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Logistics at Large: Jumping the Barriers of the Logistics Function

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 Logistics at Large:
Jumping the Barriers of the Logistics Function

Yossi Sheffi
Professor and Director
Center for Transportation Studies
Massachusetts Institute of Technology
Cambridge, USA

Peter Klaus
Professor, Chair of Business Logistics
Friedrich-Alexander-Universitaet
Erlangen-Nuernberg,
Germany

Council of Logistics Management

Educators' Conference

Chicago, IL

October, 1997
 Logistics at Large

Logistics at Large:
Jumping the Barriers of the Logistics Function

Yossi Sheffi
and
Peter Klaus

Abstract

Despite the enormous strides of the logistics profession in the last twenty years, it is still
neither widely recognized nor easily understood by business professionals outside it. In
part, it is because the profession itself has not yet succeeded in providing a widely
accepted and easily understood definition of the field and its thrust.

This paper presents a framework for thinking about logistics and its evolution, which
might help to close this gap. It argues that logistics has been evolving in two major
stages: from a focus on a collection of operational activities that define a function to a
focus on coordination and flow management activities which give the profession an
additional, much broader, identity.

This framework is then used to suggest a new definition of logistics -- one that reflects
what advanced practitioners do and where we think the profession is heading. The new
framework is then used to address certain logistics-related questions in new ways. These
include a dichotomy of logistics companies; guidelines for contracting out logistics
services; some thoughts on the required future skills; and some suggestions for teaching
logistics.

Page 2
 Logistics at Large

The Footprints of Logistics

The importance of logistics has been Logistics “Footprints”

continuously increasing and becoming
evident over the last 20 years. The "foot
prints" of logistics are everywhere:
there is a growing community of people
identifying themselves as logisticians;
there is an increasing number of
logistics books and publications devoted
to it in the commercial and academic
arenas; more business functions,
corporate positions and service
enterprises include logistics in their title;
CLM Membership membership in professional organizations,
such as the Council of Logistics
12,000
Management (CLM) and its international
10,000
counterparts is growing steadily; and there
8,000 are many stories of business success and
6,000 significant competitive advantages
4,000 associated with world class logistics
2,000 activities.1
0
1991 1992 1993 1994
The reasons for the growing significance of
1995 1996

the profession are based on several well-

known challenges and opportunities. Some of the challenges include the following:

 The globalization of commerce has created the need to procure material and parts
from far-flung locations and sell finished products globally. Furthermore, many
global companies who truly manage operations worldwide have emerged, creating a
need for intra-company international movements of material and increasing the
importance of logistics-related decisions such as facility location.

 Recognition of the true costs of inventory has led many enterprises to decrease
inventory levels, thereby creating tightly-coupled supply chains which can react
faster but require more and different skills to put together and improve continuously.
Furthermore, such tightly couples supply chains are more vulnerable to breakdowns
and interruptions, thus requiring closer monitoring and higher skill levels to operate.

1
A comprehensive survey of companies practicing world class logistics can be found in CLM (1995).
Compare also recent winners of the German BVL logistics prize such as the OTTO Direct Merchandising
Group, BMW, and SIEMENS’ Private Telecommunications Division.

Page 3
 Logistics at Large

 Increasing customer expectations for ever better service, lower costs and more
choices, have created a pressure to deliver products faster and cheaper and to react
more nimbly to changing customer requirements. Furthermore there is an explosion
of SKU-s in response to consumers' demand for variety meaning that, in addition to
the complexity of size, corporations deal with more products, each of which is subject
to higher random fluctuations since it targets a smaller niche.

 A new emphasis on environmental issues is leading corporations to manage the return

of products after their use for recycling and/or safe disposal, and the deployment of
re-useable containers which have to be managed

 Corporate realignment due to mergers and acquisitions and the emergence of

extended enterprises mean that inbound and outbound networks have to be
redesigned and tuned with increasing frequency.

The opportunities stem from the following:

 The ability of new information and communication technologies to overcome space

and time thereby transforming transportation and inventory management processes.
Of particular importance are technologies such as global positioning, shipment/
equipment identification, electronic data interchange, enterprise planning systems and
decision support systems

 The world’s movement into further deregulation of the transportation industry and
harmonization of standards and rules, is creating opportunities to plan and move
products based on economic considerations rather than bureaucratic dictates; the
deregulation of transportation service in the US in the late 1970-s and early 1980-s,
NAFTA, the European Union, Mercosur, ASEAN and open skies agreements, are all
examples of continuing deregulation.2 In addition, the privatization of national
carriers and national infrastructure will continue to bring new players into the
logistics arena.

