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TOPIC 6: LOGISTICS ORGANIZATION AND CONTROL

Topic Outcomes:

You should be able:

1. Define logistics organizational orientation

2. Define 2Pl, 3PL, 4PL and 5PL
3. Explain organizing logistics
4. Explain logistics management performance
5. Differentiate logistics partnering
6. Explain types of control process

6.1 LOGISTICS ORGANIZATIONAL ORIENTATION

A research finding found that the particular strategy a company is pursuing

determines the organizational structure of the logistics function. Organizational design
seems to follow three corporate strategies.

6.1.1 Process-based Strategy

The objective is to achieve the maximum efficiency in moving goods from a raw
material state through work in process and on to a finished-goods state. Focus on
managing a broad group of logistics activities as a “value-added chain”. Specifically,
activities such as purchasing, production scheduling, inventory, transportation and order
processing are collected and managed collectivity.

6.1.2 Market-based Strategy

Firms pursuing a market strategy have a strong customer service orientation. Both
sales and logistics coordination are sought. The organizational structure is most likely to
focus on the activities relating to customer service across business units rather than the
integration of logistics activities. Sales and logistics might report to the same executive.

6.1.3 Channel Information Based Strategy

Companies that have a significant downstream network of dealers and distribution

organizations with substantial inventories pursue this strategy. The primary objective is
the coordination of logistics activities throughout this dispersed network. The key to good

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coordination management is information. In order to secure the information the

organizational structure is apt to span over functions, divisions and business units among
the company, dealers and distribution organizations.

6.1.4 1PL, 2PL, 3PL and 4PL

1PL, which are the shipper or the consignee,

2PL, which are actual carriers,

3PL, which are one stop shops for the 1PL such as freight forwarders or courier companies.
A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides a
one stop shop service to its customers of outsourced (or "third party")logistics services for part,
or all of their supply chain management functions.

Third party logistics providers typically specialize in integrated operation, warehousing and
transportation services that can be scaled and customized to customer’s needs based on market
conditions and the demands and delivery service requirements for their products and materials

4PL, The term 4PL is generally considered to have bee nintroduced by Accenture, which
registered it as a trademark in1996. Accenture described the 4PL as an "integrator that assembles
the resources, capabilities, and technology of its own organization and other organizations to
design, supply chain solutions

A Fourth-party logistics provider (abbreviated 4PL), lead logistics provider, or 4th Party Logistics
provider, is a consulting firm specialized in logistics, transportation, and supply chain
management.

6.2 ORGANIZING LOGISTICS

In making sure that the logistics activities achieve efficiency, this requires a
structure that indicates personnel who are responsible for what functions that encourage
coordination carrying out the logistics activities. However, there are considerations that
must be taken into account in organizing a structure, which are the conflict resolution and
management.

6.2.1 Conflict and Management Considerations

As mentioned above, the two main considerations that must be taken into account are
conflict resolution and management.

a. In conflict resolution, departments that are also given the logistics responsibility might
have conflicting focus in carrying out their logistical activities. For example, marketing
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department in carrying out the order processing process might put more focus on fast
delivery customer services as to maximize revenue. Whereas production, the focus is on
logistics activities might be on producing the lowest per-unit cost. Necessary steps are
required to achieve compromise across the functions or departments that perform
logistics activities.
b. The management consideration refers to the necessary lines of authority and
responsibility to ensure goods and moved according to plan and that re-planning is
carried out when needed. This usually requires a post of a manager that could balance the
operations required in order the highest level of efficiency.

6.2.2 Organizational Choices

When the need for some form of organizational structure has been established,
there are basic choices from which a firm may select. These can be categorized as:

a. Informal
b. Semiformal; and
c. Formal

However, organizational choice for any particular firm is frequently a result of

evolutionary forces operating within the firm, often sensitive to the particular
personalities within the firm, to the traditions regarding organization and to the
importance of logistics activities.

