and makes it more

appealing to the customer. It also provides information to logistics

people, for example use of colour codes, symbols and numbers which

are used to store goods in a particular fashion.

• It improves efficiency in handling and distribution. Packaging should

be designed to maximise ease of handling in the warehouse and

during transportation.

• It meets the needs of the integrated logistics activities. Particular

attention must be paid to the package being compatible with the

customer's materials handling equipment.

• It protects the goods in the package so that they are not damaged

during handling, storage and transportation.

• It provides unitisation; that is, it allows packages to be consolidated

into larger packages and finally palletised or unitised into a single unit

such as a container.

• It facilitates the use of bar code scanners during the handling, storage

and distribution of the goods.

4.3.2 Packaging materials

There are two types of packaging: consumer or interior packaging and

industrial or exterior packaging. The marketing manager is usually most

concerned about the interior packaging because basically it markets the

product when it competes with others on the retail shelf. On the other hand

the logistics manager is concerned about the exterior packaging as it

protects the goods that a company will move and store in the warehouse.

There are many types of exterior packaging materials available today. The

conventional use of harder materials such as wood or metal containers is

being replaced by the use of softer packaging materials such as plastic.

Cushioning materials like shrink-wrap, air bubble cushioning, cellulose

wadding and corrugated paper are used inside the package to protect the

product from shock, vibration and surface damage during handling. These

materials are highly protective, inexpensive and also lightweight. A major

concern about the cost and environmental impact of packaging is the waste

that containers and packaging produce. One way to reduce this waste is to

reduce the overall packaging that a company uses. Another way is to

recycle packaging materials.

5.3.3 Packaging design considerations

In developing an appropriate interior and exterior packaging design we

must recognise that a product's package is usually in use in five basic

locations over the product's lifetime. This is particularly true for consumer

non-durables or so-called packaged goods. The five locations are the plant,

the warehouse, the transportation unit, the retail outlet, and the home or

place of use (Coyle, Bardi & Langley 1996).

We should design the package so that it serves the needs of the five

locations mentioned above. We may also examine the packaging design

from the perspective of various logistics areas and of other areas like

marketing and manufacturing.

Forcinio, H (January 2002), 'What does pharmacy automation mean

for packaging?', Pharmaceutical Technology, pp. 22-26.

CHAPTER – 5

PHYSICAL DISTRIBUTION TRANSPORTATION SYSTEM

Introduction

This is the last chapter in the first section of our chapter. It closes our study

of the major aspects of logistics.

This chapter will focus on the physical distribution system and

transportation systems. Transportation is the physical link between the

various activities associated with an integrated logistics system. Without

transportation raw materials cannot flow to the suppliers or manufacturers

of goods, nor can the finished product reach wholesalers and retailers and

finally the customer or end user. This chapter outlines the salient features of

the different modes of transportation, intermodal services, transportation

cost structures and carrier selection process. Finally we shall briefly discuss

transport management, which is one of the very important functions of a

logistics manager.

5.1 The role of transportation in logistics

We can conceptualize a company's integrated logistics system as being a

series of fixed points located spatially between the buyer and seller, where

the goods come to rest. The role of transportation is to facilitate the flow of

goods between these fixed points and to bridge the buyer-seller gap.

Hence, knowledge of the transportation system is extremely important for

the efficient and economic operation of a company's logistics function.

Transportation adds value to the company by creating time and space

utility; the value added is the physical movement of goods to the place

desired and at the time desired (Coyle, Bardi & Langley 1996, p318).

In today's global business, supply chains are becoming increasingly longer

and transportation needs to connect buyers and sellers who may be tens of

thousands of miles apart. This increased spatial gap results in greater

transportation costs and time, which in turn necessitates higher inventory

and storage costs. Freight movement has been observed to absorb

between one-third and two-thirds of total logistics costs (Ballou 2004,

p164).

In an integrated logistics system, the choice of transportation service

directly impacts on inventory and storage costs. For example, if a company

switches from rail to air transportation to move finished goods from a factory

to the customer, it would incur lower inventory and storage costs. This

advantage will of course be at the expense of higher transportation costs.

Hence the company has to make the transportation decision taking into

account the total cost or systems approach, which considers all the

elements of the integrated logistics system.

Lalani, N (May 1999), 'Transportation management and operations for

the 21 st century', ITE Journal, p. 18.

5.2 Economic and service characteristics of the modes of transport

5.2.1 Rail

Railroads are considered to be slow movers of raw materials, such as coal,

grain and sand and also low-valued manufactured goods like paper and

wood products. They are basically long haulers of domestic goods and

charge reasonable freight rates. Their main competitors are domestic water

carriers for large, bulky products and motor carriers or ships for higher

valued goods. The relatively slow speed and short car distance travelled in

a day reflect the fact that the majority of freight car time is spent in loading

and unloading operations, moving from place to place within terminals,

classifying and assembling cars into trains, or standing idle during a

seasonal slump in car demand (Ballou 2004, p171).

