FIGURE 2-2: Logistics, purchasing, and operations are interdependent.
Purchasing
Purchasing (or procurement) is the function that buys the materials and services that a company uses to produce its own products and services. The basic goal of the purchasing function is to get the stuff that the company needs at the lowest cost possible; the purchasing department is always looking for ways to get a better deal from suppliers. Some of the most common cost-reduction strategies for a purchasing manager are
Negotiating with a supplier to reduce the supplier’s profit margin
Buying in larger quantities to get a volume discount
Switching to a supplier that charges less for the same product
Switching to a lower-quality product that’s less expensive
On the surface, any of these four options looks like a simple, effective way to reduce costs and therefore increase profitability, but each can have negative long-term effects. Driving a supplier’s profit margin too low, for example, could make it hard for them to pay their bills — or even force them out of business. Although you’d save money in the short term, having to find a new supplier in the future could cost you a lot more, increasing your total cost. Many purchasing decisions can also have direct effects on the costs of other functions within your company. Sourcing lower-quality raw materials might lead to higher inspection and testing expenses, for example.
Logistics
Logistics covers everything related to moving and storing products. This function involves physical distribution, warehousing, transportation, and traffic.
Inbound logistics refers to the products that are being shipped to your company by your suppliers. Outbound logistics refers to the products that you ship to your customers.
Logistics adds value because it gets a product where a customer needs it when the customer wants it. Logistics costs money too. Transporting products on ships, trucks, trains, and airplanes has a price tag. Also, whether a product is sitting on a truck or gathering dust in a distribution center, it’s an asset that ties up working capital.
The goals of the logistics function are to move things faster, reduce transportation costs, and decrease inventory. Following are some ways that a logistics department might try to achieve these goals:
Consolidating many small shipments into one large shipment to lower shipping costs
Breaking large shipments into smaller ones to increase velocity
Switching from one mode of transportation to another, either to lower costs or increase velocity
Increasing or decreasing the number of distribution centers to increase velocity or lower costs
Outsourcing logistics services to a third-party logistics (3PL) company
You can see the conflicts that can occur between logistics and purchasing. Logistics wants to decrease inventory, which may mean ordering in smaller quantities, but purchasing wants to lower the price of the purchased materials, which may mean buying in larger quantities. Unless purchasing and logistics coordinate their decision-making and align their goals with what’s best for the bottom line, the two functions often end up working against each other and against the best interests of your company, your customers, and your suppliers.
Operations
Operations is the third key function in supply chain management, involving the processes that your company focuses on to create value. Here are some examples:
In a manufacturing company, operations manages the production processes.
In a retailing company, operations focuses on managing stores.
In an e-commerce company or 3PL, the operations team may also be the logistics team.
Operations managers usually focus on capacity utilization, which means asking “How much can we do with the resources we have?” Resources can be human resources (people) or land and equipment (capital). The operations department is measured by how effectively and efficiently it uses available capacity to produce the products and services that your customers buy. Common goals for operations teams include
Reducing the amount of capacity wasted due to changeovers and maintenance
Reducing shutdowns for any reason, including those caused by running out of raw materials
Aligning production schedules and orders for raw materials with forecasts received from customers
Although increasing operations efficiency sounds like a great idea, sometimes it actually creates supply chain problems and does more harm than good. Companies may invest in increasing their capacity only to find out that their suppliers or logistics infrastructure can’t support the higher production levels or that they’re making more product than they can sell.
Connecting Supply Chain Communities
If you’ve ever taken a personality test, such as the Myers-Briggs Type Indicator, you know that these tests can reveal important differences in the way that people approach problems and make decisions. It turns out that groups of people have personalities too. These personalities form the culture of a group, and culture matters a lot when it comes to managing a supply chain.
Suppose that one of your customers is a company that really values reliability. That company considers it important for a supplier to deliver exactly what was ordered, exactly the same way, every time. The culture of that group — the things that the company values — determines how it judges its suppliers. Now suppose that this customer has a choice of working with two suppliers: one that’s known for consistent quality and another that’s known for flexibility and innovation. Naturally, the first supplier would be a better cultural fit because of the value that the customer places on reliability.
The impact of culture can also apply to the functions within your organization. Different departments — such as purchasing, logistics, and operations — often develop cultures of their own. If the values of these departments clash, it’s difficult for the company to manage its supply chain effectively.
One useful way to think about the culture of a company or a department is to use a framework that was developed by John Gattorna in Dynamic Supply Chains: Delivering Value through People, 2nd Edition (FT Press, 2010). Gattorna says that four major behavioral forces determine the culture of a group (see Figure 2-3) and are often related to the style of a group’s leader and the norms of a particular industry:
Integrator: