Boosting Operational Excellence in Logistics

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Boosting Operational Excellence in Logistics

Sanna Hartikainen

Master’s thesis June 2019

The School of Business

Master’s Degree Programme in International Business Management

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Author(s)

Hartikainen, Sanna

Type of publication Master’s thesis

Date June 2019

Language of publication:

English Number of pages

73

Permission for web publication: x Title of publication

Boosting Operational Excellence in Logistics

Degree programme

Master’s Degree Programme in International Business Management Supervisor(s)

Anne Mäntysaari Assigned by

Anonymous case company Abstract

Continuous improvement, efficiency, positive and empowered employees, commitment to quality, innovativeness and meeting customer expectations are some of the words

describing operational excellence. It has a different meaning in every organization, but the most important of its aspects is realizing how the chain of activities inside an organization influences on the value that they bring to the customer. Operational excellence focuses on the development of business operations and the related activities. In a larger context, it is a driver of economic growth.

Given the nature of the research objective, a qualitative research approach and a multi- method case study were selected for the study. In addition, in order to gain a deeper understanding of the case company’s value chain, a documentary analysis was conducted, and certain key employees were interviewed. McKinsey’s 7-S framework were used as the theoretical framework for the research.

The research results showed that the main challenges in gaining operational excellence were related to very traditional problems in organizations: unclear processes and responsibilities, inaccurate demand planning and ever-changing customer needs, communication between internal and external customers and keeping up with the new technologies. The research also revealed that when everyone in the organization shares the organization’s values, it’s possible to succeed although strategic targets are not clear.

Based on the study, several development ideas were proposed, such as creating standard work flows charts, crystallizing the responsibilities, visualizing the process areas to identify how they could proceed, enhancing communication, creating operational excellence management system and creating a culture of operational excellence inside the

organization. Following suggestions for future research was given: how the digitalization can drive operational excellence, how the monitoring influences on operational excellence and what pros and cons it may have and how the organizational changes influence to operational excellence.

Keywords/tags (subjects)

Operational excellence, logistics, supply chain, value chain, customer satisfaction Miscellaneous

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Tekijä(t)

Hartikainen, Sanna

Julkaisun laji

Opinnäytetyö, ylempi AMK

Päivämäärä Kesäkuu 2019 Julkaisun kieli Englanti Sivumäärä

73

Verkkojulkaisulupa myönnetty: x Työn nimi

Operatiivisen erinomaisuuden tehostaminen logistiikassa

Tutkinto-ohjelma

Master’s Degree Programme in International Business Management Työn ohjaaja(t)

Anne Mäntysaari Toimeksiantaja(t)

Anonyymi toimeksiantaja Tiivistelmä

Jatkuva parantaminen, tehokkuus, positiiviset ja vahvat työntekijät, sitoutuminen laatuun, innovatiivisuus ja asiakasodotuksiin vastaaminen ovat joitain sanoja, jotka kuvaavat operatiivista erinomaisuutta. Sillä on eri merkitys jokaisessa organisaatiossa, mutta tärkeintä on ymmärtää, miten organisaation sisällä oleva aktiviteettien ketju vaikuttaa arvoon, jota ne tuottavat asiakkaalle. Operatiivinen erinomaisuus keskittyy liiketoiminnan ja sen aktiviteettien kehittämiseen. Laajemmassa yhteydessä se edesauttaa talouskasvua.

Tutkimustavoitteiden luonne huomioiden valittiin kvalitatiivinen tutkimusmenetelmä käyttäen monimenetelmäistä tapaustutkimusmetodia. Lisäksi, jotta pystyttiin

muodostamaan syvempi ymmärrys toimeksiantajayrityksen arvoketjusta, tehtiin dokumenttianalyysi sekä haastateltiin osaa yrityksen avainhenkilöistä. McKinseyn 7-S viitekehystä käytettiin pääasiallisena teoreettisena runkona tutkimustyössä.

Tutkimustulokset osoittavat, että tärkeimmät haasteet operatiivisen erinomaisuuden saavuttamisessa liityvät hyvin perinteisiin ongelmiin yrityksissä; epäselvät prosessit ja vastuut, epätarkka kysynnän suunnittelu ja jatkuvasti muuttuvat asiakastarpeet,

kommunikointi sisäisten ja ulkoisten asiakkaiden välillä sekä uusien teknologioiden mukana pysyminen. Tutkimus paljasti myös, että kunhan kaikki organisaatiossa jakavat sen arvot, on mahdollista menestyä, vaikka strategiset tavoitteet eivät ole selkeitä. Tutkimuksen perusteella annettiin useita kehittämisideoita kuten vakio työvirtakaavioiden luominen, vastuiden kirkastaminen, prosessin osa-alueiden visualisointi niiden etenemisen

tunnistamiseksi, kommunikoinnin tehostaminen, arvovirtakuvauksien luominen prosessin eri alueille, operatiivisen erinomaisuuden hallintajärjestelmän luominen ja operatiivisen erinomaisuuden kulttuurin luominen yrityksen sisällä. Jatkotutkimusehdotukseksi

annettiin: miten digitalisointi edesauttaa operatiivista erinomaisuutta, miten monitorointi vaikuttaa operatiiviseen erinomaisuuteen ja mitä etuja ja haittoja sillä voi olla sekä miten organisaatiomuutokset vaikuttavat operatiiviseen erinomaisuuteen.

Avainsanat (asiasanat)

Operatiivinen erinomaisuus, arvoketju, toimitusketju, logistiikka, asiakastyytyväisyys Muut tiedot

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1 The importance of logistics

The history of mankind shows that wars have been won through logistics strenghts and capabilities or lost due to lack of them. Strangely business organizations have not knowlidged the importance of logistics in gaining competitive advantage until

recently. (Christopher 2005, 3.) The definition process of the responsibility of logistics function and altering the service networks towards customer’s needs, is still a work in process in many companies. More tasks will be done by logistics in the future which increases the importance. Customer expectations have changed so that they are not only demanding perfect order and high delivery reliability, but the

requirements are shifting to more customized and complex solutions. (Waters &

Rinsler 2014, 29-35.)

