International Journal of

ISSN 0960-0035

Physical Distribution &

Logistics Management

Volume 28
Number 3
1998

Logistics management at the threshold of the new millennium

Guest editor
David Pollitt
Paper format

Internet Online
Publishing with
Archive, Access
to Wider
Literature and
Site Licence

The International Journal of

Physical Distribution &
Logistics Management is
published ten times a year in
traditional paper format.
Please note that two issues of
the journal are bound together
consecutively within these
covers. The contents of this
issue are detailed below.

Articles within this issue are

also published online at:
http://www.mcb.
co.uk/ijpdlm.htm along with
archive material from 1989 to
date (where available). Abstracts
of articles in the field published
in other high quality journals are
also provided, along with a site
licence which allows multiple
simultaneous user access to the
Internet pages of this journal.

CD-ROM
Archive with
Site Licence

This issue is
part of a
comprehensive
multiple access
information
service

A searchable CD-ROM
containing archive material
from 1989 to date (where
available) is provided with this
journal. A site licence also
provides multiple simultaneous
user access to journal pages on
CD-ROM.

Editorial___________________________________________ 167
Viewpoint _________________________________________ 168
SECTION 1: Far-East focus
Filling the logistics gaps in China __________________ 173
Braun muscles in on the Chinese market ___________ 175
US firm slices food costs in Japan__________________ 178
SECTION 2: Supply-chain logistics
The perils of supply-chain logistics ________________
Improving the supply chain________________________
IT and supply-chain management _________________
The bullwhip effect in supply chains _______________
Fixing the parts dilemma _________________________
Meeting customer requirements through
technology_______________________________________

183
186
189
192
195
198

CONTENTS

CONTENTS
continued

SECTION 3: Retail-industry logistics

Mail order wins consumers stamp of approval ______ 203
Retail industry prepares for home shopping_________ 205
The art and science of network optimization ________ 208
SECTION 4: The information challenge
Logistics and electronic publishing _________________ 213
Corporate intranet strategies and beyond ___________ 216
SECTION 5: The challenges ahead
Transport and the community______________________ 221
Modern economies and the impact of increased
interaction_______________________________________ 224

Editorial
Whither logistics? Two centuries ago, dramatic shifts in the economics of
transformation production and transportation brought about the Industrial
Revolution. Now the highly respected McKinsey organization predicts that an
upheaval of equal proportions is about to be triggered by unprecedented
changes in the economics of interaction the searching, coordinating and
monitoring that takes place when people and firms exchange goods, services
and ideas. Logistics, then, will play an even more important role in the emerging
economic system than it did in the last.
The McKinsey research is summarized in the final article of this special issue
of the International Journal of Physical Distribution & Logistics Management.
The issue is special because it includes strategic briefings from the literature,
conference presentations and reports covering logistics management. It departs
from the journals usual practice of exploring issues in depth through learned
papers. Instead, it highlights a range of key issues affecting practitioners and
researchers who wish to function effectively in the new millennium.
Abby Day, writer and consultant in strategy, marketing and information
management, provides the opening viewpoint. She shows that logistics touches
every part of the organization, fulfills the marketing promise and can help to
deliver greater profitability. For such reasons, logistics simply must have its
place on the boardroom agenda.
Many of the Far Eastern economies including the ones referred to until
recently as the emerging tigers have taken a knock, of late. But their growth
potential in the medium to long term is enormous. Section 1 examines the
varied and uneven practice of logistics in Korea, China and Japan.
Section 2 considers methods of improving the supply chain, including the
vital role of information technology in supply-chain management.
Information technology in the shape of the Internet also features
prominently in Section 3, which examines new logistics in the retail industry.
The section highlights how logistics is affected by developments such as home
shopping, virtual shopping malls and armchair banking.
Finally, attention turns in Section 4 to more general applications of the
Internet in the logistics field. This section includes an article which
demonstrates how great is the opportunity which the Internet provides to
reengineer both the supply and demand side of knowledge logistics or, put
more simply, publishing.
The McKinsey research concludes that doing business in a world of plentiful
and cheap interactions will require new skills and new ways of thinking. Those
who anticipate and understand the fundamental nature of the changes and
reshape their business models will be best placed to exploit the opportunities.
As in all major economic shifts, the successful innovators will be those that
develop the best understanding of the underlying changes, and act on it.
I hope that this issue of IJPDLM will help you to achieve that end.
David Pollitt
Guest Editor

Editorial

167

International Journal of Physical

Distribution & Logistics
Management, Vol. 28 No. 3, 1998,
p. 167. MCB University Press,
0960-0035

IJPDLM
28,3

168

International Journal of Physical

Distribution & Logistics
Management, Vol. 28 No. 3, 1998,
pp. 168-169. MCB University
Press, 0960-0035

Viewpoint
Getting logistics on to the boardroom agenda
One of the most common complaints of logistics managers who try to get things
done is that no one else cares. They want to introduce new information systems,
review transport arrangements, redesign packaging or further automate the
warehouse but no one seems to have the time or inclination to listen. Here,
Abby Day, writer and consultant in strategy, marketing and information
management, explains why senior management support, particularly board
level support, is so important.
Logistics is all-encompassing throughout the organization. It includes
everything from the moment a product or service needs to be made, through to
incoming raw materials management, production, finished goods storage,
delivery to the customer and after-sales service. Indeed, the most common
definition of logistics reflects this: a time-based activity concerned with the
profitable movement of information and materials into/through the
organization and out to the customer. Logistics spans everyones territory,
although the accountabilities and responsibilities are not so clear. It is best
considered as an activity rather than a function.
Senior management support is needed for another reason: logistics is the
essence of the organizations relationship with the customer the revenue
generator. This is where the money comes from; it is the reason for being in
business. The marketing people have told the customer about the product and
its benefits, and the promise is about to be delivered. It is what Jan Carlson at
SAS describes as the moment of truth. Will the customer receive the product
or experience the service in the way he has been led to expect? Will the
company make good its promise? Only the way logistics responds will
determine this it makes or breaks the customer relationship. Even if the
product is faulty, logistics will be held to account: was it a problem of
component parts? Was it damaged in delivery? Was it past its sell-by date?
So, logistics touches every part of the organization and it fulfills the
marketing promise. But there is one other reason for getting logistics on to the
boardroom agenda profitability. Logistics costs, as a percentage of sales
revenue, vary widely depending on how you account for them whether you
include all costs (even manufacturing), how you account for inventory of both
raw materials and finished goods, how overheads are determined. However one
goes about it, one cannot avoid the fact that they account for much, anything
from 10 to 70 percent depending on how they are added up. Therefore, anything
that adds to or subtracts from the total has to be important, e.g. if packaging is
redesigned to allow one more box per pallet, the difference would be
considerable.
Day suggests that the view that managers are resistant to change is untrue.
It is not the change they resist, rather it is how change happens. When new
initiatives or proposals are not adopted it is usually because something has

gone wrong in the process. No director is going to refuse to consider a great idea
that will make the company profitable on the grounds of resisting change.
Logistics managers need to make senior managers care. This means
understanding the current status and the impact that the proposed changes will
have. Often, directors are only interested in a few issues (customers,
competitors, costs) and developments in logistics should be seen in these terms.
How, for example, will a new transport system improve customer relationships?
Communication is important too: senior management will not be impressed
with jargon; keep it simple. It is also important to remember that change and
innovation involves risk. The goal is to minimize that risk in the eyes of
management.
To sum up. You need the right people on your side: who are the decision
makers? Who influences them? Make them part of your network. Devise a
strategy to include those who are not already included and to nurture those who
are. Consider the key issues facing the board and note how logistics can respond
to them. Ensure that proposals offer a strategic view that accounts for the way
logistics touches the wider organization. Consider how the project can be eased
into current operations and withdrawn if it does not work. Seek to reduce risk
in terms of time, money and personal credibility. Finally, do not be afraid to give
up if all else fails. There is a fine line between conviction and obsession; the
success of all political ventures rests on timing.

Viewpoint

169

SECTION 1

Far-East focus

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 171-179.
MCB University Press, 0960-0035

Filling the logistics gaps in

China
Chinas unprecedented economic growth has strained its logistics infrastructure
to the limit. The simple movement of goods is challenged by insufficient good
highways, antiquated roads and ports, overstressed civil aviation, and the
country suffers from an underdeveloped telecommunications network.
Transport and warehousing capacity has not kept up with the growth in
consumer demand, making it increasingly difficult for manufacturers and
marketers in China to get their products quickly, safely and reliably to
customers. One industry estimate calls for more than $230 billion to be spent on
basic infrastructure investment over the next five years for the current level of
economic growth to be sustained.
The logistical challenge has been generally overlooked until recently.
However, unless the problems are tackled, they could fundamentally block the
success of most large-scale investments in China. For companies able to fill the
logistics gaps the growth opportunities are enormous, according to Laurence
Alberts and Hugh Randall, of Mercer Management Consulting, and Guy Ashby,
of Inchcape China Logistics.
Up until 20 years ago, manufacturing, distribution and commerce in China
were dominated by state-controlled production planning. In the late-1970s, the
country launched a reform program that opened the doors for some elements of
the supply chain to non-state and foreign enterprises. In 1992, this reform
accelerated under the guidance of the late Deng Xiao Ping: investments became
more longer term, and shifted toward more capital-intensive projects involving
technology transfer and infrastructure improvement.
But although some privatization of the economy has now occurred, logistics
remain largely state-controlled; for example, 90 percent of transport and
warehousing is still in the hands of state bodies. Wholesaling is undertaken by
both state and domestic private enterprises, and retailing is served principally
by state and collective stores, although a limited amount of foreign retailing has
recently been introduced.
Despite some advances and reforms, several key issues affecting Chinas
logistics remain:
Participation of foreign distribution, warehousing and wholesaling
providers is still restricted, and allocation of capital to the warehousing
sector remains a low priority.
Lack of coordination between the central and provincial governments
continues to be a problem, especially in seeking approvals.
The need for multiple approvals for most activities is still the norm.
As essential commercial legislation continues to develop and evolve,
the importance of personal and business relationships remains
paramount.

Filling the
logistics gaps
in China
173

IJPDLM
28,3

174

In such an environment of burgeoning demand, inadequate infrastructure and

predominantly state-controlled logistics resources, multinational firms
operating in China face a number of barriers to logistics success. Limited
infrastructure poses one key challenge: railway and quality trucking capacity
are limited; waterway and coastal shipping links are not yet fully developed;
and air links remain limited and expensive. Chinas sheer scale in itself presents
a formidable barrier the country has 350 cities with more than 200,000 people,
with many more to be built over the next decade.
Legal and bureaucratic hurdles abound: navigating through the Chinese
bureaucracy and its licensing and approval procedures remains a difficult and
time-consuming task, complicated by rapidly changing rules. The time and
resources needed to train staff to world-class quality methods adds
significantly to costs. Finally, understanding the Chinese culture poses one of
the most perplexing barriers for many foreign managers. Developing a network
of guanxi, or relationships, is usually essential to penetrate bureaucratic
walls. Establishing and maintaining credibility is especially important as
mistakes, especially those committed by foreigners, are not quickly forgotten.
Despite these barriers, China has a desperate and growing need for efficient,
reliable, high-quality logistics providers operating on a national level. A
broader and higher level of logistics-service performance is becoming of
increasing importance; quality and value provided in transport and
warehousing are receiving greater attention.
The majority of foreign-owned plants are currently using non-integrated
local systems for handling their distribution. However, a limited number of
foreign service providers have been allowed to work with operators of local
warehouses and to commit some funding and technology to overcome current
limitations.
Multinational corporations investing in China are often frustrated by the
countrys underdeveloped logistics capabilities. But for companies with a
tolerance for risk, logistics-improvement opportunities in China represent an
enormous opportunity. While future economic progress is unlikely to be
smooth, particularly following the death of Deng Xiao Ping, it is nevertheless
expected to strengthen overall. Living standards will continue to improve in
coastal regions while accelerating inland; urbanization will also increase
further.
Capital investment in infrastructure is likely to be outpaced by demand,
despite the governments aggressive plans. As consumer demand accelerates
and becomes more sophisticated, requiring wider product ranges, higher
quality and better service, the demand for improved logistics capacity and
capability will continue to rise.
In China, where economic growth has strained the logistics infrastructure to
breaking point, those foreign companies who can develop the means to deliver
the goods stand to gain substantial competitive advantage, enabling them to
generate real growth from this huge market. A successful growth strategy in
China will require understanding of current realities and the vision to help build
the logistics infrastructure of the future.

