Need for Organization of Logistics

The traditional approach to managing a company was to take each functional area in isolation. So, the production manager managed his function to achieve his objective, which was probably achiev­ing the lowest unit cost of production. This was done by producing long runs of the same prod­uct. It invariably meant building up stocks of each product with the resulting inventory-carrying costs and loss of customer service. Similarly, the transport manager would optimize his function by achieving the lowest transport cost. It might mean using the cheapest mode of transport and inevi­tably this would be at the cost of service levels. The procurement manager would buy the cheapest, which would usually mean buying large quantities that would impact investment in inventory and the potential risk of damage or obsolete materials.

The principle of supply chain management is that the flow of materials needs to be managed as a whole. This means making the right trade-offs and avoiding the problems described above. The management of the entire flow of materials as a single unit is not possible without the proper orga­nization structure to facilitate the same. This involves having all logistics-related functions under the same management control.

Every firm or institution has recourse to logistics operations; at least to some degree. However, logistics matters are not equally important to all. Hence, the attention that can be given to logistics organization and to the organizational arrangement depends on the nature of logistics in a par­ticular firm. A firm spending a large fraction of its total operating costs on logistics, or one wherein logistics customer service levels are of great importance to customers, is likely to give logistics spe­cial organizational attention. The reverse is also true. The need for a given type of organization depends on how logistics costs are incurred and where service needs are the greatest. The organi­zational form may centre on materials management, physical distribution, or the supply chain. In each case, the need for organization varies among various industry types.

According to the need, there are basic choices in organization types such as informal, semi­formal and formal. No type is dominant. Organizational choice for any particular firm is the result of evolutionary forces operating within the firm. However, the logistics organizational form is often sensitive to the particular functional heads within the firm, the traditions regarding organization and the importance of logistics activities.

The major objective of logistics/SC organization is to achieve coordination among logistics activities for their planning and control. Given a supporting climate within a firm, this coordination may be achieved in a number of informal ways. These typically do not require any change in the existing organizational structure, but rely on coordination among activities and cooperation among those who are responsible for them.

For firms that have designated separate areas of responsibility for such key activities as trans­portation, inventory control and order processing, an incentive system can be created to coordi­nate them. The budget, which is a major control device for many firms, is often a disincentive to coordination. The budget can sometimes be turned into a mechanism for effective coordination. However, the budget may be a disincentive for a manager of transportation who may, for example, find it unreasonable to incur higher than necessary transportation costs in order to achieve lower inventory costs. Inventory costs do not fall within the transportation manager’s responsibility. The performance of the transportation manager is measured by how transportation costs compare with the budget. Hence, to encourage cross-activity cooperation in the organization, a number of cross charges or transfer costs need to be established among the various logistics activities.

As logistics planning and operation usually cut across the various functions within a firm’s organization, the semi-formal organization structure may be considered. The logistics manager is then assigned the task to coordinate projects that involve the supply chain and that cover several functional areas. This type of structure is often called a matrix organization. It exits in the industry where the work is executed as a project.

In a matrix organization, the logistics/SC manager is responsible for the entire logistics system, but he does not have direct authority over the component activities. The traditional organizational structure of the firm remains intact, yet the logistics/SC manager shares the decision authority and accountability with the activity area manager. Expenses for the activities must be justified by each functional department as well as by the logistics programme, which is the basis for cooperation and coordination. The logistics/SC coordinator may even assist in coordinating logistics activities among member firms of the supply channel beyond the bound­aries of his firm.

The disadvantages of the matrix organization are that the lines of authority and responsibil­ity become blurred. Conflicts may arise that cannot be easily resolved. However, for some firms this choice is a good compromise between an informal form and a highly structured one.

The formal organization establishes clear lines of authority and responsibility for logistics func- tion/SC. It places logistics in a superior position relative to logistics activities and places the man­ager’s authority in the organization’s structure on a level that allows effective compromise with the other major functional areas of the firm. This elevates and structures logistics personnel in a form that promotes activity coordination. Firms seek the formal organizational form when greater atten­tion is to be given to logistics activities. Structures of organizations are customized to circumstances within a firm. However a generalized formal organization makes good sense in terms of logistics management principles and its objectives.

Formal structure accomplishes several important ends such as:

• Logistics is elevated to a position in the organization where it is managed with the same authority as the other major functions
• Logistics activities receive the same attention as marketing, operations and finance
• The logistics manager has an equal voice in resolving economic conflicts
• Logistics if put on par with other functional areas creates a balance of power for the economic good of the firm as a whole
• Sub-functions can be created under logistics, as the technical skills required in each sub-area are substantially different

Therefore, the formal organization structure is a balance between minimizing the number of activity groups to encourage coordination, while separating them to gain effectiveness in the man­agement of their technical aspects.

The popular organizational form is the most formalized and centralized that is generally found in the industry today. It is a structure integrating both materials management and physi­cal distribution under a single banner. However, the basic model is useful, whether a firm orga­nizes its logistics operations around supply side activities, as in the case of many service firms, or around physical distribution activities, as in the case of many manufacturing firms.

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