The company’s processes which increase customer’s satisfaction, has receipt growing recognition in recent years. These processes enables the development,

manufacturing and delivery of product or service to the customer. The crucial processes are connected together by the logistics concept of an organization and it provides the basis for the systems which will deliver value to the customer in a cost- effective way. Due to this, there has been a dramatic change in the interest towards logistics as a core business activity. (ibid., 1.)

The consciousness of customers towards value has raised due to recession in many business fields combined with competition. Value doesn’t necessarily mean just value for money, it can also mean perceived benefits for the customers which are increasingly demanding products with added value. It has forced the organizations to find ways to achieve precisely that. (ibid., 1.)

Some changes to logistics strategies of multinational companies were started already in 1970’s as a result of the global economic development. In today’s globalized

world, the entire logistics chain requires maximum attention. (Cuturela & Manole 2013, 196-197.) Effective logistics management has been recognized as a key opportunity to improve both the profitability and competitive performance of companies. The focus has changed to be more customer-driven than ever before in the history of logistics (Lambert 1998, 11). The trend continues strongly as the same

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still in these days. The Internet, just-in-time operating procedures, and continuous replenishment of inventories have all contributed to customers expecting rapid processing of their requests, quick delivery and a high degree of product availability (Ballou 2004, 14-15.). A lot of added value can be created to customers by knowing the content of logistics. It’s not just an action which transfers materials from one point to another (Sakki 2003, 23.).

The technological change and the globalization of markets are the driving forces for the expression “new economy in logistics and supply chain management”. The nature of competition has developed to be broader when there’s only one supply chain with many interconnected links to other organizations. (Brewer, Button &

Hensher 2008, 2.) Major changes have been required from logistics over the past 20 years due to market changes (Waters & Rinsler 2014, 29).

1.1 Changing business environment

The business environment is changing rapidly partly because of the e-business development and partly due to competition and globalization. In order for the companies to succeed, they must be able to adapt quickly to change if they wish to compete and survive. Specific capabilities is required for being adaptive such as the ability to recognize events, the status of customers, partners, competitors and the global environment. A vital component for tomorrow’s organizations will be agility if changes are to be managed, challenges to be confronted and a competitive edge to be preserved. (Chang, Makatsoris & Richards 2004, 417-418.)

Labor productivity is one factor influencing on the development of political economy and its one of the most important objectives for the economic policy. The challenge is that the labor productivity is difficult to achieve quickly and easily through the economic policy. Only way to influence is through organization’s and through productivity growth gained in organization’s. (Maliranta 2015)

Logistics have a a big role in a company and therefore it’s vital for the business leaders to understand and recognize its importance. The basis of success in any competitive environment derives from the organizations’ possibility to differentiate itself from its competitors. From customer’s perspective, the company’s competitive

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advantage usually is either a cost advantage or a value advantage, or a combination of the two which gives the product or offering something extra when comparing to competitors. (Christopher 2005, 6-8.)

The companies that will survive, will be the ones which understand shifting market dynamics and are able to harness new digital technologies to design powerful experiences to both customers and employees. Focus is on making processes simplier, easier and better. Addition to the these basics, it requires looking at how emerging technologies can enable new ways of delivering value, releasing employees for more productive and creative tasks. In order to drive desirable values, business processes will need to become engaging and understanding on how to help people, whether its customers or employees. (The PEX Network 2017, 7.)

In figure 1, is seen the key forces of business change in the decade ahead according to study conducted by the PEX Network:

Figure 1 The key forces of business change in the decade ahead (The PEX Network 2017, 11)

Digitalization has had far reaching consequences in enabling new ways of working.

Also the demographics of both customers and employees have changed enormously which have raised new opportunities for process change but at the same time increased the pressure towards business to raise productivity and efficiency. The

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Millennial generation (people born between 1980-2000) are becoming increasingly high-performance demographic which puts pressure on businesses to simplify, automate and speed up processes. Slowing population and economic growth drives the doings towards being more efficient and innovative. (The PEX Network 2017, 9- 12.)

It will be harder for companies to maintain their competitive advantage without improvements done in products and services and how they are delivered. Process and operational excellence will be in a critical role enabling the organizations to innovate. (ibid., 14.)

1.2 Motivation for the research

The landscape for logistics have changed tremendously in the last decade. The goals for the logistics work have increased. It’s not enough anymore to manage cost and performance. There are also other, often conflicting objectives like risk mitigation, sustainability and innovation which require focus. Based on the study for key supply chain executives by Handfield, Straube, Pfohl and Wieland (2013, 11), logistics cost is still one of the critical goals. The study also states that delivery reliability is not what it should be and what customers expect. (Handfield et al. 2013, 11.)

Now a days global logistics business field is characterized by increasing complexity and the speed of change of these parameters is overwhelming. The figure 2 shows the importance of top trends identified by the global supply chain executives (ibid.

2013, 14.):

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Figure 2 Importance of Logistics Trends (Handfield et al. 2013, 11)

In order to cope and gain competitive advantage in the business and the complex environment, organization’s need operational excellence to maximize value for the customers as well for its own organization. Companies can develop efficient systems and employees can focus on fixing challenges as soon as they arise with operational excellence. (Martin 2017.)

This research studied the ways company can enhance its operational excellence in logistics in order to bring value to the customer and increase customer satisfaction.

When gathering information from various sources, it was discovered that this has been the aim of number of studies in the past decades but a study with the exact same scope wasn’t found. One reason might be that organizational studies are confidential and not shared among public audience due to the direct link to company’s strategy and the competitive advantage of a company.

There are various reasons why organization’s fail in delivering operational excellence and various ways (methods, tools, concepts and principles) how the perfomance can be improved. It’s all about organization’s strategy, business field it operates and how it acts, what are its offerings and what is the customer base like. All of these issues have big influence on which bring the most value and competitive advantage to the organization. From operational excellence improvement point of view, the most

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problematic thing is to decide how to apply the various improvement ways the most effective way in order to gain the best results. Although there are lot of studies conducted, the topic is still very current locally, nationally and globally due to the rapidly changing business environment and the main goal for every organization – to maximize the value it provides to its customer and itself.