Braun muscles in on the

Chinese market
A company which has been manufacturing shavers in China for four years still
imports all the key components from Europe. Even most of the display boxes
are shipped half way round the world to the Chinese plant. Now the firm is
increasing efforts to find local sources of supply.
Braun Electric (Shanghai) is a wholly-owned subsidiary of Braun, the
German manufacturer of small electrical appliances. The electric shaver is
Brauns core business, accounting for some 40 percent of sales and a vital share
of the companys profit.
More than $10 million has been invested in Braun Electric (Shanghai), which
today employs around 350 people. It produces three types of shaver, in more
than 20 different sub-types. The plant manufactures some 5,000 shavers a day,
of which 30 percent are sold in China and the rest exported. Japan, Hong Kong,
Singapore and other Asian markets are served directly from Shanghai.
Braun Electric (Shanghai) shavers use a minimum of 50 and a maximum of
141 individual components and materials. The company buys most of the
electronic, metal and miscellaneous parts from its German headquarters, but
the plastic components are produced within the company.
It buys printed-circuit boards from Malaysia, motors and rechargeable cells
from Japan and most of its plastic materials from German and US chemical
manufacturers in Hong Kong and Japan. Some electronic components
resistors, capacitors and diodes are bought locally in China, from Sino-foreign
joint ventures and Chinese state-owned enterprises.
Only 30 percent of the parts and materials used for production in China are
sourced in China. The company acknowledges that this figure is far too small,
and wants to increase it step by step. Eventually, all resistors, capacitors, power
cords, plastic and display material will be purchased locally. But key parts will
continue to be shipped from Germany, where Braun headquarters invests
heavily in new-technology development and testing.
The main advantages of greater local sourcing are:
(1) Just-in-time delivery. Deliveries from Germany take up to three months to
arrive. This makes the planning system sluggish and means that Braun
Electric (Shanghai) cannot react to orders at short notice. Large stocks of
display boxes and plastic raw material have to be kept in Shanghai
warehouses. This creates overhead costs that increase total production
costs.
This is a prcis of an article entitled Local sourcing in China: the case of Braun Electric
(Shanghai) Co. Ltd, which was originally published in Asia Pacific Business Review, Vol. 3 No. 3,
1997. The author was Stefan H. Kaiser, of Durham University, UK.

Braun muscles
in on the Chinese
market
175

IJPDLM
28,3

176

(2) Lower production costs. The company pays import duties on 30 percent
of the goods it imports. Almost 28 percent of the total direct cost of the
product is made up of import duties. Local sourcing could reduce this,
and cut parts, materials and transport costs.
(3) Improved delivery and easier communication. It is in the nature of
transportation that goods sometimes get damaged and quality
standards are not met. In such cases, there may be considerable benefits
if the supplier of materials is close to the manufacturing plant. In
addition, large international suppliers of materials and parts often do not
appreciate the needs of their customers. Braun Electric (Shanghai)
recognizes that local suppliers, often solely serving the needs of their
local client, can develop a closer and more personal relationship with
their customer.
(4) Foreign-exchange savings. Local sourcing helps to save foreign exchange.
This is particularly important for Braun Electric (Shanghai), since
achieving increased sales to the domestic market will be difficult as long
as a balance has to be achieved on its foreign-exchange transactions.
However, the company has encountered problems in its attempts to increase
local sourcing of parts and materials. First, local Chinese supplies do not always
meet the companys high quality requirements. This is illustrated by the firms
attempts to buy display boxes from a state-owned company based in Shanghai.
One batch would be satisfactory and the next would not. Braun Electric
(Shanghai) has found that Chinese consumers pay more attention to price than
quality packaging. It therefore uses locally-supplied boxes (provided they are of
acceptable quality) for the Chinese market, and imports boxes from Germany
for shavers for export. But as Chinese customers grow more sophisticated, they,
too, may come to find the boxes made in China to be unacceptable.
If the purchasing manager successfully finds a potential local supplier of
parts or material, a sample is sent to Brauns research and development
department, in Germany, for testing. Following R&D approval, at least one
small batch is sent for use in production in Germany. Only when the purchasing
manager gets the go-ahead from the manufacturing department in Germany
can he start to source the component locally.
A second problem of local sourcing in China is unreliable deliveries. The
managing director, Alfred Kunz, says that Chinese suppliers lack the discipline
to deliver on time. The worst offenders are state-owned enterprises. Their main
duty is not to make a direct profit, but to ensure maximum growth.
Braun Electric (Shanghai) has adopted various strategies to improve the
quality and reliability of components and materials bought in China and
to identify possible alternative sources of supply.
The Shanghai area of China does have Yellow Pages which can help in the
search for suppliers, but the rest of China does not. General newspapers and
specific commercial and engineering magazines can also provide useful
information.

The Braun Electric (Shanghai) purchasing manager has been working in the
Braun muscles
electronic-component sourcing business for ten years, and is able to draw on his in on the Chinese
experience in this field. In particular, he attends exhibitions in Shanghai which
market
might attract potential suppliers.
The firm has no formal collaboration with a local Chinese supplier. However,
collaboration on an informal level does exist. The company gives material
177
suppliers more than one chance to satisfy its requirements, and provides
detailed reasons for its dissatisfaction. This often involves sending experts to
the suppliers production sites. However, only limited direct training of local
suppliers takes place, because this is time-consuming.
Braun Electric (Shanghai) can see potential benefits from entering more
formal collaboration with Chinese suppliers in future. This approach will
gradually improve the quality of their products and delivery reliability. Equally,
the number of Western suppliers following their clients to their production sites
is likely to increase. These trends will ease the ability of manufacturers to use
local sources. Western multinationals manufacturing in China will increasingly
be able to cut their production costs and increase flexibility in planning and
manufacturing essential if they are to adjust production to the varying
demands of the international market.

IJPDLM
28,3

178

US firm slices food costs in

Japan
Mysterious, archaic, stubborn and anachronistic are just some of the adjectives
used in the West to describe the Japanese distribution system, in which a few
trading companies and exclusive distributors play a gatekeeping role, often at
the expense of Western imports.
But things are changing and with the new outlook have come growing
opportunities for Western firms. Mitsukoshi, the most prestigious of Japans
old-time department stores, now buys clothing directly from abroad. The Isetan
department store has started discount branches, offers catalog sales and buys
directly from abroad. And the rising practice of buying goods over the Internet
is also putting pressure on traditional Japanese suppliers.
Personal computer manufacturers like Dell and Gateway 2000 have
increased their sales in Japan through direct sales to consumers. By producing
only on receipt of orders, they have eliminated inventory at the production
stage. As a result, they can offer products more cheaply. Japanese computer
manufacturers have had to lower their own prices in response. Simple and short
distribution channels are now a must for personal-computer sales in Japan.
The countrys largest home-electronics maker has also reduced its list of
affiliated wholesalers by 75 percent over the last ten years, and similar
consolidation is under way in cosmetics retailing. Some 30 percent of Japanese
retailers now purchase from fewer firms than they did five years ago, and this
percentage is rising among supermarkets and convenience stores. Wholesalers
are being replaced by manufacturers as the direct source of supply. The food
industry illustrates the changes.
Most imported food traditionally has been brought into Japan through major
trading companies or specialty importers. It has then been sold to wholesalers
who, in turn, have sold it to secondary wholesalers or direct to major retail
buyers. Food manufacturers have offered incentives to retailers including, for
example, the practice of returning unsold products to the manufacturer. As a
result, retailers have been less motivated to innovate, monitor customer needs
or manage product ranges effectively. Rebates have been offered for activities
that US retailers would deem to be part of a normal business relationship.
These practices have been criticized by foreign importers as a major deterrent
to entering the Japanese market, because they are costly to manage, introduce
uncertainties into business calculations and cause difficulties in evaluating
profitability and marketing tactics.
This is a prcis of two articles which originally appeared in Focus Japan, Vol. 24 Nos 7-8, 1997.
They were Ever-shorter channels: wholesale industry restructures and Fresh ideas for
distribution: Dole Japan transforms shopping and processing.

However, major Japanese retail chains are now under increasing pressure
from consumers who want food products at the same low price and high quality
throughout the country. In response, Dole Japan Ltd, an affiliate of the US Dole
Food Company, is streamlining its processing and distribution network.
Anticipating a move in Japan towards US-style distribution, the company is
setting up a national network of food-processing centers. It has also become the
first foreign-affiliated firm to sign contracts for fresh vegetables with Japanese
farmers, who welcome the new ability to plan ahead and avoid risky market
fluctuations. By next year, Dole Japan will offer 30 items, from curry and stew
to stir-fry vegetables.
Dole is also reducing the distribution costs of imported fruit and vegetables.
Under the traditional system, it costs about 1,000 yen to ship a 13kg box of
bananas to a Japanese port. Unloading the ship and clearing customs adds
another 200 yen. It then costs 100 yen to ship the bananas to a ripening facility,
where ripening and other processing add a further 400 yen. Shipping to market
or other retailers costs another 100 yen. In total, according to Dole Japan, the
cost of delivering bananas to a supermarket is between 1,750 and 1,900 yen a
box.
Dole Japan eliminates first-stage trucking by locating banana-ripening
plants next to ports. In addition, the company has cut costs at the ripening stage
to 200 yen per box by palletizing shipments and introducing the latest ripening
equipment from the USA. Combined, these measures cut the cost of final
delivery to 1,500 yen a box.
The consumer movement in the USA and Western Europe was slow to take
hold in Japan. The Japanese culture has included a willingness to shelter one
another from outsiders and protect traditional ways. Quality and service have
been more important than price.
Over the last three years, however, the Japanese have become more price
conscious. The reasons include reduced or less-certain incomes as overtime pay
has fallen, and less lending by the banks. In addition, exposure to overseas
markets and prices has taught the Japanese consumer that lower prices do not
always mean lower quality.
Japanese consumers still claim to make no compromise on quality. But in
other respects, they appear to be growing increasingly like their Western
counterparts. The days when Japanese consumers would pay three times as
much for domestic than imported rice, simply because it was seen to be in the
national good, are over. The opportunities for Western firms are increasing by
the day.