Railroads are either government owned (common carriers which sell their

transportation services to all shippers) or privately owned (usually owned by

shippers with the intent of transporting their own products). The majority of

the railroads throughout the world are government owned. The primary unit

for charging freight on common carrier railroads is called a carload (CL).

This refers to a predetermined shipment size which is usually the capacity

of a rail car. For smaller shipments, a less-than-carload (LCL) may be

offered. In the United States, larger freight cars are being used with an

average freight car capacity of 83 tons (in the US, 2000 pounds to the ton),

and single-commodity trains (called unit trains) of 100 or more cars per train

are being used with rate reductions of 25 to 40 percent over single carloads

(Ballou 2004, p172).

In the past few decades railroads have lost much of their freight business to

road hauliers or trucks, but recently with the increase in intermodal

transport operations, they have been performing relatively well. They now

offer their clients innovative services; for example, various stop-off

privileges which permit partial loading and unloading between origin and

destination points and pick-up and delivery of goods.

5.2.2 Road

After airlines, trucks or road hauliers are the second fastest mode of freight

transportation and have the major advantages of door-to-door flexibility and

the ability to meet delivery schedules owing to the scope of their geographic

coverage. They move freight with smaller average shipment sizes than rail

and offer reasonably fast and dependable delivery for less-than-truckload

(LTL) shipments. Their primary disadvantages are the high cost of service

and their inability to handle all types of freight owing to highway safety

restrictions that limit the dimensions and weight of shipments.

In addition to the common and private legal classification of carriers,

trucking also offers services as contract carriers where they enter into

contractual agreements with shippers. This concept is similar to the

chartering of ships.

Truck companies are also classified according to:

• employment size (number of employees) and length of haul; for

example, long distance-interstate, long distance-intrastate, short

distance and road freight forwarding

• type of operator; for example, fleet operator, own account operator

and owner operator

Fleet operators are companies which own five or more trucks; own

account operators are companies which have their own products to

transport, like Shell and BP; and owner operators are individuals

owing between one and five trucks.

Shulman, R (February 1999), 'Trucking in real time', Supermarket

Business, pp. 14-22.

5.2.3 Air

The primary advantage of air transportation is speed. Airlines specialise in

the transport of high value goods, documents and perishable items.

Generally governments of countries own the air terminals and air space and

airlines purchase essential airport services, for example, fuel, storage,

space rental and landing fees. Additionally, airlines need to own or lease

ground handling, pickup and delivery equipment, which need to be

depreciated over time. Variable costs of operation are dependent on the

flying distance as aircraft are highly inefficient in the takeoff and landing

phases. This means that substantial per-unit cost reductions can be gained

from operating aircraft over longer distance. Also, the volume of freight

carried influences variable costs. It is advantageous, therefore, to operate

larger capacity aircraft. Aircraft are limited, however, by their physical

configuration from carrying large volumes or a large variety of different

products

5.2.4 Water

Ships are the primary mode of international transportation for bulk

commodities, general cargo and containers because of the low per-unit cost

structure of transportation and their ability to carry almost any type of

product. They suffer from several limitations, however, such as slow speed,

an inability to offer door-to-door service and, at times, unreliable delivery

schedules.

Ships can be broadly categorised under coastal and foreign going fleets.

The main costs for ship operators are harbour and dock dues, and terminal

handling costs, which include the costs for loading and discharging of the

goods. The cost of transportation reduces significantly with distance and

size of shipment.

5.2.5 Pipeline

Pipelines are a unique mode of transportation as they are fixed and the

product, which is either liquid or gas, moves through them. Although they

have severe limitations in terms of the type of products that can be

transported through them, they are capable of moving more tonnes in a

single shipment than any other mode of transportation. They have very high

fixed costs associated with the installation of the pipelines and pumping

equipment, as well as the construction of terminals. Therefore, to be

competitive with other modes of transportation, they must work on high

volume so as to recover these high fixed costs. The costs per ton-mile

decreases substantially with larger pipes, provided there is adequate liquid

or gas to transport through them.

5.3 Intermodal transport services

Intermodal transportation is defined as the utilisation of two or more modes

of transportation combined to transport a particular shipment. The common

intermodal combinations involve rail, road and water transport; and their

main feature is the exchange of equipment, such as truck trailers, between

the transport modes. The standarised ISO container is transferable to all

surface transportation

modes with the exception of the pipeline. Containerisation offers a door-to-

door service without the necessity of handling goods in the container at any

point of intermodal transfer. In the RoRo (roll-on, roll-off) concept, truck

trailers are loaded in the hulls of ocean-going ships and at the discharge

port, prime movers back into the ship, hook up the trailers and drive away.

Another type of intermodal transport consists of a combination of truck-rail-

sea freight movement, involving either truck trailers (trailer on a flatcar or

TOFC) or containers (container on a flatcar or COFC). In either case, a

truck moves a trailer or container to the rail head where it is offloaded onto

a railroad flatcar and then shipped to the port where the trailer/container is

transferred onto the ship via overhead cranes. At destination the same

process takes place in reverse (Bloomberg, Murray & Hanna 1998).

