Objectives of Material Management System of M/s R.

B Rai:-

 To study the supply logistics: Procurement and Materials

 To study Demand side logistics: Forecasting and Order Processing

 To study Inventory Management and Control

 To study storage facilities, Material handling equipment and packaging

 Physical distribution transportation system

 To study Change and transformation

 To study building responsiveness

 To study Faster innovation and creativity

 INTRODUCTION OF MATERIAL MANAGEMENT SYSTEM

Materials management is the branch of logistics that deals with the

tangible components of a supply chain. Specifically, this covers the
acquisition of spare parts and replacements, quality control of purchasing
and ordering such parts, and the standards involved in ordering, shipping,
and warehousing the said parts.

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

and resources involved in moving a product or service from supplier to
customer. Supply chain activities transform natural resources, raw materials
and components into a finished product that is delivered to the end
customer. In sophisticated supply chain systems, used products may re-
enter the supply chain at any point where residual value is recyclable.
Supply chains link value chains. Quality control is a process by which
entities review the quality of all factors involved in production. This
approach places an emphasis on three aspects:

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

managed processes performance and integrity criteria, and

identification of records
2. Competence, such as knowledge, skills, experience, and
qualifications
3. Soft elements, such as personnel integrity, confidence, organizational

culture, motivation, team spirit, and quality relationships.

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

Quality control emphasizes testing of products to uncover defects, and

reporting to management who make the decision to allow or deny the
release, whereas quality assurance attempts to improve and stabilize
production, and associated processes, to avoid, or at least minimize, issues
that led to the defects in the first place
The activities of sourcing, procuring and holding in readiness the raw
materials, components, sub-assemblies and packaging materials used by
manufacturing enterprises for production traditionally came under the
control of the executive responsible for production. From the early 1950s
through to the 1970s, production executives wielded considerable power
and authority in western manufacturing enterprises. These enterprises
focused on economical production, which often involved long production
runs of finished goods inventory.

In part, this was due to the difficulty of scheduling and controlling production
with mainly manual or rudimentary computer systems. Also, a focus on
lowest cost per unit of production dominated management thinking.
Frequently, this resulted in the cost of holding large finished goods
inventories being ignored or considered to be someone else's problem.

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

introduction of smaller and cheaper mini-computers made the production-
planning task easier. Planning techniques such as Materials Requirements
Planning (MRP) and later Manufacturing Resource Planning (MRPII)
provided greater materials visibility to those charged with planning and
control of the production process. It also provided a relatively efficient
means of matching production requirements with finished goods inventories
and forecasts of customer demand for finished goods.
 CHAPTER – 1

SUPPLY LOGISTICS: PROCUREMENT AND MATERIALS

1.1 Purchasing and procurement is the broad process that buys the
materials or services necessary for the organization’s production function to
meet customer requirements. Included in the process are activities like
identifying various suitable suppliers, purchasing from them, and monitoring
their performance. While this is defined very neatly in a few words, the
actual stages of the process can be quite extensive. For example, the
stages involved may include:

• identifying needs
• defining requirements for purchasing
• deciding if purchase is necessary or best option
• decide if purchase is to be existing commodity or made specifically.
• studying the market for suppliers and their market power; i.e., is the
market supplied by one, few or many suppliers
• listing all available suppliers
• selecting potential suppliers
• appointing suppliers
• receiving commodity or service
• Evaluating commodity or service received.
1.2 Warehousing and Storage

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

storage, order picking and shipping of goods, providing at the same time
office and related space. They have an effective storage plan, use efficient
material handling equipment and information systems and make maximum
use of the height of the building.

Warehousing and storage can vary widely in what they provide, depending
on the commodity stored. On the one hand, there is the storage of iron ore
or coal. On the other, there is the warehousing of temperature and climate
sensitive goods such as foodstuffs, computers and pharmaceuticals. In the
logistics context, warehouses are points on the logistics chain where
commodities or goods are held before they are used in the next process or
consumed. Warehousing happens on both sides of the production function.
Raw materials can be stored in warehouses prior to use in manufacturing;
and finished product can be stored in warehouses before distribution to
retail outlets and other customers.

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

the production equation.

The main functions of warehousing or storage are:

• consolidation for onward transport

• product mixing for specific customer orders
• cross-docking (transferring goods from one to the other through the
warehouse) between suppliers and consumers
• Contingency stocks to overcome delays or peaks and troughs in the
normal transport chain.
Warehousing and storage costs can be quite high, depending on the level
of inventory that is being maintained and the nature of the material being
stored. Generally, the more valuable or perishable the commodity, the
higher are the costs. Organizations aim to reduce their costs as much as
possible. This is the main motivation to use JIT supply of goods for
production purposes.

The relationship between the level of inventory maintained and the amount
of transportation used is direct: the greater the amount of transportation, the
less need for inventory, and vice versa. The level of inventory is then
related to the amount of warehousing that is used. There are obvious trade-
offs to be considered.

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

delivery schedules or long distance of delivery, warehousing capacity and
usage has to be high. Warehousing costs go up with increased inventory
holding. At the same time, there are economies of scale in maintaining
large warehouses. Two warehouses of 50,000 square meters are more
expensive to operate than one of 100,000 square meters.

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

an increase of production and a reduction in transport costs, reducing
overall costs. These costs will decrease as long as the inventory costs
remain lower than the cost of increased warehousing. Once that point is
reached, increasing the number of warehouses will result in an increase of
total costs.

This argument works effectively in reverse as well. Reducing warehouses

can also contribute to reducing overall costs through economies of scale
and focused transport movements. Better transport results in reduced
inventory costs.

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

on the level of service it requires. If the warehouses are used for holding
goods that are then called upon to service customers quickly, particularly
those who require shipments in various locations and in small quantities, a
number of warehouses are obviously cost-effective. Another situation in
which large number of warehouses is recommended is when customers do
not allow sufficient lead time or demand is erratic.

1.3 Data and information System

The materials manager needs information like the identities of suppliers that
the organization uses, demand forecasts for production, existing and
desired inventory levels, production timetables or schedules and transport
routing. This mass of information cannot be beneficially processed without
the use of suitable systems. Numerous software packages are available for
specialized usage, tailored for specific branches of various industries. The
main benefit of modern and powerful packages is that they permit the
linking and using of information from different aspects of the material
management function.

The main issues in any management information system are the availability
of relevant information, its accuracy and the effective communication of this
for management purposes.

To provide ever increasing levels of customer service, organizations

depend on information, increasingly in real time, about their operations and
the location of the customer's consignment. From the organization’s own
perspective, data and information systems must serve useful corporate
aims like permitting inter- and intra-functional communications, processing
data into useful information, supporting the output of personnel in the
organization, creating a useful and easily accessible archive of information
and permitting the development/improvement of processes that constitute
the business. From the logistics perspective, the most important issue
remains being able to meet the needs of the customer in the pre-
transaction, transaction and post-transaction stages, support sales and the
accounting and finance functions.

Various information systems technologies are available today. These

include bar coding, electronic data exchange (EDI), data management
(including CD-ROM), artificial intelligence and expert systems and satellite
tracking.
1.4 Information systems in material management

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

and the operations and provides pertinent information to the relevant
managers to support decision making. The main elements of the logistics
function can broadly be identified as materials management, market
information collection, management information and support systems, and
documentation. Good computer technology is essential to the effective use
of all these systems. Corporate management systems are incrementally
being amalgamated with logistics systems to provide effective overall
management. You can expect to see increasingly sophisticated information
systems being designed to:

• supply knowledge of customer needs and expectations

• reduce lead time in the performance of a service or in filling orders
• enhance the quality of data collected and information generated.

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

• developing employee acceptance of the new technology in order that

can be used effectively
• Constructing crosses functional and cross discipline teams in order to
enhance business performance.
Total quality management (TQM)

Short lead times to meeting the customer's orders have put a strong
emphasis on the production process in all areas of the organization. Most
attention has been focused on areas that have direct dealings with the
customer, such as transport. Leading logistics providers, like FedEx and
UPS, are making pick ups and deliveries in less than an hour from
notification. This impact on all parts of the organization in planning and
providing a highly responsive and reliable service. While internal systems
are being analyzed and refined, many organizations are turning to third
party providers who can meet specific requirements more cost effectively.

Quality Assurance

Quality assurance is today synonymous with the ISO 9000 series of

standards published by the International Organization for Standardization,
often incorrectly referred to as International Standards Organization, in
Geneva, Switzerland. These standards are used to control processes within
the firm as well as to demonstrate to others that there is a formal system for
developing, sustaining and managing the quality of the output.
1.6 Measurement and evaluation

Like all other processes, materials management must have proper systems
of control and measurement. To be able to control the process, it must be
properly measured. The firm must be able to collect data, identify each
stage of the process and make improvements. Typically, the stages to
identify and measure include:

• supplier performance, including the number of items

accepted/rejected, types of defects, efficiency of delivery
• inventory levels and inventory turn over, use of different types of
transportation
• material costs over time, comparing actual expenditure with forecast
spending, price effectiveness, cost savings and cost avoidance, new
work generated, work completed
• quality of supplier and finished product.

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

• the source and reliability of data

• the use of the data to generate useful information
• the purpose to which the data and information is being put.

The source and reliability of data is an important issue. Broadly, data can
be divided into two kinds - soft (personal service and customer satisfaction
ratings, for example) or hard (for example, product availability). Firm can
develop links and control variables that can impact on performance. These
can include differentiating between customer types, products, markets and
so forth.
1.7 MRP 1 and MRP 2

There are two kinds of MRP and the difference between them is important
to understand. MRP1 is materials requirements planning and MRP2 is
manufacturing resource planning. MRP1 is a production and inventory
control system that seeks to minimize inventories but retain sufficient
material for the production process. In addition, it helps in the planning of
manufacturing activities, delivery schedules and purchasing. When
production does not follow a constant pattern, e.g., when production is to
order, and demand for material is highly variable, MRP1 can improve
business results. The elements of MRP1 are shown in Figure 2

Figure 2 The MRP1 system

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

reducing inventory, which can, in turn, raise total costs through increased
transport needs and unavailability of bulk discounts; and it does not cater
for supply interruptions.

MRP2 encompasses the whole range of activities involved in the production

process. In addition to the elements of MRP1, it has production planning,
resource planning, MRP1, shop floor control and purchasing. The system
was developed first by Oliver Wight and he classified it into four groups:
The benefits of the MRP2 system are again along the lines of those for
MRP1. They include inventory reduction, higher inventory turnover,
improved customer service, and reduction of costs. The following reading
discusses these systems and links them back to TQM.
 CHAPTER – 2

DEMAND SIDE LOGISTICS: FORECASTING AND ORDER

PROCESSIONG

2.1 Customer Order Processing

Order processing is the core of logistics activity. The receipt of the customer
order is the trigger that sets into motion all the logistics functions that
culminate in the delivery of the product to the customer. Of prime
importance to good order processing is a good flow of communications,
which binds the entire system together, supported by a suitable and
efficient management information system that allows the processing of
customer orders as well as collecting relevant information for management
decision making.

For Example:

As far as the firm is concerned, the time to fulfill the customer's order is
from the time the order is received and entered into their system till the time
it is shipped. From the customer's perspective, the time to fulfill the order is
from the time the order is sent till the time product or service is received.

2.2 Environmental scanning

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

have an impact on the efficient filling and dispatching of orders for
customers. Environmental scanning, therefore, is a logistics activity that,
done well, can enhance the order processing function. Moreover, such
events and situations can seriously affect all of the activities of a company,
and the logistics manager must be constantly aware of the nature of the
environment in which the business is operating and be ready to adjust
product movement as required.
2.2.1 The environments

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

logistics manager should be aware of include:

• the global, or macro, environment

• the competitive, or market, environment
• the firm, or micro, environment.

The global environment. The global environment is the one that sets the
tone for the wider operations of the industry. In recent times, the events of
September 11, 2001 have had a major impact on the global economy. This
influences the commercial activities of various organizations. Associated
with that has been the military and other activity in different parts of the
world, with knock-on effects on local enterprises.

For Example

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

the effect of September 11 events, this had a major impact on different
industries. In Tasmania , tourism and seafood production suffered
particularly seriously. The double uncertainty of safety and lack of air
service kept many overseas holidaymakers away. The impact on the
hospitality and supporting logistics providers was severe. Many firms, such
as those that provided services and products to the airline as well as
downstream industries, ceased operations and/or went bankrupt. Others
laid off staff in large numbers and lost vast amounts of corporate
knowledge.

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

of the world have been raised in response to perceived security of
operations. In addition, oil and commodity prices have varied in response to
market sentiments. All these and similar factors have a major influence on
the competitive environment within which firms operate.
2.2.2 Approaches to scanning

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

adopted. Broadly, these may be listed as:

• formal research
• informal research
• casual information collection.

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

budget, following a predetermined plan and methodology, and with
outcomes in mind. Informal research is carried out in an unstructured way
but with a defined purpose. Casual information collecting on a topic or
areas is just that: it has no definition or structure and the information
collected is general rather than specific.

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

intermittent.

Information about the environment can be collected through various means,

including canvassing employees who interact with the customers, vendors
and sub-contractors or through consultants. Each of these will provide
information of different kinds, all of which should be used to substantiate or
counterbalance what is already known, as well as discover developments.

One of the important contributions environmental scanning makes is

towards making forecasts.

2.3 Logistics needs forecasting

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

logistics demand.

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

required is important because it affects all the processes involved in the
logistics chain, from
sourcing till consumption by the customer. For the purpose of logistics,
forecasting demand means defining all the requirements to make the
product reach the market. This includes forecasting the level of inventory to
be maintained, allocating money and material resources to various markets
that have to be serviced, and planning activities that will service the
demand. Underlying all this is the element of cost. While all the activities
named above must be carried out, that should be done at optimal cost.

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

• Long range
Made for three or more years, these forecasts are strategic in nature.
They tend to be aimed at sections of the market and are linked to
capacity and cost. They usually address resource allocation and
identifying desired asset levels.
• Medium range
Made for between one and three years, these forecasts are usually
aimed at designing budgets and planning sales. They will also be
linked to cost but to specific products rather than market segments.
Most often, these forecasts tend to identify quarterly variables.
• Short range
Made for up to one year, these forecasts are operational in nature.
They address specific items and units.

2.4 Lead time components

From the perspective of the customer, lead time is the time between placing
the order and receiving the delivery. From the supplier's perspective, it is
the time between receiving an order and getting paid for it, that is, the
period for which cash is tied up, usually taken from the time materials were
purchased to produce the product to the time that the customer buys and
finally pays for. This concept is further explored in the following reading.
the purpose of defining lead time is, of course, to reduce uncertainty and
inventory (costs). For this reduction to be realised, variable demand as well
as demand that is consistent must be considered. When demand is
consistent, the lead time and quantity of product demanded are known.
Inventory needs to be maintained at cycle stock level . This means that if,
for example, the corner shop sells 20 pots of honey every fortnight,
regularly, then the beekeeper only needs to have 20 pots available every
fortnight. The lead time (fortnight) and demand (20 pots) is known.

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

demand or lead time, a safety stock needs to be maintained. The aim is to
cover short term variables that occur in demand or lead time.

2.5 Enhancing forewarning of demand

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

demand to be able to bring the logistics lead time as close to it as possible.
There are two ways of doing this:

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

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

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

electronic point of sale (EPOS) systems are installed. The electronic till is
linked to the inventory level and sensitive data monitoring identifies
customer behaviour. If articles are being purchased faster than normal,
reorder points are adjusted to prevent stock out situations. Getting such
information allows the supplier to be prepared for changes in orders and be
able to source supplies in time. Buyers and sellers both gain form the
exchange of such knowledge. The logistics system becomes much more
responsive. Markets are becoming more time and price sensitive. Both
sides of the demand have to be addressed - not just cheaper but also
quicker!
ERP. A more recent development has been the emergence of enterprise
resource planning (ERP). This system records all transactions, produces
and executes orders and follows payments. In other words, it can schedule
all procurement and distribution activities. ERP is based on computing and
IT for data collection and information processing. The databases required
for making the best use of the potential of ERP are enormous.
Organization-wide computing and data collecting functions are linked into
the system and this data can be shared with suppliers and customers.

One of the perceived shortcomings of ERP is that it can get too accounting
oriented, that is, companies can get too focused on the savings in money
terms rather than on wider improvements of operations. In addition, ERP
packages are often customized for specific organizations. This has a cost
attached to it, although the resulting savings may far exceed this initial cost.
The personnel who use this system will have to be suitably trained as well.
 CHAPTER – 4

INVENTORY MANAGEMENT AND CONTROL

Introduction

At the outset, let us clarify some terminology. All firms hold stocks of some
goods that they keep in storage until needed. The level of stock held varies
from firm to firm but, on average, it would not be too inaccurate to say that
20% of the annual turnover would be the amount of stock a firm holds in
some sort of storage. As you can imagine, this can be a big investment.
Much work has been expended in trying to reduce this and to not have
capital tied up in stock which is not in the process of being turned to
income. The move is towards lower levels of stock and shorter lead times,
as discussed in the last chapter.

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

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

goods and their quantities. An inventory is, therefore, a list of all the stock
. Very often, however, the terms stock and inventory are used
interchangeably. We must understand the meaning of the terms quite
accurately, as well as the fact that they are used frequently to mean each
other. When we talk of inventory management, we are talking about
managing all the stock that is recorded in the inventory of a firm.
3.1 Basic concepts and rationale for inventory holding

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

finished material, spare parts, consumables, etc. that appear at various
points in a logistics channel are termed inventory. Inventory holding is a
basic of business, as it is of life. We see inventory holding all the time.
Animals do it as a normal function of their lives. Humans do too. Weekly
shopping for food and other household needs is an example. We maintain a
stock of goods that we think we will consume in a certain period in the
future. The rationale includes standard consumption, abnormal
consumption through expected or unexpected visitors, and allow for
considered unforeseen events. As uncertainty increases, higher stocks
result and can be the strength of an organization in being able to meet
customer needs in such conditions. Benefits from holding inventory are that:

• supply and demand can be smoothed

• abnormal consumption can be accommodated
• irregular supplies can be accommodated
• savings can be made from large purchases
• savings are made when price increases are expected
• stockpiled products might not be produced any longer, but might still
be required occasionally in the marketplace
• there is a reduction in transport costs through bulk buying
• there is security at times of emergency.

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

procurement to consumption:

• Place an order with a supplier.

• Take delivery when it arrives (after lead time, studied in previous
chapters).
• Check, sort and store.
• Internal demand draws upon this stock.
• When stock falls to re-order point, another order is placed.
Inventory is a cushion between the distribution and consumption processes.
It absorbs the lead time factor as well as any errors that may exist in the
forecasting process. Buying in bulk often leads to economies of scale and
cheaper quotes. Inventories also act as a balance between supply and
demand.

3.2 Inventory costs

Inventories, therefore, are useful tools in the logistics chain, and there are
good reasons for them being there. However, they must be carefully
managed, because they also represent a significant cost. Keeping low
inventories and risking a stock out can be very expensive, for example. A
stock out occurs when there is a buyer for an item but the item is no longer
available. Custom will be lost in these circumstances, perhaps never to be
regained.

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

nevertheless, money tied up in material which is sitting in stock, not being
processed or having value added, and not with the customer, earning
payment. Maintaining inventories of increasingly processed stock is
incrementally costly. The decision that a firm has to make is whether it is
worthwhile locking up this capital in stock or investing the same money
elsewhere to get better returns.