The needs and the requirements on the one side and the myriad of opportunities on the
other explain the growing importance and recognition of the logistics profession.

Yet, even as logistics is leaving such large foot prints on business and commerce, the
question of "what is it?" has not been answered satisfactorily for many, in and out of the
profession, since Henry Eccles (1954) posed it first . Furthermore, the continuous
changes in the scope of what logistics professional do require that old definition be
examined and updated.

Webster (1994)3 defines logistics as:

2
An up-to-date review of deregulation histories in Europe and the US is offered in Aberle (1996).
3
A similar definition is given by Microsoft's Book Shelf 95, which is part of Microsoft's Office 95 suite.

Page 4
 Logistics at Large

(1) The aspect of military science, dealing with the procurement, maintenance
and transportation of military materiel, facilities and personnel

(2) The handling of the details of an operation. (From the Greek logistice -- the
art of calculation)

The Council of Logistics Management (CLM) defines logistics as:

The process of planning, implementing, and controlling, the efficient,

cost effective flow of raw material, in-process inventory, finished
goods and related information from point of origin to point of
consumption for the purpose of conforming to customer requirements.

While rooted in military science, modern business logistics is seen by CLM and most
logisticians4 as a business function, requiring a set of skills, and based on a developing
academic discipline. As such it is developing its own set of analytical tools and a
"philosophy."

Operational Logistics - Optimization of the "Three P-s".

The original and most elementary notion of logistics is that of a set of three operational
activities - movement, storage and rearrangement5 - that add value to goods. The value-
added inherent in these activities is based on the following:

Place - Adding place value to items by moving them from locations of lower value for
the customer, to locations of higher value to the customer.

Period & Pace - Adding time value to items by storing them and thereby (i) moving
items from periods when they are available (following extraction, harvest, or
manufacturing) to periods when customers require them, and (ii) Making all processes
more effective - inventory allows for de-coupling the processes along the value chain
from each other, so they can each run at their optimal pace according to their own
economics.

Pattern - Adding order value to items by arranging them in desired quantities and
patterns. Example include consolidation, break-bulk, sequencing, picking/packing, etc.

4
See for example Novack et al (1992) and Johnson and Wood (1996).
5
In East Germany, where some areas of engineering and technology developed in isolation when the "iron
curtain" was still up, the field paralleling Western business logistics has been called "TUL Technology."
The acronym stands for "Transport," Umschlag" (for "break-bulk" operations) and "Lagerung" (for
"warehousing"). See for example Krampe (1990).

Page 5
 Logistics at Large

The cost of adding place value is the transportation cost. The cost of adding the period
value is the inventory carrying costs, and the cost of adding the pattern value is the cost
of picking and packing, sorting, and sequencing. As items are moved through a
distribution channel from a vendor to, say, a distributor, they go from the vendor's
inventory, through a picking and packing operation, loading, transportation, receiving
and are put away as part of the distributor's inventory management system. The same
activities are then repeated when the distributor is replenishing the retailer.6

The transportation and storage operations have been long recognized as the building
blocks of logistics. In many cases the creation of a "pattern" or ordering items according
to certain rules, (which may include direction, size, sequence, ownership, or whatever)
has been thought of as part of either the transportation or the inventory management
function. Indeed, carriers have been sorting their freight as part of their consolidation
operation and warehouse operators were placing items in storage in specific patterns and
picking items and packing them into shipments as part of warehousing activities. Lately,
however, logistics operators have been offering "ordering" or pattern-creation activities
as a stand-alone value addition lines of business. Examples include line sequencing,
where logistics companies would sequence parts and deliver then to an assembly plant in
the order the items are needed at the plant, thus allowing the plant to synchronize the
incoming flow with the production sequence. Another example is packaging, where
logistics companies change the packaging of incoming items so they will fit better a
downstream process.

Another aspect of pattern-creation, or "arranging" is the processing of information. For

example, after entering orders for certain goods, the software "rearranges" certain indices
in the computer's data base so orders can be bunched and organized according to the
distribution center that has to supply them, the plant responsible for manufacturing them,
the carrier responsible for hauling them, the party responsible for payment, the time of
shipment, or whatever. Thus, all the reporting associated with logistics can be seen as
information pattern-creation.

Thus a definition of what operational logistics encompasses, can be based on the 3P's of
logistics operations mentioned:

Logistics is the addition of place, period and pattern values to items.

