Ch00fm-pgs-Martichenko/Goldsby

10
Lean Six Sigma Logistics
of logistics recognize the difficulties associated with getting the right product
to the right place at the right time in the right quantity and condition at the
lowest possible cost. It involves not only a lot of heavy lifting, but also deep
thought and decisive action to provide promised service at the lowest cost. Back
in 1962, renowned management guru Peter Drucker once referred to logistics
as an untapped source of innovation and opportunity, calling it the economy’s
“dark continent.”* Four decades later, logistics management is only somewhat
better understood among business practitioners and the general public. It is
regarded as an afterthought among many companies, a necessary cost of doing
business that has little viable input on corporate strategy. Yet, ask the CEOs
of the leading companies noted above what role logistics plays in their enter-
prises. Excellence in logistics provision not only supports the missions of these
companies but, in fact, also serves as a focal point in their very competitiveness.
Take Wal-Mart, for instance. How well does its model of “every day low
pricing” stand in the absence of cross-docking and economies of scale in trans-
portation, keeping costs below those of rival retailers? And, at the end of the
day, what good are “every day low prices” if the products are not on the shelf
in sufficient quantity and quality? So, it is not only the low prices but also the
exceptional service that differentiates Wal-Mart from rivals.
Too often, companies fail to deliver on the implicit promises that are made
to customers. What is worse is when an explicit promise is left unfulfilled.
Consider the promotional advertisements and fliers that appear in newspapers
almost daily. What happens when the retailer promoting the product depletes
its inventory? If the retailer is lucky, customers facing the empty shelf will
accept a rain check or the promise to accept the order at a later date when
inventory is replenished. However, in many instances, the customer knows that
he or she can take the promotional flier to a rival store that will honor the deal
offered by the first retailer. What might such an experience mean for the future
relationship between the retailer and that particular customer? For one thing, the
retailer is likely to order greater quantities of product in the future to overcome
the stockout situation. However, the customer may not return in the future,
knowing that a rival store down the street will honor the deals promoted by the
first store. In this instance, the second retailer actually benefits from the pro-
motions of the first store. Meanwhile, what happens when the consumer in
question tells a few people about this experience? The impact of that original
stockout can be amplified dramatically as others consider similar action in the
future, bypassing the promotion-happy retailer in favor of the customer-respon-
sive one. So, simply adding inventory is not the answer but, in fact, is a big
step backwards.
* Drucker, Peter, The economy’s dark continent, Fortune, pp. 103–104, April 1962.

The Importance of Logistics and Supply Chain Management
11
Wal-Mart enjoys fewer product stockouts than its competitors not because
of higher inventories but because of better inventory management achieved
through high-frequency replenishment. Order cycle times (the time from order
placement to order delivery) are forty-eight hours or less for U.S. stores, allow-
ing store shelves to be replenished as much as four times faster than competi-
tors. Not only does frequent replenishment of stores support in-stock objectives,
but it also provides for “fresher” products. Like availability, the timeliness of
product delivery have become a key differentiator in many markets. “Freshness”
is obviously important for perishable consumer products like fruits, vegetables,
dairy products, baked goods, and infant formula, but now it is also commonly
advertised as important for products like soft drinks and beer. The waste of
obsolete inventory is created when supplies are left unclaimed at the time of
their expiration.
To take the concept of timeliness a step further, it is important to get the
goods in the hands of customers while the product is in peak demand or “hot.”
This is especially true of fashion goods or products with very short life cycles.
Getting the product to market first can often serve as the make-or-break moment
for many products and perhaps the make-or-break moment for entire companies
when their future hinges on a critical product introduction. Customer loyalty
finds its roots in the first experience that customers enjoy (or despise) with a
product and company. Being first to the market with a product or service that
meets a previously unmet need offers a way to establish satisfaction that, over
time, leads to loyalty. The benefits accrued by having loyal customers are well
documented, including openness to new products, interest in collaboration,
resistance to competitors’ claims, price stability, and lower cost of sales.
Being first to market means having the first crack at being the industry
leader. Logistics plays an important role in support of bringing innovative
products and services to light. By effectively coordinating material flows with
suppliers and managing distribution with intermediaries and customers, the
logistics organization can help the company to “make the boat” rather than miss
it. Along with a thorough understanding of internal operations, this physical
connection to suppliers upstream in the supply chain and customers downstream
allows logistics to assume a leadership role in the realm of supply chain man-
agement. This relationship is described next.

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