3.2.1 Managing inventory costs

'The benefits of smart inventory management'. This short reading covers

the wide range of topics that we will touch upon in this chapter. As such, it
is a good introduction to our discussion to follow.

Broome, JT (1999), 'The benefits of smart inventory management',

Nation's Business , June 1999, pp18 - 19.

From this basic understanding, we come to some important questions that

an organization must address:

• What should be stocked?

• When should orders be placed for more stock?
• What quantity should be ordered?
The most fundamental is the first question. The answer is not
straightforward.

Because stock outs are expensive, there is a risk-averting tendency in

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

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

The aim is to minimize overall cost, and the control of inventory is vital.
Being vital, it has become subject to rigorous attention on the part of not
only managers, but academics in the field of business. The lowest overall
cost must define the various elements we have mentioned above - stock
levels, amount of capital tied up in inventory, and the level of customer
service that is acceptable.
Kilty, G (May 2000), 'Inventory management within the supply chain', Hospital Material Management Quarterly
, pp18 - 24.

In this reading, the writer identifies the need to study the entire chain of
events from procurement to distribution. In other words, the total cost must
be the focus of study to reduce inventory costs. Basically, inventory holding
costs can be divided into the following broad categories:

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

• the cost or re-ordering the item, i.e., order preparation, follow-up,
receipt of item, transport costs, quality check, and sorting
• the cost of storing the item for a given period of time
• the stock out cost.

The last one is the most complicated, possibly the highest cost, because it
involves the estimating of externalities and knock-on effects, including loss
of customer, disruption to operations, cost of overcoming these and so
forth.

Re-ordering. Looking at the first three items, we need to consider the cost
of ordering small and frequent deliveries of items against large and
infrequent ones. The small deliveries obviously cost less in direct terms but
may cost more in indirect terms when the cost of reordering and transport
etc are included. So, the frequent deliveries will have low inventory costs
but high processing costs. The reverse is true in the large deliveries but
infrequent ordering situation. In logistics related literature, we come across
a term economic order quantity (EOQ). EOQ is expressed as

Placing an order. Now that the optimum order size is decided, the next
question is: when should a re-order be placed? This depends on two
variables that we have pointed out in the last chapter - lead time and
demand. If demand remains fairly predictable, the re-order should be
placed when lead time will equal to zero stock. The new stock will then
arrive just as the existing stock is finishing. In practice, this accuracy of
prediction and consumption is the elusive grail. Organisations, therefore,
maintain a safety stock. Re-order then occurs when existing stock reaches
a level which is:

demand in the lead time + safety stock

This situation can be expressed diagrammatically, as shown in your

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

In the drive to solve the problems of lead times and re-order points, some
work has been done to identify best ways to control and reduce inventory
costs. One such process is a classic one - statistical process control ,
devised to solve quality problems in 1931 by Shewart. This process is
widely discussed in quality related literature but it is interesting to read its
application to the logistics context and to optimising inventory holding.

Pfhol, H-C, Cullmann, O and Stolzle, W (1999), 'Inventory management

statistical process control: Simulation and evaluation', Journal of
Business Logistics , vol 20, no. 1, pp 101 - 120.

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

3.2.2 Push and pull control methods

Push inventory control (pp340 - 342) is fairly straightforward and is based
on the fact that the product has to be stored at supplying points after
production.

The study gets a little bit more elaborate when we start looking at the Pull
Inventory Control (starting from page 342). It is useful to work through the
worked examples and calculations and understand how the process is
conducted. You will see, for instance, how a reorder point is established,
with an example given on page 340. This example is carried forward in
other places to illustrate the issues of data inaccuracies and non-
instantaneous re-supply.

The next section in the text, advanced pull inventory control , takes you
to further practical complexities that can be expected to occur in normal
operations. These take into account the concept of total cost and service
levels.

4.3 Types of inventory

Push and pull inventories are two of the main types. In this section, we will
overview the various other types of inventory that are commonly discussed
in logistics parlance.

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

meeting demand in normal conditions. This occurs when demand and lead
times are accurately known. When this happens, no added level of stock
needs to be held. Sometimes this inventory is called 'cycle stock'.

Pipeline: Described well in your text on page 374, this is stock that is in
transit between one place and another. Cargo carried on ships is often
pipeline or in-transit stock.

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

lead time or demand or a combination of both. This inventory is sometimes
called buffer stock. We have studied aspects of it in the previous section,
when making calculations in the pull system.

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

Examples include bulk buying and receiving rebates or holding stock to
cover expected shortages of material or labour. Ships are sometimes
known to carry cargo between countries that they have carried in the
opposite direction earlier. This is also speculative holding and subsequent
trading on the world market. Another form of speculative inventory is
seasonal purchase of stock to be used or traded later in the year when
availability is poorer.

Obsolete: This is stock for which demand no longer exists. This can be true
for the whole company or for just one holding location. If it is for just one
location, this stock is usually transferred to where it can be used.

3.4 Inventory management

Inventory means various things to various people, even within one

organisation. The inventory manager sees it as his responsibility; the
purchaser sees it as stock that is available to him; the materials manager
sees it as something that he needs to maintain at certain levels; the
accountant sees it as dollars. For all of them, dynamic inventory control
gives real data on which they can base their decisions. Scanning an item at
the time of sale provides information on consumption, available stock, any
necessary adjustments to existing processes of re-ordering, moving over-
stocks to places where demand is high. Electronic point of sale (EPOS)
systems are widely used to provide such dynamic management but they
should be regularly reconciled with the actual holdings to adjust for
damage, theft or other inaccuracies that might creep into the system.

ABC classification. One of the basic principles in inventory management

is ABC classification, based on the Pareto principle, which says that 20% of
the product generates 80% of the sales. The ABC classification system is
described with an example in your text. Basically, the principle it follows is
this: the top 10% of the items are placed in class A, the next group in class
B and the slowest in class C. Each group is handled separately, keeping in
mind their particular market characteristics.

The next reading illustrates the use of the ABC classification and shows
how that can be used to better the returns on investment.
Petry C (June 2001), 'Key calculations for effective inventory control',
Metal Center News, pp. 1 - 33.

Very rarely can a logistics manager look at all his inventory and keep visual
track of it. Often, inventory of large organisations is spread out all over the
world, some of it in the 'pipeline' mode in transit on ships, aircraft, or on
various land transport modes. To be able to effectively manage his
inventory, the manager has to maintain records that can be adjusted
continually to replicate sales, purchases, deliveries and so forth.

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

which each item is added or deleted manually. Clearly, this is not practical
in most operations these days and sophisticated computer systems are
used to perform essentially the same function, but with much more
functionality added in the form of inputs and available outputs.
3.4.1 Inventory management systems

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

Auditor , pp40 - 44.

This paper focuses not only on the management of inventory but also on
how the organisation runs its business. The point is made that, regardless
of the systems used, it is the people who make the systems work.

Tracking procedures become more important when inventory is spread over

many points. In organisations that have global operations, this can be seen
to be crucial to their functioning effectively. Even for operations that are
much smaller in scale, inventory management systems play a crucial role
that underpins the commercial success of the organisation. In the aviation
industry, for example, inventory is maintained at various points around the
globe but can be accessed from any location. On the other hand, small
businesses that have a few outlets only can decide to pool inventory for all
outlets in one place and manage it centrally. Some items in the inventory
are easier to track because regulations require that they be suitably
numbered and identified (pharmaceuticals, vehicles, spare parts for
machinery are examples) but other items (clothes, for instance) may not be
so formally tracked. Such items are then tracked by the organisation's
inventory management systems.

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

developing responsive inventory management systems. When Toyota were
devising their JIT system, they studied the processes of supermarkets
carefully to see what lessons could be learnt. The most frequently used
method of inventory management in supermarkets is bar coding. Bar codes
are commonly based on the universal product code (UPC). If you consider
the usual experience of supermarket shopping, you see that the customer
collects their purchases and goes to the checkout where the items are
scanned. If there is a supermarket store card in the name of the customer,
this is scanned first. This links the customer to the purchase that is being
made. The information is recorded in a computer that provides the checkout
operation with the price, any tax, any special offers that may apply, and any
regulatory restrictions that may be in place. It provides the total cost of
purchase and prints out the receipt.

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

customer preferences and shopping patterns, as well as the items that have
been removed from the inventory. In this way, bar codes help to monitor
stock levels and instigate re-order procedures. The result of using bar
codes is efficient movement of stock from supplier to customer and a drop
in the amount of stock that has to be stockpiled. When allied to a customer
card, a large amount of data on the customer can be maintained which
helps when designing promotions aimed at specific groups of customers.

Bar codes use the thickness and separation between bars to code
information. The scan can read the full information in very quick time.
Generally, bar codes are mono-dimensional, which limits to some extent the
amount of information that can be stored in the code. There is a move
towards the use of two dimensional codes, e.g., with UPS. The drawback of
these is that they must be scanned in two dimensions for all the information
to be read.

Increasingly, containers are tracked through terminals by scanning the

barcodes on them as they go on their journey, often without stopping at the
gate. This speeds up movement of cargo while maintaining track of their
movement.

Wireless tracking. Sometimes called radiofrequency identification (RFID),

this method uses small transponders and readers that are linked to an
information management system. This allows the tracking of a large range
of items. The technology is applied in a wide range of logistics operations,
from automatic handling in terminals and warehouses to production line
functions. The versatile nature of this technology permits its application in
areas which can be unfriendly to human presence, such as, toxic
environments, heat and other micro atmospheres which can degrade
human performance.
The fundamentals of the working of this technology are that the transponder
responds to a signal from an antenna and sends back a signal. This
information can be merely recorded or rewritten into another function and
exchanged with a control or activating system. This allows operations in the
dark, permits automation in a wide range of activities and keeps operating
costs low and tracks tagged items in real time. Incrementally, this
technology is replacing bar codes.

