This is the second part of an article that seeks to discuss the role and importance of the logistics organization and its planning processes in the performance of logistics operations. While the first part of the article showed more theoretical concepts, this second part will present the results of a survey with seven consumer goods companies that aimed to ascertain the level of integration provided by their organizational structures and their logistics planning processes. Before we get into the survey results, it is important to take a step back and recall the main points of the previous article, as they will help to understand the motivations of the survey carried out.
- INTRODUCTION
First, we saw that three factors show the importance of the organizational structure in the integrated management of a company's logistics. They are: the multifunctional nature of the activities to be carried out; the expertise and focus needed to improve and maintain an integrated logistics operation; and strategic involvement in the management of the business as a whole. We show how the organizational structure in logistics evolves over time and with increasing operational complexity. Additionally, we suggest a method that helps to assess the level of formalization of the logistics area in a company.
It seems quite clear to us that the way a company structures its activities and distributes responsibilities has a significant impact on supply chain management. However, it is quite reasonable to assume that not all companies actually need a Supply Chain department – not only because of the size or complexity, but also because of the level of integration it achieves through other means. We understand that the strategy of grouping logistical responsibilities and activities under a single board (Logistics/Supply Chain) is one of the ways to promote chain integration. There are others that can have a very similar impact.
Management by processes, for example, is a way of managing the chain of activities without “getting attached” to departmentalization. Companies that manage their logistics by process often have professionals focused on, for example, requisition to stock or order to delivery. Another classic way of integrating supply chain management is the Sales & Operations Planning (S&OP) process, which is already widespread in organizations. Additionally, the most recent advances in chain integration are definitely those related to Information Technology.
Therefore, the organizational structure is an important point in supply chain management, but its assessment must be carried out considering its current and past context, as well as its relationship with other possible integration initiatives. We must also remember that, when it comes to organizational structure, there are “extra-technical” factors that influence the way it is presented: corporate culture, distribution of power, corporate structure, global (if multinational) structure, among others.
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| Figure 1 – Organizational structure evaluation dimensions |
From now on, we will focus on describing and analyzing the results of a benchmark survey conducted through interviews with seven large consumer goods companies operating in Brazil. Our objective was to understand how the organizational structure was characterized and its relations with the logistic planning processes.
- THE SEARCH
Seven companies operating in the consumer goods market were surveyed in order to ascertain the level of integration provided by their organizational structures and their logistical planning processes. Some features of sample1:
- Market leaders in Stationery, Cosmetics, Food and Beverages and Personal Care;
- All have an international presence; five are multinationals in Brazil;
- All operate with more than 300 simultaneous SKUs;
- Of the seven, six sell their products through three or more distribution channels.
Despite the qualitative nature of an organizational structure analysis, a methodology was developed so that the information collected in interviews with executives in the area could be compared numerically. Comparative scores were attributed between companies, according to the level of sophistication observed in several aspects. It is important to emphasize that this work is not intended to be a quantitative research (statistically). As a complement to the qualitative interpretation, we used a quantitative assessment of a few cases, allowing deeper comparisons. Additionally, we do not intend here to make a correlation between the level of logistics integration and the effective performance of companies. This correlation would indeed require statistical rigor.
Figure 1 shows the three dimensions evaluated and scored to classify companies in relation to the level of integration by structure.
Figure 2 shows how companies were scored in relation to the level of integration by structure.
In addition to the organizational structure, we asked questions related to the planning processes (another chain integration initiative). The evaluation of the logistics planning processes of the companies aimed to understand the degree of internal and external integration that they provide to the supply chain. Internally, the S&OP process was evaluated against a number of criteria. Externally, the existence of collaborative relationships with customers and/or suppliers was evaluated. Figure 3 lists the practices that demonstrate logistic integration by processes.
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| Figure 2 - Scoring method for organizational structure |
The scoring method used in evaluating the planning processes was relatively simple. For each evaluated aspect (Hierarchical Commitment, for example), three categories were created in which companies could be classified. These categories were created from observation of cases. The categories had scores linked to them (3, 2 and 1 points), representing a greater or lesser level of contribution to good management of the planning process.
For example: Assessing Hierarchical Commitment.
- Constant and close participation of the presidency (receives 3 points).
- Constant and close participation of the board (receives 2 points).