This research was assigned by anonymous case company operating in the technology industry. The company is providing energy metering technology, smart metering systems and services and energy service devices. Characteristic for the business industry is regulations set by the governments of different countries. The company acts in a highly regulated business. Project contracts are long (10-20 years) and very expensive also for the customers to run. The relationship with the customer is therefore long. Major part of the sales deals are done through public acquisitions with additional restrictions and responsibilities. The main customers are in the Nordics where the company is a market leader. The customers are only companies, business to business transactions, although the end user of the hardware products are consumers. From that point of view, the case company is interlinked to

consumers in addition to several organization’s. Materials for the products are coming all over the world. The company relies heavily on partnering and outsourcing which makes the overall supply chain global.

The company is fairly young, established in 2004, but have already experienced a lot.

In figure 3 can be seen the case company’s net sales change percentages in years 2012-2016:

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Figure 3 The case company's net sales change% in years 2012-2016

As seen from the figure 3, after 2012, the company went through a more challenging period when all the company’s operations and the whole logistics and supply chain needed to be adjusted to the decreasing sales and volumes. Starting from 2014, the company achieved fast growth and operations and the whole logistics and supply chain needed to be adjusted again to the increasing sales and volumes. It can be said that company has went through many changes during the last years with both negative and positive learnings. In 2017, the company deployed a new strategy where one focus point was on operational excellence and the work continues still.

Therefore, the relevancy of this research for the case company is obvious.

1.3 Research questions

As described earlier, in order to be profitable in the now a days complex business environment, organization’s need to focus on operational excellence in order to maximize value for the customers as well for the own organization. In this research, instead of focusing on the whole organization, the main focus is on logistics due to it’s seen as the linkage to other operation’s in organization and thus a critical function for delivering value. Therefore, the main focus of this study is to answer to the following research question:

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- How to enhance operational excellence in logistics in order to bring value to the customer and increase customer satisfaction?

The supporting research questions for the study are:

- What are the main issues and challenges in the case company’s logistics function?

- What are the key value drivers to quide the operational excellence performance in logistics in the case company?

The objective of this research is to identify the inputs in the case company’s logistics function which create value for the customers and enhance operational performance and ultimately bring profit to the company.

This research is expected to be of interest to any managers, for both profit and non- profit organizations, operational personnel and to all, who wants to increase their understanding about operational excellence. It’s hoped also that this research will shed light to all organizations struggling with operational efficiency and performance.

1.4 Structure of the thesis

As seen in figure 4, the thesis is divided into five main chapters:

Figure 4 Structure of the thesis

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Chapter 1 focuses on giving a detailed overview of the research topic by describing the backround and motivation of the subject, introducing prior research and presents the objectives as well as research questions.

Chapter 2 contains a literature review. It starts by introducing the reader to the concepts of customer satisfaction, value chain, supply chain, logistics chain and how they are synchronized. It will also describe the concept of operational excellence in the light of the context of this study. Finally it also describes the theoretical

framework of the study.

Chapter 3 describes the research methodology including research approach and research design as well as data collection and data analysis methods. The chapter explains also the concepts of the research’s validity and reliability.

Chapter 4 presents the research results in the light of the theory presented. It will also have researcher’s interpretations of the findings.

Chapter 5 focuses on summarizing the findings. It also includes discussion about how well the answering to the research questions and objectives is achieved, the

limitations of the research and suggestions for future research.

2 Logistics as a competitive advantage

This chapter contains a review of literature which is related to the concept of operational excellence in logistics. The main elements customer satisfaction, value chain, supply chain, logistics chain and operational excellence concepts are

presented in this chapter as own sub chapters. The last sub chapter describes the theoretical framework for the study, the McKinsey 7-S Model.

2.1 Customer satisfaction

One of the most important aspect in building a long-term functioning relationship with a customer is customer satisfaction. It’s been studied that the probability of doing business again increases in 81 per cent of the cases if customers have a

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positive experience. When customer trusts to the company, who in addition delivers value to the customer through transactions, it increases the satisfaction and finally might lead to customer loyalty. (The Importance of Customer Satisfaction 2017.) Customer loyalty is related to customer relationships and can be associated to satisfaction of each customer (Peppers & Rogers 2004, 30). One of the main drivers of corporate growth is customer loyalty (Pacelli 2011).

Companies need to investigate their customer’s interests towards their products and services in order to understand customer’s behavior and expectations (Pacelli 2011).

Customer satisfaction measures how a company meets or exceeds a customer’s expectation when product or service is supplied. It provides important information to business (or process) owners how to manage and improve their businesses.

Customer satisfaction is also seen as a key differentiator. According to Accenture’s global customer satisfaction report (2008), the overall poor quality of customer service is the main reason for customer’s getting confused. (Beard 2014.) As a result, this may lead to the ending of the customer relationship. Therefore, conducting customer satisfaction surveys is essential in today’s business environment (What is Customer Satisfaction? 2017).

Also correlation between customer satisfaction and organizational performance have been recognized. The supplier company is more motivated, satisfied and committed when there’s also high customer satisfaction. (The Importance of Customer

Satisfaction 2017.) This even increases the value of making customer satisfaction surveys.

In now a day’s business landscape, the customers are more demanding, and companies are facing totally different competitive environment as the information about their customers is coming more abundant. Technology is helping to harness this information in order to serve the customers better. New technologies and applications make it easier for the companies for delivering individual service and assist in managing their interactions with customers. (Peppers & Rogers 2004, 8-9.) One of the driving forces of logistics is customer satisfaction. Two factors are crucial;

costs and lead time. Efficiency and leanness is connected to low cost when short lead

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times are connected to customer service and agility. Lean logistics aims at a more efficient flow of materials by making deliveries faster, keeping stock levels low, reducing handling time and lower costs. Agile logistics aims to be flexible in order to provide a customized service and respond quickly to changing demands. (Waters 2009, 38, 42-43.)

The challenge for logistics is to support in the development of customer loyalty by delivering quality of service. Product quality and price are much easier for

competitors to copy than service quality as seen in figure 5 by Parasuraman and Grewal (2000) for describing key drivers of customer loyalty (Harrison & Hoek 2011, 52.):

Figure 5 Key drivers of customer loyalty (Harrison & Hoek 2011, 52, modified)

Today’s customers expect to have more. Premium product quality is not enough; also service quality needs to meet the customer’s expectations. (Christopher 2005, 37.) According to Harrison and Hoek (2011, 52), Johnston and Clark (2005) see following benefits of loyal customers: gives long-term revenue streams to the company, characteristic is to buy more than new customer and increase spending over time, may be willing to pay higher price and brings cost savings compared to alluring new customers. Potentially the benefits of customer loyalty are seen as huge. (Harrison &

Hoek 2011, 52).

