Logistical considerations have always played a strategic role in business. Among retailers and wholesalers, they transcend inventory management and transportation to include one of the most critical factors in business success—location in relation to markets or sources of supply. Among manufacturers, logistics concerns itself with matters as basic as plant location, sourcing of raw materials, and standards of customer service. In recent years, changes in the business environment have forced companies both large and small to pay particularly close attention to how this function relates to others. Government regulation, the health of the nation’s transportation system, energy restrictions, and technological developments all represent important considerations in the formulation of a business strategy. As the author shows in this article, many companies have responded to these challenges by developing competitive strategies based in part on such concepts as postponement and speculation, standardization, consolidation, and differentiation. These are companies in which management has conducted either formal or informal logistics audits, has redesigned systems to provide more effective support for corporate strategies, and has taken steps to ensure continued appraisal of opportunities over the long run.
Logistics can spell the difference between success and failure in business. For example, a few years ago a young engineer-entrepreneur began to build a company from scratch. His first product was liquid bleach. Actually, he didn’t know much about the business at the time. He knew that liquid bleach is nearly all water and that the U.S. market is divided among two large manufacturers, Clorox and Purex, and a number of smaller producers that sell branded and private-label bleach on a regional basis. He also knew that the market for private-label bleach in New England, where he wanted to be, was dominated by a manufacturer located in New Jersey.
So the entrepreneur decided to found a private-label bleach manufacturing company near Boston. This location provided his company with a distinct transport cost advantage over its chief competitor. But he didn’t stop there. He located his plant near a concentration of grocery chain retail outlets. This enabled him to sell his bleach under an arrangement in which retailers’ trucks were loaded with his bleach after making their retail deliveries and before returning to their respective distribution centers. Given this double cost advantage, he was able to go one step further. By adding other items to his product line, he was able to obtain efficient truckload orders from his retail chain customers.
Another new venture in which logistics plays a major role was set up by two honors students. On their graduation from business school, they devised an innovative, low-cost way to distribute a high volume of milk and other products. Building a retail “store” that consisted of a convenience-oriented self-service front end and a large truck dock in the rear, they have raw milk delivered by tank trucks and put into vats in the rear of the store. Milk and cream is then separated, homogenized, and bottled on site for sale direct to consumers at significantly lower prices than through traditional channels. Having expanded its line to include other food items often purchased in large quantities, this retailer now enjoys one of the highest sales-per-squarefoot ratios of any retailer in the United States and does a volume of sales through its relatively small outlet that many supermarket operators would be pleased to achieve.
Logistics-oriented strategies are also important in large companies. As an example, one of the world’s largest chemical manufacturers recently had to replace its ships. The ships carried materials in bulk from plants in the Caribbean to Gulf and East Coast ports for subsequent transfer to barges and rail cars for delivery to terminals at which customers’ orders were packed into containers for final delivery by rail and truck. Instead of merely replacing its ships with more modern versions of the same design, the company instead is converting its entire distribution system to one using containers.
This system requires that orders processed in Puerto Rico be shipped in containers that will be delivered direct to customers in the eastern United States by a combination of river barge, rail, and truck. As a result (1) repackaging at all inland terminals eventually will be eliminated, (2) material handling costs and capacities at Gulf and East Coast port facilities will be greatly reduced, and (3) because of the increased frequency of departures of ocean-going container barges from plants, orders will be delivered to customers with little or no increase in order response time and only a small increase in total inventory in the system. Because of the company’s sales volume, it is unlikely that competitors will be able to emulate the program even though their geographic production and transport patterns are similar.