- Constant and close participation of area managers (1 point).
Using this method, companies received scores on the various aspects related to the S&OP process, internal/external integration and IT, as shown in Figure 3.
Additionally, we seek to understand the sophistication of the structure and processes in the context of the operational complexity in which they operate. Therefore, questions were asked and values were recorded in relation to factors that reflect the complexity of the chain to be managed. Scores were assigned based on the number of factories, distribution centers, suppliers with 80% of the volume, distribution channels, simultaneous SKUs in the market, new products/year, customers and number of invoices/year .
The analysis of the results allowed us to understand, in addition to the level of sophistication of the companies in relation to the organizational structure and planning processes, the common factors that characterize the best evaluated companies.
- RESULTS ANALYSIS
In assessing the organizational structure, companies were classified and plotted on a continuum, so that the most integrated had a higher score and vice versa. Separated by an overall average, two groups of companies are clearly identifiable. The dispersion found in Group 2 is much smaller than that found in Group 1, indicating that, in addition to being more integrated, the companies in Group 2 have common characteristics that differentiate them from the companies in Group 1. Figure 4 shows the placement of companies , where each letter represents a company.
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| Figure 3 – Evaluation dimensions of planning processes |
The analysis of the information indicates that the distance between the two groups can basically be explained by two factors: the amplitude of control over activities and the centralization of chain planning. Contrary to what one might imagine, the hierarchical level of the main logistics executive did not present a differentiating force, because all the companies in the sample had a Logistics/Supply Chain department.
On average, Group 2 companies scored 25% higher than those in Group 1 on “Must Have”2 activities. In the “Good to Have”3 activities, Group 2 obtained scores that are, on average, 71% higher than for Group 1 companies. This suggests that Group 2 companies have more control over Logistics/SC areas, not only on the chain's traditional planning activities, but also on activities that are normally the responsibility of other areas (“Good to Have” activities).
Additionally, in Group 2 companies, the decentralization of chain planning is less frequent and less intense than in Group 1. This finding came from observing the number of different areas (in addition to logistics) that have formal responsibility for the chain planning. Another aspect that helps to understand the differences: all the companies in Group 2 had a Planning/Project management, while none of the companies in Group 1 had one.
In summary, if a manager wants to increase the level of integration of his supply chain through a change in the organizational structure, he must start by increasing the span of control in the area, as well as his expertise to take care of planning.
In order to complement the understanding, we also analyzed the planning processes, especially the S&OP. In accordance with the analysis of the organizational structure, the companies were also scored and classified according to the degree of sophistication of their logistics planning processes. Figure 5 shows placement, where each letter represents a company.
The results indicated that two companies clearly stood out from the rest (Group 2 in Figure 5). Analysis of the information showed that these two companies:
- a) were significantly more sophisticated in the use of information technology, specifically in relation to the amount of advanced functionalities used (ERP), as well as the breadth of coverage in the chain. Their IT scores were always twice as high as other companies. The executives interviewed mentioned that the main improvements in management came from the standardization of information with the other areas of the company. Excel, however, is still widely used, both in Group 1 and Group 2 companies.
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| Figure 4 - Level of integration of the organizational structure |
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| Figure 5 – Ranking of sophistication and integration in processes/IT |
- b) were significantly more integrated with the next link in the chain (distributors and wholesalers) than the others. In the comparison of points, the other companies had scores 40% lower in the item “forward integration”. In general, the companies in the sample had few forms of structured communication and cooperation with their customers. The best evaluated companies cited their experiences, stating that the main challenges of integration with customers were the cultural aspect (trust) and systems integration.
- c) they mobilized practically all their areas (departments) around the chain planning process. According to the interviewees, the participation of the financial area in the planning process led to the inclusion of aspects such as margin/profit and capital employed in meeting demand. This vision complements the traditional focus on balancing capacity and service level. In general, at least the industrial, commercial and logistics/purchasing areas participate. Some common factors were identified among the seven companies, regardless of group. In the first place, all of them maintained a structured relationship with their main suppliers in the chain, reporting their needs for materials with reasonable regularity, through systems (but only in some cases was information on stocks shared). Second, they all used the performance indicators considered critical for good logistics management. This aspect was not critical for the differentiation of groups. Third, all companies interviewed cited the use of best practices regarding planning horizons. Finally, the level of communication with the logistics operators proved to be, in all cases, mostly operational.