US firm slices
food costs in
Japan
179

SECTION 2

Supply-chain
logistics

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 181-200.
MCB University Press, 0960-0035

The perils of supply-chain

logistics
Many firms have responded to globalization by developing international supply
chains. At the same time, many have also tried to implement lean-production
systems: just-in-time (JIT) delivery, low inventories, zero defects, design for
manufacturing (DFM), flexible production in small batches and close technical
cooperation with suppliers. While many commentators have championed both
globalization and lean production, there has been little investigation into the
interaction of the two, claims David Levy, assistant professor in the department
of management at the University of Massachusetts, Boston, writing in the Sloan
Management Review, Winter, 1997. Are the strategies compatible?, he asks.
Of course, managers are aware of the logistical problems involved in
operating international value chains long lead times, expensive air freight,
high inventory, poor sales forecasting accuracy and significant delays in
resolving technical problems. Yet Levys research suggests that managers
underestimate the costs involved in lean production because they tend to plan
for a relatively stable supply chain and dont fully appreciate the complex way
in which various disruptions affect a geographically dispersed chain.
JIT is a good example. Some Japanese companies require suppliers to make
several deliveries a day, each scheduled to arrive within a two-hour period; this
is clearly impossible if components are imported by sea. Freight connections
are also less frequent to remote locations, and numerous shipments of small
quantities face high shipping rates. In addition, goods are subject to
unpredictable delays because of bad weather, customs and documentation
bureaucracy, and occasional strikes. As distance increases shipping times,
higher inventories are needed to fill the pipeline. Many US companies have
attempted to implement JIT delivery from warehouses located near their
factories, but this is not the same as true JIT delivery direct from the factory.
Flexible manufacturing, the ability to customize a product, to produce to
order, or to shift quickly from production of one model to another on the same
line, also requires rapid delivery from suppliers. The ability to produce a wide
variety of products in smaller volumes reduces economies of scale and
diminishes the incentive for global production too. Lean-production methods
also require close coordination with suppliers. While developments in IT have
improved global communications, many managers and engineers still prefer
face-to-face contact.
Levys research focuses on printed circuit board (PCB) production at a
company called CCT. CCT was buying pre-specified fabricated boards from
external suppliers and assembling them in its own facilities. Yet CCTs global
sourcing strategy for finished computer systems made it almost impossible to
implement JIT delivery to the country of final sale. CCT usually shipped

The perils of
supply-chain
logistics
183

IJPDLM
28,3

184

products from its three factories (in California, Ireland and Singapore) by sea
because of the high cost of delivery by air a policy which resulted in
occasional severe delays. Despite using sea freight as the primary mode of
transportation for finished systems, CCT often felt compelled to use air freight
because of production delays and unexpected fluctuations in demand. This put
up the cost to an average of about 10 percent of cost of goods sold. To put this in
perspective, production costs in Singapore were estimated to be 7 to 10 percent
less than in California. The cost of freight alone therefore wiped out the
locations cost advantage.
In the absence of true JIT manufacturing, accurate sales forecasting is
important; it keeps inventories low without risking a loss of sales due to lack of
product. Unfortunately for CCT, the distance was causing problems here as
well. First, because of the long shipping time from its Singapore factory, CCT
needed to arrange production schedules and orders one or two months earlier
than similar schedules for the California operation. It therefore based the
schedules and orders for the Singapore factory on sales forecasts further into
the future, thus reducing the likelihood of great accuracy. Distance also
impaired communications the accuracy of sales forecasts over the same
period was lower for countries remote from the corporate marketing and
production scheduling departments in California.
Levy also maintains that the geographic dispersion of the supply chain
reduces the effectiveness of DFM. The complex trade-offs involved in DFM
meant that a significant amount of face-to-face communication was important.
An incident at CCTs plant in Singapore illustrates the danger of not
coordinating at the design stage. CCT had developed DFM guidelines to assure
that boards could be fabricated by at least two of CCTs PCB suppliers and then
assembled at any CCT plant. The Singapore plant sometimes strayed from
these guidelines, and CCT managers attributed this to the infrequent personal
contact they had with the plant. In one case, the Singapore factory used PCBs
with greater warp than the corporate guidelines allowed. When CCT decided to
produce the system in the USA, the boards could not be assembled on the
Californian factorys existing equipment. The boards had to be redesigned at an
estimated cost of $500,000. Distance also appeared to impair CCTs ability to
resolve technical problems with suppliers differences in language, culture and
time zone caused delay.
Its a pretty gloomy picture. However, with regard to PCBs, CCT did achieve
some success in implementing DFM and in achieving very high quality levels
two important aspects of lean production which helped to stabilize the supply
chain. It meant significant investments in travel, communications and
technology during the early stages of new-product introduction, including
several lengthy trips abroad when each new PCB was introduced. But the
investment appeared to pay off later when the product was in volume
production because the number of engineering change orders dropped and
defective products were reduced. Indeed, these achievements helped with the
early transfer of production to offshore plants.

Before lean production, CCT had traditionally introduced new products in its
Californian plant to iron out production and quality problems. Defect levels on
PCBs were relatively high during the first few months of production, and the
company typically issued one or two change orders a month during the first
year of production. CCT managers considered these to be very difficult to
implement at overseas plants, so the company waited a year or more for a
product to stabilize before transferring production overseas. CCTs success with
DFM helped to reduce the number of change orders on PCBs to two or three
during the products lifetime (typically about two years). It was also moving
toward a target quality level of less than 400 defects per million PCBs.
Managers soon felt they could introduce new products directly into overseas
plants, avoiding the costs of transferring production in the middle of a products
life, and freeing up the US plant to concentrate on high-end products.
Levy asserts that managers must be aware of underestimating the costs of
operating an international supply chain. They tend to plan optimistically for a
stable chain and do not anticipate the frequent disruptions. An international
supply chain is a dynamic system in which disruptions owing to quality
problems, delayed deliveries, engineering change orders and poor sales
forecasts interact with long lead times to create substantial costs.

The perils of
supply-chain
logistics
185

IJPDLM
28,3

186

Improving the supply chain

European electronics industries have become leaner and fitter over the past few
years and seen significant revenue growth. However, few companies should
take comfort in their performance because the industrys improvement was still
insufficient to make them fully competitive with their US counterparts.
The latest annual survey of the industry Study of Inventory Performance in
the Electronics Industry, conducted by consulting firm Pittiglio Rabin Todd &
McGrath (PRTM), highlights that although inventory performance in the
European electronics industries has improved more than in the USA and Japan,
this comes at the expense of gross margins and still leaves them growing slower
than US companies.
The study summarizes the performance of more than 300 publicly held,
technology based companies over the past five years by region Europe, the
USA and Japan and by six industry segments: telecommunications,
computers, aerospace and defence, industrial equipment, components and
diversified. To support its inventory analysis, it also considers revenue growth
and gross margin as indicators of general business health. Both indicators are
higher in Europe than Japan as it emerges from recession, but still lag behind a
buoyant USA.
Therefore, while European companies in the study have grown by almost 19
percent, this is compared to US companies 55 percent growth and Japans 2
percent shrinkage. Similarly, several waves of restructuring and productivity
improvement have helped US companies maintain their gross margins, while
those in Europe and Japan declined. The median US company now enjoys gross
margins over 10 percent higher than its European and Japanese counterparts.
Insufficient improvement
In some specific inventory performance areas, the report found that European
companies had outperformed both their US and Japanese rivals. For instance,
European companies reduced their inventory days of supply, while those in
other regions increased. They also reduced their cash-to-cash cycle time (a
measure of effective management of working capital) by five days, while the
figures for the USA and Japan remained constant. Yet, despite these
improvements, Europes smaller and more fragmented geographic markets
continue to create challenges in inventory management which leaves Europe
trailing both the USA and Japan in all key metrics other than asset turns.
European industry findings by segment
Computer companies retained their strong leadership in inventory-management
performance. They held considerably fewer days supply of inventory than
counterparts in other sectors. This achievement was made in the face of a
significant erosion in unit margins arising from abundant worldwide production

capacity, and slower than expected demand toward the end of the year, which
forced manufacturers to cut prices and concentrate their product ranges.
Aerospace and defense companies significantly improved their performance,
continuing a transition to increased accountability from customers. The
traditionally poorest inventory performer is rapidly catching other segments
and returning to rapid revenue growth.
Stable inventory performance among telecommunications companies
concealed an underlying struggle within the European telecomms market.
Explosive growth for equipment providers arising from continued
deregulation, companies increasing global presence, and popularization of
mobile telephony has placed an enormous pressure on the total supply chain.
This was particularly visible with respect to widespread shortages in several
key components, which restricted equipment manufacturers ability to balance
effectively supply and demand associated inventories.
Steady inventory performance has been maintained within the industrial
equipment sector, as companies strengthen revenue growth to 8.7 percent, at the
expense of gross margins which drop below 30 percent. Inventory turns and
cash-to-cash cycle time remained static.
For component companies inventory was brought back into line after 1994,
when volatile demand in the telecomms and personal-computer segments
caused performance to dip. Companies used their low reliance on memory
products to avoid the late 1995 slump in other regions. Revenue growth rates
decreased but remained over 10 percent, while gross margins remained above
25 percent. Inventory turns increased from 3.7 to 4.7 and cash-to-cash cycle time
reduced by 27 days to 108 days.
The diversified segment showed the greatest improvement during the study
period, and in all metrics measured. The US companies still performed at a
higher level but their advantage is diminishing.
European companies must now, more than ever, transform their operations
if they are to remain competitive, says PRTM director Gordon Stewart. Our
experience working with European companies suggests they can join the
leaders in their industries worldwide.
New forum for change
However, the need for companies to transform their supply-chain performance
is not restricted to the electronics industry. Nor is the fact that, to make effective
improvements, companies need to use hard data to evaluate and control their
business processes, and use regular global benchmarking to establish any
strategic and operating performance gaps.
The recent European launch, by PRTM, of the supply-chain council (SCC),
and its supply-chain operations reference model (SCOR), may now provide
European companies, across all industrial sectors, with a way to establish this
crucial information and learn best practice.
Originally formed in April 1996 in the USA, the SCC was initially a
consortium of 70 major world-class businesses. During last year the SCC has
developed a framework, SCOR the first cross-industry framework for

Improving the
supply chain

187

IJPDLM
28,3

188

evaluating and improving enterprise-wide supply-chain management. Since the

launch, in collaboration with PRTM and Advanced Manufacturing Research
(AMR), of SCOR in the USA, 140 more companies have joined the SCC.
Following its official European launch, it is expected that around 70 European
companies from manufacturers, logistic/distribution service providers and
software-solutions suppliers will become members of the European arm of this
worldwide forum. According to PRTM, the companies that are participating,
including Rolls-Royce, GPT, Apple Computer, Nokia, Glaxo, Rank Xerox, TNT,
Guinness and Zeneca, are getting involved in the SCC because they want to
understand and use SCOR in global supply chain applications.
Transforming through common evaluation
The importance of supply-chain optimization has long been understood by
successful, well-managed companies, explains Stewart. But until now, the
sheer diversity of both third-party distributors, providers of logistics and
service, and the complexity of the supply-chain process itself, have all been
obstacles to companies agreeing on a common supply-chain model to allow any
sort of meaningful comparison.
The SCOR model can now be used to address this issue, as it has been
designed to enable companies to communicate, compare and learn from
competitors and companies both within and outside their industry. Its key
components are:
Standard descriptions of the process elements that make up complex
management processes.
Benchmark metrics used to compare process performance to objective,
external points of reference.
Descriptions of best in class management practices.
Mapping of software products that enable best practices.
By effectively bringing together terminology, major supply-chain processes and
performance indicators, the model provides manufacturers, suppliers,
distributors and retailers in any area of industry with the necessary guidance to
evaluate the relative effectiveness of their supply chain. It will also assist in the
identification, targeting and measuring of specific process improvements. In
this way, claim PRTM, it presents manufacturers and their supply-chain
vendors with the means to improve performance to world-class levels.
Crucially, major supply chain software vendors, such as Oracle and SAP,
have agreed to adopt SCOR as the basis for future software development.
SCOR is a major accomplishment for industry, said SCC advisory-board
member Richard Beck, director of supply chain reengineering at Compaq
Computer Corp. Dozens of manufacturers have pooled their real-world supply
chain experiences to build a flexible framework and common language that can
have a dramatic impact on companies ability to improve the supply chain, both
internally and among supply chain partners.