5.4 Transportation cost structures

There are basically three types of costs associated with transportation.

These are fixed costs, variable costs and common or joint costs. Let us

briefly discuss each of these types of costs.

Fixed costs. Fixed costs are those that do not vary with change in output;

in other words, they are constant regardless of the firm's activities.

Examples of fixed costs would include capital outlay for roadways,

terminals, transport vehicles and equipment and carrier administration.

Variable costs. Variable costs change as the output varies. They include

costs such as fuel and labour, equipment maintenance, handling, pickup

and delivery. The easiest way to determine whether a certain element of

cost is fixed or variable is to assume that the business has shut down, in

which case if the cost is still incurred it would be a fixed one. However, in

the long run even fixed costs are said to vary. As there are significant cost

differences between transportation modes, there is no precise allocation

between fixed and variable costs for some of a firm's activities. Some costs

are partly fixed and partly variable and allocation of cost elements into one

class or the other is a matter of individual perspective. Examples are costs

related to maintenance and handling.

Besides the fixed and variable costs discussed above, there are other costs

incurred which have no simple formula for cost allocation and production

costs on a per shipment basis remain a matter of judgement. For example,

the costs incurred by carriers on their return or backhaul service need to be

taken into account in the total costing. These costs are categorised under

common or joint costs. It is assumed that the forward haul is the heavy

traffic direction and the backhaul is the light traffic direction. However, this

may not always be true, especially if carriers offer shippers heavy discounts

on the backhaul service.

5.5 Transportation rate profiles

The rates or tariffs charged by a carrier will depend on its market and cost

structure. The two basic pricing methods used by carriers to determine their

rates are: cost-of-service pricing and value-of-service pricing.

Cost-of-service pricing and cross subsidisation. When using cost-of-

service pricing method, carriers charge rates which, as a minimum, cover

their variable costs or marginal costs of operation. This method is usually

applied to low value products, where shippers' profit margins are low, hence

they are on the lookout for cheaper transportation. Some carriers use this

method of pricing for certain goods, which is offset by the higher rates

charged for others. This concept is called cross subsidisation.

Value-of-service pricing. When using a value-of-service pricing method,

carriers charge rates which the traffic will bear or which shippers are willing

to pay. Hence they maximise their revenue regardless of the costs involved

in the transportation of the goods.

The various factors affecting the pricing of transport services is shown in

the table below:

Table 6.1 Factors affecting the pricing of transport services

Pricing Variable Elements of Pricing Variables Commodity cost factors

Route cost factors

Commodity demand factors

Loading characteristics

Susceptibility to loss and damage

Volume of traffic

Regularity of traffic

Type of equipment required

Distance

Operating conditions

Traffic density

Value of the commodity

Economic conditions in the user industry

Rates on competing commodities

Route demand factors

Competition with other carriers

Production-point competition

Traffic density

Source: Bloomberg, D.J., Murray , A. & Hanna, J.B. 1998, The

Management of Integrated Logistics, Prentice Hall of Australia Inc., 2

nd edition.

5.6 Modal and carrier selection

There are a number of service characteristics that need to be considered

prior to selecting a particular mode of transportation and more specifically

the type of carrier to be used for a particular shipment of goods. The

important service characteristics are usually related to the cost, speed and

dependability. Others that affect the selection process are capability,

availability and adequacy of equipment, availability of service, frequency of

service, security, claims handling, shipment tracing and problem-solving

assistance to name just a few.

When a transportation service is not used to provide a competitive

advantage, the best service choice is found by trading off the cost of using

a particular transport service with the indirect cost of inventory associated

with the performance of the selected mode. That is, speed and

dependability affect both the shipper's and the buyer's inventory levels (both

order quantity stock and safety stock) as well as the amount of inventory

that is in transit between the shipper's and buyer's locations (Ballou 2004,

p220).

When evaluating alternative choices of transportation, it is necessary to

consider the lowest total cost, which includes not only the cost of

transportation, but also the cost of the inventory that is required as a result

of the choice of transport mode. When slower and less reliable services are

selected, for example, it is necessary for shippers and buyers to carry

higher levels of inventory, both order quantity stock and safety stock.

Moreover, the selected service should be consistent with customer service

goals while meeting customer service objectives.

Wisner, JD & Tan, KC (Fall 2000), 'Supply chain management and its

impact on purchasing', The Journal of Supply Chain Management, pp.

33-42.

