Prior to the 1950s,functions now accepted as logistics were generally viewed as facilitating or support work. Organizational responsibility for logistics was dispersed throughout the firm. This fragmentation often meant that aspects of logistical work were performed without cross-functional coordination, often resulting in duplication and waste information was frequently distorted or delayed and lines of authority and responsibility were typically blurred. Managers recognizing the need for total cost control began to reorganize and combine logistics functions into a single managerial group. Structuring logistics as an integrated organization first appeared in the 1950s.
The motivation behind functional aggregation was the belief that grouping logistics functions into a single organization would increase the likelihood of integration. The paradigm (model) was that functional proximity would facilitate improved understanding of how decisions and procedures in one area affect performance in other areas. The belief was that eventually all functions would begin to work as a single group focused on total system performance. This integration paradigm, based on organizational proximity, prevailed throughout a thirty-five year period. However, by the mid 1980s, it was becoming increasingly clear that the paradigm of functional aggregation might not, in final analysis, offer the best approach to achieve integrated logistics. For many firms, the ink had barely dried on what appeared to be the perfect logistics organization, when new and far more pervasive rethinking of what constituted the ideal structure emerged.
Almost overnight, the emphasis shifted from function to process. Firms began to examine the role logistical competency could play in the overall process of creating customer value. This ushered in new thinking regarding how to best achieve logistical performance. To a significant degree, the focus on process reduced the pressure to aggregate functions into all encompassing organization units. The critical question became not how to organize individual functions but rather how to best manage the overall logistical process. The challenges and opportunities of functional disaggregation and information driven integration began to emerge.
The mission of logistics is to position inventory when and where it is required to facilitate profitable sales. This supportive work must be performed around the clock and typically throughout the world, which means that logistics needs to be an integral part of all processes. The ideal structure for logistics would be an organization that performs essential work as part of the processes it supports while achieving the synergism of cross functional integration.
Information technology introduced the potential of electronic integration as contrasted to physically combining logistics functions. Using information technology to coordinate or orchestrate integrated performance allows the responsibility for work itself to be distributed throughout the overall organization. Integration requires that logistics combine with other areas such as marketing and manufacturing. For example, rather than focusing on how to relate transportation and inventory, the real challenge is to integrate inventory, transportation, new product development, flexible manufacturing and customer service. in order to achieve overall organizational integration, a firm must combine a wide variety of capabilities into new organizational units. This means that the traditional single function department must be assimilated in a process. Such assimilation often requires the traditional organizational structure be dissaggregated and then recombined in new and unique ways in one sense, such a functional disaggregation may appear to come full circle back to the early days of fragmented single-function departments. However, the critical differences in the emerging organization model are widespread availability of unbridled information. The new organization format is characterized by an extremely different culture concerning how information is managed and shared.
Understanding the organizational development process permits logistics managers to evaluate the firm’s current state of organization and plan changes that can be accommodated.
Stages of functional organization
Figure illustrates a traditional organizational structure with dispersed logistical functions. The initial belief was that integrated performance would be facilitated by grouping logistical functions normally spread throughout the traditional organization into a single command and control structure.. It was felt that these functions would be better managed, trade-offs better analyzed, and least-Total cost solutions better identified if all logistics work was integrated into one organization. In order for operational integration to occur, managers had to believe that performance could be improved.
Without this belief, they would continue to emphasize structure as opposed to management practice.
While the idea of functional integration is logical and appeals to common sense, it is not always supported by other unit managers. It is natural that any attempt to reposition management authority and responsibility will meet resistance. Many logistics executives can provide examples of how attempts to reorganize were met with rivalry and mistrust— not to mention accusations of empire building. Traditionally, in organizational structures, financial budgets follow operational responsibility. Likewise, power, visibility, and compensation result from managing large head counts and substantial budgets. Logistical reorganization, therefore, was typically seen as a way for logistical managers to gain power, visibility and compensation at the expense of other mangers. This also was ample reason for other managers to protect their power by resisting logistics functional integration. As a result, unified logistical organizations faces considerable resistance. But in an increasing number of firms, benefits were sufficient to empower reorganization. The resulting evolution typically involved three stages of functional aggregation.
STAGE 1 ORGANIZATION
The initial attempt at grouping logistical activities emerged during the late 1950s and early 1960s. Organizations with even a minimal degree of formal unification emerged only after senior management became committed to the belief that improved performance would result. The typical evolutionary pattern was for two or more logistics functions to be operationally grouped without significant change in the overall organization hierarchy. Such initial aggregation Occurred at both the staff and line levels of organization. Seldom were organization Units engaged in purchasing and physical distribution integrated during this initial development stage.