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

satellites to produce very accurate location coordinates. GPS is widely used
to track vehicles, ships, aircraft, containers, and shipments. The use of this
system allows, in conjunction with the organisation's management
communications systems or the Internet, the availability of real time tracking
and location of items or shipments. The widespread use of this technology
has made it a base technology for managing the logistics chain.

4.4.2 Computers and inventory management

Computing power remains the platform on which all modern inventory

management systems depend. Special software is constantly being
developed and integrated to manage inventory; and computing hardware
provides more and more effective computers on which to run the software.
When bar coding, for example, RFID and GPS are linked together with a
wider management system, and a streamlined logistics management
process evolves. Within this process specific components can be identified
for which specialised software is used. Examples include warehousing
management systems, terminal operations management systems, yard
planning and control systems, equipment control systems, vehicle booking
systems and so forth. With suitable software, communications between the
various nodes of the logistics chain (warehouses, terminals, workers,
planners, etc.) is maintained by the use of radio signals. The labour
intensive practice of updating information has been replaced with
technology that carries out the mundane tasks of counting, recording and
transmitting information.
Intelligent transport systems (ITS). Intelligent transport systems are
complex IT related technologies applied to various transport and logistics
functions. They include traffic, transport and commercial vehicle operating
systems using powerful computing and control functions like collision
avoidance, ground sensors to maintain track of movement, video camera
linked vehicle management, electronic guidance systems, automatic vehicle
location and GPS. This is new technology that is making inroads into
warehousing and terminal operations. The ability to implement these
systems is controlled not by what is technologically possible but by what
government policies will allow and social tolerances to technology will
accept. The use of these technologies is expected to contribute to greater
reliability in the logistics chain and reduce costs to users as well as
management.

The integration of the various technologies is contributing strongly to overall

management of the logistics chain. New opportunities for conducting
operations are offered and are being used. The capacity and productivity of
operations are being consistently improved as are the time and cost of
operations.

4.5 Inventory management and business success

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

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

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

available at the right time in the right place in the right quantity. With this in
mind, some factors that indicate the effectiveness of inventory management
can be identified:

1. Customer satisfaction: Finding out whether customers are satisfied

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

effectiveness of the management of inventory. This factor can be
explored through tracking customer loyalty, repeat orders, order
cancellation, incidence and frequency of stock outs, and general
relationship with suppliers and sub-contractors.
2. Expediting orders: The more often this occurs, the clearer the

indication that the inventory management system is not being

effective. Reordering may not be occurring at the correct levels of
stock or lead times are not being realistically built into the reordering
process. The fundamental issue here is that the stock is not available
when it is needed.
3. Inventory turnover: Annual revenue from stock divided by value of

stock indicates the level of inventory turnover. While high inventory

turnover indicates a good management of stock, it can also result in
some items being not available when needed. For this reason,
inventory turnover must be measured for individual items or locations,
rather than through the whole spread of operations.
4. Inventory and sales: As sales increase overall, the level of inventory

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

should. The holding of stock must not be higher than the sales of that
stock. When demand for specific items increases, it is often more cost
effective to improve delivery processes and improve order processing
than increase stock held in reserve.
 CHAPTER – 4

STORAGE FACILITIES, MATERIALS HANDLING EQUIPMENT AND

PACKAGING

Introduction

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

and storage. The first part of this chapter focuses on the management of
warehouses and distribution centers. This is essential for cost reduction and
productivity of integrated logistics. There is also a brief explanation of
warehouse information systems which are absolutely essential today for
proper management of a warehouse. The second part of this chapter
discusses the concept of material handling which is related to the
movement of raw material, inventory and finished product within a facility
structure. Closely related to material handling is correct packaging which is
the last topic discussed in this chapter.

4.1 The management of warehouses and distribution centres

4.1.1 Storage alternatives

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

subsection 2.1.2 of chapter 2. There are four basic alternative methods of
financial and legal arrangements associated with the storage of goods:
owning, renting, leasing or storing in transit (Ballou 2004, p.479). Obviously,
the costs relating to the storage system are very important for any
organisation. Depending on these it may decide to use one of three types of
warehousing: private, public or contract.

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

producing or owning the goods. There are several advantages which the
firm expects out of the capital investment in the space. These are listed on
page 479 of your text. Basically, this type of warehousing offers better
control, lower costs and greater flexibility compared to rented warehouse
space. Also, there is the tax advantage of depreciation.
However, because of its high fixed costs, the efficient, profitable use of a
private warehouse needs a constant product throughout to make it a viable
proposition.

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

a wide variety of services including packaging, inventory maintenance, local
delivery and consolidation. A firm can gain several benefits by using public
warehousing, the most obvious one being that it does not need to tie up a
sizeable amount of money in capital investment. Public warehouses can be
classified into a number of groups which are listed on page 480 of your text.
These offer storage space for commodities, bulk products, reefer,
household goods and general merchandise.

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

warehousing. It provides its clients with customised services, thus allowing
them to concentrate on their speciality. In essence, contract warehousing is
a type of third party integrated logistics organisation usually providing a
'higher level of quality' than a public warehouse. The On-Line warehousing
facility operated for Mars in Ballarat is a good example of contract
warehousing. It is specifically built and is operated to handle Mars's
products (candy) and some of their raw bulk material
(Bloomberg, Murray & Hanna 1998).

4.1.2 Warehouse design

Whatever method you choose, consideration of warehouse design is

essential. The five interrelated factors which need to be considered when
designing a warehouse or renting an existing warehouse are:

• land and building

• management and staff
• storage and handling equipment
• computer and software
• operating methods and procedures
Each of these factors must be considered in a systems and total cost
approach, for each has the ability to affect the others (Bloomberg, Murray &
Hanna 1998).In countries like Australia, where land costs are not high,
single storey warehouses are preferred because they allow for straight line
flow of products. In countries like Japan , Singapore and Hong Kong ,
where land costs are exorbitant, multi-storey storage facilities are very
common. Prior to designing a warehouse, the material handling system
should be selected so that the storage facilities are designed around it.
Also, the entire cubic space of the warehouse should be fully utilised.

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

distribution center', Journal of Business Logistics, vol. 21, no.2,
pp. 161-172.

4.1.3 Productivity associated with warehousing

In today's business setting, most firms dealing with integrated logistics are
conscious of measuring warehouse performance because it directly impacts
on their profits. In terms of productivity measures (ratios), there are three
basic approaches. The first is productivity , which is defined as the ratio of
real output to real input. An example of this is the number of cases handled
per labour hour. The second productivity measure is called utilisation
which is defined as the ratio of capacity used to available capacity. This
could refer to the amount of space used by pallets, the number of employee
hours logged to those available or even the amount of cubic space used
relative to that available. The final measurement is performance which is
the ratio of actual output to standard output. Examples could include cases
or orders picked per hour compared with what was planned and equipment
hours run compared to what was planned (Bloomberg, Murray and Hanna
1998).

Ackerman (1983) identified the following important areas for improving

warehouse efficiency:
 • Improving forecasting accuracy
• Freeing up labour bottlenecks
• Reducing the amount of product handling
• Improving the product packaging
• Smoothing out the variations in product flow in the warehouse
• Installing improvement targets
• Decreasing the distances travelled in the warehouse
• Increasing the size of the units handled
• Constantly seeking round trip opportunities
• Improving the cube utilisation in the warehouse.

4.1.4 Warehouse information systems

Information technology (IT) has provided to the warehousing process

several benefits, such as improved customer service, efficient operations
and lower costs. These benefits flow from a warehouse's various IT
interfaces in receiving, storing, shipping, order processing, packaging and
quality control. Some of the IT used in warehouses today are electronic
data interchange (EDI), automatic data collection (ADC) and radio
frequency (RF).

Electronic data interchange refers to the exchange of machine-readable

data in a standard format between workstations that belong to different
firms engaged in the integrated logistics process. Effectively, EDI creates
paperless transactions and this has several advantages as compared to the
traditional paper-based method.

Automated data collection uses computer technology to capture data

using machine-readable bar codes and scanners. This has potential
benefits ranging from lower inventory costs to better overall quality control
in the warehouse.

Radio frequency is comprised of terminals, network controllers and radio

frequency units. The terminals can be hand held, vehicle mounted or fixed
collectors of data. The radio frequency units are transmitters/receivers that
communicate with the terminals. A RF system is a series of antennas
placed under
the roof of the warehouse (Bloomberg, Murray & Hanna 1998). This system
when used in the warehouse has several benefits, some of which are
increased productivity, decreased errors, better utilisation of space, better
control of stock rotation and improvement in overall customer service.

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

warehouse measurement systems in the context of supply chain
implementation', Transportation Journal, pp.19-27.

4.2 Materials handling

4.2.1 Objectives of material handling

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

objectives of materials handling:

1. Increased effective capacity of warehouse. Many warehousing

facilities waste much space by not storing goods as high as possible.
Warehouse managers must focus on cubic space, not just on floor
space.
2. Minimisation of aisle space. The type of materials handling equipment
a company uses will affect aisle width. For example, forklift trucks
very often require turning space and so they may necessitate much
wider aisles than are required by other types of materials handling
equipment.
3. Reduction of the number of times product is handled. Usually,
products are received in a warehouse and placed in a storage area
before being moved to an order selection area to be 'picked' and
made up into orders. Finally they are moved to ready them for
shipment to customers. This process involves several unavoidable
movements. However, in some warehouses, goods are moved
several times in each area and this additional handling causes
inefficiency. Hence, the materials handling system should be
designed so that movements to, within and from a warehouse are
minimised.
 4. Development of effective working conditions. The materials handling
equipment, while enhancing productivity, should simultaneously
minimise danger to workers operating them and also to workers in the
vicinity.
5. Reduction of movements involving manual labour. The system should
be designed in such a way as to eliminate as much as possible short
distance warehouse movements which are repetitive, monotonous
and involve heavy manual labour. This objective suggests that
companies should automate warehouses as much as possible.
6. Improvement of logistics service. Materials handling equipment
improves efficiency by making the logistics system respond quickly
and effectively to plant and customer requirements.
7. Reduction of cost. Effective materials handling can contribute to cost
minimisation by increasing productivity and also by more efficient
space utilisation.