5.7 Management of the transport function

Integrated logistics managers are required to manage the transport function

of their 50rganizations. In the past, some of these 50rganizations had

appointed traffic managers who were responsible for the daily operation of

the transportation activity. However, traffic management today has been

incorporated in the job functions of integrated logistics managers. Hence,

they must understand the management of transport operations both in the

inbound and outbound phases of the logistics process so that the materials

management and distribution functions are effectively carried out. Basically

they would need to possess knowledge and experience not only in a

particular segment of the transportation industry, but in several areas

associated with business logistics, the more important ones being:

• industry knowledge

• strategic planning

• human resource management

• operations management

• integrated logistics management

• transport policy

• services marketing

• finance and accounting

• sales management

(Bloomberg, Murray & Hanna 1998, p77)

Smaros, J, Holmstrom, J & Kamarainen, V (2000), ‘New service

opportunities in the e-grocery business’, The International Journal of

Logistics Management, vol.11, no. 1, pp. 61-73.

CHAPTER – 6

CHANGE AND TRANSFORMATION

Introduction

This is the first chapter in the second section of our chapter. In the dynamic

world of logistics and supply chain management the only constant is

change itself. To this end this section of our study within this chapter covers

how managers can lead change and promote agility and innovation.

At its heart the management of most operations occurs in an environment

of change. As such, management is about transforming organisations by

leading people and innovation from one continuum onto another before

discontinuities and non-competitive practices occur.

This chapter will deal with change and the many traditional views on

change and how we need to adopt a more enduring approach to address

change as part of both transport and logistic business operations.

There are so many different perspectives on the change process

(organisational, product, behavioural, societal, etc), different stages in a

change process, different levels (individual, group, organisational, systems),

and many ways of explaining the nature of change (continuous, dynamic,

rapid, transformational, innovative, etc). What we do know is that change

affects individuals and influences the competitiveness and survival of an

organisation. As such this chapter will seek to remove the 'noise' associated

with the management of change and suggest how individuals, groups and

organisations can adapt to change and meet real world business

challenges.

6.1 Nature of change

Change can take many forms and occur at any time. Some argue that

change is so constant in organisations today that discussing and studying

how to manage change will distract the student from the fact that it is ever-

present and impacting on everything we do. Others argue the reverse;

change has to be studied if it is to be appreciated and managers with an

understanding of change can be specifically recruited by organizations that

need these capabilities.

Aside from the fact that this debate keeps many academics, management

practitioners, and consultants gainfully employed, the nature of the debate

confirms both the complexity of change and the value of managers who

understand its impact.

Just as with the very polarized views of the theorists, key aspects of change

can be placed on a continuum.

Figure 1 - Dimension to change

The above figure sets dimensions that we will have to examine and

understand. It suggests that a manager's role and activities will vary

contingent upon the change dimensions.

6.1.1 The manager's role and change

To be able to consider what role one can play in the change process, we

must first understand the nature of change, what causes change in

organisations and how it affects us as individuals. The following two

exercises explore this concept and set some assumptions and concepts we

can explore in later parts of this study guide.

No two change initiatives will be the same, however, there are some

common actions managers can undertake to enhance successful

implementation of change programs. Peter Dunphy also suggests a 'check

list' for change:

• Clear objectives .

• Realistic and limited scope .

• Informed awareness - awareness for the need for change is built,

and commitment to it and agreement about the general directions for

change developed.

• Selection of appropriate intervention strategies - these are chosen

to be appropriate for the goals of the program, and adapted to the

situation, people, technology and resources available.

• Good timing - changes are timely and the pace of change is fast

enough to provide a sense of progress but not so fast that people are

unable to absorb it.

• Participation - the program is introduced and explained to staff who

are then involved in its development and implementation. They have

time to consider and discuss it and to find solutions to problems or

issues arising from these discussions.

• Support from key power groups - senior management and unions

support the program and provide clear policy guidelines and

authoritative backing.

• Use existing power structure - staff at all levels take initiatives in

making changes within their own spheres of responsibility. Decision

making is well organised. Projects are run by those involved. Change

agents are widely respected throughout the organisation.

• Open assessment beforehand - there is realistic assessment and

open dialogue concerning the ways in which the proposed changes

may affect the interests of those involved, and issues of concern are

discussed and negotiated. Objections are dealt with seriously and

equitable distribution of consequent economic gains are negotiated

beforehand.

• Majority support - proposed changes are welcomed by the majority.

The changes will reduce present difficulties and key interests will be

protected.

• Competent staff support - a number of skilled, highly motivated and

credible staff are available to provide temporary support to areas

whose resources are stressed in the change process.

• Integrated - new methods are developed which are evaluated and

integrated into everyday operations if successful.

• Transfer and diffusion of successful innovations - successful

small scale or pilot programs are used to seed and introduce change

elsewhere in the organisation.

• Continuing modification - the program is kept open to revision and

reconsideration as experience and results indicate that further

modifications are desirable. (Dunphy, 1981)

6.1.2 Transformation and change continuums

Note:

This section draws heavily on research completed in the Eknowledge

and Learning to Elearn Investigative research project (

http://www.portal.unitas.com.au ) and Bowles, M (2004) Relearning to

E-learn , Melbourne University Press: Melbourne, Chapter 9 Forces for

Transformation ( http://marcbowles.com ).