- INTEGRATED ANALYSIS: STRUCTURE, PROCESSES AND COMPLEXITY
In addition to the partial conclusions about the organizational structure and planning processes, analyzes were carried out that allowed us to better understand the development of these integration “fronts” over time, as well as in their context of operational complexity.
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| Figure 6 – Timeline: integration by structure x integration by process |
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| Figure 7 – Integration x complexity matrix |
An important aspect of the results is that the histories of supply chain integration initiatives, in these seven companies, present a similarity: with the exception of Company D, all implemented the S&OP process only after a redistribution of activities and responsibilities between departments /directories. Most of the interviewed companies reported that integration by organizational structure, taking place first, allowed for better preparation of the Supply Chain area, before starting to involve other areas in chain planning. Figure 6 shows a timeline of this last decade and indicates that the future intentions of companies have a main focus on increasing external integration (mainly forward).
Understanding the organizational structure and integrating processes, however, will not be complete until the context of logistical complexity is also understood. In the various organizational structure diagnoses already carried out by the ILOS Institute team, a fact commonly found is the imbalance between the level of complexity of the operation and the level of integration/sophistication provided by the organizational structure. Sometimes, we encounter situations in which the company operates in a relatively simple chain, but has a Supply Chain department (very well equipped). Most of the time, however, the imbalance lies in an organizational structure that is not very integrative for a medium/high complexity chain (which is the worst case). In general, it is expected that the greater the operational complexity, the more integrating the organizational structure, the management processes and the technologies employed must be.
As explained earlier, the logistical complexity can be measured and evaluated according to several criteria, among them: the number of factories, distribution centers, suppliers with 80% of the volume, distribution channels, simultaneous SKUs in the market, of new products/year, of customers and number of invoices/year. There are other aspects that also contribute to the increase in complexity, such as the added value of the product, its loss ratio, number of imported items, among others, but in this work we limit ourselves to those previously listed.
In our sample, we made a comparative evaluation of the companies, plotting them in a continuum of complexity (vertical axis) and simultaneously in another continuum of general level of integration (horizontal axis). The latter is a composite result of integration by structure and integration by processes. Figure 7 shows the location of the companies surveyed in the matrix, indicating that most of them are positioned in a region of “good compatibility”, that is, the observed level of integration is adequate to the measured complexity. It is noteworthy that this is a comparative analysis for the companies in this sample. The result, however, corroborated the indication that the more complex the chain, the greater the need for integration (either through organizational structure initiatives, or through process integration initiatives).
5 Conclusion
Throughout this article (Parts 1 and 2), we seek to illustrate how the organizational structure can be a fundamental support for logistics management, doing so in a theoretical and practical way.
We have seen that the span of control of the Logistics Area/SC (as an organizational function, department) is a very important aspect in the way a company manages logistics. This is because the performance of a supply chain has an impact on several areas (production, commercial, financial) and its management must, therefore, be done in an integrated manner. Functional aggregation in logistics allows decisions to be made by evaluating the various logistical tradeoffs (transport costs x inventory costs, total cost x service level, etc.). Increasing, therefore, the area's span of control is one of the important ways to improve performance, by reducing the organizational interfaces (in the decisions that affect these trade-offs).
This functional aggregation, in our sample, was one of the critical success factors for the implementation of structured processes for planning and executing chain operations. The structure supports the processes (S&OP, for example). Functional aggregation, increasing the level of importance of a Logistics/SC Area, also imposes the need for specialization in different planning activities, improvement projects and operations. The use of information technologies in these activities also proved to be a critical success factor. The technology supports the processes (VMI, for example).
In summary, it seems reasonable to us to conclude that, in supply chain management, it is advisable to first seek to reduce the interfaces (by organizational structure) and then create a way to manage very well the interfaces that remain present (by processes and IT).
1 For reasons of confidentiality, information such as name, brands on the market, billing, etc., have been omitted. The operating segments are the main ones, as there are cases in which the companies' product lines belong to more than one segment.
2 Integrated Planning (S&OP), Distribution Planning, Distribution Management and Customer Service.
3 Demand Planning, Production Planning, Participation in R&D, Import and Export, Raw Material Replacement, Receiving, Shipping and Handling, Production.