IT and supply-chain
management
Many global manufacturing companies are involved in implementing new
information systems and technology for supply-chain management. Initial
applications include financial systems, production planning, distribution and
inventory management systems. Most will take four-to-five years to implement
and cost millions of dollars in direct expenses. When asked about the impact of
these projects, managers usually say their companies will be more customerresponsive, more cost-effective and better able to share consistent and accurate
information across functions. Although this long-term view of investments in IS
and IT sounds reasonable, managers need to ask whether these approaches are
appropriate says Donald Marchand, professor of information management and
strategy at IMD in Lausanne, Switzerland.
Most companies are beginning to face hyper-competition, where firms
position themselves against one another in an aggressive fashion, as opposed to
moderate competition where firms are positioned around each other. With
moderate competition, barriers are used to limit new entrants and sustainable
advantage is possible so long as industry leaders cooperate to restrain
competitive behavior. However, hyper-competitive firms (where customer
loyalty is challenged continuously and where organizations must transform
their capabilities and processes to match or exceed those of competitors) are
constantly seeking to disrupt the competitive advantage of industry leaders
and create new opportunities.
In hyper-competitive markets, the pursuit of four-to-five-year reengineering
application software and database projects is questionable, as firms are
continually changing their strategic capabilities in small 6-12-month
increments; short-term changes which permit new bases for profitability and
growth. These modular and flexible changes in processes, information
management and application systems not only allow more rapid and flexible
implementations, but also enable firms to undo or unlearn approaches
which no longer offer competitive potential.
The operational focus of supply-chain management projects may also be at
issue in moderate versus hyper-competitive markets. In the former, investing in
upstream projects (new financial systems, production planning or inventory
management systems) may offer substantial benefits, including consistent
information sharing and improved cross-functional cooperation. In hypercompetitive conditions, the focus needs to be on process and information
systems with high return-on-investment and added customer value. The
operational focus will shift to the demand side and emphasize customer
interaction, account management, after-sales service and order processing. To
sustain competitive advantage in hyper-competition, a firm may seek to

IT and
supply-chain
management
189

IJPDLM
28,3

190

eliminate the need for detailed management reporting and controls, or market
forecasts and production plans. Instead, a firm can substitute real-time, online
product movement information from its dealers and retailers or simplify
controls and management reporting by delayering the organization and
empowering employees to improve process quality continuously.
In addition to selecting the right processes and information flows to
automate, managers must also consider the impact of the ways in which they
are automated. The trade-offs and choices related to information management,
IS and IT are different under conditions of moderate versus hyper-competition.
In moderate competition the focus is usually on achieving consistent data
definitions among disparate functions and removing unnecessary costs of
paper handling, inefficient software applications and labor. Supply-chain
management improvements are directed at making the supply-chain
relationship faster and more consistent, and lowering the cost of working
capital by using inventory as the buffer of the last rather than the first resort. In
hyper-competition, the focus is on creating value primarily by improving
information use and quality in customer data, after-sales service and order
fulfillment, and only secondarily by defining more consistent information for
upstream processes.
In no other area of supply-chain management has there been such dramatic
shifts during the 1990s as in the domain of software applications. The changes
have occurred on two levels. First, over the last ten years, package software
offerings for manufacturing companies have evolved as a major growth market.
Firms now offer packaged software on mainframe or more distributed
platforms such as the AS 400. Also, there has been significant growth in new
firms which offer software packages on client/server platforms with versions of
the UNIX operating system. Second, for most of the 1990s and earlier decades
of predominantly mainframe-based computing, the dominant paradigm for
implementing software was based on the waterfall approach, where a
complex linear process was launched to specify client needs followed by the
development of applications software over four-to-five years. Such projects
often led to very high failure rates of 80 percent or more.
However, over the last five years this paradigm has begun to be challenged
by companies which provide more adaptable software on lower-cost platforms,
and/or by companies whose speciality is rapid application software
implementation on a fixed-cost, fixed-time basis. The latter companies usually
emphasize the customer value side of the supply chain and focus on
implementing systems in 6-12 months. They also attempt to share the risks of
time and cost overruns with their clients. Clearly there are significant
alternatives for manufacturing companies. General managers in hypercompetitive markets are no longer restricted to software application changes in
their supply chain which are not consistent with their competitive needs for
rapid, high quality and lower-cost information systems.
Most large manufacturing companies are trying to leverage their supply
chains on a global, regional and local basis simultaneously. A firm can enjoy the

cost reduction and value-creating advantages of consistent computer platforms,

operating systems, etc., and still tailor software application packages for
localized content where necessary. At the same time that these firms have
moved to client/server technology and more robust voice, data and video
networks, they have also instituted standards for IT infrastructure. Thus, they
have sought to globalize infrastructure and lower costs as a percentage of sales
while implementing applications software rapidly in their supply chains
regionally and locally.
Many leading manufacturers are committing millions of dollars to IS and IT
projects whose benefits will take four-to-five years to reap, if at all. More than
one large manufacturing company in Europe has committed 200-300 million
dollars on integrated, supply-chain management projects whose implementation
risks are high and whose business paybacks are perhaps low for the hypercompetitive markets of the late 1990s. Fast, flexible and modular software
systems and databases will differentiate manufacturing companies over the
next two-to-four years in hyper-competitive markets. Those companies who
enter into IS and IT projects with the wrong competitive assumptions may find
that their approach has become a competitive disadvantage. They will have
created significant business risks at precisely the time when their competitors
are creating value with customers through rapid, focussed and continuous
improvements in supply-chain core processes and information flows.

IT and
supply-chain
management
191

IJPDLM
28,3

192

The bullwhip effect in supply

chains
There is a well-known game in which students, managers and analysts play the
roles of customers, retailers, wholesalers and suppliers of a popular brand of
beer.
In the beer game the participants cannot communicate with one another
and must make order decisions based only on orders from the next downstream
player in the supply chain.
The ordering patterns share a common, recurring theme: the variabilities of
an upstream site are always greater than those of the downstream site.
It is a simple, yet powerful illustration of the bullwhip effect, or, as it is
known in some industries, the whiplash or the whipsaw effect. Distorted
information from one end of a supply chain to the other leads to demand order
variability. These are amplified as they move up the supply chain.
It is a problem that has become familiar to many firms examining order
patterns. At Procter & Gamble, for example, logistics executives looked at order
patterns for a best-selling product, Pampers. They were astonished by the
degree of variability in distributors orders but when they looked at their
companys orders of materials to suppliers, the swings were even greater.
The factors causing these phenomena have been investigated by Hau L. Lee,
V. Padmanabhan, and Seungjin Whang. Writing in Sloan Management Review,
Spring 1997, they acknowledge that amplified order variability in the beer
game model might be attributed to irrational decision making. But they believe
this view is false; rather, the bullwhip effect is a consequence of players rational
behavior within the supply chains infrastructure.
In view of this, companies wanting to control the bullwhip effect have to
focus on modifying the chains infrastructure and related processes rather than
the behavior of decision makers. In other words, the problem lies with the
system.
The writers see four major causes of the bullwhip effect. Understanding
them helps managers to design and develop strategies to counter it.
Demand forecast updating
Every company in a supply chain usually does product forecasting, often based
on the order history from the companys immediate customers. In the beer
game, when a downstream operation places an order, the upstream manager
readjusts his or her demand forecasts and, in turn, the order placed with the
suppliers of the upstream operation. This signal processing is a major
contributor to the bullwhip effect.
As one remedy, demand data at a downstream site could be made available to
the upstream site. Both sites would be able to update forecasts with raw data.

More radically, the upstream site could control resupply from themselves
downstream.
Another approach, favoured by Apple, involves bypassing the downstream
site. The computer company sells directly to customers without going through
the reseller and distribution channel. As a result, it can see demand patterns for
its products.
Improvements in operational efficiency can also help to reduce the highly
variable demand due to multiple forecast updates. Just-in-time replenishment is
therefore also effective.
Order batching
Companies often batch or accumulate demands before issuing an order. Instead
of ordering frequently, they do it weekly, biweekly or monthly. This periodic
ordering amplifies variability and contributes to the bullwhip effect.
The relatively high cost of placing orders and replenishing is one reason that
order batches are large or order frequencies low. The use of an electronic data
interchange can reduce the cost of paper work in generating an order. Nabisco
has used a computer-assisted system and found that customers order more
frequently as a result.
Transportation costs are another factor behind large order batches.
Customers find it economical to order full truckloads of one product even
though this leads to infrequent replenishments from the supplier. Some
manufacturers are inducing distributors to order assortments of different
products. The result is higher order frequency for each product, unchanged
frequency of deliveries to distributors and preserved transportation efficiency.
Another option is the use of third-party logistics companies. By consolidating
loads from multiple suppliers located near each other, a company can realize
full truckload economies without the batches coming from the same source.
Price fluctuation
Forward buying, items bought in advance of requirements, accounts for 80
percent of transactions between manufacturers and distributors in the US
grocery industry. Price fluctuations, the result of special promotions such as
discounts, encourage this process. Customers purchases do not reflect their
immediate needs; they buy in bigger quantities and stock up for the future.
When the products price returns to normal, the customer stops buying until
it has depleted its inventory. The buying pattern therefore does not reflect the
consumption pattern, and variation of buying quantities is much bigger than
variation of consumption rate.
The simplest way to control the bullwhip effect created by this process is to
stabilize prices, by reducing both frequency and level of wholesale price
discounting. A uniform wholesale pricing policy can help. In the US grocery
industry, Procter & Gamble moved to an everyday low price, reducing list prices
by 12 to 24 percent and slashing promotions to trade customers. In 1994, it
reported highest profit margins in 21 years and showed increases in market
share.

The bullwhip
effect in supply
chains
193

IJPDLM
28,3

194

Rationing and shortage gaming

When product demand exceeds supply, manufacturers often ration the product
to customers. The tit-for-tat response from customers is to exaggerate real
needs when they order. Later, when demand cools, orders disappear and
cancellations pour in. The effect of this extremely common gaming practice is
that customers orders give the supplier little information about real demand for
the product. The financial consequences in terms, for example, of unnecessary
capacity increases can be severe.
There are several ways to eliminate gaming. Suppliers facing a shortage can
allocate in proportion to past sales records, rather than on orders. They can
share capacity and inventory information and work with customers to place
orders well in advance of the sales season. Finally, the generous return policies
offered by manufacturers aggravate gaming. Penalties will discourage the
practice.
These four major factors indicate that the bullwhip effect rises from rational
decision making by members in the supply chain. Companies can counteract
the effect by thoroughly understanding its underlying causes. The choice for
companies is clear: either let the bullwhip effect paralyze you or find a way to
conquer it.