Each organisation has a different mix of variables that influences its

learning capacity, but the largest influence is the organisation itself, and its

progress along what may be termed a change continuum. Change

continuums provide a visual map of where a business is heading and allow

us to plot its position so as to indicate when and how managers can deploy

learning to achieve organisational goals.

A central issue here is organisational responsiveness. This is relevant to

the question of how e-learning can assist a change process, and how it can

be managed as a transformation in its own right. Where slow

responsiveness leads to a loss of competitive advantage, it can have a

negative impact on the entire organisation.

Figure 2 illustrates the impact of responsiveness on organisational

dynamics. It depicts an organisation concentrating on a core goal and

strategy, as represented by the A parabola. The aim, to advance to a

competitive position, is marked as B. To respond to the need for change,

the organisation must ensure that by the time it arrives at A2 it can

transform its focus from A to B. The required responsiveness (time,

expenses, resource commitment) to achieve the necessary change is

represented by RR.

Figure 2 Change continuums

It is easy to see the impact of a lag between identifying the need for change

and implementing a response. The time immediately following the

identification of the need for change represents a window of opportunity or

threat. If a company shifts focus soon after identifying the need for change

at A1, it may shorten the lag before it reaches A2, the optimal point where

the next 'wave' of transformation is beginning. Completing change before

one's competitors involves some risks, but it also enables the organisation

to move to the new operational state in a timely manner. In this case, the

organisation is early to market and has the potential to become a market

leader.

While some companies seek to optimise the window of opportunity by

becoming early adopters or 'first entrants', others may not respond until the

impact of change is evident, whether because they are unable to anticipate

the change or because they wish to avoid risk. In Figure 2, A3 represents

the point at which change is initiated so late that the organisation is already

at a competitive disadvantage.

In this scenario, the company will be trying to manage the change while its

business revenue and competitive position are declining. While there are

obvious risks in being an early adopter, a risk-avoidance strategy holds

even more serious dangers if it involves changing too late.

The reduction of lag requires an understanding of the organisation's current

competitive position and the likely changes in its competitive environment.

This has to be managed across all the potential change scenarios - not just

one - within the identified planning period.

6.1.3 Responding late in the change continuum

Figure 3 Losing competitiveness through changing late

Figure 3 expands on the late-response scenario. Here, change is initiated at

A2 rather than A1; as a result, change will not be implemented until A3, late

in the evolution of that change cycle. Meanwhile, early adopting competitors

are already responding to another change cycle, depicted as C. By the

point marked as B1, the late adopter is well behind the competition,

struggling with a declining revenue base and facing yet another cycle of

change. The situation is even worse if the C wave is based on a more

sophisticated technology that is replacing B. Here, rather than developing a

new market, the organisation is spending time, money and resources on a

technology in market decline. The difference between B1 and C1 therefore

represents a gap in responsiveness.

The required responsiveness (RR) to achieve the necessary change is not

a simple move from one change continuum to another. As responsiveness

is acquired or agility achieved, the organisation is better placed to improve

its overall competitive position. In short, a virtuous circle is established. By

contrast, failure to achieve the required responsiveness leads to a vicious

circle of declining competitiveness, falling revenue and diminishing capacity

for change. This becomes especially important when numerous cycles of

change affect an organisation and cascade into further transformations, as

shown in Figure 4.

6.1.4 Rapid change continuum cycles

Figure 4 Increased cycle of change

Figure 4 indicates the longer-term impact as the requirements for

responsiveness accelerate. Assume that the first required responsiveness

(RR), moving from A to B, occurs in one twelve-month period. During the

next twelve months, however, the second RR interval experiences two

cycles of change, from B to C and from C to D. In the last period, there are

three RR intervals: D to E, E to F and F to G. While the time and duration of

the intervals can vary enormously, as change accelerates, the

organization’s capacity to respond may decrease. Equally, the acceleration

places pressure on the systems that manage responsiveness when they

have to deliver three changes in the same time formerly taken to

accomplish one.

Figures 2, 3 and 4 highlight the fact that systems can no longer afford to lag

behind for even one change imperative. Failure to respond rapidly to a

change imperative in the first cycle (A) may mean a loss of competitiveness

at C. Two years later, the same lack of responsiveness could place the

company three cycles behind. Assuming the same slow rate of response,

the organisation would be moving from D to E while competitors have

already arrived at G.

It is readily apparent why some companies have developed 'change

fatigue'. Effort seems to be focused on managing change rather than on

operational outcomes and core business. Organizations need to respond to

change and develop the capabilities necessary to sustain this activity as the

speed of change increases (Christensen 1997: 254-60).

Building learning initiatives can support the organisation's progress along a

change continuum. To support change across all continuums, however,

learning must be flexible. The organisation that embraces learning across

all subsystems and accepts it as a builder of transformative capacity can

also use learning to support accelerated responsiveness and organisational

agility. This is imperative if organisations are to succeed in an aggressive

marketplace.

