FIG: LOGISTICS ORGANIZATION DEVELOPMENT CYCLE

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.

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 th 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 controllership 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 controllership 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