Fixing the parts dilemma

In more than 50 years of making electronic equipment, Tektronix the Oregon,
USA-based manufacturer of measurement, color printing and networking
products had accumulated approximately 600,000 part specifications,
maintained electronically and in paper drawings. Of these, 160,000 were
considered active parts used in existing products. However, as with most
companies, many of these parts had duplicate or very similar capabilities and
were costing unnecessary time and money in procurement, inventory control
and management costs. In addition to monitoring part usage for inventory and
managing part data for retrieval, the company also recognized the need to build
a preferred parts list to optimize its part procurement process.
The objectives
The company, therefore, embarked on a preferred-parts (preferred-supplier)
initiative that included three objectives:
(1) shorten time to market by increasing parts reuse and establishing
relationships with preferred suppliers;
(2) reduce complexity in designs by reducing the number of unique parts in
new designs, reducing duplicate part creation and improving quality;
and
(3) reduce cost by using preferred suppliers, leveraging volume from fewer
suppliers and reducing maintenance costs.
The companys aggressive goal was to have 80 percent of the components used
in new products come from a list of only around 5,000 preferred parts. To
achieve this meant that all existing parts needed to be analyzed to identify the
approximate preferred parts, and to make it easier for a design engineer to
locate existing components, the database had to be searchable by comparable
design attributes and other data. Tektronix estimated that creating a software
program to accomplish these tasks would take 50 percent of ten engineers time
for 15 months, at a cost of $360,000.
At this point the company had already invested a significant amount of
money in an effort to create a master database for all design parts. This
relational database included extensive information on every inventory part,
searchable by part number, but it did not have the capability to conduct a metric
search for the part based on attributes such as temperature, voltage, tolerance,
etc.
The solution
However, rather than having to write new code internally, Tektronix came
across CADIS Inc. The then-new company was emerging with a partsmanagement expert system (CADIS-PMX). Tektronix made the decision to

Fixing the parts

dilemma

195

IJPDLM
28,3

short-circuit its internal efforts and partner with CADIS. The result is a system
whereby PMX acts as the parametric search index to Tektronixs larger
relational database. This approach helped the company accomplish several of
its goals:

The systems built-in legacy process was used to translate data on

160,000 active parts into the knowledge-based schema in just a few
months.

The intuitive graphical user interface (GUI) made it easy for Tektronix to
establish a list of preferred parts and suppliers, in addition to
consolidating parts data for easy access.

The expert system also enabled Tektronix to develop the custom parts
schema engineers sought, so they could search for parts according to
attributes.

196

The largest part of the implementation, two to three months, was spent
capturing legacy data and setting up the knowledge base. The entire process
was complete and operational within six months. This enabled Tektronix to
deploy its preferred-parts program a year sooner than originally expected.
Although everyone in the company can view the knowledge base on a readonly basis via client server and intranet access, its parts-search capability is
used mostly by engineers. In particular, the knowledge base is most helpful to
new engineers who are not familiar with the intelligent part-number system
that Tektronix previously had in place. New engineers can search for parts with
words that describe the attributes they need. The only users who have seemed
to have a problem with the new systems GUI are the veteran engineers, who
have most of the part numbers they use embedded in memory. The company
admits that the older ASCII tools are much faster to use if you already know the
part number. Therefore the use of the GUI technology has required a bit of a
cultural shift, but the long-run benefits are expected to far outweigh the
adoption hurdles.
An advantage with the system is its cross-functional capability to share
information. Tektronix purchases scores of parts from National Semiconductor
Corp. every year. Since National now has its entire catalog of products indexed
on its Web site, Tektronix can link its knowledge base via a universal resource
locator (URL) to this Web site to retrieve National parts data instantly. So
instead of Tektronix having to maintain data sheets and specifications, they
now link to data that are always maintained and always kept current at
National. The company is also gradually loading other URLs into its database
as other companies make their databases available on the Web.
The results
Since the August 1994 implementation of the system, with a knowledge base of
160,000 active parts, Tektronix has reduced its inventory of parts to 112,000 a

net reduction of 48,000 part numbers. This process eliminated more than 30,000
duplicate parts, saving the company $8 million in carrying costs alone.
Equally important, the company has insured that the problem of duplication
stays solved. An engineer who wants to release a new part is expected to
research the part through the system. A component engineer will review a
request for a part by conducting a search, denying the request if the search
turns up a match or close match. If the search produces nothing, then the
attributes applied to the process define the new part for release. Interestingly,
parts reuse and database research serve as factors by which engineers are now
evaluated. This is intended to help engineers focus on the high value items that
will differentiate a new product.
The company also has a bill of materials review process that checks to see
how well the company is performing in relation to the usage of preferred parts.
Tektronixs performance against that check has improved dramatically, moving
closer toward its target of 80 percent. Now, statistics reflecting bill of materials
review get high-level visibility and have become a part of the monthly reporting
process.

Fixing the parts

dilemma

197

IJPDLM
28,3

198

Meeting customer
requirements through
technology
Global competition has simultaneously reduced product lifecycles, increased
cost competition and highlighted the need to differentiate products. In response,
many companies are placing greater focus on satisfying the needs of individual
customers and reacting rapidly to market forces. Thus, mass customization, the
production of highly customized goods at mass-production prices, has become
the new paradigm spreading across a whole spectrum of manufacturing
disciplines and products.
The resultant process reengineering of design, manufacture, marketing and
sales, that is proving a necessity if companies are to meet this goal, has also
highlighted the potential benefit of applying various technologies in helping to
reduce costs, shorten lead times and improve communication throughout the
entire supply chain. According to Charles Carson, of Cincom Systems (UK) Ltd,
one such tool is the sales-configuration system. This helps automate the key
processes of selling and product configuration.
Traditionally, sales and product configuration are viewed as discrete
disciplines performed by salespeople and product engineers respectively. The
salesperson identifies a customers requirement and then liaises with product
engineers and production planners to produce a product configuration and
quotation. Unfortunately, this process is both time consuming and error prone,
with a high potential for miscommunication of requirements and
misinterpretation of product information. The resultant inefficiency can be very
costly, as research has proved. According to Advanced Manufacturing
Research Inc. (AMR), companies typically lose 2-3 percent of revenue in rework
and penalty costs due to errors in the initial product configuration.
Not only can the successful adoption of sales-configurator systems overcome
these losses, explains Carson, but the subsequent improvement in response
times in matching products to requirements allows companies to quote for an
increased volume of business if presales activities are currently a bottleneck.
And, by moving from a make to forecast to a configure to order paradigm,
massive reductions in inventory costs are generally achievable. Moreover, salesconfigurator implementation also provides a unique opportunity to redefine
how a company interacts with its customers and distributors, developing closer
relationships which can be the foundation for repeat business.
Sales configurators can address the problems of miscommunication and
misinterpretation by capturing the configuration rules from the product
specialists and putting them in the hands of sales personnel dealing directly
with the customer. An effective sales configurator will allow the incorporation

of product-selection criteria associated directly with customer requirements to

ensure that product options can be selected or excluded based on conditions of
usage.
As with many emerging technologies, product development has evolved
along a number of different paths, and in this case configuration products can
be typically categorized into one of four general solution methods: features and
options, rules-based, knowledge-based and constraints and resources (a subset
of knowledge-based).
Each approach has its own strengths and weaknesses, observes Carson.
However, the potential previously attributed to sales configurators would only
realistically be achievable by either a knowledge- or constraint-based system, or
a hybrid of these two. These apply the technologies of artificial intelligence to
the problem of product configuration. They share many of the same
capabilities, and are more suited to the complex product-configuration needs.
Combined with the progress of configuration technology, not only have
developments in network communications and the emergence of high
performance PCs made it easier to move configuration away from back office
central systems and out to the sales staff and distributors, but nomadic sales
staff now have the ability to produce high quality quotations and graphical
output face-to-face with the customer using powerful multi-media laptops.
Also, the emergence of the Internet as a means of global communication is
further revolutionizing how information is communicated and how business
transactions are conducted. Therefore, although some aspects of configuration
(e.g. technical detail) may still be conducted centrally on local area networks
(LANs), the desired mechanism for sales configuration may now be through
nomadic sales staff, remote distributors or by allowing customers to selfconfigure their own products.
For example, for many salespeople, every prospect has different usage
requirements for their companys product. In terms of forklift trucks, the
variables include materials, loads, height displacements, dry or wet
environments and warehouse layouts. Instead of using bulky product catalogs
and price lists, and thumbing through the technical detail to try to match the
customers requirements and budget, with a sales-configurator system it
becomes possible for the salesperson to simply type the requirements into a
laptop. The system will automatically present or select the valid options. The
customer can then view his forklift from the illustration library on the portable
CD-ROM and get an immediate priced quotation for either purchase or rental.
Then, the next time the salesperson dials into the headquarters system,
orders and inquiries for the last few days are automatically transferred into the
central planning and manufacturing systems, and the latest product options
and prices loaded into their PC.
By providing distributors (at home or abroad) with a new sales configurator,
the supplier enables the distributor to configure product requirements for
specific customer orders. The system automatically validates the usage
requirements and translates them into product codes. Regular weekly orders

Meeting
customer
requirements
199

IJPDLM
28,3

200

can then be sent as product codes with required quantities through the Internet
directly to the suppliers order-processing system. The supplier re-processes the
product codes in a factory phase of the sales configurator to produce the
kitting list of standard assemblies required to meet the order. Assembly and
shipment can be within days. Every month, the supplier sends an electronic
update via the Internet with the latest products and options for the sales
configurator. In such a case, make to stock becomes a thing of the past, and
configure to order a reality!
Similarly, rather than making regular customers wait to see a salesperson
to discuss new-product requirements and then wait again to receive a
specification and valid quotation for a new order, with a new sales-configurator
tool the customer can configure their own reorder. The requirements can then be
sent as a sales order to the supplier using EDI through the Internet. Moreover, if
regarded as a valued customer, the company may also be authorized to price
and self-invoice using the sales configurator. Every quarter, the supplier just
issues a new CD-ROM with the latest options and prices. Overall, the system
enables administration costs and lead times to be reduced considerably for both
customer and supplier.
As Carson concludes, these examples are not visions based on future
technology. Instead, they are representative of how an increasing number of
forward-thinking organizations are using current technology to achieve or
maintain a competitive advantage in the vital process of selling.

SECTION 3

Retail-industry
logistics

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 201-210.
MCB University Press, 0960-0035

Mail order wins consumers

stamp of approval
Western companies and individuals tired of the constant bombardment
of direct mail might wish they could move to Japan, where the Japan Direct
Marketing Association (JDMA) reports that businesses and households receive
only a tenth the amount of direct mail delivered in the USA.
But direct marketers themselves will be attracted by figures which show that
the average direct-mail response rate in Japan at about 3 percent is more
than twice the level in the USA.
Asahi Bank Research Institute predicts that mail-order sales in Japan will
grow by an average 5 percent a year in the next five years, topping the rate at
department stores and other large retailers, and reaching 2.63 trillion yen by the
year 2000.
The ability to offer products at low prices has been key to previous growth in
mail-order sales. But there are limits to how far growth can be sustained by low
prices. Future growth will be helped greatly by increased consumer knowledge
of products. More customers are now happy to buy goods through catalogs, and
advances in telecommunications and home-delivery services are expanding the
customer base.
One new route is television shopping. JDMA points out that TV-shopping
sales rose from 5.9 percent of all mail-order sales in 1990 to 7.4 percent recently.
Convenience is the key to this growth. Consumers relaxing at home can watch
as products are introduced on television, then order by telephone or fax. Despite
their notoriety in the West, infomercials do provide detailed explanations of
products in an easy-to-understand way. With the number of television channels
set to rise, more growth seems certain.
A TV-shopping program was launched in Japan four years ago. It is a
cooperative venture between Mitsui and the US National Media Corporation,
relayed by 27 terrestrial stations, a satellite channel and a cable station. All the
products featured are imports, mainly from the USA. Items otherwise
unavailable in Japan are popular, especially car-care and personal-fitness goods.
Mail-order sales were formerly limited to low-price daily necessities. But the
sales have now spread to jewelry, brand-name accessories, travel,
entertainment, insurance and fresh food.
Otto-Sumisho, a joint venture between Sumitomo and the worlds largest
mail-order company, Otto Versand of Germany, was set up more than ten years
ago. Today, its products range from womens fashion to furniture and from
outdoor clothing to kitchen utensils.
World-famous designers create brand-name products exclusively for OttoSumisho. It is also aggressively introducing high-quality foreign products like
This is a prcis of an article entitled Mail-order innovations: convenient new media expand
market, which was originally published in Focus Japan, January 1998.