The success of every organization ultimately depends on achieving loyal customers who are satisfied. Therefore, it can be said that companies should organize logistics in such way that customer satisfaction can be achieved. Designing must be made

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carefully though due to any organization can give outstanding customer service if there are enough resources. It should be noted that resources cost money and higher customer service comes at a higher price. Only rarely customers are willing to pay extra for the service so more realistic aim for logistics is to find balance between service and cost. (Waters 2009, 16.)

2.2 Value chain

The environment, where business operates, is increasingly dynamic and challenging.

Globalization of markets, increase of technology and interconnections with suppliers, customers and competitors are going through changes everywhere. (Walters &

Rainbird 2004, 219.) Value chain business models are often used among companies who are seeking competitive advantage and ways to find cost savings and

differentiation possibilities in the production cycle. Customer demands grow in complexity also due to competition in the market increases which influences on the profit earning capacity and possibilities. (How Your Business Can Benefit from Value Chain Modeling 2019).

The concept of the value chain as an organization analyzing tool was first introduced in 1985 in Michael Porter’s book “Competitive Advantage”. For delivering

competitive advantage and competing in a particular industry, it’s necessary to define the value chain for the organization. The value chain is collection of the activities (design, produce, market, deliver and support) which are used in the organization’s product what it delivers to its customers. (Porter 1985, 36, 45.)

The goal for any generic strategy is to create value for buyers which exceeds the cost.

Every organization have a value chain of their own which is key source for bringing competitive advantage to the organization. The value chain consists of value activities and margin which shows the total value of the value chain. Margin is the difference between cost of performing the value activities and total value but can be measured also other ways. Physical and technological activities what the

organization performs are considered as value activities. Information is used and created through every value activity. Porter divides the value activities into two types; primary and support activities as seen in figure 6. (ibid., 38-39.)

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Figure 6 Porter's Generic Value Chain (Porter 1985, 37)

Primary activities are the activities used in the creation of the product and its sale and transfer to buyer. Support activities are supporting the primary activities and each other. Primary activities are divided into five generic categories; Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Service. (Porter 1985, 38-39.)

Inbound Logistics. Activities related to receiving, warehousing and distributing inputs to the product, for example material handling, storing, inventories and returns to supplier. (ibid., 39-40.)

Operations. Activities related to transforming the inputs into final products, for

example production, packaging, testing and equipment maintenance (ibid., 40.) Outbound Logistics. Activities related to collecting, warehousing and distributing the physical product to buyers, for example finished goods storing, order processing and scheduling. (ibid., 40.)

Marketing and Sales. Activities related to providing information to buyers on how they can purchase the product, for example offering, customer channel selection, pricing and promotion. (ibid., 40.)

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Service. Activities related to improving or maintaining the value of the product, for

example installation, training, repair and spare part delivery. (ibid., 40.)

Support activities are divided into four generic categories; Procurement, Technology Development, Human Resource Management and Firm Infrastructure (Porter 1985, 40).

Procurement. Activities related to purchasing raw materials, suppliers, equipments and buildings. The procurement activity tends to spread in the organization due to several person’s being responsible of the different purchasing items. The activity usually has large affect on the organization’s cost structure and differentiation possibilities. (ibid., 41.)

Technology Development. Activities related to know-how, procedures and technology required in process equipment and in the development of the sellable product. It’s an important activity to bring competitive advantage. (ibid., 41-42.) Human Resource Management. Activities related to recruiting, training and development of personnel. It’s a supporting activity for primary and supporting activities as well as for the entire value chain. In any organization, human resource management largely influences on the organization’s competitive advantage through skill, motivation and cost of employees. (ibid., 42-43.)

Firm Infrastructure. Activities related to for example general management, finance, accounting and quality management. Unlike other activities, the Firm Infrastructure activity supports the entire chain and not individual activities. The activity is often seen only as “fixed cost” but can be also a robust way to differentiate and bring competitive advantage. (ibid., 43.)

The value activities can be considered as the building blocks of organization’s competitive advantage but value chain is not build through independent activities.

Value chain is a system of interconnected activities which can lead to competitive advantage through optimization and coordination. (Porter 1985, 48.) The term “value chain” unfortunatelly is sometimes misused or mixed up with other concepts such as supply chain (Walters & Rainbird 2004, 338).

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Since the development of the value chain model, there have been changes in business thinking. The model hasn’t been revised since it was established and it’s missing some key aspects such as company culture which encourages the

interconnection between activities. In addition, through the development of supply chain management concept over the past decades, procurement is now a days more than support activity. It has direct impact on how organization’s can bring value to the market and therefore, procurement should be seen as primary activity. Acquiring and moving materials has become a key strategic advantage. (Presutti & Mawhinney 2013, 1, 3-4.)

2.3 Supply chain

Supply chain management is perhaps one of the fastest growing fields of knowledge within the last decades. Some business executives have described it as the last goldmine for achieving competitive advantage over organizations competing with each other. New ways for delivering cost leadership and customer satisfaction are daily being explored by supply chain management professionals in every part of the world. The technological change and the globalization of markets are the driving forces for the expression “new economy in logistics and supply chain management”.

(Brewer, Button & Hensher 2008, 2.)

Supply chain is the series of activities and organizations needed in order to move material from initial suppliers to final customers. All products have own, unique supply chains. (Waters 2009, 9.) Harrison and Hoek (2011, 7) defines the supply chain as follows: “A supply chain is a network of partners who collectively convert a basic commodity (upstream) into a finished product (downstream) that is valued by end customers, and who manage returns at each stage”. In the concept of a supply chain, series of processes are linked together in order to form a chain. According to

Harrison and Hoek (2011, 9), Slack et al. (1997) defines the supply chain as a number of processes that extend across organizational boundaries (figure 7 below):

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Figure 7 Supply network (Harrison and Hoek 2011, 9)

The “Buy side” can be referred also as “Inbound logistics”, the “Inside” can be referred as “Internal logistics” and the “Sell side” can be referred as “Outbound logistics”. Materials flow from left to right. The aim for a supply chain is to keep materials moving from source, from first-tier or second-tier suppliers, to end

customer as fast as possible. The flow must be orchestrated so that parts movement is coordinated in order to prevent local inventories. The goal is to have continuous flow. It might be hard to see the chain from the start to the end which usually has negative effects such as build-ups of inventory and deliberate and inaccurate response to end-customer demand. (Harrison and Hoek 2011, 9-13.)