6
Marshall (1920), in a book that was originally published in 1890, recognizes the three value-added
function mentioned here, arguing that the "place utility" introduced by the transportation function is no less
or more important than the "order utility" ("pattern" value addition in our terminology) introduced by the
producer by rearranging matter in the manufacturing process. In our context, the pattern creation refers to
activities conducted by the logistics function or logistics provider.

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 Logistics at Large

This definition is independent of what the

“PPP” Logistics
"items" are so it may be applicable not only to
inbound material and finished goods, but also
to semi-finished goods, sub-assemblies and
returns. Note that this definition does not
mention explicitly the customers' requirement,
since value is provided only if the movement,
storage, or other activity conforms to those
requirements.

The "PPP" notion of logistics, (or operational

logistics) has been traditionally performed as a
collection of functions: traffic, distribution, material management, inventory
management, warehousing, and as part of manufacturing. The first stage in the evolution
of logistics was to recognize this collection of activities and functions as part of a single
profession, and the recognition of "integrated logistics."

Inbound through Outbound Logistics Activities

O/B Inventory Pick, Pack I/B Inv. Receive & O/B Inv.
Transport Receive Manufacture Pick, Pack Transport
Management & Load Mgmt & Load Put Away Mgmt

Legend:
Place Period Pattern

This figure depicts the series of logistics activities associated with the three P-s of
logistics. This series presents the activities from the point of view of a single player in the
channel - a manufacturer. The leftmost outbound inventory management activity in the
figure, however is typically conducted by the vendor of this manufacturer, managing its
inventory of outbound goods, which are inbound material for the manufacturer under
study.

Finally, operational logistics includes a set of specialty activities which support the
primary "PPP" activities. These include audit and payment, customs brokerage, order
processing, international documentation, etc.

Logistics as A Coordination Process - Two More "P-s."

Operational activities have been the cornerstone of logistics for many years. Soon after
"business logistics" began to be established and recognized, it was realized that a focus
on the improvement of transfer activities in isolation from each other was not sufficient.
It became evident that most leverage for cost reductions and operational improvements
was in the interfaces and interactions between activities. The integration and coordination

Page 7
 Logistics at Large

of such activities became a primary concern, foreshadowing what is now often called
”supply chain management”7.

The supply chain management aspect of logistics can be defined as:

The coordination of the series of activities/processes which

procure, produce, and deliver products and/or services to
customers.

It is tied to the view of the enterprise as a collection of processes which need to be

coordinated and integrated to ensure business success. Thus we introduce the fourth "P"
of logistics: process coordination. The management of supply chains involves setting up
many partnerships -- both inside the enterprise and between enterprises -- so this fourth P
of logistics can also be referred to as partnerships' management.

The processes to be coordinated include not only the three P-s of "placing," "pacing" and
"patterning." Instead they involve manufacturing and other operational activities.

Points of Coordination

O/B Inventory Pick, Pack I/B Inv. Pick, Pack Receive & O/B Inv.
Transport Receive Manufacture Transport
Management & Load Mgmt & Load Put Away Mgmt

Process
Coordination

Regardless of the type of flow (parts inbound or product outbound; primary or return,
etc.) operational activities are always accompanied by information flows. The
information consists of purchase orders, status (location and inventory) messages,
invoices, shipment content information, period reports, etc. The management of these
information flows is a crucial part of the coordination activities included in supply chain
management. Not only does the information generated help execute the operational three
P-s of logistics, but it has a value in its own right. It enables planning of logistics-related
activities as well as control of all other corporate activities touched by logistics.

In addition to materials and information, there is also a need for the coordination of the
flow of cash. The cash moves from customers to vendors, as payment for the items, and
from vendor to customer to account for the reverse flow of items.

Last, leading corporations are also including logisticians in concurrent engineering

teams. According to Volkswagen AG,8 for example, 75% of logistics costs are set by the

7
Lewis (1956) classical paper on ”The Role of Air Freight” may be seen as a forerunner of this insight,
which has been articulated more in Heskett (1963) and, recently through Weber (1992).
8
Private communication with Dr. Hermann Krog, head of Volkswagen's logistics organization.

Page 8
 Logistics at Large

time "Job 1" (the first car of a given model) rolls off the assembly line. Thus, issues of
design for logistics, plant location, choice of vendors and manufacturing discipline are all
important determinants of logistics costs. Leading corporations, make sure, therefor that
logistics considerations are accounted for at the earliest design stages and the process of
designing the logistics supply chain is integrated with the product design process.