7.1.5 Increasing organisational responsiveness and agility

It is well over a decade since Stalk and Hout (1990) first advanced the

notion that speed and responsiveness were crucial in competitive markets.

In spite of this, the adoption of new systems and practices has itself been a

slow process.

Organisational design, or the way roles are defined within organisations,

has a significant impact on organisational agility. Rigid organisational

structures and procedures emphasise certainty of outcomes for participants

and efficiencies in processes, but they have shown poor capacity to

produce innovation. Innovation and organisational agility are stifled by

stratified organisational structures conceived in functional terms, where

work is defined in terms of procedures and

processes, and positions in terms of reporting roles. Such structures are

increasingly inappropriate to workplaces where technology is used to

perform routine tasks, while non-routine tasks are contracted out to

knowledge workers.

Some organisational structures provide greater agility than others.

Networks, which are the most dynamic and adaptable of organisational

designs, have been gradually replacing traditional structures. At its extreme,

the dynamic network consists of a number of market relationships brokered

by a 'core' unit. Car manufacturers, for example, are no longer large,

hierarchical factory-centred organisations. They now outsource component

production, sales and marketing; the result is a network of partners, all

centred on manufacturing and selling a vehicle. A more extreme example is

online exchange companies, which maintain their virtual presence with a

small cadre of administrative staff and mainly coordinate how partnering

businesses sell products and services. In this case, conventional notions of

organisational boundaries must be discarded.

Networks are more flexible and innovative than traditional structural

relationships, and more responsive to changing conditions in products and

markets. They are also less constrained in the way they source skills and

take advantage of external opportunities.

The main concern in the development of network organisations is their

comparative lack of stability and the difficulty of securing commitment from

individual participants. Agile organisations not only compete on current

strengths and competitive advantages but also nurture the capacity to

respond to future opportunities. In network organisations , adaptability may

be achieved either by enhancing staff capabilities or by sourcing knowledge

outside the organisation. A network organisation may 'graft' on new

capabilities by engaging contract employees or outsourcing critical

functions. While these tactics can supply performance competencies, it still

takes time to build collaboration and instil shared meaning, a sense of

purpose and a culture that underpins the desired organisational identity.

Another alternative organisational model is the workplace community . This

is a more holistic approach in which community-based values formed within

the organisation can change along with the organisation's needs. A third

possibility is developing networks of knowledge , which value individual

knowledge advancement both by employees and by people outside the

organisation. All three of these approaches offer greater flexibility and more

permeable organisational boundaries, which are of particular importance in

assisting organisations to attune themselves to a changing environment.

Agility must be conceptualised as extending beyond the 'walls' of the

organisation. This is not, however, a simple matter of separating out

'internal' and 'external' factors. Organisational knowledge and

responsiveness are shaped by many and varied elements - business

relationships, relationships with local communities, involvement with other

business groups, and actions by government and other corporations (Rigby

et al. 2001: 180-4).

The fit between the organisation and the environment is referred to as

'environmental attunement'. For an organisation to survive, it must be

compatible with its environment. Increasing complexity and competition,

combined with growing interdependence within and beyond the

organisation, lead to a need for adaptation and change.

For organisations to achieve environmental fit, their values, norms,

processes, reward systems and performance must recognise the

importance of people. Agility is achieved above all through the development

of capability in individuals, who are thus able to acquire new frames of

reference while still achieving current performance outcomes.

6.2 Scale and pace of change

Managers are distinguished by their capacity to achieve operational

outcomes while leaders must also initiate and sustain change. In effect, the

manager-leader can take a perspective of the current operations while

leading others towards a vision for the

future.

Their ability to lead will depend on the scale of the change process. Is it

incremental, slow and conducted on a scale able to be easily managed? Or

is it at the other end of the spectrum, as represented below, and profoundly

transforming the current situation?

Figure 5 - Time and Change Dimensions

The scale and pace of change will affect how an operational manager leads

change. It will especially affect how staff and relationships with suppliers

and customers are sustained through the change process. This revolves

around maintaining a focus not just on goal attainment, but also on the

overall vision.

Figure 6 - Time and Change Dimensions

Another aspect to how managers can lead change is the need to focus on

internal or external considerations. The situational variables impacting the

leader's activities may be predominantly either internal or external to the

organisation. Change may be driven by factors outside the organisations

domain of control. In such cases managing these factors is often

impossible.

7.2.1 Leading rapid change

Burt Nanus (1992:10-14) argued that the visionary leader must possess the

ability to balance not just internal or external domains, but also future and

present domains that shape the 'situation' or context within which they must

operate. In effect, the

effectiveness of different leaders will depend on them identifying what they

can influence and concentrating on applying leadership to situations and

contingencies that cannot be removed, but require constant attention.

Figure 7 - Internal or External Situational Dimensions

Moss Kanter, R ( Summer, 1999) 'T he Enduring Skills of Change

Leaders', Leader to Leader , No. 13, pp. 15-22. Sourced December

2001, at http://www.pfdf.org/leaderbooks/l2l/summer99/kanter.html .