4.2.2 Materials handling systems and equipment

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

and automated. The choice of a particular system will depend on various
factors such as physical structure of the warehouse, types of materials to
be handled, types of movements and of course the initial capital outlay. The
objective of the materials handling manager is obviously to ensure that
materials must be in the right place at the right time and in the right
quantity.

Manual materials handling systems are labour intensive and lead to

inefficiencies in space utilisation and product movement. Examples of these
systems are low racks, drawers, bins, manual and gravity flow conveyors.
Mechanised materials handling systems such as the forklift truck and
pallets, towlines, cranes, storage rack systems and wheel conveyor have
replaced much of the labour intensive handling, thereby dramatically
increasing efficiency.
Automated materials handling systems are more sophisticated and more
efficient than either of the previous two.

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

automatic storage and retrieval systems, high-rise rack systems, automatic
guided vehicles (AGV) and robots. Although these are highly productive,
some companies refrain from using them because of their high initial costs,
their requirement for special types and sizes of facilities and lack of back-up
systems in case of failures.

4.2.3 Materials handling productivity ratios

The efficiency and productivity of a particular materials handling system can

be calculated and therefore demonstrated by the use of materials handling
productivity ratios. These ratios are:

1.

2.

3.

4.

5.

6.

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

38-43.
4.3 Packaging

4.3.1 The role of packaging

Packaging of goods serves the following purposes:

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

is a marketing function which provides information and makes it more
appealing to the customer. It also provides information to logistics
people, for example use of colour codes, symbols and numbers which
are used to store goods in a particular fashion.
• It improves efficiency in handling and distribution. Packaging should
be designed to maximise ease of handling in the warehouse and
during transportation.
• It meets the needs of the integrated logistics activities. Particular
attention must be paid to the package being compatible with the
customer's materials handling equipment.
• It protects the goods in the package so that they are not damaged
during handling, storage and transportation.
• It provides unitisation; that is, it allows packages to be consolidated
into larger packages and finally palletised or unitised into a single unit
such as a container.
• It facilitates the use of bar code scanners during the handling, storage
and distribution of the goods.

4.3.2 Packaging materials

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

industrial or exterior packaging. The marketing manager is usually most
concerned about the interior packaging because basically it markets the
product when it competes with others on the retail shelf. On the other hand
the logistics manager is concerned about the exterior packaging as it
protects the goods that a company will move and store in the warehouse.
There are many types of exterior packaging materials available today. The
conventional use of harder materials such as wood or metal containers is
being replaced by the use of softer packaging materials such as plastic.
Cushioning materials like shrink-wrap, air bubble cushioning, cellulose
wadding and corrugated paper are used inside the package to protect the
product from shock, vibration and surface damage during handling. These
materials are highly protective, inexpensive and also lightweight. A major
concern about the cost and environmental impact of packaging is the waste
that containers and packaging produce. One way to reduce this waste is to
reduce the overall packaging that a company uses. Another way is to
recycle packaging materials.

5.3.3 Packaging design considerations

In developing an appropriate interior and exterior packaging design we

must recognise that a product's package is usually in use in five basic
locations over the product's lifetime. This is particularly true for consumer
non-durables or so-called packaged goods. The five locations are the plant,
the warehouse, the transportation unit, the retail outlet, and the home or
place of use (Coyle, Bardi & Langley 1996).

We should design the package so that it serves the needs of the five
locations mentioned above. We may also examine the packaging design
from the perspective of various logistics areas and of other areas like
marketing and manufacturing.

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

for packaging?', Pharmaceutical Technology, pp. 22-26.
 CHAPTER – 5

PHYSICAL DISTRIBUTION TRANSPORTATION SYSTEM

Introduction

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

This chapter will focus on the physical distribution system and

transportation systems. Transportation is the physical link between the
various activities associated with an integrated logistics system. Without
transportation raw materials cannot flow to the suppliers or manufacturers
of goods, nor can the finished product reach wholesalers and retailers and
finally the customer or end user. This chapter outlines the salient features of
the different modes of transportation, intermodal services, transportation
cost structures and carrier selection process. Finally we shall briefly discuss
transport management, which is one of the very important functions of a
logistics manager.

5.1 The role of transportation in logistics

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

series of fixed points located spatially between the buyer and seller, where
the goods come to rest. The role of transportation is to facilitate the flow of
goods between these fixed points and to bridge the buyer-seller gap.
Hence, knowledge of the transportation system is extremely important for
the efficient and economic operation of a company's logistics function.
Transportation adds value to the company by creating time and space
utility; the value added is the physical movement of goods to the place
desired and at the time desired (Coyle, Bardi & Langley 1996, p318).
In today's global business, supply chains are becoming increasingly longer
and transportation needs to connect buyers and sellers who may be tens of
thousands of miles apart. This increased spatial gap results in greater
transportation costs and time, which in turn necessitates higher inventory
and storage costs. Freight movement has been observed to absorb
between one-third and two-thirds of total logistics costs (Ballou 2004,
p164).

In an integrated logistics system, the choice of transportation service

directly impacts on inventory and storage costs. For example, if a company
switches from rail to air transportation to move finished goods from a factory
to the customer, it would incur lower inventory and storage costs. This
advantage will of course be at the expense of higher transportation costs.
Hence the company has to make the transportation decision taking into
account the total cost or systems approach, which considers all the
elements of the integrated logistics system.

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

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

5.2 Economic and service characteristics of the modes of transport

5.2.1 Rail

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

grain and sand and also low-valued manufactured goods like paper and
wood products. They are basically long haulers of domestic goods and
charge reasonable freight rates. Their main competitors are domestic water
carriers for large, bulky products and motor carriers or ships for higher
valued goods. The relatively slow speed and short car distance travelled in
a day reflect the fact that the majority of freight car time is spent in loading
and unloading operations, moving from place to place within terminals,
classifying and assembling cars into trains, or standing idle during a
seasonal slump in car demand (Ballou 2004, p171).

Railroads are either government owned (common carriers which sell their
transportation services to all shippers) or privately owned (usually owned by
shippers with the intent of transporting their own products). The majority of
the railroads throughout the world are government owned. The primary unit
for charging freight on common carrier railroads is called a carload (CL).
This refers to a predetermined shipment size which is usually the capacity
of a rail car. For smaller shipments, a less-than-carload (LCL) may be
offered. In the United States, larger freight cars are being used with an
average freight car capacity of 83 tons (in the US, 2000 pounds to the ton),
and single-commodity trains (called unit trains) of 100 or more cars per train
are being used with rate reductions of 25 to 40 percent over single carloads
(Ballou 2004, p172).

In the past few decades railroads have lost much of their freight business to
road hauliers or trucks, but recently with the increase in intermodal
transport operations, they have been performing relatively well. They now
offer their clients innovative services; for example, various stop-off
privileges which permit partial loading and unloading between origin and
destination points and pick-up and delivery of goods.

5.2.2 Road

After airlines, trucks or road hauliers are the second fastest mode of freight
transportation and have the major advantages of door-to-door flexibility and
the ability to meet delivery schedules owing to the scope of their geographic
coverage. They move freight with smaller average shipment sizes than rail
and offer reasonably fast and dependable delivery for less-than-truckload
(LTL) shipments. Their primary disadvantages are the high cost of service
and their inability to handle all types of freight owing to highway safety
restrictions that limit the dimensions and weight of shipments.

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

trucking also offers services as contract carriers where they enter into
contractual agreements with shippers. This concept is similar to the
chartering of ships.

Truck companies are also classified according to:

 • employment size (number of employees) and length of haul; for
example, long distance-interstate, long distance-intrastate, short
distance and road freight forwarding
• type of operator; for example, fleet operator, own account operator
and owner operator
Fleet operators are companies which own five or more trucks; own
account operators are companies which have their own products to
transport, like Shell and BP; and owner operators are individuals
owing between one and five trucks.

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

Business, pp. 14-22.

5.2.3 Air

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

the transport of high value goods, documents and perishable items.
Generally governments of countries own the air terminals and air space and
airlines purchase essential airport services, for example, fuel, storage,
space rental and landing fees. Additionally, airlines need to own or lease
ground handling, pickup and delivery equipment, which need to be
depreciated over time. Variable costs of operation are dependent on the
flying distance as aircraft are highly inefficient in the takeoff and landing
phases. This means that substantial per-unit cost reductions can be gained
from operating aircraft over longer distance. Also, the volume of freight
carried influences variable costs. It is advantageous, therefore, to operate
larger capacity aircraft. Aircraft are limited, however, by their physical
configuration from carrying large volumes or a large variety of different
products
5.2.4 Water

Ships are the primary mode of international transportation for bulk

commodities, general cargo and containers because of the low per-unit cost
structure of transportation and their ability to carry almost any type of
product. They suffer from several limitations, however, such as slow speed,
an inability to offer door-to-door service and, at times, unreliable delivery
schedules.

Ships can be broadly categorised under coastal and foreign going fleets.
The main costs for ship operators are harbour and dock dues, and terminal
handling costs, which include the costs for loading and discharging of the
goods. The cost of transportation reduces significantly with distance and
size of shipment.

5.2.5 Pipeline

Pipelines are a unique mode of transportation as they are fixed and the
product, which is either liquid or gas, moves through them. Although they
have severe limitations in terms of the type of products that can be
transported through them, they are capable of moving more tonnes in a
single shipment than any other mode of transportation. They have very high
fixed costs associated with the installation of the pipelines and pumping
equipment, as well as the construction of terminals. Therefore, to be
competitive with other modes of transportation, they must work on high
volume so as to recover these high fixed costs. The costs per ton-mile
decreases substantially with larger pipes, provided there is adequate liquid
or gas to transport through them.