Supply chain management, as a coordination process is not a new concept. It has been
taking root both within companies and in inter-companies operations, but has been
known by different names. Within companies it has been known as "lean manufacturing,”
“re-engineering,” “process orientation,” “concurrent engineering,” and even “team
work.” All these concepts are different manifestations of coordination of activities and
processes along the internal enterprise's "operations" process, at different time frames.
This process of managing the flow of items, from material and parts supplied by vendors
to finished goods in the customer's hands, while coordinating with Manufacturing,
Purchasing, Marketing, Finance, Legal and all other corporate functions is the essence of
internal supply chain management.

Supply chain coordination activities among companies have also been described in many
different contexts by various terms, all implying closer relationships and tighter
coordination between the companies. These terms include the Japanese “Keiretzu;” the
practice of vendor-customer “partnerships;” the movements of corporations to “core
supplier,” leading to a reduction in the number of suppliers so coordination activities can
be executed better; the practices of “vendor managed inventory,” “efficient consumer
response,” “quick response,” and “continuous replenishment” used in the consumer
goods industry for tighter manufacturer-retailer coordination; the practice of “Just in
time” replenishment used originally in the automobile industry and now an accepted
practice of vendor-manufacturer coordination; and “pull” vs. “push” methods to move
material along the supply chain.

Most of these terms and practices include elements of "coupling," "integration" and
"coordination." To see the reason for it, note that aside from work-in-process, the only
reason for having inventory is so that processes can be de-coupled from each other. The
de-coupling allows each function to operate at its maximum efficiency in terms of its
own parameters, including economic order quantities, process fluctuations, and process
variability. All of the terms above are manifestations of the realization that not only is the
inventory required in order to de-couple processes expensive and wasteful, but
optimizing independently each function within the enterprise and each enterprise within
the supply chain does not lead to over-all optimal processes. Many companies have
demonstrated that quantum leaps in cost improvements and customer service can be
achieved by integrating supply chain activities through coordination.

Page 9
 Logistics at Large

One can look at every enterprise

Business Process Model
as a collection of two
fundamental processes: product OPERATIONS
Suppliers Customers
development and "operations," or
supply chain management.9
Support Services
These two fundamental processes
are supported by a range of
support services such as Legal, MARKET
Product Development
VALUE

Human Resources, Finance,

Marketing, etc.

Embracing supply chain management is not "just another fad" for the logistics profession.
Regardless of the type of process coordination activity which is relevant for particular
enterprises, supply chain management is fundamentally a different activity for logistics
professionals and it redefines the profession. It moves the logistician from a functional
manager of one or more support activities to an owner of one of the two fundamental
processes in every enterprise. In fact, recognizing the equal importance of activities that
happen inside the factory walls and outside them, many organizations, such as Goodyear
Tire and Rubber Company, Digital Equipment Corporation, and others, have an
executive with the title of "Manufacturing and Logistics" in charge of that process.

Agility and the Last "P."

If one observes the activities of those businesses which appear to be the most advanced
and successful practitioners of logistics10, it becomes apparent that beyond the function
of “Placing,” “pacing,” and “patterning”, and still beyond mere coordination among two
adjacent activities or a customer-vendor partnership -- there is more. Companies as
diverse as Toyota, Walmart, Dell, The Gap and many other, less visible, “champions” in
today’s dynamic and volatile markets,11 seem to have found ways to set themselves apart
in yet another way. They “program” their operations and processes to “mobilize” the
flows of information and goods through their systems in a flexible and agile fashion. It is
this agility, or pliancy, which is the fifth P of logistics.12

At the core of the success of the logistics leaders is the concept of “pliant flow13,” which
leads them to:

 View their businesses as networks of interrelated flows that bring value to their
customers, and hence focus on network structures and corporate cultures that allow

9
This view of commercial enterprises is taken from Lucas Engineering.
10
Rather than, for example, successes based on new product technologies, new manufacturing methods,
utilization of information and communication technology, monopoly power, or charismatic leadership.
11
See, for example, Simon (1996)
12
The classical example for successful application of ”pliant logistics” – even though the term is not used -
is Toyota; see for example, Ohno (1988).
13
Some suggested phlexible phlow instead of "pliant flow…"

Page 10
 Logistics at Large

for - indeed demand - unobstructed, speedy flow of goods, information, cash, and
ideas, which easily rise, ebb and change with customer demands.

 Focus on the dynamics of getting products, parts and information to move according
the customers changing requirements, having the ability to adjust operations
dynamically backwards, in an optimal fashion, throughout their own supply chain.

