Systems Approach

Theory building, however, is argued to advance a discipline and profession, and is thus relatively more important to an emerging and growing discipline. Logistics just like any other scientific discipline aims to create new, or modify existing theories.

Knowledge can be described as a multilevel abstraction of reality, and different layers of knowledge can be distinguished. Its base consists of facts, observations, experiences and perceptions, which when recorded constitute the data. The data, when organized tabulated and presented logically and meaningfully becomes information. Information, when analyzed and processed with care can lead to inferences, generalizations and insights. Insights based on empirical observations are derived inductively, but insights can be arrived at deductively also. Insights can lead to formulation of concepts that become the tools for thinking, analysis and discussion. Concepts are then the basic elements for building theory.

Various theories applicable to Logistics and SCM are

Theory	Application
Activity Based Costing	Costing & performance measurement
Artificial Intelligence	Decision making; inventory management
Conflict theory	Channels of distribution
Control theory	Customer service
Product life-cycle theory	Decision making; strategy formulation
Queuing theory	Inventory management, warehousing
Systems theory	Cost trade-offs; logistics engineering; supply chain management
Transportation	SCM
Agency theory	Organisations; strategic alliances & partnerships; supplier relations; SCM
Central place theory	Location analysis
Network model	Channel flows; systems view
Relationship marketing	Customer service; strategic alliances & partnerships; supplier relations

We will discuss important theories

Systems theory began to appear in logistics practice in the 1970s and 1980s. At the same time, a major shift in how organizations viewed customer service began to take hold. Companies started to compete on the basis of customer service, and logistics naturally played a vital role in making such service both possible and profitable. Businesses learned that by combining the two approaches effectively, they could offer competitive service at a lower total cost than their competitors, and thus gain an advantage.

Six Degrees of Preparation

At the heart of this systems theory approach to logistics is a fundamental change in how companies view, capture, and manage costs.

According to Marien, six stages in enterprise costing today pertain to logistics. These stages reflect an increasing shift toward a systems approach to management and are evolving as follows:

• Stage 1: Direct cost or price of purchased materials.
• Stage 2: Net delivered cost of goods purchased. This includes Stage 1 costs plus order processing, transportation, and packaging costs.
• Stage 3: Total cost of ownership (TCO). TCO includes Stages 1 and 2, as well as inventory carrying/holding costs and warehousing.
• Stage 4: Total cost of sales. This includes the items in Stages 1 through 3, as well as other value-added costs such as overhead and administrative, marketing, R&D and manufacturing/operations, leading to before-tax gross margin.
• Stage 5: Inter-enterprise oriented costing. This level includes all of the above, but also extends out to incorporate collaborative costs, shared among a manufacturer’s immediate Tier 1 supplier, customer, and intermediaries. Relationships are managed for mutual gain across channel partners.
• Stage 6: End-user lowest delivered price. This final stage of cost management extends the aggregated supply chain value-add costs across all trading partners. All parties in the channel work to orchestrate their efforts toward the goal of delivering the best product, profitably, at the right cost for the end user.

Marien explains the concept behind Stage 6 as follows. “Suppose I have a 12-year-old Whirlpool dryer. At present, Whirlpool is insulated from me, the end user, by intermediaries such as the dealer or retailer. If Whirlpool was managing the end-user relationship, it would know that my dryer is nearing the end of its useful life. The only product performance metric that’s important to me is product up time.

“The manufacturer, therefore, could contact me and say, ‘We know you have a 12-year-old dryer; we know that certain major parts will go out before too long, so here’s a coupon to put toward replacing the dryer before it breaks down.’ Alternatively, the manufacturer could schedule maintenance on the dryer before it breaks down.

“As you start managing the end-user relationship more proactively,” Marien continues, “think about the impact on the supply chain. The manufacturer doesn’t have to carry a lot of spare parts that it may or may not use. Instead, all it needs to do is run a failure analysis of the product in the field, and work with dealers and end users to manage planned parts or unit replacements.

“The consumer benefits from greater up time, the manufacturer and dealer cement their relationship with the end user, and the manufacturer doesn’t need to have all this inventory sitting around in a warehouse somewhere waiting for the unknown service event to occur.”

Few companies have evolved beyond Stage 3 or 4 on Marien’s cost ladder. “On a scale of one to 100 where 100 is total integration, we’re at a five right now,” he suggests. “My estimate is the spread among corporations breaks down like this: 60 percent are in Stage 1, 20 percent are in Stage 2, 10 percent and five percent in Stages 3 and 4 respectively, and the remaining few are beginning to explore Stages 5 and 6.”

To make cost and supply chain integration theories work, leading companies are adopting a process approach to managing their logistics/supply chain activities.

Four core business processes comprise supply chain management. Marien describes them as follows:

• Demand Management (Forecast) — a collaborative, integrated process composed of these major tasks: corporate and financial planning, product/market planning, sales and operations planning, manufacturing planning, and supply planning, designed to provide forecasts and materials planning schedules to support the efficient flow of products and services throughout the supply chain.
• Procurement (Source)— the process of developing strategic plans and forming alliances with suppliers to focus resources on minimizing total delivered costs, developing new products in support of the manufacturing “make” process while achieving simplified replenishment and transactional costs within the supply chain.
• Manufacturing Flow Management (Make)— the process for obtaining maximum flexibility of production planning in using manufacturing capabilities and capacities to provide rapid response to changing market conditions and customer requirements.
• Logistics Fulfillment Management (Deliver)— the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption to meet customers’ requirements. This includes customer service ordering, shipment planning, transportation, warehousing, physical inventory control, packaging and unitization, and reverse logistics.

Managing these four core processes requires companies to adopt a cross-functional team or matrix organizational structure.

Theories

There are gaps in the literature on supply chain management studies at present : there is no theoretical support for explaining the existence or the boundaries of supply chain management. A few authors, such as Halldorsson, Ketchen and Hult, and Lavassani, have tried to provide theoretical foundations for different areas related to supply chain by employing organizational theories, which may include the following:

• Resource-based view (RBV)
• Transaction cost analysis (TCA)
• Knowledge-based view (KBV)
• Strategic choice theory (SCT)
• Agency theory (AT)
• Channel coordination
• Institutional theory (InT)
• Systems theory (ST)
• Network perspective (NP)
• Materials logistics management (MLM)
• Just-in-time (JIT)
• Material requirements planning (MRP)
• Theory of constraints (TOC)
• Total quality management (TQM)
• Agile manufacturing
• Time-based competition (TBC)
• Quick response manufacturing (QRM)
• Customer relationship management (CRM)
• Requirements chain management (RCM)
• Dynamic Capabilities Theory
• Dynamic Management Theory
• Available-to-promise (ATP)
• Supply Chain Roadmap