5.3 Intermodal transport services

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

of transportation combined to transport a particular shipment. The common
intermodal combinations involve rail, road and water transport; and their
main feature is the exchange of equipment, such as truck trailers, between
the transport modes. The standarised ISO container is transferable to all
surface transportation

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

door service without the necessity of handling goods in the container at any
point of intermodal transfer. In the RoRo (roll-on, roll-off) concept, truck
trailers are loaded in the hulls of ocean-going ships and at the discharge
port, prime movers back into the ship, hook up the trailers and drive away.
Another type of intermodal transport consists of a combination of truck-rail-
sea freight movement, involving either truck trailers (trailer on a flatcar or
TOFC) or containers (container on a flatcar or COFC). In either case, a
truck moves a trailer or container to the rail head where it is offloaded onto
a railroad flatcar and then shipped to the port where the trailer/container is
transferred onto the ship via overhead cranes. At destination the same
process takes place in reverse (Bloomberg, Murray & Hanna 1998).

5.4 Transportation cost structures

There are basically three types of costs associated with transportation.

These are fixed costs, variable costs and common or joint costs. Let us
briefly discuss each of these types of costs.

Fixed costs. Fixed costs are those that do not vary with change in output;
in other words, they are constant regardless of the firm's activities.
Examples of fixed costs would include capital outlay for roadways,
terminals, transport vehicles and equipment and carrier administration.

Variable costs. Variable costs change as the output varies. They include
costs such as fuel and labour, equipment maintenance, handling, pickup
and delivery. The easiest way to determine whether a certain element of
cost is fixed or variable is to assume that the business has shut down, in
which case if the cost is still incurred it would be a fixed one. However, in
the long run even fixed costs are said to vary. As there are significant cost
differences between transportation modes, there is no precise allocation
between fixed and variable costs for some of a firm's activities. Some costs
are partly fixed and partly variable and allocation of cost elements into one
class or the other is a matter of individual perspective. Examples are costs
related to maintenance and handling.

Besides the fixed and variable costs discussed above, there are other costs
incurred which have no simple formula for cost allocation and production
costs on a per shipment basis remain a matter of judgement. For example,
the costs incurred by carriers on their return or backhaul service need to be
taken into account in the total costing. These costs are categorised under
common or joint costs. It is assumed that the forward haul is the heavy
traffic direction and the backhaul is the light traffic direction. However, this
may not always be true, especially if carriers offer shippers heavy discounts
on the backhaul service.

5.5 Transportation rate profiles

The rates or tariffs charged by a carrier will depend on its market and cost
structure. The two basic pricing methods used by carriers to determine their
rates are: cost-of-service pricing and value-of-service pricing.

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

service pricing method, carriers charge rates which, as a minimum, cover
their variable costs or marginal costs of operation. This method is usually
applied to low value products, where shippers' profit margins are low, hence
they are on the lookout for cheaper transportation. Some carriers use this
method of pricing for certain goods, which is offset by the higher rates
charged for others. This concept is called cross subsidisation.

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

carriers charge rates which the traffic will bear or which shippers are willing
to pay. Hence they maximise their revenue regardless of the costs involved
in the transportation of the goods.

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

the table below:

Table 6.1 Factors affecting the pricing of transport services

Pricing Variable Elements of Pricing Variables

Commodity cost factors Loading characteristics

Susceptibility to loss and damage

Volume of traffic

Regularity of traffic

Type of equipment required

Route cost factors Distance

Operating conditions

Traffic density

Commodity demand factorsValue of the commodity

Economic conditions in the user industry

Rates on competing commodities

Route demand factors Competition with other carriers

Production-point competition

Traffic density

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

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

5.6 Modal and carrier selection

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

prior to selecting a particular mode of transportation and more specifically
the type of carrier to be used for a particular shipment of goods. The
important service characteristics are usually related to the cost, speed and
dependability. Others that affect the selection process are capability,
availability and adequacy of equipment, availability of service, frequency of
service, security, claims handling, shipment tracing and problem-solving
assistance to name just a few.

When a transportation service is not used to provide a competitive

advantage, the best service choice is found by trading off the cost of using
a particular transport service with the indirect cost of inventory associated
with the performance of the selected mode. That is, speed and
dependability affect both the shipper's and the buyer's inventory levels (both
order quantity stock and safety stock) as well as the amount of inventory
that is in transit between the shipper's and buyer's locations (Ballou 2004,
p220).

When evaluating alternative choices of transportation, it is necessary to

consider the lowest total cost, which includes not only the cost of
transportation, but also the cost of the inventory that is required as a result
of the choice of transport mode. When slower and less reliable services are
selected, for example, it is necessary for shippers and buyers to carry
higher levels of inventory, both order quantity stock and safety stock.
Moreover, the selected service should be consistent with customer service
goals while meeting customer service objectives.

Wisner, JD & Tan, KC (Fall 2000), 'Supply chain management and its
impact on purchasing', The Journal of Supply Chain Management, pp.
33-42.

5.7 Management of the transport function

Integrated logistics managers are required to manage the transport function

of their 50rganizations. In the past, some of these 50rganizations had
appointed traffic managers who were responsible for the daily operation of
the transportation activity. However, traffic management today has been
incorporated in the job functions of integrated logistics managers. Hence,
they must understand the management of transport operations both in the
inbound and outbound phases of the logistics process so that the materials
management and distribution functions are effectively carried out. Basically
they would need to possess knowledge and experience not only in a
particular segment of the transportation industry, but in several areas
associated with business logistics, the more important ones being:

• industry knowledge
• strategic planning
• human resource management
• operations management
• integrated logistics management
• transport policy
 • services marketing
• finance and accounting
• sales management

(Bloomberg, Murray & Hanna 1998, p77)

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

opportunities in the e-grocery business’, The International Journal of
Logistics Management, vol.11, no. 1, pp. 61-73.

CHAPTER – 6

CHANGE AND TRANSFORMATION

Introduction

This is the first chapter in the second section of our chapter. In the dynamic
world of logistics and supply chain management the only constant is
change itself. To this end this section of our study within this chapter covers
how managers can lead change and promote agility and innovation.

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

of change. As such, management is about transforming organisations by
leading people and innovation from one continuum onto another before
discontinuities and non-competitive practices occur.

This chapter will deal with change and the many traditional views on
change and how we need to adopt a more enduring approach to address
change as part of both transport and logistic business operations.
There are so many different perspectives on the change process
(organisational, product, behavioural, societal, etc), different stages in a
change process, different levels (individual, group, organisational, systems),
and many ways of explaining the nature of change (continuous, dynamic,
rapid, transformational, innovative, etc). What we do know is that change
affects individuals and influences the competitiveness and survival of an
organisation. As such this chapter will seek to remove the 'noise' associated
with the management of change and suggest how individuals, groups and
organisations can adapt to change and meet real world business
challenges.

6.1 Nature of change

Change can take many forms and occur at any time. Some argue that
change is so constant in organisations today that discussing and studying
how to manage change will distract the student from the fact that it is ever-
present and impacting on everything we do. Others argue the reverse;
change has to be studied if it is to be appreciated and managers with an
understanding of change can be specifically recruited by organizations that
need these capabilities.

Aside from the fact that this debate keeps many academics, management
practitioners, and consultants gainfully employed, the nature of the debate
confirms both the complexity of change and the value of managers who
understand its impact.

Just as with the very polarized views of the theorists, key aspects of change
can be placed on a continuum.
Figure 1 - Dimension to change

The above figure sets dimensions that we will have to examine and
understand. It suggests that a manager's role and activities will vary
contingent upon the change dimensions.

6.1.1 The manager's role and change

To be able to consider what role one can play in the change process, we
must first understand the nature of change, what causes change in
organisations and how it affects us as individuals. The following two
exercises explore this concept and set some assumptions and concepts we
can explore in later parts of this study guide.

No two change initiatives will be the same, however, there are some
common actions managers can undertake to enhance successful
implementation of change programs. Peter Dunphy also suggests a 'check
list' for change:

• Clear objectives .
• Realistic and limited scope .
• Informed awareness - awareness for the need for change is built,
and commitment to it and agreement about the general directions for
change developed.
• Selection of appropriate intervention strategies - these are chosen
to be appropriate for the goals of the program, and adapted to the
situation, people, technology and resources available.
• Good timing - changes are timely and the pace of change is fast
enough to provide a sense of progress but not so fast that people are
unable to absorb it.
• Participation - the program is introduced and explained to staff who
are then involved in its development and implementation. They have
time to consider and discuss it and to find solutions to problems or
issues arising from these discussions.
• Support from key power groups - senior management and unions
support the program and provide clear policy guidelines and
authoritative backing.
• Use existing power structure - staff at all levels take initiatives in
making changes within their own spheres of responsibility. Decision
making is well organised. Projects are run by those involved. Change
agents are widely respected throughout the organisation.
• Open assessment beforehand - there is realistic assessment and
open dialogue concerning the ways in which the proposed changes
may affect the interests of those involved, and issues of concern are
discussed and negotiated. Objections are dealt with seriously and
equitable distribution of consequent economic gains are negotiated
beforehand.

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

The changes will reduce present difficulties and key interests will be
protected.
• Competent staff support - a number of skilled, highly motivated and
credible staff are available to provide temporary support to areas
whose resources are stressed in the change process.
• Integrated - new methods are developed which are evaluated and
integrated into everyday operations if successful.
 • Transfer and diffusion of successful innovations - successful
small scale or pilot programs are used to seed and introduce change
elsewhere in the organisation.
• Continuing modification - the program is kept open to revision and
reconsideration as experience and results indicate that further
modifications are desirable. (Dunphy, 1981)

6.1.2 Transformation and change continuums

Note:
This section draws heavily on research completed in the Eknowledge
and Learning to Elearn Investigative research project (
http://www.portal.unitas.com.au ) and Bowles, M (2004) Relearning to
E-learn , Melbourne University Press: Melbourne, Chapter 9 Forces for
Transformation ( http://marcbowles.com ).