 Ensure that all parts of the business "oscillate together" in a holistic fashion by
organizing resources and orienting people along the flows of the ordering, fulfillment
and payment processes that are the lifeline of each business.

Pliant Logistics

Resources Customers

The primary flow in each business is, of course the supply chain, which entails the
management of the "flow" of parts into manufacturing plants and finished products
outbound to customers. It also includes the management of reverse flows rooted in
returns, recycled items, exchanges, reusable containers, trade ins, etc. The flow
perspective can be applied to work flows, cash flows, service flows, idea flows and
elsewhere.

From the notion of pliant flow, one can develop a wealth of new ideas for the
conceptualization and practice of management. Hydrodynamics concepts of
characterizing flows, which can be transferred to the logistics context include, for
example:

 Gradient - which, for any flow, is the force causing the movement. In logistics it is
the service requirement. Parts/products flows are moved fast or slow depending on
the customer service requirements and how well the control system "pumps" the flow.

 Velocity - the rate of flow, which for items in the supply chain is measures in
inventory turns

 Viscosity - is an internal characteristic of the fluid moving. When we deal with the
flow of items we deal with characteristics such as bulk, standardization, homogeneity,
and inventory carrying costs, etc.14

14
Packaging is generally intended to improve those "viscosity" characteristics of the items flowing, to
make the flow smoother and faster.

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 Logistics at Large

 Friction - measures the interaction of the fluid with its channel. With logistics flow
we may be dealing with perishability, susceptibility to damage and pilferage,
susceptibility to information loss en route, etc.

 Turbulent flow - characterizes the nature of the flow. Turbulent logistics flows
involves rework, unscheduled returns, shortages and other unexpected phenomena.
This contrasts with regular flow, where items, information, cash, and ideas flow
smoothly.

These characteristics influence the speed of

moving the items and the nature of the PPP
logistics activities involved. Similarly,
hydraulics concepts such as pressure,
pumping and metering can be applied to the
process of managing the flow along a supply
chain.

While the analogy to fluid dynamics has its

limitation, it can provide a strong guidance and a mental picture of what is required and
how different items' flow can be compared and managed.

Pliant flow management requires efficient PPP (operational) logistics, and it requires that
the right processes will be identified and controlled inside the firm and the right
partnerships set along the supply chain. Beyond these prerequisites, however, the
challenge facing logisticians is the development and management of smooth-flowing,
demand-stimulated, well structured flows of parts and products. This requires a tuning of
the organization by pruning non-value-creating activities, programming the directions
and responses that ensure smooth flows, and setting up of the culture and ideas that will
result in fast and agile organizations.

The two dimensions: operations and coordination can now be combined in the following
definition of logistics management:

The dynamic management of flows of items, information,

cash and ideas, based on coordination of all the supply
chain processes and the addition of place, period and
pattern values.

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 Logistics at Large

Summary of Framework

This paper suggest that one can think about logistics in two dimensions: the first one
encompasses the basic three P-s of logistics consisting of providing place, period and
pattern values. This dimension of logistics includes the provision of (i) transportation, (ii)
warehousing and (iii) picking/ packing, sorting and sequencing.

The second dimension of logistics is the management of supply chains. This activity
involves two aspects: (i) coordination of the processes controlling the flow of parts and
products, from vendors to sub-assemblers, to manufacturers to distributors and finally to
customers, and (ii) alignment of the flow of items, information, cash and ideas for
maximum agility and flexibility.

Beyond the basic functions of logistics, is a specific perspective, which leads logisticians
to view businesses and entire supply chains as networks, in which the changing flows
bring value to customers. Such a perspective can bring about new opportunities for
business rationalization

The five P-s of logistics are then:

• Operational Logistics:
– Place value
– Period and pace values
– Pattern value
• Coordination logistics:
– Process coordination and partnerships
– Pliant flow management

The following table contrasts the two levels of logistics management. By its nature, the
table presents these as two distinct management challenges, while in reality many
logisticians are involved in activities that span elements of both operational and
coordination logistics.

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 Logistics at Large

Operational logistics Coordination logistics

Focus of activities Operational - improve efficiency Strategic - improve
and effectiveness competitiveness of the enterprise
Planning activities Set systems, network and Choose the right partners; change
contracts to fulfill requirements organizational culture, set
requirements
Customers Other functions in the enterprise The end consumer
or other businesses
Place in the organization A logistics function manager - one A process/flow owner -
of the support activities responsible for one of the two
main processes of the enterprise
Optimization Functional (i.e., vehicle routing, Broad scope: enterprise and
facility location, carrier choice) supply-chain wide; dynamic
considerations
Orientation Efficient transaction processing; Partnerships and long term
reaction to the market relationships; planing for
continuous change
Performance metrics Minimize functional costs, Market share, speed of product
improve service to immediate introduction
customers

This table highlights the change in the logistics profession from the "PPP" operational
view to the inclusion of coordination and flow management as part of the profession. The
change from functional management to coordination means that the skills required by a
modern logisticians are not restricted to the understanding of how to operate a warehouse
or how to reduce the rate per mile charged on a particular lane.

