Logistics Organization Design Principles

For logistics and supply chain management, a suitable organization structure needs to be devel­oped so as to achieve the desired performance level. The organizational structure should be con­sistent with the firm’s logistics strategy so that the desired performance can be achieved to fulfil the corporate vision and mission. The following commonly used organization principles should be kept in the mind:

1. Division of Work

Specialization allows the individual firms to build experience, improve their skills and enhance their productivity. Hence, the division of work in logistics in job functions such as transportation, warehousing, material handling, inventory control, packaging and customs clearance was thought of and put into practice.

2. Authority

It pertains to the right to issue commands to get the work done. The empowerment of the employee helps to carry out the responsibility assigned successfully.

3. Scalar Chain

Hierarchy is necessary for unity of direction. However, lateral communication is fundamental to all forms of communication in the organization.

4. Unity of Command

The principle of unity of command implies that an employee should receive orders only from one superior or boss. This will help avoid any conflicting orders.

5. Span of Control

This refers to the control of the number of subordinates a manager can effectively manage or super­vise. It requires the management to decide the degree to which logistics activities are grouped together in the same organization. In some organizations, the scope may be broad enough, as in a company that has grouped all logistical activities into a single function headed by the chief of logistics.

6. Authority and Responsibility

Allocation of authority and responsibility depends on the objectives set for the logistics functions. Authority is power derived from the rights that come with a position and which can be exercised to get a certain work done. Responsibility is accountability for the attainment of objectives, the use of resources and the adherence to organizational policy. Hence, this principle determines the hierarchy of organizational structure, specifying the accountability and power associated with each position in the logistical organization for the attainment of pre-determined results.

7. Line and Staff Relationships

Business firms do not create organizations that have line responsibility over goods movement and storage. The responsibilities are advisory in nature. This is called a staff function for the organiza­tion for logistics. In this case, the logistics manager is placed in a consulting role to the other line functions such as marketing and operations. Staff function is a good alternative when:

• Line function (logistics) would cause unnecessary conflicts among the existing personnel
• Logistics activities are less important than selling and producing
• A lot of planning is involved rather than administration
• Logistics is a shared service among the product divisions

The staff type of organization may be attached to any of the functional areas at a centralized or decentralized level. Normally, the logistics staff is located near the top management in terms of geographical location and also on the organization chart. Because the logistics staff has in an advi­sory role, authority that is more indirect can be given to logistics through this type of organizational positioning. Logistics and supply chain management is a multidisciplinary activity whose perfor­mance largely depends on the efficient coordination of other organizational functions. Hence, while designing a logistical organization structure, it is essential to define the mode of its interac­tion and coordination with other functions of the enterprise.

8. Centralization Versus Decentralization

In many organizations the activities are grouped close to the top management or dispersed throughout the divisions of the larger firms. For example, purchases of all manufacturing divi­sions of the company are done centrally at the company’s HO, while in some companies the marketing is decentralized across the strategic business units (SBUs) for different product groups. A centralized organization groups logistics activities at the corporate level for serving all product groups. On the other hand, the decentralized logistics organization puts the responsibility for logistics at the product group or division level. A separate decentralized logistics organization is established to serve each division.

In the centralized form there is close control over logistics activities, which is achieved by con­centrating all logistics activities for the entire corporation under a single director, so that the orga­nization can benefit from the efficiencies associated with the scale of activities that can occur. For example, Hindustan Lever has a centralized transportation division to supervise the entire goods movement of the company. Many firms, such as Coca Cola, have their own truck fleet. In such cases maximum utilization of equipment assets is the key to system efficiency. Through the centralized control of traffic activities of all divisions, a firm is in a position to maximize its fleet utilization and earn savings on transportation cost. Similarly, efficiencies can be gained through shared warehous­ing, shared purchasing and shared data processing.

In a decentralized set-up, the organization is more responsive. It allows for a quicker and more customized logistics response to customer needs than the centralized organization. The decentral­ized structure is more effective when product lines are distinctly different in their marketing, logis­tics and manufacturing characteristics, and when few economies of scale can be found.

In practice, organizations use a structure with a mixture of centralized and decentralized decision making processes. For example, although there is managerial interest in divisional and even regional autonomy among the operating units of a firm, technical advances such as computerized data pro­cessing have made it more efficient to have centralized order processing and inventory control. Thus, there is a diversity of organizational forms in practice to achieve each organizational goal.

In a nutshell, in centralization little authority is delegated to the lower level of management, whereas in decentralization a great deal of authority is delegated to the lower levels. If customer ser­vice is a priority of the organization, then it is essential to permit decentralization for quick customer responsiveness and satisfaction. For cost control, the centralization of authority is the best option.

9. Organizational Structure

Due to emergence of e-commerce and the Internet, virtual supply chain has become the extension of the information system beyond the conventional dimensions. The structure of the organizations has received a paradigm shift from hierarchical controls to electronic information network controls to achieve speed in decision making in competitive environment. Logistical organizations that have made the above shift are referred to as e-logistics companies. In these companies all logistics operations are carried out using e-commerce, except the physical movement of goods ordered. Such companies link the customers directly to the supplier and even to the supplier’s bankers and logistics partner. In the e-logistics organization, the supplier can respond on a real-time basis to the changes in the market and a vendor-managed inventory (VMI) system can be developed. This organizational structure enables firms to capture the benefits of an integrated logistics system with­out the command and control of the formal hierarchical organizational structure.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.