6.3 Stages of change

Major change in our lives and in organisations is generally associated with

some form of major loss. People often react to change with anger and this

is caused by a sense of loss of the old way of doing things and fear of the

new. In this way, reactions to change generally go through similar phases to

the grieving process. This is represented below.

Figure 8 Stages of change

• Denial Characterised by blaming others, clinging to the past,

withdrawal and a reluctance to act.

• Resistance Fear, anger, victim mentality.

• Acceptance Moving beyond fear towards action, may be a lack of

focus in the actions taken.

• Commitment Action is more strategic, plans are made for the future.

6.3.1 The stages of change and approaches to management

Change can be managed well or managed very poorly. One of the major

reasons that change initiatives fail is that management fails to involve

people in the process. If people feel alienated or 'kept in the dark' they are

much more likely to remain in the early stages of the change process i.e.

Denial or Resistance. If they are key people then this can derail the entire

change initiative.

To successfully implement therefore, the key questions that must be

answered are:

• Who will be affected by the change?

• Of these, who needs to be involved in implementing the change?

• Who are the people that are critical to have 'on board'?

For each of the key people or groups that are critical for the successful

implementation of the change process, commitment to the change must be

gained and the key question that they will want answered is What's in it for

me?

To persuade effectively involves appealing to a belief, a contingency (such

as a monetary reward) or a recognised purpose in others; it also depends

on the credibility of the manager and the trust employees place in him/her.

6.3.2 Change and the organization’s development stage

An important consideration when managing a change process as a

manager is the organisation's stage of development, or its progress on a

competitiveness life cycle.

Figure 9 - Organisational Development Life Cycle

© Working Futures 1997 (see McDonnell, 1993: 47-48)

What the above figure illustrates is that a change strategy formulated for an

organisation has to consider the evolution of the company in terms of its

competitive position. A change strategy formulated for a company at the

distinctive competitiveness level is unlikely to be communicated in the same

manner, or target similar outcomes if implemented for a base-level

unsophisticated company. Worse still, is to develop a change strategy more

appropriate for an advanced company when the company is really only at a

base level of development.

In effect managers seeking to plan and implement world-class best practice

in an organisation at the unsophisticated stage may stimulate change, but

the ability to sustain and promote such change may be difficult, or

impossible.

Another consideration in the level of change and approach is the nature of

the market position. The adopted strategy may be modified if, for instance,

the market position of the company is growing or shrinking, or if it is in a

new and growing market or in an older market in decline. As markets

emerge it is often more desirable to be a novice in a market that is growing

(with a small market share that grows as the market develops) than to be

holding a large market share in a market that will disappear. Change

strategies that move the whole organisation through pain and develop new

commitment are redundant if the company is in the wrong market or

producing the wrong product to survive.

Table 1 Strategic market positioning of a business

Growth Maturity Decline

Leader Keep ahead of the field Cost leadership

Raise barriers

Deter competitors

Redefine scope

Divest peripherals

Encourage departures Follower Imitate at lower cost Differentiation

Focus

Differentiation

New Opportunities

(Porter, 1985; & McDonnell, 1993:58)

The stage of organisational development and the commitment to secure

competitive advantage should influence the level of change and the

approach. Ignoring this macro-level issue has caused many organisations

to undertake large scale restructuring when all they were really doing was

process innovation. Instead, some would argue, they should have been

completely reengineering the organisation towards a new market reality that

would justify both competitive needs, and the cost and pain associated with

the radical change process.

Once you have identified who the key players in the change process are,

the next challenge is to communicate the changes to all individuals and

teams who will be affected.

Comparative

standards

focusing on employee-to-employee or company to company

reasons for change

Task

standards

focusing on employee-to-task performance requirements

(lack of competitive performance)

Knowledge

standards

focusing on the lack of competitive knowledge within the

organisation comparative to others - need to up skill and

improve knowledge of staff, both technical and behavioural

(e.g. trust, commitment, motivation, etc.).

Process

standards

focusing on objective measures of process outcomes and

lack of competitiveness or need to improve product and

service deliverables

6.4 Communicating change

No complex organization can remain healthy and viable for long without the

capacity to anticipate, execute and adapt to change (Ellingsworth, 1976)

As we have already seen, the very nature of workplace change

necessitates managers to communicate with employees in an open and

flexible manner. Any form of autocratic management will only serve to

alienate people and derail the change process.

Communication during a change process is essential and can:

• Foster an open questioning environment;

• Open communication channels beyond task performance issues;

• Seek new ideas and solutions to problems that hinder good

performance;

• Encourage employee involvement in setting and evaluating their

performance;

• Provide both formal and informal feedback;

• Maximise flexibility in evaluating results; and

• Look for success as much as failure.

The point here is that communicating change need not be a rigid process in

which managers communicate according to rigid interpretation of how

outcomes should be achieved. The communicative style is more flexible

and builds mutual respect.