A much more important set of skills is required and valued --

the skills that allow logisticians to "jump the barriers" of
narrow functional thinking. Paramount among those is the
ability to manage processes that cut thorough internal
functional "silos" as well as create and maintain partnerships
with vendors, customers, and logistics services providers,
thus creating and managing extended enterprises.
Furthermore, "static" management of such interfaces is not
enough. These extended enterprises have to be agile and thus
logisticians need to think in terms of dynamic solutions
rather then rigid ones. In other words, logisticians should be
equipped to set supply chains that not only respond to an
existing situations but are able to change and adapt. The challenge then is to manage
networks which are focused on creating customer value, by regulating the flow of items,
information, cash, and ideas dynamically.15

15
A somewhat different thesis of the evolution of logistics, which, however, is based on the same set of
considerations used here is offered by Klaus (1993).

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 Logistics at Large

Applying the Framework

Using the framework suggested here, it is now possible to classify logistics activities,
thereby tackling some questions which many in and outside of the profession have
grappled with for some time. The first of these is, of course, the question of what is
logistics. An answer to this question was suggested in the definition given above and the
discussion of the two primary dimensions of logistics. The framework can also be used to
classify who is a logistics service provider, as opposed to a carrier with a revised title;
provide a framework for thinking about what type of logistics services should be
outsourced; and address the challenges associated with generating the human capital
needed to address future logistics requirements.

Classification of Logistics Providers

One of the complaints voiced often by shippers and leading logistics services providers is
that "everybody is now a logistics company." Indeed, the number of vendors identifying
themselves as logistics providers has grown dramatically in the last ten years.

Traditional providers of operational logistics have focused their services on a single "P"
or a single operational supporting service. Thus, transportation companies are in the
business of providing place value - managing the movement of items (most of them using
a single mode of transportation). Similarly, public warehouse operators, are in the
business of providing period value - managing items while they are stored. Recently,
logistics providers started to render "stand alone" pattern value services - providing value
by organizing and ordering items, including consolidation, sequencing, kiting, packaging,
etc. Similarly, logistics software houses provide data patterning services.

Furthermore, there are many providers of a single related, specialty service, involving the
management of information, cash, or meeting regulations. Examples of such provides
included audit and payment houses, order entry processors, customs brokers,
international forwarders16, etc. These vendors provide a single auxiliary service
surrounding the flow of parts and products.

What separates logistics providers from transportation carriers, warehouse operators, and
other providers of a single service dimension is that they render more than one and
sometimes all of the "PPP" logistics services, as well as a set of specialty services.

Modern integrated logistics providers, such as Ryder Integrated Logistics, Schneider

Logistics, Caliber Logistics, CTI, Caterpillar Logistics Services, Menlo Logistics, and
scores of others, offer all the three P-s of operational logistics. The provision of these
services is typically characterized by reliance on primary assets such as transportation

16
Forwarding is, in many ways, all about coordination. Many shippers, however, look at it as a function,
responsible for the "black art" of international shipping.

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 Logistics at Large

equipment, warehouses and other facilities, and including blue collar work force. Many
vertically-integrated enterprises have, of course, provided all three values in house, using
private fleets, company warehouses and their own manufacturing capacity.

Modern contract logistics providers have also started to offer coordination services,
setting them further apart from traditional providers of a single service. These offerings
are rooted in the provision of several operational logistics functions and the realization
that by coordinating them the logistics provider can offer a "one stop shop" that services
a large part of the customer's internal supply chain. The other motivation for offering
coordination processes is that they render opportunities for the logistics providers to
become part of the fabric of the customer organization, thus creating a stronger customer
bond. Coordination services are sometimes offered independently by non-asset-owning
providers, or in addition to providing operational logistics.

The most advanced providers are helping customers to see and realize the potential of
transforming their businesses: from coordinated assemblies of functional competencies to
integrated flow systems that maximize customer value and rationalize the network of
contributing processes.