Mail order wins

consumers stamp
of approval
203

IJPDLM
28,3

204

LOreal cosmetics. Otto-Sumisho has even formed a joint-venture company with

US outdoor-clothing company Eddie Bauer. To keep prices relatively low, and to
preserve a US flavor, it imports and sells American products without
modification for the Japanese market. All the creative work for Otto-Sumisho
catalogs is done overseas, to underline the international image.
The policy of unconditionally accepting the return of any product has won
customer confidence in Otto-Sumisho, and earned much repeat business. The
firm earned 35.1 billion yen in 1996-97.
Lands End Inc., a major US mail-order company selling mainly casual
clothing, set up Lands End Japan in 1993. Its quintessentially-American
products are a hit with Japanese consumers, and sales have climbed rapidly. The
company has invested heavily in service improvements. It set up a new delivery
center in 1996, expanded its business hours to between 7.00 am and 10.30 pm in
1997, and has recently begun mail-order sales of childrens products.
One advantage of mail order is that it makes available in rural areas products
that otherwise could be bought only in urban centers. Foreign computer
manufacturers such as Dell Computer and Gateway 2000 pioneered direct sales
of personal computers in Japan. Other foreign and domestic manufacturers and
large-volume retailers are now following suit.
Direct-mail sales of office supplies are also expected to rise sharply. Askul
Corporation, a subsidiary of office-equipment maker Plus, expanded the
number of products it sells by 40 percent last year, and extended the hours of its
next-day delivery service. Askul was spurred by intensified competition, with
foreign-affiliated stationery-store chains entering Japan and specialitystationery stores starting mail-order sales.
The Business Co-op, established two years ago by the Pasona Group,
Mitsubishi and others, has embarked on a new type of mail-order selling to
corporate clients. Last year it linked with credit-card company Million Card
Service to begin catalog sales of office supplies over the Internet. The Business
Co-op now offers Internet purchasing of travel tickets, hotel reservations and
inclusive tours. Prices can be as much as 35 percent below recommended retail
prices. Consumers welcome such 24-hour services, which let them not only buy
products but also reserve airline or other tickets, and hotel rooms.
JADMA reports that 36.4 percent of mail-order products are clothing, 20.7
percent are furniture, home electronics or other household goods and 15.1
percent are correspondence courses. Recently, however, the share held by travel,
insurance, finance and other services has reached 2.9 percent, and further
growth is expected.
Among imports, almost half of mail-order products sold in Japan are
clothing, around a quarter are furniture, home electronics or other household
goods and 13.3 percent are clothing accessories and sundries. Moreover, almost
65 percent of JADMA member companies plan to increase their sales of
imported goods over coming years.
Compared to markets like the USA, there is still plenty of scope for mailorder sales to expand in Japan. That bolt-hole for Westerners sick of their daily
diet of junk mail, e-mail and faxes may not be open for much longer.

Retail industry prepares for

home shopping
Such is the speed of new technological advance that most of us are becoming
attuned to the arrival of new developments which will supposedly help to
improve our lives. Interactive home shopping (IHS) is one of them.
Telecommunications giants such as Time Warner are funding more than a
dozen tests of their proprietary systems, and major retailers such as JCPenney
and Wal-Mart are among the thousands of retail home pages that can be
accessed through the Internet. Although in its infancy, IHS is likely to change
the way in which people shop as well as the structure of the consumer goods
and retail industries.
According to a Marketing Science Institute report, Interactive Home
Shopping and the Retail Industry, projections about the diffusion of IHS are
pretty breathtaking. Forecasts of IHS sales range from $5 billion to $300 billion
by the year 2000. In contrast, current sales are barely perceptible. Sales over the
Internet in 1995 were estimated at only $0.02 billion (compared to $0.8 billion
through CD-ROM catalogs). All electronic sales are dwarfed by noninteractive
home shopping formats such as television home shopping ($5 billion) and
conventional catalogs ($60 billion). Moreover, all nonstore channels account for
less than 8 percent of US retail sales, which is less than Wal-Marts 1995 in-store
sales of $94 billion.
While optimistic projections about electronic shopping are not anchored by
the status quo, demographic and cultural trends suggest that IHS has a bright
future. Succeeding generations will be increasingly comfortable with
computers, and computers themselves are taking on the everyday status of
household appliances. Penetration of home computers is projected to reach 60
percent by the beginning of the millennium. Integrated computer/television sets
are nearing commercialization, as are low cost information appliances
designed specifically to surf the Net. User interfaces are becoming more friendly
and more intuitive with the emergence of voice-based interaction.
IHS differs from traditional shopping channels in terms of the quantity and
quality of information offered to consumers. Although IHS does not allow direct
product experience it does compete favorably for search attributes. These
include:
a greatly increased number of offerings;
an efficient means of screening offerings;
unimpeded search across stores and brands;
memory for past selections, which can be used in simplifying
information search and purchase decisions.

Retail industry
prepares for
home shopping
205

IJPDLM
28,3

206

IHS has the potential to increase price competition across retailers. For those
retailers who cannot compete on cost of goods sold, survival may depend on
developing advantage in terms of:
distribution efficiency;
assortments of complementary merchandise;
collection and use of customer information;
presentation of information through electronic formats;
unique merchandise.
However, IHS will not threaten all retail formats or even all competitors within
a format. Some retailers will be relatively immune to the threats of IHS and
others may prosper. Indeed, the Marketing Science Institute claims that while
IHS has the potential to exert a dramatic impact on the retail industry, this will
only occur if the IHS systems provide superior benefits over existing retail
formats, such as the opportunity for consumers to search across a broad range
of alternatives. Current shopping over the Internet does not provide such
benefits because Internet retailers are preoccupied with the potential of IHS to
intensify price competition and are configuring electronic marketplaces to
preclude much comparison shopping. But in the long run, technological and
market forces can be expected to thwart retailers efforts to isolate themselves.
The suitability of different types of merchandise will be driven by delivery
costs, the consumers need for immediacy and the degree to which electronic
retailers can provide pre-purchase information that predicts consumption
satisfaction. As with successful catalog retailers, successful IHS retailers will
overcome the direct-experience limitations of IHS by presenting information
that predicts satisfaction to a degree that more closely approximates or even
surpasses in-store observation and trial. Technology may play a key role by
offering testimonials from other buyers, video information about the experience
yielded by a product, or saved information about brand/size combinations that
fit specific members of the household. Alternatively, for experienced
consumers, brand name alone may suffice to predict satisfaction.
Insofar as IHS technology makes it easier to compare alternatives on qualityrelated search attributes, it will both stimulate and reduce price competition
among brands depending on the true degree of parity in the product category.
IHS may reduce rather than increase price competition among retailers carrying
unique merchandise but it will intensify competition among retailers carrying
overlapping branded merchandise. Retailers can differentiate their offerings by
using their unique customer knowledge to provide information-based value. In
addition retailers will increasingly use private-label merchandise to differentiate
themselves.
Of the established catalog companies, department stores and category
specialists, the incentives for leaders in each format to participate in IHS vary
depending on their reliance on national versus private-label merchandise, and
on their ability to adapt their merchandise mix to emphasize items that are

suited to IHS. Disintermediation by manufacturers (i.e. cutting out channel

intermediaries) will be rare. Exceptions will include manufacturers of very
strong national and international brands who do not need to rely on
complementary merchandise. Less rare will be non-intermediation, wherein
entrepreneurial manufacturers who do not have established relationships with
retailers sell directly to consumers.
In an IHS world, brands will become increasingly important to consumers as
they allow prediction of satisfaction when buying outside of stores.
Paradoxically, this also makes national brands less attractive for retailers to
carry when IHS makes it easy to find the retailer carrying the lowest price on an
item sold by many. Manufacturers of strong national brands will feel pressure
from retailers to give some protection from competition via exclusive or very
limited distribution. When this is not feasible, retailers will pressure
manufacturers for branded variants to deter direct price competition on
identical branded items.

Retail industry
prepares for
home shopping
207

IJPDLM
28,3

208

The art and science of

network optimization
Newly created distribution networks in financial services institutions have
failed to live up to their promise. These organizations have made a massive
investment in new technologies and distribution channels, but the returns
continually fall short of expectations.
The main problem has been the failure to match the needs of the desired highly
profitable customers with the distribution offered. Customer-driven network
optimization offers the potential to align the delivery network with customers
needs, say Darren King and Donald Santoski, of Mercer Management Consulting.
In a rapidly changing market, financial institutions have enabled customers
to conduct transactions at any time and with easier access through an
increasing number of channels, from automated teller machines (ATMs) to the
Internet. These new technologies and distribution channels have also reduced
operating and transaction costs. The use of electronic and telephone
interactions offer the promise of moving lower-value interactions and lowervalue customers to less-expensive methods of access.
However, having analyzed the effectiveness of these newly created distribution
networks, most financial-services institutions have found that the cost reductions
and volume shifts have been smaller than anticipated. Worse still, the networks
installed were not designed to acquire and retain their most profitable customers.
By using the art of customer management and the science of network
optimization, financial institutions and other customer-focussed organizations
can effectively target favorable customer segments, thereby maximizing returns.
A complex process, network optimization involves determining the
capabilities and access points that key customers require and then setting up a
distribution system that more closely matches these requirements. Effective use
of customer information is central to the development and execution of network
optimization, which aims to: retain high-value customers, ensure that lowervalue customers and interactions migrate to low-cost channels, and prevent
sales and service declines. Traditional, profitability-based approaches to
network optimization have not proven effective as they take out costs but do not
protect and grow sales. Mercer Management Consulting has developed a
pragmatic, fact-based, three-phase approach to customer-focussed network
optimization that companies can follow to obtain higher profitability and
actionable results (Figure 1).
Phase 1: Build a customer focus
First, determine the existing customer segments, and describe the
distinguishing features, value and the organizations share of each segment.
From an article published in The Mercer Management Journal.