Table 8.1 shows the three categories of organizational choices

Categories of Explanation
Organizational
Choices
Informal In the informal organizational form, key logistical activities are designated
to separate areas or department. The major objective is to achieve
coordination among logistics activities in these different departments. Thus
require a supporting climate within a firm in order for coordination to be
achieved in a number of informal ways. These typically do not require any
change in the existing organizational structure but rely on coercion or
persuasion to accomplish coordination among activities and cooperation
among those who are responsible for them. Examples are the incentive
system, cost savings sharing arrangement, coordination committee and
encouragement and support or top management regarding logistics
activities.
Semiformal In semiformal organization for, the coordination of logistics activities that
span across several departments is coordinated through a structure called a
matrix organization. In this system, the logistics manager has responsibility
for the entire logistics system but does not have direct authority over the
component activities. Though the traditional organizational structure
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remains intact, the logistics manager shares the decision authority and
accountability with activity are manager.
Formal The formal organizational is one that established clear lines of authority
and responsibility for logistics. This typically involves:
a. Placing a manager in a superior position relative to logistical
activities and
b. Placing the managers authority on a level in the organization’s
structure that allow effective compromise with the other major
functional areas of the firm, specifically finance, operations and
marketing.
This form promotes logistics activities coordination. Firm seeks the formal
organizational or when greater attention is to be given to logistics
activities.

6.2.3 Organizational Positioning

Positioning refers to where to place these activities in the organizational structure.

This is determined by such issues as:

a. Decentralization versus centralization

A centralized organization, the activities are grouped close to top
management with the purpose of serving all product groups. The principle reason
for the centralized form is to maintain close control over logistics activities. It is
also to benefit from the efficiencies with the scale of activities that can occur by
concentrating all logistics activities for the entire corporation under a single
director.
Whereas in decentralized organization, the logistics activities are
dispersed throughout various department of the organization; with the purpose to
serve each divisions or department. Decentralization of organization often allows
quicker and more organization. Decentralized suits when the products lines are
distinctly different in their marketing, logistics and manufacturing characteristics
and when few economies of scale can be found.
b. Staff versus line
In the staff organization, the logistician is placed in a consulting role to the
other line functions such as marketing and operations. It is good alternative when:
i. A line organization would cause unnecessary conflicts among the existing
personnel
ii. Logistics activities are less critical than selling, producing and other activities
iii. Planning is relatively more important than administration and
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iv. Logistics is treated as a shared service among the product division

c. Large company size versus small
In large versus small, small organization has some form of centralized
organization because it does not benefit from volume movement as the larger firm
and there is no product division among its products.

6.3 Logistics Management Performance

Once a logistics organization is implemented; a continuous monitoring and

evaluating of its effectiveness is carried out. The feedback is essential for organizational
changes that will increase the company’s likelihood of achieving its desired goals as
organizational structure is not fixed. The changes are such as new business conditions,
development of new technologies, modification of strategic plans and goals necessitating
a structural change in logistics organization. Company may employ several different
methods to measure the logistics organization’s performance, generally deal with cost,
productivity and service.

6.3.1 Measurement Method

Cost objectives are established for the performance of individual logistics

functions. A comparison action taken on the logistics operation’s cost with its established
objectives and corrective actions taken if necessary.

While productivity criteria measure the amount of output a firm procedures per
unit of input or outputs divided by input. Examples of output measures are tons shipped,
pound loaded, orders filled and shipments delivered. Inputs include labour hours, the
number of employees or trucks and warehouse space. Company defines service quality in
terms of criteria such as time, accuracy, consistency and damage. A seller’s service level
provides a competitive advantage (or disadvantage) and service is a criterion that buyers
especially industrial buyers, use in making the purchase decision.

6.3.2 Logistics Manager Ability

Company evaluates logistics managers primarily on the basis of three factors: line
management ability, problem solving ability and project management ability as explained
in Table 8.2.

Table 6.2: Logistics Managers Ability

Logistics Managers Explanation

Ability
Line Management Line management ability considers the manager’s ability to manage
Ability logistics operations on a day-to-day basis and to meet goals that the firm
has established for service quality, productivity and all aspects of
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performance including budget.

Problem Solving Problem-solving ability deals with the ability to diagnose problems with
Ability the operations and to develop and apply innovative new ideas that
results in cost savings, service improvement or increased financial
performance. Also is the logistics manager’s ability to anticipate
opportunities for improvement before it become a problem to be solved.
Project Management Project management ability refers to the ability to structure and manage
Ability projects designed to correct problems and improve the logistics process.

Managers are also frequently being evaluated on their ability to motivate their
subordinate and develop their technical and management skills through individual
employees’ productivity, utilization and performance.

6.4 Logistics Partnering

Firms with extensive logistics need an alternative from doing it on its own. This is
called logistics partnering.

The alternative available are:

 To share its logistics capability with other firms, known as alliances or

 To contract the activities to be performed by specialist commonly known as third-
party providers.