The "classical" providers of coordination and transformation services are the logistics
management consulting firms. In the past, one would not have included consultants in
any definition of coordination services providers even though that is the aspect of
logistics where most of their advise is targeted. The reason was that most consultants did
not use to provide such services but rather opinions and studies. The role of logistics
management consultants is changing, however, as more and more of them are getting into
the provision of services which include implementation.17 At the same time, traditional
logistics providers are realizing that they have to provide "value-added" consulting
services and so the lines between traditional types of providers continue to blur.

Thus one can define four types of logistics providers:

 Single value providers - including carriers, warehousemen, forwarders, customs

brokers and other vendors offering a single dimension of PPP logistics value.

 Multiple value providers - who offer several PPP logistics services as well as cash
and information management services

 Coordination providers - offering a set of coordination and flow management services

which cut several function within the enterprise and between enterprises.

17
Note for example the recent strategic alliance between Ryder Integrated Logistics, Anderson Consulting
and IBM, as well as the practice of running bid and core carrier programs by several management
consultants such as A. T. Kearney and Mercer Management. Also note the recent emphasis on
implementation in many consultants' advertisements..

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 Strategic transformation providers - giving customers the vision and tools to redefine
their businesses as flow systems and helping these customers instill this perspective
in their organizations.

What Should be outsourced

Given the various types and levels of logistics providers and the trends towards focus on
core competencies, an important question is how should one think about which services
should be outsourced and which should stay within the enterprise.

Contracting out a single dimension of operational logistics value (a single "P" or single
specialty service) is a relatively straightforward "make" versus "buy" decision. The
traditional transportation, warehousing and specialty services industry has existed for a
long times by selling services to shippers who chose to "buy." Furthermore, many
shippers, even those running private fleets and company warehouses, have chosen to
contract out such specialty services as freight bill audit and payment, customs brokerage,
and forwarding.

Contracting out coordination services represents a large leap in a corporation's thinking

about logistics. As long as only operational logistics is contracted out, providers can still
be treated in a traditional adversarial manner, whether based on pure transactional
relationships or contracts which are put up for extensive bids on an annual basis. It is,
however, the contracting out of coordination services, which represents a true
partnership, since the provider will have to coordinate with internal corporate
organization beyond logistics.

As mentioned above, however, forwarding services which represent pure coordination

services are frequently contracted out. The reason is the coordination takes place between
entities that many shippers do not normally deal with directly, such as ocean carriers,
foreign drayage companies, or customs authorities.

Contracting out coordination and flow management services means that the logistics
service provider coordinates directly with the shipper's manufacturing or marketing
organization. For example, many automotive companies have contracted with CTI,
Schneider Logistics, Ryder Integrated Logistics, and several others to provide inbound
inventory deployment and transportation services. These include frequent downloading
of "build" schedules and coordination of information between the shipper's
manufacturing organization and the suppliers' data base systems. Similarly, companies
such as Skyway, Menlo Logistics and others who are involved with consumer goods
distribution, manage the information flows between manufacturers and retailers regarding
promotion cycles, set up of in-store displays, manage returns and product recalls and
coordinate other flows within their clients' organizations and between it and the
customers and vendors dealing with it.

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There is typically limited risks in contracting out basic "PPP" and related services. The
risks increase when contracting out coordination services. These risks are twofold: first, a
growing dependency on the provider of such services with subsequent high costs of
changing providers, and second, the risk of losing expertise which are not easy to replace
or develop. Coordination services require a higher degree of managerial talent than basic
operational services and are also more situation-special, and therefore more difficult to
find or cultivate in the short run. Yet, the reward from well-run coordination is much
larger than the rewards associated with better managed functions.

Developing Logistics Skills: the Teaching Challenge

Logistics education and training in both academia industry

have traditionally focused, just like the profession itself, on
PPP logistics. Researchers have developed and taught
methods and systems for transportation and inventory
deployment issues. Thus, there are methods for optimizing
facility location; inventory deployment and ordering rules;
transportation routing and scheduling; and other
operational challenges.

The profession has been less successful with the development of optimal coordination
methods and tools, or developing the perspective of "flow management." Approaches
such as material requirement planning (MRP) and distribution requirement planning
(DRP), developed conceptually in the 1960-s, are recognized now as less than
satisfactory, in that they promote "push" mentality, process de-coupling and long (and
therefor relatively inflexible) supply chains. A new generation of methods based on lean
manufacturing principles (Womack, 1990) and demand flow technology (Costanza, 1996)
need to be developed so that the principles behind these methods can be codified and
used en-mass. In that sense, the profession may need a new theory of "flexible flow
management," which can then be used to develop methods and a general understanding

The challenge is also for universities to develop curriculums that teach methods beyond
management science, which even with its enormous modern sophistication, can tackle
only relatively simple, static questions. The future logistics professional need not only to
be versed in the management of PPP services but in the management of extended supply
chains, involving the building of relationships and the management of flows over far and
wide networks. The issues facing this professional will increasingly involve the setting of
strategic partnerships and the dynamic control of the flow of items and information
throughout the networks connecting these partnerships.

