Page 280 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 12: Network Integration

Notes
Did u know? At the point where the cost of serving peripheral customers results in minimum
allowable profit margins, further extensions of the service territory become unprofitable
on a total-cost-delivered basis.

If the customer were provided improved service, it is possible that it would purchase more of
the overall product assortment sold by a firm. In theory, additional service should be introduced
to the point where marginally generated revenue equals marginal costs. At this point of
equilibrium, no additional service would be justified. Additional service may or may not result
from increasing the number of warehouses. The desired service might be provided best by a
supplemental delivery system using direct or dual distribution. The theoretical profit
maximization position is easier to state than to actually measure.

Maximum Competitive Advantage
Under special situations, the most desirable strategy to guide logistical system design may be to
seek maximum competitive advantage. Although there are many ways in which systems can be
modified to gain competitive advantage, two are presented to illustrate strategic considerations.
 Segmental Service: A common modification in least cost design consists of improving
service to protect major customers from competitive inroads. Management needs to be
concerned with how expectations of key customers are being satisfied. If the existing
service policy is only capable of providing 42 percent of the customers with 24-hour
delivery at 95 percent inventory availability, care must be taken to be sure that the most
profitable customers are getting the best service possible.

 Justified High-cost Warehouse: An additional application of design modification to
capitalize on competitive situations is an economically justified high-cost warehouse.
This situation is pertinent especially to smaller or niche businesses. Because of the rigidities
inherent in large firms, pricing policies are likely to be inflexible. Antitrust legislation
reinforces such rigidities. The result is that large firms selling in broad geographical
markets tend to disregard unique cost and demand situations in localized markets or find
it nearly impossible to adjust marketing and logistical systems to accommodate such
unique opportunities. This inflexibility creates opportunities for smaller firms, enabling
them to make significant investment in logistical capability to attract the localized market
segment.

Minimal Asset Deployment

A final logistical strategy may be motivated by a desire to minimize assets committed to the
logistical system. A firm that desires to maintain maximum flexibility may use variable cost
logistical components such as public warehouses and for-hire transportation. Such a strategy
might result in higher total logistical costs than could be realized by asset commitment to
obtain economies of scale. However, risk would be less and the strategy would increase overall
flexibility.

Integration of logistical strategy to support overall enterprise operations requires precise customer
service commitment. From the viewpoint of designing a logistical system, total least cost and
associated threshold service offer an ideal platform for undertaking cost/service sensitivity
analysis.

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