Figure illustrates a typical stage 1 organization. Although completely separate, physical distribution and material management units serve to aggregate related functions. As the potential of integrated logistics developed recognition within an enterprise, one or two clusters of unified operations emerged. In the marketing area, the cluster typically centered around customer service. In the manufacturing area, concentration was usually on inbound materials or parts procurement.. However, with few exceptions, most traditional departments were not changed and the organization hierarchy was not altered significantly. For the most part, stage 1 organizational change involved grouping functions within the traditional domains of marketing and manufacturing. The notable deficiency of stage 1 organization was a failure to focus direct responsibility for inventory.
For example, initial physical distribution organizations typically controlled warehousing, transportation and order processing. Few stage 1 organizations had direct responsibility to manage trade-offs between transportation and finished inventory deployment.
STAGE 2 ORGANIZATION
As the overall enterprise gained operational experience with unified logistics and cost benefits, a second stage of organization began to evolve. Figure illustrates stage 2, which began to emerge in the late 1960s and early 1970s. The significant feature of stage 2 was that logistics was singled out and elevated To a position of higher organizational authority and responsibility. The motivation was simple: Positioning logistics at a higher organization level increased the likelihood of strategic impact. Independent status allowed logistics to be managed as a core competency. A likely candidate for elevated status was physical distribution in firms where customer service performance was critical to overall success. The grocery manufacturing business was an example where materials management often increased in operational authority and responsibility because inbound materials and production were a major portion of product costs. Thus the focal group that was elevated to higher organizational prominence in the stage 2 organizations typically depended on the nature of the enterprise’s primary business. The example in the figure illustrates a situation wherein physical distribution was restructured and elevated.
In order to establish a stage 2 organization, it was necessary to reassign functions and position the newly created organization at a higher level within the overall enterprise structure. In the stage 2 organization, the concept of a fully integrated logistics unit was not achieved. Rather, integration was focused on either physical distribution or materials management. This failure to synthesize logistical management into an integrated system was due in part to a preoccupation with the performance of specific functions, such as order processing or purchasing, which were perceived as essential to traditional operations. A second limiting factor to total integration was the lack of cross — functional logistical information systems.. As a general rule, organizational integration reflected the information systems capability of the firm.
A significant point about the stage 2 organization is that integrated physical distribution and/or materials management began to gain acceptance among financial, manufacturing, and marketing counterparts. The other corporate officers viewed these integrated organization as something more than purely reactive efforts aimed at cost reduction or containment. In the stage 2 organizations, it was common for the integrated unit to become a primary contributor to business strategy. The stage 2 organization is readily observable in industry today and may well remain the most adopted approach to logistical facilitation.
STAGE 3 ORGANIZATION
Stage 3 organizations emerged in the 1980s the logistical renaissance began. This organizational structure sought to unify all logistical functions and operations under a single senior manager. Stage 3 organizations, having the comprehensive nature, were and continue to be rare. However, the trend at the stage 3 level of organization structuring is clearly to group as many logistical planning and operational functions as practical under single authority and responsibility. The goal is the strategic management of all materials and finished product movement and storage to the maximum benefit of the enterprise.
The rapid development of logistical information systems provided an impetus for stage 3 organizations. Information Technology became available to plan and operate systems that fully integrated logistical operations. Several aspects of the stage 3 organizations justify further discussion.
First, each area of logistics — purchasing, manufacturing support and physical distribution is structured as a separate line organization. The lines of authority and responsibility directly enabled each bundle of supportive services to be performed within the overall integrated logistical effort. Since areas of operational responsibility are well defined, it is possible to establish manufacturing support as an operational unit similar to purchasing and physical distribution. Each of these units is operationally self-sufficient. Therefore, each can maintain the flexibility to accommodate critical services required by its respective operational area. In addition, since overall logistical activities can be planned and coordinated on an integrated basis, operational synergies between areas can be exploited.
Second, five capabilities grouped under logistical support are positioned as operational services. This common service orientation is the mechanism to integrate overall logistical operations. It is important to stress that logistical support is not a staff organization. Rather, the group manages the day-to-day logistics work, which is structured with matrix accountability for direct liaisons between physical distribution, manufacturing support, and purchasing operations.
Third, logistical resource planning embraces the full potential of management information to plan and coordinate operations. Order processing triggers the logistical system into operation and generates the integrated database required for control. Logistical resource planning facilitates integration. The plans are based on product/market forecasting, order processing, inventory status, and capacity strategy to determine overall requirements for any planning period. On the basis of identified requirements, the planning unit operationalizes manufacturing by coordinating production scheduling, capacity planning, and materials requirement planning.
Finally, overall planning and controller-ship exist at the highest level of the stage 3 organization. These two efforts serve to facilitate integration. The planning group is concerned with long-range strategic positioning and is responsible for logistical system quality improvement and reengineering. The logistical controller is concerned with measurement of cost and customer service performance and with provision of information for managerial decision-making. The development of procedures for logistical controller-ship is one of the most critical areas of integrated logistical administration. The need for careful measurement is a direct result of the increased emphasis placed on customer service performance. The measurement task is extremely important because of te large operating and capital dollar expenditures involved in logistics.