Krajewski, Ritzman and Malhotra (2007, 372) defines the supply chain as the “the network of services, material, and information flows that link a firm’s customer relationship, order fulfillment, and supplier relationship processes to those of its suppliers and customers” (Krajewski, Ritzman and Malhotra 2007, 372). This summarizes the ideology of supply chain of connecting various processes and requirements to one another.

Brewer, Button and Hensher state that the nature of competition has developed to be broader. In addition, they see that there’s only one supply chain with many

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interconnected links to other organizations (Brewer, Button & Hensher 2008, 2.) The globalization is seen in the businesses and supply chains and it has had substantial affect in the development of the chains over the last decade. Supply chains involve more companies in addition to the geographical spreading the chains have gone through. Almost 80 percent of the supply chain executives studied say they expect the number of collaborative relationships to increase. (The Smarter Supply Chain of the Future: Global Chief Supply Chain Officer Study 2010, 12.)

Supply chains have a dynamic of their own that is often called the “bullwhip” effect.

It means that relatively small changes at the demand information can cause

disturbances as they move upstream in the chain. Improved forecast accuracy is one tool for helping to reduce the bullwhip effect. In addition, the following three

methods can be used to reduce this effect (Slack, Chambers, Johnston & Betts 2009, 211.):

1) Information sharing 2) Channel alignment

3) Improving the operational efficiency

Information sharing can prevent over reaction and give a better view of the status of the whole chain. Channel alignment through standardized planning and control methods easens the co-ordination of the whole chain. Improving the operational efficiency of each part of the chain prevents errors multiplying in the rest of the chain. (Slack et al. 2009, 211, 235.)

According to global supply chain survey (Next-generation supply chains; Efficient, fast and tailored, 2013), reliable end-to-end supply and demand planning is increasingly challenging due to macroeconomic changes in a turbulent market conditions which influence on both operations and sales. Customers have more high requirements when thinking of total supply chain flow time with less cost. Getting the best out of supply chain flexibility and managing multiple supply chains are the new trends.

(Next-generation supply chains; Efficient, fast and tailored 2013, 3.) The supply chain should be seen as a system of connected value chains. Through supply chain,

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businesses can deliver value to the supply chain over its value chain. (Wilkinson 2013.)

2.4 Logistics chain

Logistics is the link between internal functions of an organization. According to Waters (2003, 14, 18), logistics is the activity responsible for the flow of materials through a supply chain as seen also in figure 8. Logistics is the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in- process inventory, finished goods and information related to this from point of origin to point of consumption for the purpose of conforming to customer requirements.

Logistics creates a process where information, material and cash flows are essential issues. As seen in figure 8, logistics is as much a part of marketing as a part of material management. (Sakki 2003, 25.):

Figure 8 Logistics process (Sakki 2003, 25)

Logistics is a sequence of events intended to satisfy a customer. If it doesn’t satisfy customers, it is unlikely to survive in the long term, let alone make a profit, have high return on assets, add shareholder value, or achieve any other measure of success.

Ultimately, the success of every organization depends on customer satisfaction.

(Waters 2003, 18.)

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The processes of companies which deliver materials or services confronts with the customer processes. Now a day is not enough that operations are developed internally. Also all the companies which are a part of the demand-supply chain should take part to the development process. The competition is not anymore just between separate companies. Also the logistics processes compete with other companies’ logistics processes (Sakki 2003, 20-21.).

According to Sakki (2003, 25), there are two main objectives in logistics:

1) External in other words service efficiency 2) Internal in other words costs efficiency

Service efficiency means that operations are developed continuously so that it’s possible to offer overall solutions instead of pure materials to customers. Costs efficiency means that every unnecessary handling is avoided, inventories are reduced and both work and equity productivity are improved continuously. (Sakki 2003, 25.) However, everything starts from the customer and the success and failure of any business is determined by the level of customer value the company is able to deliver in the chosen markets (Christopher 2011, 29).

2.4.1 Logistics performance

The nature and role of logistics functions in companies have changed due to globalization and business environment. The overall supply chain and distribution channels are more complex and require also more from logistics operations and organizations. Logistics is seen as key success factor for business competitiveness and building competitive advantage in an increasingly competitive environment.

(Logistics performance 2017.)

Working in the logistics field requires competencies as critical thinking and problem- solving skills to coordinate the movement of goods and services. In a market always aiming for optimization of the chain, decision-making skills are essential. There are many principles which quide and influence on the logistics performance. Four themes work as a basis for successful logistics chain; responsiveness, reliability, resilience and relationships. (Christopher 2011, 23-24.)

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Responsiveness. The ability to meet customer’s expectations and requirements in shorter time-frame has become critical in now a days just-in-time world. The customers are looking for shorter lead times but in addition, also flexibility and customized solutions. Agility has become the key term in this changed business meaning the ability to react sooner and meet (or exceed) customer demand earlier.

(ibid., 23.)

Being close to the customer and quickly adapting to the demand signals the organization receives, is important when thinking of the responsiveness.

Organization can improve its customer service at lower cost both in the early capture of information on demand and responsiveness. Superior logistics service increase the probability of customers being more loyal to a supplier. (ibid., 23, 63-64, 87.)

As mentioned earlier, according to Sakki (2003, 25), there are two main objectives in logistics; external (service efficiency) and internal (cost efficiency). When thinking of responsiveness, time has direct correlation to cost and service efficiency. The length of the logistics pipeline influence firstly on the product lead time and secondly to the customer response time. Understanding and managing the complexity of the whole supply and logistics chain is a must due to it has influence on the responsiveness, service and cost efficiency. (Christopher 2011, 121, 167.)

Reliability. Uncertainty, either about future demand or supplier’s capability to fulfill a delivery promise, is one of the reasons why company carries safety stock.

Improvements in reliability can be obtained through re-designing the processes that have influence on the performance. Process control is the best way to improve product quality and it can be applied also for logistics realiability. For example, by decreasing process variability, the company can strengthen its reliability and increase the likelihood for customers being more loyal. (ibid., 23, 63.)