Each organisation has a different mix of variables that influences its

learning capacity, but the largest influence is the organisation itself, and its
progress along what may be termed a change continuum. Change
continuums provide a visual map of where a business is heading and allow
us to plot its position so as to indicate when and how managers can deploy
learning to achieve organisational goals.

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

the question of how e-learning can assist a change process, and how it can
be managed as a transformation in its own right. Where slow
responsiveness leads to a loss of competitive advantage, it can have a
negative impact on the entire organisation.

Figure 2 illustrates the impact of responsiveness on organisational

dynamics. It depicts an organisation concentrating on a core goal and
strategy, as represented by the A parabola. The aim, to advance to a
competitive position, is marked as B. To respond to the need for change,
the organisation must ensure that by the time it arrives at A2 it can
transform its focus from A to B. The required responsiveness (time,
expenses, resource commitment) to achieve the necessary change is
represented by RR.

Figure 2 Change continuums

It is easy to see the impact of a lag between identifying the need for change
and implementing a response. The time immediately following the
identification of the need for change represents a window of opportunity or
threat. If a company shifts focus soon after identifying the need for change
at A1, it may shorten the lag before it reaches A2, the optimal point where
the next 'wave' of transformation is beginning. Completing change before
one's competitors involves some risks, but it also enables the organisation
to move to the new operational state in a timely manner. In this case, the
organisation is early to market and has the potential to become a market
leader.

While some companies seek to optimise the window of opportunity by

becoming early adopters or 'first entrants', others may not respond until the
impact of change is evident, whether because they are unable to anticipate
the change or because they wish to avoid risk. In Figure 2, A3 represents
the point at which change is initiated so late that the organisation is already
at a competitive disadvantage.

In this scenario, the company will be trying to manage the change while its
business revenue and competitive position are declining. While there are
obvious risks in being an early adopter, a risk-avoidance strategy holds
even more serious dangers if it involves changing too late.

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

competitive position and the likely changes in its competitive environment.
This has to be managed across all the potential change scenarios - not just
one - within the identified planning period.

6.1.3 Responding late in the change continuum

Figure 3 Losing competitiveness through changing late

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

A2 rather than A1; as a result, change will not be implemented until A3, late
in the evolution of that change cycle. Meanwhile, early adopting competitors
are already responding to another change cycle, depicted as C. By the
point marked as B1, the late adopter is well behind the competition,
struggling with a declining revenue base and facing yet another cycle of
change. The situation is even worse if the C wave is based on a more
sophisticated technology that is replacing B. Here, rather than developing a
new market, the organisation is spending time, money and resources on a
technology in market decline. The difference between B1 and C1 therefore
represents a gap in responsiveness.
The required responsiveness (RR) to achieve the necessary change is not
a simple move from one change continuum to another. As responsiveness
is acquired or agility achieved, the organisation is better placed to improve
its overall competitive position. In short, a virtuous circle is established. By
contrast, failure to achieve the required responsiveness leads to a vicious
circle of declining competitiveness, falling revenue and diminishing capacity
for change. This becomes especially important when numerous cycles of
change affect an organisation and cascade into further transformations, as
shown in Figure 4.

6.1.4 Rapid change continuum cycles

Figure 4 Increased cycle of change

Figure 4 indicates the longer-term impact as the requirements for

responsiveness accelerate. Assume that the first required responsiveness
(RR), moving from A to B, occurs in one twelve-month period. During the
next twelve months, however, the second RR interval experiences two
cycles of change, from B to C and from C to D. In the last period, there are
three RR intervals: D to E, E to F and F to G. While the time and duration of
the intervals can vary enormously, as change accelerates, the
organization’s capacity to respond may decrease. Equally, the acceleration
places pressure on the systems that manage responsiveness when they
have to deliver three changes in the same time formerly taken to
accomplish one.
Figures 2, 3 and 4 highlight the fact that systems can no longer afford to lag
behind for even one change imperative. Failure to respond rapidly to a
change imperative in the first cycle (A) may mean a loss of competitiveness
at C. Two years later, the same lack of responsiveness could place the
company three cycles behind. Assuming the same slow rate of response,
the organisation would be moving from D to E while competitors have
already arrived at G.

It is readily apparent why some companies have developed 'change

fatigue'. Effort seems to be focused on managing change rather than on
operational outcomes and core business. Organizations need to respond to
change and develop the capabilities necessary to sustain this activity as the
speed of change increases (Christensen 1997: 254-60).

Building learning initiatives can support the organisation's progress along a

change continuum. To support change across all continuums, however,
learning must be flexible. The organisation that embraces learning across
all subsystems and accepts it as a builder of transformative capacity can
also use learning to support accelerated responsiveness and organisational
agility. This is imperative if organisations are to succeed in an aggressive
marketplace.

7.1.5 Increasing organisational responsiveness and agility

It is well over a decade since Stalk and Hout (1990) first advanced the
notion that speed and responsiveness were crucial in competitive markets.
In spite of this, the adoption of new systems and practices has itself been a
slow process.

Organisational design, or the way roles are defined within organisations,

has a significant impact on organisational agility. Rigid organisational
structures and procedures emphasise certainty of outcomes for participants
and efficiencies in processes, but they have shown poor capacity to
produce innovation. Innovation and organisational agility are stifled by
stratified organisational structures conceived in functional terms, where
work is defined in terms of procedures and
processes, and positions in terms of reporting roles. Such structures are
increasingly inappropriate to workplaces where technology is used to
perform routine tasks, while non-routine tasks are contracted out to
knowledge workers.

Some organisational structures provide greater agility than others.

Networks, which are the most dynamic and adaptable of organisational
designs, have been gradually replacing traditional structures. At its extreme,
the dynamic network consists of a number of market relationships brokered
by a 'core' unit. Car manufacturers, for example, are no longer large,
hierarchical factory-centred organisations. They now outsource component
production, sales and marketing; the result is a network of partners, all
centred on manufacturing and selling a vehicle. A more extreme example is
online exchange companies, which maintain their virtual presence with a
small cadre of administrative staff and mainly coordinate how partnering
businesses sell products and services. In this case, conventional notions of
organisational boundaries must be discarded.

Networks are more flexible and innovative than traditional structural

relationships, and more responsive to changing conditions in products and
markets. They are also less constrained in the way they source skills and
take advantage of external opportunities.

The main concern in the development of network organisations is their

comparative lack of stability and the difficulty of securing commitment from
individual participants. Agile organisations not only compete on current
strengths and competitive advantages but also nurture the capacity to
respond to future opportunities. In network organisations , adaptability may
be achieved either by enhancing staff capabilities or by sourcing knowledge
outside the organisation. A network organisation may 'graft' on new
capabilities by engaging contract employees or outsourcing critical
functions. While these tactics can supply performance competencies, it still
takes time to build collaboration and instil shared meaning, a sense of
purpose and a culture that underpins the desired organisational identity.

Another alternative organisational model is the workplace community . This

is a more holistic approach in which community-based values formed within
the organisation can change along with the organisation's needs. A third
possibility is developing networks of knowledge , which value individual
knowledge advancement both by employees and by people outside the
organisation. All three of these approaches offer greater flexibility and more
permeable organisational boundaries, which are of particular importance in
assisting organisations to attune themselves to a changing environment.

Agility must be conceptualised as extending beyond the 'walls' of the

organisation. This is not, however, a simple matter of separating out
'internal' and 'external' factors. Organisational knowledge and
responsiveness are shaped by many and varied elements - business
relationships, relationships with local communities, involvement with other
business groups, and actions by government and other corporations (Rigby
et al. 2001: 180-4).

The fit between the organisation and the environment is referred to as

'environmental attunement'. For an organisation to survive, it must be
compatible with its environment. Increasing complexity and competition,
combined with growing interdependence within and beyond the
organisation, lead to a need for adaptation and change.

For organisations to achieve environmental fit, their values, norms,

processes, reward systems and performance must recognise the
importance of people. Agility is achieved above all through the development
of capability in individuals, who are thus able to acquire new frames of
reference while still achieving current performance outcomes.

6.2 Scale and pace of change

Managers are distinguished by their capacity to achieve operational
outcomes while leaders must also initiate and sustain change. In effect, the
manager-leader can take a perspective of the current operations while
leading others towards a vision for the

future.

Their ability to lead will depend on the scale of the change process. Is it
incremental, slow and conducted on a scale able to be easily managed? Or
is it at the other end of the spectrum, as represented below, and profoundly
transforming the current situation?

Figure 5 - Time and Change Dimensions

The scale and pace of change will affect how an operational manager leads
change. It will especially affect how staff and relationships with suppliers
and customers are sustained through the change process. This revolves
around maintaining a focus not just on goal attainment, but also on the
overall vision.

Figure 6 - Time and Change Dimensions

Another aspect to how managers can lead change is the need to focus on
internal or external considerations. The situational variables impacting the
leader's activities may be predominantly either internal or external to the
organisation. Change may be driven by factors outside the organisations
domain of control. In such cases managing these factors is often
impossible.

7.2.1 Leading rapid change

Burt Nanus (1992:10-14) argued that the visionary leader must possess the
ability to balance not just internal or external domains, but also future and
present domains that shape the 'situation' or context within which they must
operate. In effect, the

effectiveness of different leaders will depend on them identifying what they

can influence and concentrating on applying leadership to situations and
contingencies that cannot be removed, but require constant attention.

