EFFECT OF LOGISTICS MANAGEMENT PRACTICES ON OPERATIONAL EFFICIENCY AT MUMIAS SUGAR COMPANY LIMITED, KENYA CHAPTER 2

LITERATURE REVIEW

THEORETICAL REVIEW

Fugate Logistic Performance Model

The model created by Fugate et al. (2010), puts emphasis on the dimensions of efficiency, effectiveness and differentiation of logistics activities as determinants of logistics performance. Fugate et al. (2010) analyzed the relationship between logistics performance and organizational performance, stating that logistics performance is multidimensional and is a function of the resources used in logistics, according to outlined objectives and outcomes against competitors.

Conversely, Fugate et al. (2010) find firms that choose to combine efficiency and effectiveness achieve better performance than their competitors who choose only one of these dimensions, which is in line with what is stated by Seldin and Olhanger (2007).

Aramyan Model

This model, created by Aramyan et al. (2007), analyzes the supply chain of food products, using efficiency, flexibility, responsiveness and food quality as determinants of logistic performance. The Aramyan model is based on a literature review of the main methodologies for analyzing performance and contains the specific features of a food supply chain. The model structure is based on four categories of variables which, in the authors’ opinion, collect specific information about that industry. Based on these dimensions, Aramyan et al. (2007) theorized a conceptual framework for evaluation of logistics performance, which suggests dividing the analysis of logistics chain performance in four categories or clusters of indicators. The first category is, efficiency which seeks to measure how resources are used. This category consists of a set of logistical process indicators, such as distribution costs, transaction or possession of stock. The second category, flexibility, indicates the ability of the Performance Measurement System to respond to changes in the environment and exceptional customer orders. The third category, called responsiveness helps to promote what the customer wants in the shortest amount of time while quality, the fourth category represents the particular characteristics of the food supply chain, such as shelf life and product safety, among others.

Empirical Literature Review

Information Flow Management

The information in a supply chain can be classified in different ways; strategic or tactical; logistical or pertaining to consumers (Mentzer, 2004). Effective inter-organizational communication could be characterized by frequent, genuine and involving personal contacts between buying and selling personnel (Krause & Ellram, 1997). Lee & Whang (2000) discuss various types of shared information and their potential benefits. For example, sharing order status can improve the quality of customer service, reduce payment cycles and reduce labor cost. On the other hand, information sharing on forecast demand of products that have high demand variability is significant in assist reduce stock out and over-stocking related costs whereas sharing information on market knowledge can help improve advertisement. While sharing information, it is important to consider the level of benefit to the users and timeliness; delayed transmission of information increases the effects of volatility afflicting the upstream level of supply chain.

There is possibility that some companies might not want to share their detail data with partners, fearing that the data could leak to their competitors (Foerstl et al, 2010). Information-enabled collaboration reduces costs across the chain while enhancing customer service and value. Unfortunately, few companies have fully harnessed information’s ability to enhance SC performance (Fawcett et al, 2007).Advances in information technology have changed modern business practice, making collaborative supply chain management possible (Chatfield et al, 2004). Information’s competitive value is widely heralded it substitutes for inventory, speeds new product design, shortens order fulfillment cycles, drives process re-engineering, and coordinates SC activities (Hult et al., 2004).

Warehousing Management

Warehousing refers to the activities involving storage of goods on a large-scale in a systematic and orderly manner and making them available conveniently when needed. Warehousing is one of the important auxiliaries to trade. It creates time utility by bridging the time gap between production and consumption of goods. According to Lambert et al. (1998) they contribute to a multitude of the company’s missions, like; Achieving transportation economies (e.g. combine shipment, full-container load), achieving production economies (e.g. make-to-stock production policy),taking advantage of quality purchase discounts and forward buys, supporting the firm’s customer service policies, meeting changing market conditions and uncertainties (e.g. seasonality, demand fluctuations, competition), overcoming the time and space differences that exist between producers and customers, providing temporary storage of material to be disposed or recycled (i.e. reverse logistics).

Tompkins et al., (2003) cites the typical warehouse functional areas and flows as; receiving, staging for cross-docking, reserve, forward and shipping. Receiving, transfer and put away, order picking, cross-docking, and shipping. Order picking is the most labor-intensive and costly activity of most warehouses. Approximately 55% of the total warehouses operating expenses are related to order-picking operations (Bartholdi & Hackman, 2011). According to De Koster (2004), the most common order picking system is picker-to-parts systems, in which the order pickers walks or drives along the aisle to pick items.

Warehouse layout is also important in achieve greater efficiencies. Minimizing travel time between picking locations can greatly improve productivity. However, to achieve this increase in efficiency, companies must develop processes to regularly monitor picking travel times and storage locations. Warehouse layout is one important factor affecting the order picking process. Caron et al, 2000 find that the warehouse layout has a considerable effect on order picking travel distance. They point out the layout design has an effect of more than 60% on the total travel distance, and also find the relationship between warehouse layout and order picking travel distance(Bartholdi & Hackman, 2011). Warehouse operations that still use hard copy pick tickets find that it is not very efficient and prone to human errors. To combat this and to maximize efficiency, world class warehouse operations have adopted hand-held RF readers and printers. Companies are also introducing pick-to-light and voice recognition technology (Tsige, 2013).

Physical Distribution

Physical distribution is a whole process that concern also materials and finished product, a physical (spacial) movement of goods from the manufacturers to intermediaries and finally to the ultimate consumer. Distribution accomplishes this by providing time and place utility, in other words, availability and its goals are like any other marketing goals: consumer’s satisfaction and profit for the firms (Muhscina, 2008). There are various routes that products or services use after their production until they are purchased and used by end users. These channels are referred to as distribution channels or marketing channels. Therefore, distribution channels are all those organizations that a product has to go through between its production and consumption (Kotler et al, 2006). Distribution channel management is very critical for the firms when they decide to enter one or more markets. In accordance with Gattorna and Walters (1996), depict that distribution channel management follows a structured approach, using criteria which help to evaluate optional channel structures during which alignments, trade-offs and channel relationships are considered. Increasingly, the roles of logistics service firms are included in the decision process for distribution channel, especially when they are a dominant element within the supply chain. Figure 1 below represents the most common distribution channels for consumer goods. There are 3 degrees of intensity of distribution namely; selective, intensive and exclusive distributions with their application relying on the nature of the product and market type (Etzel et al, 2004).

Transportation management

Transportation can be defined as the act of moving goods or people from an origin to a required destination. It also includes the creation of time and place utilities. Transportation plays a key role in the supply chain, because without the efficient movement of finished goods and raw materials the entire system would not be able to work at its full potential (Randall et al., 2010). According to the investigation of National Council of Physical Distribution Management in 1982, the cost of transportation, on average, accounted for 6.5% of market revenue.

The modes of transportation can be divided into five: rail, road, air, water and pipeline. Intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation (rail, ship, air, water and truck), without any handling of the freight itself when changing modes. The method reduces cargo handling, and so improves security, reduces damages and losses, and allows freight to be transported faster (Cavinato et al., 2007).The goal for any business owner is to minimize transportation costs while also meeting demand for products. Transportation costs generally depend upon the distance between the source and the destination, the means of transportation chosen, and the size and quantity of the product to be shipped. In many cases, there are several sources and many destinations for the same product, which adds a significant level of complexity to the problem of minimizing transportation costs (Lambert, 2004).

Figure 2. Conceptual Framework