Organization and how they are designed have major impact on the reliability. The challenge for organizations is to find a balance between people and process behavior. When organizations get bigger, the likelihood of them getting

unmanaegable increases. (Christopher 2011, 164.) Reliability against promises given

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by the organization are essential for all companies trying to bring value to its customers.

Resilience. Volatility and turbulence are one of the characteristics in current

marketplace. The risk to business disruption have increased through wider business, economic and political environments. Resilience is the way company acts when unexpected events, business disruptions, occurs. Many companies are in favor to find low-cost supply chain solutions due to gross margin pressure but it has been discovered to lead more vulnerable supply chains. The supply chain needs to be resilient in order to cope in the uncertain business environment and usually it’s not the most lowest cost wise. Most important aspect for resilient supply chain is a business-wide knowledge of where the chain is at its weakest. (Christopher 2011, 24.)

The company needs to find a way to mitigate and manage the risk business disruption brings due to it may have big financial effects in the whole network.

Disruptions may not be able to prevent. Goal for the companies is to create operational resilience for quick recovering and finding alternative way of working around the disruption. (ibid., 189, 195.)

Relationships. The relationships in the history with supplier and downstream customers have been adverse instead of co-operative. Some companies might still today find cost reductions and profit increase at the expense of their partners.

According to Christopher (2011, 17), it’s recognized that successful companies are those who try to establish strategies based on closer relationship to their key partners and who they work with on a long-term basis. (Christopher 2011, 14, 17.) The trend is to reduce supplier base and work with fewer who bring competitive advantage to the company and reduce the complex web of relationships and flows in the whole supply chain. The method called ‘partnership sourcing’ is widespread which ultimately could bring such leverages as improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. However, it should be noticed that the more the processes between the customer and the supplier are linked the more the dependency towards other increase. In marketing

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and logistics, there is new trend emerging where the focus is to create such a customer satisfaction level where the customers don’t even feel the necessary to find other suppliers. A large proportion of costs are driven by logistics decisions and the quality of the whole supply chain relationships. Therefore the potential for operating cost reduction through managing relationships is substantial. (ibid., 19, 24, 37, 64.)

2.4.2 Logistics monitoring

Logistics processes are quite often tighly linked with a number of different functional factors of the business which makes it challenging for it to operate efficiently. The outcome of this is usually either additional costs to the organization or reduced level of customer service or even both. (Rushton, Oxley & Croucher 2000, 99.) Activities needs to be planned carefully in order to get firm and reliable data to support the process improvement and development actions. This makes the effective

management of logistics difficult or at least challenging. (Hill 1996.)

The costs of meeting the customer expectations in full can be notable and not always understood by companies. Traditional accounting systems are build to focus on understanding the product costs instead of focusing on the customer costs. It should be remembered that logistics activity is not creating just cost, it also brings revenue.

Current rapidly changing business environment requires being aware of the financial dimension of decision making, also in logistics. Logistics can influence on the

company’s balance sheet in many ways as seen in figure 9 (Christopher 2011, 57-60.):

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Figure 9 Relation between a balance sheet and logistics variables (Christopher 2011, 60)

Cash and receivables are crucial to the liquidity of the business. There’s direct link between logistics variable such as order cycle time, order completion rate and invoice accuracy and cash and receivables. For example, the invoice accuracy can influence on how quickly customer pays the invoice in case of inaccuracy and have impact on company’s cash flow. Inventory might tie even fifty per cent or more of company’s current assets and therefore it has significant role on how inventory levels and stock locations are determined, monitored and managed. Depending on the company’s business field and role in the logistics network, the logistics system (the plant, depots, warehouse and distribution) increases the total sum of fixed assets. It’s very common for companies to outsource for example transportation in order to move assets off their balance sheet. Current liabilities in logistics are coming from bought-in materials and services. Order quantities might lead to excessive levels of materials which are not in line with the actual manufacturing or distribution demand which leads to big stocks. The current liabilities are debts that have to be paid in certain, agreed, period of time and therefore have tremendous impact on the

balance sheet. Debt and equity affect on the funding requirements of the business. It might be worthwhile to investigate and reflect the impact of alternative logistics

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strategies and in case leasing instead of owning or using third-party for warehousing and transportation instead of having them done in-house is wiser. (Christopher 2011, 60-61.) The company’s balance sheet shows the internal status of logistics. In order to get more wider view of the status and also from other point of view than internal, companies should use also other ways of measuring and monitoring the

performance.

The overall coordination of chain and activities should be the main objective in logistics. There are number of critical performance measures in logistics which need continuous monitoring. This can be done by using key performance indicators, KPI’s, which can provide insight to management how strategic goals are met. Usually the basis for KPI’s is the company strategy. (Christopher 2011, 239.)

Companies needs to focus on improvement in order to compete in today’s business environment. Key performance indicators can be determined towards a pretermined goal or against a required standard or performance. KPI’s are good tools to visualize fluctuations and performance which is going to wrong direction. In case performance is constantly and regularly as set or exceeding the target level, it’s easy to raise the level to be higher. Because of this, KPI’s are crucial for any business improvement strategy. As defined by O’Byrne (2017), “KPIs provide visibility of business

performance and allow objective quantitative and qualitative evaluation”. (O’Byrne 2017.)

2.5 Operational excellence

Operational excellence is a mindset needed in an organization to do things better. It has many positive effects such as increasing profitability, effectiveness, engagement and empowerment of employees. It should be knowledge though, that there is no common understanding of what it means although organizations have used it for years. (Miller 2014, 10-11.) Due to it’s not easy to define what operational excellence mean, it might be difficult to take the different interpretations into practical actions.

Organization has succeeded in delivering operational excellence when “each and every employee can see the flow of value to the customer and fix that flow before it breaks down”. (What is Operational Excellence? 2016.)

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Hohmann (2014) states, that operational excellence uses many methods, tools and techniques, and is built on continuous improvement. By pursuing it, the organization is more likely to continue to maintain and build on these improvements. It’s a

structured and systematic approach to strive superior performance. (Hohmann 2014.)