Figure 7 - Internal or External Situational Dimensions

Moss Kanter, R ( Summer, 1999) 'T he Enduring Skills of Change

Leaders', Leader to Leader , No. 13, pp. 15-22. Sourced December
2001, at http://www.pfdf.org/leaderbooks/l2l/summer99/kanter.html .

6.3 Stages of change

Major change in our lives and in organisations is generally associated with

some form of major loss. People often react to change with anger and this
is caused by a sense of loss of the old way of doing things and fear of the
new. In this way, reactions to change generally go through similar phases to
the grieving process. This is represented below.
Figure 8 Stages of change

• Denial Characterised by blaming others, clinging to the past,

withdrawal and a reluctance to act.
• Resistance Fear, anger, victim mentality.
• Acceptance Moving beyond fear towards action, may be a lack of
focus in the actions taken.
• Commitment Action is more strategic, plans are made for the future.

6.3.1 The stages of change and approaches to management

Change can be managed well or managed very poorly. One of the major
reasons that change initiatives fail is that management fails to involve
people in the process. If people feel alienated or 'kept in the dark' they are
much more likely to remain in the early stages of the change process i.e.
Denial or Resistance. If they are key people then this can derail the entire
change initiative.

To successfully implement therefore, the key questions that must be

answered are:

• Who will be affected by the change?

 • Of these, who needs to be involved in implementing the change?
• Who are the people that are critical to have 'on board'?

For each of the key people or groups that are critical for the successful
implementation of the change process, commitment to the change must be
gained and the key question that they will want answered is What's in it for
me?

To persuade effectively involves appealing to a belief, a contingency (such

as a monetary reward) or a recognised purpose in others; it also depends
on the credibility of the manager and the trust employees place in him/her.

6.3.2 Change and the organization’s development stage

An important consideration when managing a change process as a

manager is the organisation's stage of development, or its progress on a
competitiveness life cycle.
Figure 9 - Organisational Development Life Cycle
© Working Futures 1997 (see McDonnell, 1993: 47-48)

What the above figure illustrates is that a change strategy formulated for an
organisation has to consider the evolution of the company in terms of its
competitive position. A change strategy formulated for a company at the
distinctive competitiveness level is unlikely to be communicated in the same
manner, or target similar outcomes if implemented for a base-level
unsophisticated company. Worse still, is to develop a change strategy more
appropriate for an advanced company when the company is really only at a
base level of development.

In effect managers seeking to plan and implement world-class best practice

in an organisation at the unsophisticated stage may stimulate change, but
the ability to sustain and promote such change may be difficult, or
impossible.

Another consideration in the level of change and approach is the nature of

the market position. The adopted strategy may be modified if, for instance,
the market position of the company is growing or shrinking, or if it is in a
new and growing market or in an older market in decline. As markets
emerge it is often more desirable to be a novice in a market that is growing
(with a small market share that grows as the market develops) than to be
holding a large market share in a market that will disappear. Change
strategies that move the whole organisation through pain and develop new
commitment are redundant if the company is in the wrong market or
producing the wrong product to survive.

Table 1 Strategic market positioning of a business

Growth Maturity Decline

Leader Keep ahead of the fieldCost leadership Redefine scope

Raise barriers Divest peripherals

Deter competitorsEncourage departures

FollowerImitate at lower cost Differentiation Differentiation

Focus New Opportunities

(Porter, 1985; & McDonnell, 1993:58)

The stage of organisational development and the commitment to secure

competitive advantage should influence the level of change and the
approach. Ignoring this macro-level issue has caused many organisations
to undertake large scale restructuring when all they were really doing was
process innovation. Instead, some would argue, they should have been
completely reengineering the organisation towards a new market reality that
would justify both competitive needs, and the cost and pain associated with
the radical change process.

Once you have identified who the key players in the change process are,
the next challenge is to communicate the changes to all individuals and
teams who will be affected.

Comparative focusing on employee-to-employee or company to company

standards reasons for change

Task focusing on employee-to-task performance requirements

standards (lack of competitive performance)

Knowledge focusing on the lack of competitive knowledge within the

standards organisation comparative to others - need to up skill and
improve knowledge of staff, both technical and behavioural
(e.g. trust, commitment, motivation, etc.).
Process focusing on objective measures of process outcomes and
standards lack of competitiveness or need to improve product and
service deliverables

6.4 Communicating change

No complex organization can remain healthy and viable for long without the
capacity to anticipate, execute and adapt to change (Ellingsworth, 1976)

As we have already seen, the very nature of workplace change

necessitates managers to communicate with employees in an open and
flexible manner. Any form of autocratic management will only serve to
alienate people and derail the change process.

Communication during a change process is essential and can:

• Foster an open questioning environment;

• Open communication channels beyond task performance issues;

• Seek new ideas and solutions to problems that hinder good

performance;
• Encourage employee involvement in setting and evaluating their
performance;
• Provide both formal and informal feedback;
• Maximise flexibility in evaluating results; and
• Look for success as much as failure.

The point here is that communicating change need not be a rigid process in
which managers communicate according to rigid interpretation of how
outcomes should be achieved. The communicative style is more flexible
and builds mutual respect.

Informing staff on change processes and goals requires the manager to

communicate for the purpose of:

• Clarifying employee role expectations;

• Identifying problems and/or plans for change; and
• Structuring a course of action.

6.4.1 Guidelines for communicating change

Many people have put forward ideas about how to communicate change.
Some of the more typical ones are summarised below. What specific
communication strategies can you suggest to put these guidelines into
practice?

Guide 1: Establishing the right environment for change

1. Establish credibility with those affected by change.

2. Gather the necessary information to identify and solve the problems
associated with the change (credulity of purpose).
3. Establish a supportive environment for the change (empathy).
4. Implement the approaches necessary to achieve the desired change
(persuade, force, reward, and/or train).
5. Establish procedures for stabilising, monitoring and evaluating the
change (including feedback to employees).

Guide 2: Traditional approach to communicating change

1. Explain the action to be implemented and the reasons for it. This
combats rumours and minimises disruptive behaviour.
2. Prepare the employees for major changes by alerting them to the
benefits and difficulties. Sudden changes can result in employee fear
and anxiety.
3. Identify informal leaders in the organisation and explain
management's objectives. Informal leaders can encourage others to
be co-operative with the change.
4. Repeat important information and techniques, thereby increasing
memory.
 5. Allow people time to adjust to the change; recognise that conflict
communicates issues that need to be resolved.
6. Encourage change by recognising good (appropriate) performance.

Guide 3: Strategic approach to communicating change

1. Explore the need for change in relation to the external environment

(identify the purpose for change).
2. Relate the organisation's purpose and vision to the change strategy
(put change into the milieu of the familiar).
3. Identify the organisational qualities needed to implement the business
strategy (appeal to the skills and talents of the work team).
4. Assess the gap between the current state of the organisation and the
needed state, and the organisation's readiness to change (identify the
training required to change).
5. Determine a transition strategy for whatever organisational change is
needed (plan your communications).
6. Determine tactics for implementing the transition strategy (appeal to
the needs of employees).
7. Implement and monitor the transition process (coach and provide
feedback).
8. Recognise and celebrate (reinforce) the completion of the transition

(acknowledge contributions) (Miller, 1986:214).

Graham, C & Bowles, M (1994), Chapter 5 'Five theories of change',

extract from the Workbook on Change Management , DIRETFE &
Centre for Working Futures NSW.

Graham (1994) (Used with permission)

Jones, J, Aguirre, D & Calderone, M (April, 2004) 'Principles of Change

Management', Resilience Report, Strategy+Business, Booz, Allen,
Hamilton , Sourced July 2004, at http://www.strategy-
business.com/resilience/rr00006?pg=all .
6.4.2 Communicating change to stakeholders

When introducing change, especially to systems and strategies, it is

necessary to identify how such changes will impact upon an organisation's
stakeholders. This is a common exercise in strategic planning processes.
The organisation identifies stakeholders, lists them by name and later, after
goals and objectives have been framed, revisits to see which stakeholders
are impacted by particular goals and objectives. Strategies are then devised
to secure the support of affected stakeholders. Strategic planning is itself an
initiation of change - hopefully an incremental and controlled evolution of
people, systems and processes, but nevertheless a change process.

Just as we need to identify stakeholders in strategic planning processes, so

too the manager when planning any change process. The table below lists
an example of an organisation that has identified stakeholders, their
expectations (think of stakeholders as customers with expectations that
define the qualitative target that the organisation should satisfy), and how
change may impinge upon satisfaction of these expectations.

The company is about to introduce a new ISO 9001-2000 quality

management system.

Table 2 Determining stakeholder expectations prior to change

Organisation Country Clothing Company

Stakeholder Expectations How the change may be
perceived by stakeholders
to impact on their
expectations
Shareholders High share earnings Consistency of
competitiveness
Stable market share
Short term higher costs may
High asset values reduce profits

High profits after all

expenses and tax
Employee Job security Standards of performance will
representative need to be reconfigured
groups (unions) High reward for work
contributions to Reward systems may alter
company success
Efficiency may reduce need
Fair and well regulated for as many jobs
 work conditions
Suppliers Price security High supply standards

Forward orders Suppliers need quality

systems which will be
Certainty and early expensive to introduce
notification of demands
New reporting systems
Clear conditions and
terms for supply
Authority to act Need new training and ways
of making decisions
Job security
Workforce disruption may
High reward for work mean longer work hours
contributions to
company success Need to work as a team and
'convey the same message'
Premium for success
Management
Customers Expectations satisfied Quality may necessitate prices
rise
Service standards that
consistently meet Expectations and relationships
requirements managed by communicating
benefits
Price, price, price

Quality of product
Regulatory Compliance of people,Important they are informed of
agencies systems and processesthis positive move
(government) with requirements
Quality of services and
Safe workingproducts needs to be reflected
environment in working conditions and
processes
Compliance of services
and products