Informing staff on change processes and goals requires the manager to

communicate for the purpose of:

• Clarifying employee role expectations;

• Identifying problems and/or plans for change; and

• Structuring a course of action.

6.4.1 Guidelines for communicating change

Many people have put forward ideas about how to communicate change.

Some of the more typical ones are summarised below. What specific

communication strategies can you suggest to put these guidelines into

practice?

Guide 1: Establishing the right environment for change

1. Establish credibility with those affected by change.

2. Gather the necessary information to identify and solve the problems

associated with the change (credulity of purpose).

3. Establish a supportive environment for the change (empathy).

4. Implement the approaches necessary to achieve the desired change

(persuade, force, reward, and/or train).

5. Establish procedures for stabilising, monitoring and evaluating the

change (including feedback to employees).

Guide 2: Traditional approach to communicating change

1. Explain the action to be implemented and the reasons for it. This

combats rumours and minimises disruptive behaviour.

2. Prepare the employees for major changes by alerting them to the

benefits and difficulties. Sudden changes can result in employee fear

and anxiety.

3. Identify informal leaders in the organisation and explain

management's objectives. Informal leaders can encourage others to

be co-operative with the change.

4. Repeat important information and techniques, thereby increasing

memory.

5. Allow people time to adjust to the change; recognise that conflict

communicates issues that need to be resolved.

6. Encourage change by recognising good (appropriate) performance.

Guide 3: Strategic approach to communicating change

1. Explore the need for change in relation to the external environment

(identify the purpose for change).

2. Relate the organisation's purpose and vision to the change strategy

(put change into the milieu of the familiar).

3. Identify the organisational qualities needed to implement the business

strategy (appeal to the skills and talents of the work team).

4. Assess the gap between the current state of the organisation and the

needed state, and the organisation's readiness to change (identify the

training required to change).

5. Determine a transition strategy for whatever organisational change is

needed (plan your communications).

6. Determine tactics for implementing the transition strategy (appeal to

the needs of employees).

7. Implement and monitor the transition process (coach and provide

feedback).

8. Recognise and celebrate (reinforce) the completion of the transition

(acknowledge contributions) (Miller, 1986:214).

Graham, C & Bowles, M (1994), Chapter 5 'Five theories of change',

extract from the Workbook on Change Management , DIRETFE &

Centre for Working Futures NSW.

Graham (1994) (Used with permission)

Jones, J, Aguirre, D & Calderone, M (April, 2004) 'Principles of Change

Management', Resilience Report, Strategy+Business, Booz, Allen,

Hamilton , Sourced July 2004, at http://www.strategy-

business.com/resilience/rr00006?pg=all .

6.4.2 Communicating change to stakeholders

When introducing change, especially to systems and strategies, it is

necessary to identify how such changes will impact upon an organisation's

stakeholders. This is a common exercise in strategic planning processes.

The organisation identifies stakeholders, lists them by name and later, after

goals and objectives have been framed, revisits to see which stakeholders

are impacted by particular goals and objectives. Strategies are then devised

to secure the support of affected stakeholders. Strategic planning is itself an

initiation of change - hopefully an incremental and controlled evolution of

people, systems and processes, but nevertheless a change process.

Just as we need to identify stakeholders in strategic planning processes, so

too the manager when planning any change process. The table below lists

an example of an organisation that has identified stakeholders, their

expectations (think of stakeholders as customers with expectations that

define the qualitative target that the organisation should satisfy), and how

change may impinge upon satisfaction of these expectations.

The company is about to introduce a new ISO 9001-2000 quality

management system.

Table 2 Determining stakeholder expectations prior to change

Organisation Country Clothing CompanyStakeholder Expectations How the change may be

perceived by stakeholders to impact on their expectations

Shareholders High share earnings

Stable market share

High asset values

High profits after all expenses and tax

Consistency of competitiveness

Short term higher costs may reduce profits

Employee representative groups (unions)

Job security

High reward for work contributions to company success

Fair and well regulated

Standards of performance will need to be reconfigured

Reward systems may alter

Efficiency may reduce need for as many jobs

work conditionsSuppliers Price security

Forward orders

Certainty and early notification of demands

Clear conditions and terms for supply

High supply standards

Suppliers need quality systems which will be expensive to introduce

New reporting systems

Management

Authority to act

Job security

High reward for work contributions to company success

Premium for success

Need new training and ways of making decisions

Workforce disruption may mean longer work hours

Need to work as a team and 'convey the same message'

Customers Expectations satisfied

Service standards that consistently meet requirements

Price, price, price

Quality of product

Quality may necessitate prices rise

Expectations and relationships managed by communicating benefits

Regulatory

agencies

(government)

Compliance of people,

systems and processes

with requirements

Safe working

environment

Compliance of services

and products

Important they are informed of

this positive move

Quality of services and

products needs to be reflected

in working conditions and

processes