Phase 1:
Building a Customer Focus

Phase 2:
Understanding
Supply and Demand

Phase 3:
Optimizing Network Coverage

Understand
Customer
Segments

Art and science

of network
optimization

Determine
Customer Demand
Assess
Competitors

Identify
Target
Segment(s)

Define
Channel
Capabilities

Perform
Optimization

Develop
Implementation Plan

Develop a Picture
of Supply
Take Stock of
Internal Capabilities

Typically, customer segmentation reveals immediate opportunities to improve

profitability by eliminating low-value products and services; repricing
products, services and customers based on value; and improving operational
effectiveness by tailoring service levels and communications to the needs and
preferences of each segment.
Using this segmentation, identify one or two primary customer segments.
The network optimization is designed to capture a disproportionate share of
these primary customer segments. This focus on key customers does not mean
abandoning other customers: most secondary customer segments will continue
to use the network.
Phase 2: Understand distribution supply/demand
Having identified primary customer segments, the next step is to understand
how well distribution supply (total access to sales and service offered by all
competitors) and demand (total sales and service transactions conducted by all
customers) are matched in each market area.
To calculate demand, customer data from the segmentation analysis are used
to develop an estimate of current and future channel demand. Characteristics,
such as age, ATM usage, etc. that predict segment membership are collected
and run through a classification algorithm that gives a segment share for each
market. Channel usage by customer segment can then be aggregated to
estimate total market sales and transactions.
Supply is determined by analyzing competitors distribution networks. Build
up a detailed understanding of each competitors branch/office network, ATM
penetration, and telephone and electronic channel capabilities. It is important to
also consider the direction in which competitive networks are heading,
otherwise the optimum network structure will not match the future competitive
situation.
Phase 3: Optimize network coverage
The final phase is determining the range of channel options that will be offered,
which need to be defined in detail to include capabilities, capacities, investment

209
Figure 1.
Three-phase approach
to network optimization

IJPDLM
28,3

210

cost and annual operating cost. This allows an evaluation of the most efficient
ways of delivering the relevant capacity and capabilities at a minimum cost but
with maximum future value.
Network optimization is a combination of art and science. The science is
creating a model that incorporates market supply and demand and the range of
channel options that will cost-effectively satisfy the needs of key customer
segments. The art is introducing business judgment to the model to determine
realistic market-share targets, developing guidelines about ratios of outlet types
and channels, and gauging levels of competitive activity.
This process provides a distribution blueprint for each market that compares
anticipated customer demand with current supply, which can become a plan for
action. A customer-focussed approach helps to ease the execution of the
distribution network plan. Knowledge acquired during the process can assist in
organizing implementation around high-payback opportunities; reducing
resistance to change; and managing across multiple channels.
Customer-focussed network optimization is all about matching distribution
network capacity and capabilities more precisely with the demands of key
customer segments. This means designing a distribution network that meets
customers needs for access and functionality but without providing excessive
and often costly service levels. It is designed to meet the needs of a specific
set of high-value customers in a competitively superior way, which will
ultimately help companies maintain and increase revenue while improving
operating costs and productivity.
Organizations in several industries, including retail banking, which have
applied customer-focussed network optimization have demonstrated increased
annual sales of 10 percent and a reduction in operating costs by up to 15
percent, among a number of other added benefits. The initial investment of time
and resources to fund such a change can have a major payoff both immediately
and in the long term.
Customer-focussed network optimization offers benefits to any organization
that is managing complex multi-channel distribution networks in industries
which serve increasingly sophisticated consumers in highly competitive
markets. Getting the science and the art of optimization right can generate
significant sales increases and cost reductions.

SECTION 4

The information
challenge

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 211-218.
MCB University Press, 0960-0035

Logistics and electronic

publishing
Logistics the movement or flow of people, materials and information is an
important part of any companys business strategy. The term has its origin in
things military, and it was not until the last quarter of this century that business
organizations (which expended up to 30 percent of total cost on achieving
effective distribution of their products) began to take the subject seriously. Here,
Gordon Wills, professor of customer policy with IMC and chairman of the
electronic publishing division at MCB University Press, and Mathew Wills,
vice-president, ANBAR Electronic Intelligence, show just how great the
opportunity is to reengineer both the supply and the demand side of
knowledge logistics, or put more simply, publishing.
Logistics seeks to identify the cheapest way of achieving a given level of
availability or service to customers. There are five key elements:
(1) unitization the product or service;
(2) facilities where the product or service is made available;
(3) communications;
(4) inventory;
(5) transportation.
The challenge is to achieve the requisite availability through trade-offs between
each element. For example, many womens fashions last for only a short season.
Preparations for launch normally have a sufficiently long lead time to enable
suppliers to source items from across the world at the lowest cost. Cost-effective
transportation can be accomplished by sea container and inventory can be set
conservatively in case the fashion does not take off. But if the fashion does catch
hold, the supplier needs to know as quickly as possible, to allow him or her to
find and deliver more items to retail stores. The additional items can seldom
come by the cheapest form of transport or they will arrive too late, nor can they
be made far away by the cheapest source unless high-cost transport is used
such as air freight. The speed with which the supplier receives feedback from
the information system on sales uptake determines his ability to meet demand.
Usually reliability and consistency in the level of service are more important
than speed. If a promise is made, it must be kept. The speed required depends
on the context in which the need has arisen. Item designations of A, B and C
have been used in inventory control for many years. Item A must be available at
all times oxygen in a hospital, or engines at the right assembly point in a carmanufacturing plant but others, such as a light bulb in a home, can be
regarded as B or C items. You can borrow one from another room. Also, it is
unlikely that most customers will change their choice of car because availability

Logistics and
electronic
publishing
213

IJPDLM
28,3

214

Figure 1.
The logistics of
knowledge flows in
traditional publishing

Figure 2.
The logistics of
knowledge flows in
electronic publishing

is not immediate. However, with a chocolate bar or drink they will buy a
different brand or go elsewhere.
Figure 1 shows the total logistics flow cycle in traditional publishing. Figure
2 shows how electronic publishing is transforming the process, whereby:
(1) The authors draft is created on a PC connected to the Internet.
(2) He/she submits to a virtual academy of like-minded academics/
professionals for constructive criticism and feedback.
(3) Comments are digested and the final version prepared.
(4) The author re-submits for final review and acceptance in a housestyle/
template that conforms to the publishers specification for Internet
publication.

(5) The editor alerts the refereeing panel by e-mail to the articles presence
on the journal-protected database and asks for credit scores plus
comments.
(6) The scores and final comments are fed back to the author for
incorporation.
(7) The refereed finalized article or book is published on the Internet.
(8) Interested parties are notified by e-mail and invited to view or download.
This sequence, Project PeerNet, is currently under development at MCB
University Press for all its journals. It goes further than merely reducing the lag
time in getting articles or books into print. Some of the major improvements
include:
The virtual academy allows a much wider audience to see and comment
on a draft. MCB University Press Literati Club of more than 15,000
authors worldwide is keyworded to achieve this broader canvas.
The drafts in process are assembled in an electronically available
citation/list/register thereby enabling others to be aware sooner of
what is on the way and protect the author against plagiarism.
The on-line credit scoring in the refereeing process is expected to
produce more consistent and reliable results.
There is no need to wait for a full issue to be assembled as each article
can be published as it is accepted.
The articles abstract can be added to the global abstracting and citation
sources immediately.
The author, publisher and interested readers can communicate with each
other by e-mail.
References to other works cited in any article or book can be traced and
accessed quickly.
This process will be a faster and cheaper way to provide timely material once
all parties have access to the required technology. It will make it easier to
scan/search all the literature available in a designated field. It will also make it
easier for authors to shop around. Accordingly, the prize will go to the publisher
with the most helpful and supportive supply-side process and the best virtual
academy resource. Also, the best publisher will have the maximum outreach to
the authors intended audience. This gives a whole new meaning to the concept
of database marketing and marketing intelligence/loyalty systems. In electronic
terms, the more intended readers one can alert by e-mail to the publication of
the article, the stronger the desire of authors to commit their knowledge to that
particular publisher.

Logistics and
electronic
publishing
215

IJPDLM
28,3

216

Corporate intranet strategies

and beyond
We have all heard that electronic publishing is revolutionizing business, but
how is it doing it? What are the key issues and the key technologies?
Electronic publishing (EP) means reaching the public using electronic
methods. However, since the technology is the same whether information is
provided for one person or 1,000, every electronic communication is a form of
publishing, even if only to an audience of one.
The impact of EP can be considered in terms of a matrix. Along one axis are
the business sectors; along a second axis the technologies; finally, along a
logical third axis are the aims: awareness, access to and provision of
information, communication and transactions (AICT) (based loosely on the
Butler Group report The Corporate Intranet/Internet: Strategies and
Technologies). An example is shown, where for each of the major technologies
the aims are listed (in italic if very significant) for each business sector. This
technique can, of course, be made quantitative, with financial implications
added, so that the importance of specific technologies in different business
sectors can be assessed.
The technologies and AICT
Table I gives an estimate of which technologies are important, but what are the
technologies providing AICT?
Awareness and information
Awareness and information differ in focus, but the mechanisms are very
similar. The World Wide Web (WWW) is, of course, a huge source of
information. Much is said about the difficulty of finding relevant, current and
accurate information. While push technologies (below) are improving the focus
of information, how to find information is a skill that must be learned just as
with conventional information sources.
In contrast to pull technologies, such as WWW, there are push
technologies. Broadcasting is a push technology; programmes are
transmitted on different channels and we select what we want to watch or listen
to. Now available is narrowcasting, usually over the Internet, so that users
receive only information corresponding to their specific interest profiles. The
commercial implications of this for marketing and sales are huge.
CD-ROM publishing was until recently regarded as the main format for EP.
However, CDs present problems over networks in corporate environments and
thus corporate librarians only favour CD-ROMs as a delivery medium, the
contents then being downloaded on to fixed disk. So the future of the CD is
likely to be for delivery of software and reference information.

Technology

Business sectors
Manufacturing Marketing
Sales
Finance

Administration

E-mail

AC

CD-ROM

AI (obtaining) AI (providing)

WWW

AI (obtaining) AI (providing) T

T(perhaps)

ISDN

T (perhaps)

Teleconferencing C

IC

CT

CT

Corporate
intranet
strategies

217
C (with
teleconferencing)

C (perhaps) TC (perhaps) C

Compression

Encryption

IC

Note:
The technologies and allocations of A, I, C and T are only representative. Italic AICT indicates
major importance

File compression and bandwidth go together; the smaller a file, the more
quickly it can be transmitted and therefore perhaps the lower the
communication cost. Whether speed or cost is more important depends on the
users environment. For the small company, not only are connect times critical in
cost terms, but communications speeds are likely to be relatively slow, so that,
from both viewpoints, compression is important. On the other hand, in a large
corporate environment, where a network is always available, the speed of
download becomes the critical factor. ISDN may provide significant benefits for
the small company, but UK connection charges are still much higher than for
analogue lines.
Compression can be combined with encryption (below), so that files are both
secure and small. This provides a way of selling electronic publications over the
Internet; information is locked until payment is received and, of course, such
files are quicker to download.
Another important area is multimedia, where EP provides what print-onpaper cannot, although file sizes can be huge and thus compression is vital.
Often, therefore, there has to be a trade-off between file size and quality.
Another important development has been streaming (or real) audio and video,
so that the files can be viewed/heard as they arrive, rather than once the
download is complete.
Communications
Electronic mail (e-mail) is important for every business sector. Although WWW
receives much more media attention, it is e-mail that has had a major effect on
the way the commercial world operates. While this may not yet be true in all
business areas, wherever e-mail has been used it has had a dramatic effect. Of
course, how to handle e-mail effectively is a skill that has to be learnt.

Table I.
A possible EP impact
matrix.

IJPDLM
28,3

218

Another important communication channel is teleconferencing, which makes

possible virtual meetings, with consequent savings in executive time and travel
expenses, while use of an electronic whiteboard allows such meetings to be
truly interactive. While most videoconferencing takes place over ISDN lines, it
is also possible over the Internet.
Teleworking, working at home with electronic access to a central office,
although the office itself may not exist, is also growing in importance. Related
aspects are workgroup software, which means people can work together even if
they are geographically separated, and the spread of digital mobile telephones,
providing access to the Internet from almost anywhere.
While it is the growth of wide area networks that has made the growth of EP
possible, intranets (private Internets) and extranets (intranets extended to
include other organizations) are also having a major impact on the information
flow in many companies.
Transactions
The electronic revolution happened first in the world of finance. Electronic
share trading systems predated WWW and banks have long used SWIFT.
Conversely, there is still no widespread acceptance that transactions over the
Internet are adequately secure. Most Internet systems use public key
encryption, with a trusted third party providing verification, although there are
also a number of secret key systems. In addition, US government restrictions on
the use of the more secure algorithms are an inhibiting factor. It is thus too soon
to say whether corporate transactions will ever be transferred to the Internet to
any significant extent.
Structured data
Finally, organizations are beginning to realize that, if their information is to be
published electronically, it must be in a structured format, such as a database or
a language like Standard Generalized Markup Language (SGML). This change
in attitude to the structuring of information may well be the most significant
impact of EP as more organizations discover that (electronic) publishing is
every companys second business.