The stage 3 logistical organization approach offers a single logic to guide the efficient application of financial and human resources from material sourcing to customer delivery. As such a stage 3 organization, stage 3 logistical positions a firm to manage trade-offs between purchasing, manufacturing support, and physical distribution.
STAGE FOUR: A SHIFT IN EMPHASIS FROM FUNCTION TO PROCESS.
Interdependent of functional aggregation or disaggregation it is clear that organizations are struggling to position their operating capabilities to better support oriented process management. Mckinsey Consultants, frank Ostroff and Doug Smith proposed architecture to illustrate how functional hierarchical vertical organization to transition to become a process oriented horizontal model.
The concept of 21st century organization is envisioned as the result of three factors: development of a highly involved work environment with self directed work teams (SDWT) as a vehicle to empower employees to generate maximum performance; second, improved productivity that results from managing processes rather than functions (this notion has always rested at the core of integrated logistics) and third, the rapid sharing of adequate information that allows all facets of organization to be integrated.
The essence for the argument for radical restructuring is that the traditional evolutionary concept of organization change is not sufficient to stimulate major breakthroughs in service or productivity. Rather, traditional change shifts the balance of centralization and decentralization or realigns operating structure between customers’ territories or products without any serious redesign of the basic work process. Because such restructuring typically assumes that functional organizations will continue to perform the basic work, little or no difference in actual practice results. In essence, companies are refocusing old business practices rather than designing new, more efficient processes.
The challenges of managing logistics as a process are three fold. First all effort must be focused on value added to the customer. an activity exists and is justified only to the extent that it contributes to customer value. Therefore, a logistical commitment must be motivated by a belief that customers desire a specific activity to be performed. Logistical managers must develop the capacity to rethink externally. Second, organizing logistics as part of process requires that all skills necessary to complete the work be available regardless or functional organization. Organizational grouping on the basis of selected functions can artificially separate natural workflows and create bottlenecks. When horizontal structures are put in place, critical skills need to be put into position to ensure that required work is accomplished. Finally, work performed in a process context should stimulate synergism. With systems integration, the design of work as a process means that overall organizational trade-offs are structured to achieve maximum output for minimum input investment.
The radical changes proposed by the shift from functional to process orientation have mixed messages for managers involved in logistics. On the positive side, general adoption of a process orientation builds on the basic principles of systems integration. At the core of integrated logistics is a commitment to functional excellence in the context of contribution to process performance. A general shift in managing logistics as a process means that it will be positioned as a central contributor to all initiatives that focus on new product development, customer order generation, fulfillment and delivery. The overall trend of process integration expands the operational potential and impact of logistics.
STAGE 5: BEYOND STRUCTURE: VIRTUALITY AND ORGANIZATIONAL TRANSPARENCY
It is highly unlikely that the attention being given to process will end management ‘s quest for the ideal logistical organization. While several different scenarios concerning the organization of the future are technologically feasible, one of the most intriguing is speculation
That formal hierarchical command and control organization structure will be replaced with an informal electronic network often referred to as a virtual organization. The word virtual implies an underlying existence without formal recognition. In other words, a virtual organization, whether it is a total enterprise or a specific core competency, would exist as a provider of integrated performance but not as an identifiable unit of in terms of the formal organization structure of their membership critical activities in an integrated fashion. These work teams could be transparent in terms of the formal organization structure of their membership. In other words, formal organization charts may not be related to actual workflow. In fact, logistics organizations of the future could not be characterized by functional disaggregation throughout the organization in an attempt to focus on workflow rather than structure.
THE NEED FOR INTEGRATION
Integration is required not just within the organization but integration upstream with suppliers and distributors and customers. This integration is logistical rather than “vertical”; in other words we do not imply ownership or domination of the supply chain but rather that there is a greater emphasis on the linkage of organizations through information.
The whole nature of logistics management has been dramatically changed by the information technology revolution. Information systems have now become the driving force pressurizing companies to reconsider their relationships with customers as well as suppliers. It is no longer possible to manage the business as if it were in a vacuum with no interconnections with other organizations.
By process integration we mean collaborative working between buyers and suppliers, joint product development, common systems and shared information. For some companies such ideas are yet unthinkable and yet the signs are clearly pointing to a future where it will be the extent and quality of supply chain, integration that will determine market place performance.
However in many industries the concept of process integration is increasingly accepted. For e.g. Over the last decade there has been a significant change in the way many car manufacturers in Western Europe have changed from fragmented, transaction focused businesses to highly integrated and relation ship based supply chains.