Firm can gain strategic and operating advantages from logistics partnering. Some
general benefits are shown in figure 6.2

The benefits of logistics partnering:

 Reduced cost and lower capital requirements

 Access to technology and management skill
 Improved advantage such as through increased market penetration
 Increased access to information for planning
 Reduced risk and uncertainty

There are two factors in deciding whether to perform the logistics individually or
with another party. These factors are:

i. How critical logistics is to the success of the firm and

ii. How competent the firm is in managing the logistics function
The options available are shown in figure 8.3

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Importance of Logistics to Company’s Success

Perform
Seek
Logistics
High Competent
Activities
Partner
In-House

Be a
Low
Outsource Partnership
Leader

Low High

Company’s Competence in Handling Logistics

Figure8.3: Selection diagram for where to perform logistics activities

Company with low need might outsource the logistics activities to another party.
Examples are such using third-party provider, common carrier or public warehouse on
single events to long-term contractual arrangement. Company with high needs on both
factors is better off to handle the logistics on its own.

If logistics is critical to strategy but logistics competency is low, finding a firm

with which to partner may provide significant benefits. A strong partner may provide
facilities located in existing and new markets, a transportation capability and
administrative expertise not available within the company.

If logistics is not critical to strategy, company can lead in seeking partners to

share the logistics system. This would reduce the company’s cost through increased
volume and the economies of scale.
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6.4.1 Alliances

Company that does not desire to build a high degree management competency in
logistics may find seeking an alliance with a stronger logistics partner which will
strengthen its own competitive position.

However, company must understand that a logistics alliance is built on trust, a

sharing of information that aids logistics performance, specific goals to achieve a higher
level of logistics performance that can be achieved alone, operating ground rules for each
partner and exist provisions for alliance termination.

Although the benefits are obvious but only few alliances were created. Logistics alliance is
fragile. It can be difficult to form and can dissolve easily. Interestingly, ways are being explore
to make logistics alliances work due to its potential benefits.

6.4.2 Contract Logistics

This alternative is widely used by companies to support its logistics activities

compared to forming alliances. Common carriers provide trucking and rail services.
Public warehouse provide storage services. Specialty firms provide freight bill auditing
and accounting services. In fact in recent years, logistics companies have emerged that
provide a full-service logistics whereby the entire logistics operations are performed for a
client company for a contract price. These companies are known as third-party providers,
integrated logistics and contract logistics specialists. These companies sell logistics
services, as logistics is its primary business.

6.5 CONTROL PROCESS

The control process is one of comparing actual performance actual performance

to planned performance and initiating corrective action. Or in other words, the process
where planned performance is brought into line or kept in line with desired objectives.
The logistics manager seeks to control planned logistics activities (transportation,
warehousing, inventories, material handling and other processing in terms of customer
service and activity costs. The control mechanism includes the audits and reports about
system performance, the goals established for performance and some means for initiating
corrective actions.

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6.6.1 TYPES OF CONTROL SYSTEMS

The control process is one of comparing actual performance to planned performance and
initiating corrective action. There are four types o control systems.

6.6.1.1 open-loop systems

This is the most common system. Its important feature is the human intervention
between the action and desired performance and the action to reduce the process error.
The manager must intervene in a positive way before any corrective action can occur, as
goals, plans and environmental influences are subjected to frequent changes.

6.6.1.2 Closed-loop systems

Closed loop systems reduce the human in the control processes. In controlling
logistics activities the manager is replaced by the decision rule. The decision rule acts as
the manager if he had observed the performance error. The best example is the inventory
control system. Although it has a great capacity for controlling numerous product
inventories with speed and accuracy this system is quite rigid in meeting changing
conditions outside its design parameters.

6.6.13 Modified Control Systems

It is combination of open-loop and closed-loop control system. In this system, the

manager may at times substitute for the decision rule. For example, the manager could
override the automatic decisions of when to order and how much to order. The manager
has accessed to a much broader information base than the automatic control system and is
in a position to judge the performance of the control system. These additional information
are such as customer service complaint, inventory cost reports, marketing promotional
announcements, transportation service changes and production schedule changes. This
system offers leverage in controlling complex activities without requiring the manager to
relinquish managerial command over the system.

6.6.4 Control System Details

Once the type of control system for controlling single activities in the entire
logistics function has been broadly defined, a number of system details needs to be
considered. These are error tolerance, system response, and nature of control information.

Error tolerance refers to the degree of performance error to be before corrective

action is initiated.
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When the error in a control system is no longer tolerable, corrective action must
be taken, as it will affect control costs. Information time lags are also an important factor
in the pattern response. The system will tend to hunt the time lag between when a change
in process occurs and when the change is detected in the control monitor. If the
information lags is not great it is within acceptable limits. If not a more responsive
information system need to be designed.

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