SECTION 5

The challenges
ahead

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 3, 1998, pp. 219-226.
MCB University Press, 0960-0035

Transport and the community

Owing to their flexibility, cars, buses and trucks, account for a predominant and
increasing share of transport services within the industrialized nations, and
particularly the European Union (EU). People are willing to pay for the ability
to move in comfort and privacy. Moreover, modern manufacturing approaches
are leading to just-in-time deliveries from door to door. For instance, by 1990 in
Western Europe, 80 percent of the kilometers travelled by people was by car,
and 70 percent of freight ton miles went by road. As a consequence the EUs
transport system, as with the rest of the industrialized world, is heavily
dependent on fossil fuels.
In his presentation at the 150th Anniversary Symposium of the Institution of
Mechanical Engineers Visions of Tomorrow Lars Anell, senior vicepresident, head of corporate communications and affairs, Volvo, highlighted the
future transport challenge.
There can be little doubt, especially on a global scale, that demand
for transport services will continue to increase rapidly, for the foreseeable
future. Admittedly, in mature economies there are some factors that
will provide some checks on growth, such as the transmission of digital data
replacing the need to transport printed material, and enable more flexible
working methods and so reduce the traveling of both individuals and company
personnel. But there are strong forces sustaining transport demands, and
according to Anell, the best guess is that the increase in transport services will
continue to keep pace with gross domestic product in OECD countries and
expand at a faster pace in the rest of the world.
It also seems likely that the trend toward more flexible modes of transport
will continue. This is partly because there is limited genuine competition as far
as transportation of goods is concerned. In a society characterized by rapid
changes and more flexible life styles, it becomes more difficult to predict what
or whom shall be transported where and when. Therefore, lean production
based on reliable just-in-time delivery becomes increasingly important. Today,
cars, trucks and buses represent the cost-effective solution.
However, it is highly unlikely that tomorrows transport system can be based
on such fossil fuel-based transport. There is also the increasing problem related
to space and congestion. Therefore the challenge, observes Anell, is to develop
transport systems that are still flexible, cost effective and environmentally
sustainable.
There are various unpleasant emissions from petrol and diesel engines,
many of which can be effectively taken care of by the modern three-way
catalytic converter with a lambda sond for petrol engines and the heated
converter for diesel. It is evident, at least in Europe, claims Anell, that the main
concern is emissions of carbon dioxide (CO2) which are proportional to the

Transport and
the community

221

IJPDLM
28,3

222

burning of fossil fuel. It is not the only, but is the most important of the
greenhouse gases.
Technology has enabled the fuel per freight mile to be reduced by some 60
percent between 1970 and 1995, through improved engine efficiency, increased
load capacities, lighter vehicles and improved logistics and this development
will continue. Fuel consumption for cars in Europe and the USA will also be
reduced because of demand from both customers and legislators. But to get the
real significant reduction in consumption of fossil fuel, and so comparatively
reduced CO2 emissions, will take an international effort. Some studies indicate
that the same dollar spent in reduction efforts in Western Europe could buy a
thousandfold greater reduction in India and China.
However, even if impressive reductions are achieved, the fact that oil is a
finite source cannot be avoided. Therefore, alternative fuels will always remain
high on the agenda. Unfortunately, when looking at the fuel lifecycle which
includes exploitation, refining, distribution and operation, there is no perfect,
clean and effective direct fuel substitute for gasoline and diesel oil.
With regard to the electric car, today this primarily carries batteries and not
much more and not very far. Its future is tied to the technology to store and
generate electricity and a battery is probably not the answer. There is a
growing consensus that the most popular electric-drive vehicles will be hybrids
propeled by electric motors but ultimately powered by small internal
combustion engines that charge batteries, capacitors or other power sources.
The average power required for highway driving is only about 10 kilowatts
for a typical passenger car, so the engine can be quite small, with the storage
cells charging during periods of minimal output and discharging rapidly for
acceleration. When operated at a constant speed, internal combustion engines
can reach efficiencies as high as 40 percent, and so the overall efficiency of a
hybrid vehicle can be even better than that of a pure electric drive. Thus, hybrid
vehicles will play an increasing role sometime in the next century.
However, according to Anell, the most promising future option involves fuel
cells. Although far from being competitive at present, many researchers see
them as the most likely successor to the internal combustion engine, and they
are the center piece of the ongoing Partnership for a New Generation of
Vehicles, a collaboration between the federal government and the Big Three
automakers in the USA.
Overall, if we look at the coming decades, we are stuck with the fact, explains
Anell, that the 100-year-old invention of the internal-combustion engine will
most likely be powering some 800 million to one billion vehicles by 2020. This
leads to the second challenge, congestion.
It has been stated that the private car cannot be the primary solution for
flexible mobility in megacities or vast metropolitan areas of 20-30 million
people. Cars would become stuck in permanent traffic jams and simply building
more roads and car parks is not a viable option. The solution must be based on
a smarter infrastructure, price incentives, improved mass-transit systems and
the synchronization of different modes of transport.

Information technology can play a significant role. Vehicles can already

receive information about traffic problems. But what is really needed is an
infrastructure and logistics system that make use of the smart vehicles that, for
instance, use devices that sense the distance to other vehicles and have links
that ensure people who want to use limited space in peak hours are charged.
Moreover, modern cities must have effective mass-transport systems.
Underground transport is attractive, but expensive, and to be very effective it
has to be combined with buses and private cars. As an alternative, Volvo has
developed a mass-transit system based on biarticulated buses that carry as
many as 220 people. This solution, with a capacity almost as great as an
underground system but at only 20 percent of the cost, has been implemented in
the Brazilian town of Curitiba.
Overall, improving the existing traffic system and infrastructure will require
cooperation among all producers and users of equipment as well as the fuel
industry. Consumers can play a role as purchasers willing to pay more to
make their own contribution and as voters. The oil industry should be able to
provide cleaner fuels and cleaner extraction although the proposed European
Union (EU) Auto-Oil directive does not even go as far as existing regulation in
Sweden and Finland. Governments have a decisive influence on the price and
accessibility of alternative fuels, while the development of improved
infrastructure is largely in the hands of public authorities. Moreover,
environmental standards are also the prerogative of the legislators. However,
these standards need to be international, which may mean finding ways to
direct resources for improvement investments where there is likely to be the
biggest global return.
As Anell concludes, the lack of international cooperation could actually
render national actions counter productive. In Sweden there are proposals to
increase CO2 taxes and shut down safe nuclear plants. But the result could be
simply that production moves to areas where the emissions are far greater. For
example, the emissions of sulphur from the oil shale-fired power plant in Narva,
Estonia, are equal to the total emissions from the Swedish and Finnish industry.

Transport and
the community

223

IJPDLM
28,3

Modern economies and the

impact of increased
interaction

224

The world economy is in the early stages of a profound change. Two centuries
ago, dramatic shifts in the economics of transformation production and
transportation precipitated the Industrial Revolution. An upheaval of equal
proportions is about to be triggered by unprecedented changes in the economics
of interaction. Interactions the searching, coordinating and monitoring that
takes place when people and firms exchange goods, services or ideas pervade
all economies, particularly those of modern developed nations. They exert a
potent but little understood influence on how industries are structured, how
firms are organized and how customers behave. Any major change in their level
or nature would trigger a new dynamic in economic activity.
According to The McKinsey Quarterly, Number 1, 1997, just such a change is
beginning to occur. A convergence of technologies is set to increase our capacity
to interact by a factor of between two and five in the near future. Yet business
leaders will find it difficult to anticipate the resulting opportunities and threats
because our thinking about strategy and organization is based more on the
economics of transformation than on the economics of interaction. Firms will
need to adopt new attitudes, new measurements and new vocabularies.
Drawing on both public sources and its own proprietary data, McKinsey has
estimated the scale of interactions in modern economies:

At an economic level interactions represent as much as 51 percent of

labor activity in the USA the equivalent of over a third of gross
domestic product. Even in India 36 percent of all labor content is made
up of interactions.

At an industry level interactions account for over 50 percent of all labor

in service industries, and even in mining, agriculture and manufacturing
they amount to 35 percent.

At a firm level interactions make up a large part of any companys

activities. In one US electric utility, 58 percent of all employee activity
could be attributed to interactions.

At an individual level interactions vary according to type of worker.

They peak at nearly 80 percent for managers and supervisors and
trough at 15 percent for those involved in physical labor. As the labor
mix continues to shift toward information workers interactions will
become more important.

Technological progress is bringing about a massive increase in interactive

capability. All modern forms of interaction from simple tasks like writing
letters to complex problem-solving techniques are shaped by computing and
communications technologies. The past couple of decades have brought
remarkable innovations in these fields, but modern economies have yet to
exploit opportunities to increase the quantity and quality of interactions and
reduce their cost. Until now, our ability to manipulate and process data has far
outstripped our ability to communicate and interact. However, a number of
converging factors are set to change this including:
the growing use of networks;
vast improvements in connectivity and bandwidth technologies over the
next five to ten years will multiply the interactive power of networks;
computer processing power and memory will continue to get faster,
cheaper and more abundant;
a new set of standards will boost network use and applications
development;
basic technologies will begin to penetrate more deeply.
McKinseys research suggests that simple acts we take for granted will be
transformed. The efficiency of data gathering could increase by a factor of at
least three, written and oral communication by around two and group problem
solving by 1.5. Straightforward searches, say for a simple banking product,
could be conducted in a fraction of the time they currently take, an inventory
item re-ordered in a tenth of the time, an investment portfolio updated in less
than 30 seconds. All in all, taking a conservative view and factoring human
limitations into the pace of change, the overall interactive capability in
developed economies could increase by a factor of two to five over the next five
to ten years.
Also, expect the following:
While interactive technology will be used to boost efficiency and cut
jobs, in the long run there will be a net increase in employment,
generated by a rise in the overall demand for interactions.
Vertical integration will become less valuable, and disaggregation,
outsourcing and the use of external markets will increase.
Horizontal integration and cooperation will become more attractive.
There will be a shift toward more networked forms of business
configuration. At its simplest, this means that companies will be able to
devolve decision making from corporate headquarters as interactions
become easier and cheaper.
It will be far easier for any company, regardless of size, to reach new
customers anywhere in the world.

Modern
economies

225

IJPDLM
28,3

226

Communication with customers advertising, research and marketing

will shift from broadcast to narrowcast mode.
Expertise will become an increasingly valuable asset, to be leveraged
across organizational and geographical boundaries.
Doing business in a world of plentiful and cheap interactions will clearly
require new skills and new ways of thinking. While the exact pace and extent of
change will vary by company, industry and national economy, no firm or sector
will be left unaffected. As a rule, those who anticipate and understand the
fundamental nature of the changes and actively reshape their business models
will be best placed to exploit the opportunities. Those that dont will face a
rocky transition from the heritage of the past to the realities of the future. The
businesses likely to be most affected include:
Interaction-intensive industries, such as retail banking and
communications.
Digitizable industries, such as entertainment and software.
Intermediary industries, such as broking and wholesaling.
Integrated firms, such as many utilities and oil companies.
Firms in regulated environments.
Multinationals that are configured according to outmoded assumptions
about manufacturing locations, distribution requirements, etc.
As in all major economic shifts, the successful innovators will be those that
develop the best understanding of the underlying change and act on it. Success
in the next five to ten years will require a deep understanding of the power of
interactive capacity in both your own industry and the economy at large.