The logistics business model

How efficient is value creation?

Around 75 percent of the value-added costs that can be influenced depend on a company’s logistics business model. It is therefore the most important factor in a company’s competitiveness. But how can this be improved?

Every company has a (hopefully carefully considered) business model. This involves the questions of what value proposition you want to give your customers, to what extent the company wants to control the value chain itself and how you want to earn money. However, this only defines the body of the company. A suitable engine in the form of a logistics business model is also required to turn this into a complete vehicle that can move around the market efficiently.

Performance and costs

However, while the corporate business model is carefully considered, the logistics business model has mostly “grown organically”. The task and goal is to achieve the performance requirements for logistical targets such as adherence to delivery dates, delivery readiness, delivery time, etc. and at the same time to keep the total costs of the value chain as low as possible under the given requirements.

These two goals are rarely achieved optimally: sometimes the logistics business model fulfills the necessary performance requirements, but fails to keep the value creation costs sufficiently low. Just as often, we also encounter the opposite situation: the value-added costs are satisfactorily low, but the logistical performance requirements are not met. Here, too, work needs to be done on the logistics business model. If the logistical performance requirements can be improved, the costs of the value chain usually increase – sometimes even beyond what is economically justifiable. And so it can happen that it is not possible to construct and adjust a logistics business model that makes it possible to implement the corporate business model. In this way, however, a USP (Unique Selling Proposition) becomes an interchangeable service.

Of strategic importance

And that brings us back to the heart of corporate strategy! Not only in such cases, but generally in order to improve earnings, it may therefore be necessary or advantageous to align the corporate business model with the possibilities of the logistics business model or to ideally harmonize the two.

The strategic importance of the logistics business model is made clear time and again by our analysis results from various projects: around 75 percent of the controllable value creation costs do not depend on the entrepreneurial business model, but on the correctly constructed and correctly adjusted logistics business model! This fact should make it clear how important it is to optimize the logistics business model.

Influenceable costs of value creation

The logistics business model must be built in three dimensions: firstly, through a suitable logistics structure of the product portfolio, secondly, through a suitable architecture of the value chain and thirdly, through the correct logistics positioning of the value chain.

Let’s take a closer look at these three dimensions: The logistical structuring of the product portfolio can be achieved, among other things, by changing the stock level, the delivery capability, the price level of the products or by ensuring product streamlining. The main design elements that can be used to compose the architecture of the value chain from the customer, through the company, to the suppliers are:

  • the coordination of market synchronization
  • adjusting the logistical decoupling points
  • the development of postponed manufacturing
  • the production segmentation
  • Determining the correct degree of smoothing of the value stream
  • the coordination of order-neutral and order-related production
  • the optimization of storage levels
  • the optimization of vertical integration

Once the architecture of the value chain is in place and the product portfolio is known, it is important to position the value chain logistically in such a way that the logistical requirements are met as far as possible and the overall costs are kept as low as possible.

Comprehensive optimization

Logistics positioning can be achieved by adjusting the logistics performance indicators in line with the requirements of the corporate business model and adapting the planning and control model. Figure 1 attempts to illustrate the abstract terminology and the chain of effects described.

Fig 1: The chain of effects in the logistics business model
The chain of effects in the logistics business model

The architecture of the value chain influences the logistical performance variables, such as batch sizes, replenishment times, capacity utilization, etc. These are not only interrelated but, together with the planning and control model, determine the level of logistics cost drivers and thus the total logistics costs. Figure 1 illustrates this basically simple relationship. The main design parameters of the planning and control model include

  • Planning and scheduling strategies
  • Planning and scheduling methods and parameters
  • Reported stocks
  • Covering periods

Central logistical cost drivers that are influenced are, for example:

  • Basic stocks
  • Current stocks
  • Safety stocks
  • Actual delivery readiness levels

The resulting logistically induced costs can be:

  • Storage costs
  • Order costs
  • Capital commitment
  • Variable setup costs
  • Variable procurement costs
  • etc.

These correlations make it clear why new market potential and significant increases in efficiency can be achieved by not only focusing on logistics positioning, but also questioning and adapting the architecture of the value chain and the logistics structure of the product portfolio, thereby optimizing the logistics business model.

Simulation approach for solutions

The extent of the interdependencies and the large number of adjusting screws make it difficult to achieve an optimized business model in a targeted and reliable manner. Traditional methodical project approaches, which rely heavily on the experience of the project team and simple static calculations, will only be able to achieve significant improvements, if at all, after a very long time and with many costly, sometimes even dangerous attempts.

A more effective and efficient way is to capture the described “overall system” with its interdependencies, make it calculable, identify the right control variables to optimize the overall system and set them appropriately.

We solve this problem, even with highly fluctuating demand structures and complex value chains, with the help of our DISKOVER SCO simulation system, which has been continuously developed and expanded for over 17 years. With the help of supply chain simulations, we are able to dynamically simulate the logistical behavior of the entire value chain. To do this, we draw data from the ERP system (ideally, but not necessarily SAP), which we use to build up the value stream in detail and dynamically run through it over time using real, detailed historical data.

In this way, we can simulate different logistical structures with different logistical performance variables and different planning and control models and arrive at optimized solutions. By simulating the entire logistics business model and determining logistics performance and logistics-influenced costs, we are able to,

  • evaluate and optimize different alternative courses of action,
  • to secure and accelerate decisions and
  • shorten the period between concept and resulting benefits.

Worth the effort

Using the simulation approach, we can not only optimize a logistics business model or harmonize the corporate and logistics business models. Sub-aspects can also be picked out and dealt with, for example:

  • Reduce inventories and capital commitment
  • Improve delivery capability
  • Simplify and automate the planning process
  • Improve planning quality
  • tune and automatically readjust the ERP system
  • Reduce personnel deployment in the planning and control chain

Making the internal and external supply chain calculable is not only a more effective and efficient solution on balance, but practically the only way to assess the overall impact of simple or complex packages of measures in advance and thus avoid costly mistakes. The opportunity to work on 75 percent of the company’s controllable value-added costs is certainly worth the effort.

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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