Organization can improve its culture and performance through operational excellence which leads to long-term sustainable growth. One big element of operational excellence is Lean methodology which is focusing on elimination of waste. It teaches that every process has bottlenecks and a business should focus on the matters which adds value. The key idea behind Lean manufacturing is on

improving the quality of products and services by eliminating everything which doesn’t add value and decreasing costs. Related to Lean manufacturing, Six Sigma methodology can be used as a tool to improve the customer experience by identifying and eliminating variation. Connected to Lean and Six Sigma, Kaizen methodology helps organizations to create a culture of continuous improvement where employees work together to achieve the mutual goals. (Johnson 2019.) According to Miller (2014), the limitation with Lean and Six Sigma methodologies is however that they focus on removal of waste and root cause of errors instead of on the creation of value. The methodologies don’t help to develop new ideas or

strategies but can be useful when trying to improve performance in a specific organization area or resolving issues. The business environment is now a days too complex, too interconnected and moving too fast to focus only on solving problems and standardizing processes. The ways the employees interact with customers, suppliers, and other business partners is being recognized by organizations as a method of improving performance. Focusing on people can ultimately lead to also a better profitability. (Miller 2014, 12, 13-14.)

The key to achieve success in Operational Excellence is to define it so that everyone can understand what it means in all levels of the organization and know what is expected and what should be achieved. Once Operational Excellence is achieved, management’s involvement in the day-to-day operations are not required anymore.

(What is Operational Excellence? 2016.)

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2.6 McKinsey 7-S Framework

McKinsey consultants Tom Peters, Robert Waterman and Julien Philips developed the McKinsey 7-S model (see figure 10) in 1980s with a help form Richard Pascale and Anthony G. Athos. It’s one of the most popular strategic planning tools and has been widely used by academics and practitioners since the introduction. Jurevicius (2013) defines that “the goal of the model was to show how 7 elements of the company:

Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company”. All the seven elements are

connected. The key point in the model is that change in one element influences and requires change in the rest of the elements for it to function effectively. (Jurevicius, 2013.) The framework can be used to obtain deep insights into organization and leverage it to maximize efficiency and profitability. (The McKinsey 7-S Framework 2018). For this thesis, the McKinsey 7-S framework is used as the main theoretical framework.

The seven elements are divided into the soft and hard elements in the McKinsey model as seen in figure 10. The hard elements (Strategy, Structure, Systems) are easier to manage and identify. The soft elements (Style, Staff, Skills, Shared Values) are the base of the organization and although harder to manage, more likely to create sustainable competitive advantage. Each element shouldn’t be analyzed alone. The core and most valuable asset of the model is to analyze how well-aligned the elements are with each other. (Jurevicius, 2013.)

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Figure 10 The McKinsey 7-S Model (Jurevicius, 2013)

Strategy. A plan to achieve sustainable competitive advantage and successfully compete in the market as developed by the organization. In general, it helps to achieve competitive advantage, it’s understandable, it’s long-term and is confirmed by strong vision, mission and values and clearly articulated. (Jurevicius, 2013.) It’s the high-level direction on how the company plans to defeat the competitors over time (The McKinsey 7-S Model, 2019).

Structure. The way company is organized including information of who reports to whom. Structure element can be considered as one of the most seeable and easiest to change. (Jurevicius, 2013.) An organizational chart or similar document is often used to visualize the element (The McKinsey 7-S Model, 2019).

Systems. Company’s processes and procedures where the daily activities are seen and revealed. Should show also the direction to decision making and how business is run. (Jurevicius, 2013.) Without this element to function properly, it’s hard to keep the business operating and moving forward (The McKinsey 7-S Model, 2019).

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Skills. The potential capabilities and competences company’s employees have. This element is especially important during organizational change when information of the required skills to reinforce the possible new strategy is needed. (Jurevicius, 2013.)

Staff. The number of employees and roles required to run the business. This element also includes information on how they are recruited, trained, motivated and

rewarded. (Jurevicius, 2013.) It’s a classic leadership responsibility to understand the strengths and weaknesses of the team and to know how to develop their skills along the way at the same when getting the most from them (The McKinsey 7-S Model, 2019).

Style. The way company is lead by their top-level managers (Jurevicius, 2013). The leadership style should be inline with both the culture of the organization and the need of the team (The McKinsey 7-S Model, 2019). In the most successful

organizations, the style was discovered to be participative (Chelsom, Payne & Reavill 2005, 37).

Shared Values. The core element of McKinsey’s 7-S framework. Shared values are the standards that guide the way of employee acting and creates the basis for every organization. (Jurevicius, 2013.) They are the values organization believes in and represents. Only by knowing and sharing these throughout the organization, it’s possible to combine and succeed in the individual and functional targets. (Chelsom, Payne & Reavill 2005, 37.)

The developers of the framework point up, that all the seven (7) elements described above must be equally treated and handled in equivalent importance to achieve the best results (Jurevicius, 2013.) According to Chelsom, Payne and Reavill (2005, 37), shared values is more notable element than the others as claimed by many managers (Chelsom, Payne & Reavill 2005, 37). In order to bring operational excellence and to be successful, it’s useful for every company to have good understanding of the internal organizational alignment. It might reveal also if work can be done more effectively and efficiently.

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Analyzing these seven elements gives good understanding of how the organizational elements are connected or possibly are there inconsistency, and how well the organization is positioned to attain the wished objectives and targets. Reflected against the framework, it’s possible to identify the main issues and challenges in the case company’s logistics function and give ideas on how to enhance the operational excellence and finally bring value to the customer.

3 Methodology

This chapter presents the methodology used in this research. It starts by introducing the research approach and the research design, data collection and data analysis methods as well as evaluation of the research’s reliability and validity.

3.1 Research approach

The research strategy was qualitative due to the nature of the study; exploratory research. According to Wilson (2010, 103), exploratory research is a research where there exists very little earlier research’s to refer to. When there’s a lack of published research and knowledge about a given study topic, exploratory research is feasible research design. Exploratory research’s are mostely qualitative and typically requires in-depth interviews and observation. As a result from exploratory research, it rarely gives answers to the research problems but helps to issue future research direction.

(Wilson 2010, 103.)

Main research question in this research is:

- How to enhance operational excellence in logistics in order to bring value to the customer and increase customer satisfaction?

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The supporting research questions for the study are:

- What are the main issues and challenges in the case company’s logistics function?