What is Next?

This paper attempted to view the evolution of logistics in a new way. The 1997 Annual
CLM Conference is dedicated to "breaking the barriers." This papers constitutes a

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continuation of the effort to remove the barriers -- which are the narrowing functional
perspective -- that have dominated logistics for a long time. This will, hopefully
illuminate what advanced practitioners are doing and open our minds towards new ways
to further the field in the future.

Like any other change and breaking of barriers, this is a risky undertaking. This paper is
intended to continue the debate in the logistics community as to the role and education of
future logistics professional.

References

Aberle, Gerd (1996). Transportwirtschaft. Oldenbourg Verlag, Muenchen 1996.

Costanza, John (1996), The Quantum Leap in Speed to Market. J-I-T Institute of
Technology. Englewood, CO. 3rd Ed. 1996

Council of Logistics Management (1995). World Class Logistics: The Challenge of

Managing Continuous Change. CLM, Oak Brooks/Ill. 1995

Eccles, Henry E. (1954). Logistics - What is it? Naval Research Logistics Quarterly,
1954, pp. 5-15.

Heskett, James L. (1973). Sweeping Changes in Distribution. Harvard Business

Review, Vol. 52, 1973, March-April, pp. 123-132.

Klaus, Peter (1993), Die dritte Bedeutung der Logistik, Nürnberger Logistik

Arbeitspapier Nr. 3, Universität Erlangen-Nürnberg, Lehrstuhl für Logistik, Nürnberg,

1993.

Krampe, Horst (1990), Wissensspeicher für Technologen - Transport, Umschlag,

Lagerung, Leipzig.

Lewis, Howard T., J.W. Culliton, and J.D. Steele (1956). The Role of Air Freight in:
Physical Distribution. Harvard Business School, Boston, Mass. 1956

Magee, John F. (1960). The Logistics of Distribution. Harvard Business

Review, Vol. 38, Nr. 4 July-August, pp. 89-101. 1960

Marshall, Alfred (1920). Principles of Economics, Macmillan and Company. London

and New York, 8th Ed., 1920.
Ohno, Taiichi (1988). Toyota Production System: Beyond Large Scale Production,
Cambridge, Mass. 1988 (Original: "Toyota Seisan Hoshiki", Tokyo, 1978).

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Simon, Hermann (1996). Hidden Champions: Lessons from 500 of the World’s Best
Unknown Companies. Harvard Business School Press, Boston, 1996.

Weber, Jürgen (1992). Logistik als Koordinationsfunktion. Zur theoretischen

Fundierung der Logistik, in: Zeitschrift für Betriebswirtschaft, 62. Jg. 1992, H. 8, pp.
877-895.

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Biographical Sketches

Yossi Sheffi is a Professor at the School of Engineering at MIT and Director of the MIT
Center for Transportation Studies. He is the founder LogiCorp, a third party logistics
company, which was sold to Ryder Systems in 1994, and of PTCG, a scientific software
company, which was sold to The Sabre Group in 1996. He serves as a consultant to major
domestic and international transportation and logistics organizations. He is interests are
in operations research, advanced decision support systems, logistics process innovation,
and logistics management. He obtained his B.Sc. from the Technion in Israel and both his
M.Sc. and Ph.D. from MIT.

Peter Klaus, D.B.A./Boston Univ., M.Sc. (Transport)/MIT, Dipl.Kfm., is holder of the

Chair of Business Logistics at the Wirtschafts- und Sozialwissenschaftliche Fakultät of
the Friedrich-Alexander-Universität Erlangen-Nürnberg. He is also the director of the
Fraunhofer Anwendungszentrum für Verkehrslogistik und Kommunikationstechnik, an
institute for applied research in transport logistics and communications technologies of
the Fraunhofer Gesellschaft (FhG). FhG is a large semi-public research organization in
Germany. His specific academic interests are in the fields of the management of third
party logistics service providers, the application of organizational and behavioral science
concepts to logistics and management, and theories of logistics and other service
organizations. He is member of the boards of several transport and retail organizations
and also active in several professional organizations.

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