- What are the key value drivers to quide the operational excellence performance in logistics in the case company?

The research was started by investigating published researches. Quite many were found but not exactly from the perspective of this study which endorsed the qualitative approach for the research.

According to Gillham (2000, 10), the focus on qualitative methods is enabling the researcher to understanding the meaning of what is going on (what people tell you and what people do). Also Gillham justifies the usage of qualitative methods to investigate situations where little is known and to explore complexities. It’s also a justifiable method when researcher needs to understand the study according to those involved. (Gillham 2000, 10-11.) The focus of this research was in the specific case company – organizational research. Therefore, qualitative approach supports the way research was conducted.

One approach for qualitative research is case study. Yin (2014, 4) defines the case study research as an empirical enquiry which investigates a contemporary

phenomenon in a real-life context. It’s one of the mostly used research method types. Case study is a popular method when making study about organizational behaviour and it allows focusing on small group behaviours as well as organizational and managerial processes. (Krishnaswami & Satyaprasad 2010, 15.)

Case study is a research strategy that involves empirical investigation of a particular contemporary phenomenon, using multiple sources of evidence. Multiple sources of evidence can be obtained through collecting and analyzing documents, interviewing people etc. (Saunders, Lewis & Thornhill 2012, 179). Case study is always a main method which enables the use of other sub methods for example interviews, observations and/or documentary analysis (Gillham 2000, 13).

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According to Woodside (2010, 1) case study research (CSR) is an inquiry that focuses on describing, understanding, predicting, and/or controlling the individual (i.e.

process, animal, person, household, organization, group, industry, culture or nationality).

The case study strategy is suitable if the goal is to gain a rich understanding of the context of the research and processes being enacted. The case study strategy also has notable ability to evoke answers to the question ‘why?’ and ‘how?’ and because of this, case study research is most often used in explanatory and exploratory research. (Saunders et al 2012, 179.)

Normally a new case study is started with a search of literature for information and potential theoretical models. Selecting an exploratory approach, meaning that no theoretical basis is used, for a descriptive case study can therefore be either a deliberate decision or a necessity, because no suitable theory or model is available.

(Routio, 2007.)

In order to achieve deep understanding in CSR, it usually involves the use of multiple research methods across multiple time periods for example triangulation.

Triangulation includes (Woodside 2010, 6.):

1) Direct observation by the researcher within the environments of the case 2) Probing by asking case participants for explanations and interpretations of

“operational data”

3) Analyses of written documents and natural sites occurring in case environments

The value of most CSR reports increases with the use of dissimilar, multiple research methods and the inclusion of multiple study objectives. The core strength of CSR is collecting operational data, as opposed to presentational, which vary widely from presentational data. (Woodside 2010, 11.) Case studies are likely to be more convincing and more accurate if they are based on several different sources of information.

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The targets for case studies usually are following according to Routio (2007):

1) Describing the object or phenomenon - not only its external appearance but also its internal structure, and perhaps also its earlier phases of development 2) Explaining the reasons why the object is as it is, or its earlier development 3) Predicting the future of the object

4) Planning improvements to the object or to other similar objects, or gathering opinions about it, in other words a normative approach

Figure 11 demonstrates the overall research design in this study:

Figure 11 The research design

The study was started by reviewing the literature, theories available and introducing to the backround information of the case company. Next step was to decide the research approach which was decided to be a qualitative approach and the case study method. Case company interviews and documentary analysis were used as an additional method to get more reliable and accurate results. As a last step, the findings and conclusions summarized the results and answered to the primary

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research question: ‘How to enhance operational excellence in logistics in order to bring value to the customer and increase customer satisfaction?’.

3.2 Data collection

The data collection techniques may be various and are likely to be used in

combination in case study research. These may include interviews, observations, documentary analysis and questionnaires, as an example. (Saunders et al 2012, 179.) The study was made to single organization and it focused on the organizational behavior and processes. The next subchapters describe how the evidences were collected from the case company, how the interviews of the case company key employees were conducted and what kind of documentary analysis was conducted.

3.2.1 The Interviews

The primary method for collecting data was interviews. According to Brewerton &

Millward (2001, 77), interviewing is flexible tool which can be used in different stages of the research process. Interviewing is open to a number of biases of which the most critical one is the difficulty of getting reliable and valid results. The advantages and disadvantages of interviewing can be seen from table 1 below (Brewerton &

Millward 2001, 77, 81.):

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Table 1 The advantages and disadvantages of interviewing (Brewerton & Millward 2001, 81, modified)

The interview was semi-structured. According to Krishnaswami & Satyaprasad (2010, 105), the semi-structured interview focuses on the discussion on the real effects of a given experience of which the interviewees have been exposed. In addition, Gillham (2000, 65) states that it can be the richest single source of data if done well.

The interview questions can be seen in the appendix 1. Due to the type of the interview, semi-structured, it should be recognized that the questions were not strictly followed.

Following interview process procedure was used:

1. Preparing the semi-structured interview questions.

2. Sending the interview proposal to the interviewees by mail. The mail included also brief explanation about the study.

3. Interview time was agreed.

Advantages Description Disadvantages ^Column1

Rich data preserving the original meaning of participants

Cost need trained interviewers, logistics time-consuming etc.

Flexibility interview's can be used at any stage of the research process; multi-method data collection is also possible, by including interview's with other techniques, e.g. Observational and self- administered elements

Time-consuming due to volume of data in analysis, and to length of time needed to introduce, establish rapport, probe, debrief on completion

Interviewer availability due to the availability of the interviewer, interviewee questions can be answered, the interviewer is able to probe for adequate answers and can ensure that complex instructions or sequences can be adhered to

Accessibility some samples (especially those which are geographically disparate or isolated) may be more accessible via other methods

Ensures co-operation interview's are probably the most effective way of ensuring co-operation from most populations

Open to bias highly reactive environment with biases from interviewee (reaction to artificial nature of situation, adoption of role by interviewee, social acceptability bias, acquiescence bias)

Rapport and confidence- building

can be ensured, both important for addressing complex or sensitive topics

Poor reliability due to their openness to so many types of bias, interviews can be notoriously unreliable, particularly when the researcher wishes to draw comparisons between data sets

Boosting Operational Excellence in Logistics