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VALUE PROPOSITION FOR 3PLs AND OTHER LOGISTICS PROVIDERS
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A CEO's View
of Logistics
World Wide Shipping
September 2000
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By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com |
Step
back for a moment from your day-to-day operations. Step back from thinking about
shipments and warehouses and freight rates. Step back and look at logistics and
how CEO's and other senior executives look at it.
THREE OBJECTIVES
The CEO has three goals or objectives:
Growth. This may involve sales growth with existing customers, new customers,
new products and/or new markets.
Profitability. This may involve cost reductions and being able to raise prices.
Shareholder/Investor Value. He has to answer to the owners of the company.
Put these in the context of today's business environment that customers, competitors
and suppliers are now global. To support the goals, he will look at programs
and issues, such as:
Agility. How fast can the company respond and develop new processes, products
and markets?
Inventory levels. Is too much capital tied up in inventories? Why are there
out-of-stock occurrences?
Cycles times. How can we reduce the time and inefficiencies it takes to do
our basic business with customer orders and with manufacturing? Can we do it
faster and better?
Product cost and Sourcing. Are there sourcing opportunities in other countries
to bring in lower cost components or finished products?
Sales. Are export markets fully developed?
Plus. Are there other opportunities that we are missing? None of these programs
specifically mention logistics. Yet logistics is important to each program,
and hence, to the corporate goals. Logistics executives have to present their
strategic participation and role for the corporation and how they can positively
impact each program.
LOGISTICS' ROLE
Let's take a brief look at each program and how logistics is vital to each.
To help the discussion, keep in mind the five elements of effective logistics--movement
of product, movement of information, time/service, cost, and integration,
both internal and external.
Agility. This trait is demanded by the dynamically changing requirements of
customers and markets. Look at how each customer has different requirements.
There is no longer mass-market with producers pushing products. Instead customers
specify what they want, how they want it and when they want their orders. Standardized,
uniform practices are replaced by flexibility and responsiveness tailored to
individual customers. Products have shorter and shorter life cycles. Companies
must be able to quickly respond to changing markets and customer demands.
Agility is a trait of leading-edge logistics organizations. Logistics people
have demonstrated logistics with adapting and exploiting transportation deregulation,
with handling expanded responsibilities, geographically and organizational.
Look now at logistics in the supply chain and how well and how fast it can
and does respond. Make it proactive; make it responsive; make it aggressive.
Maybe no where is agility better shown than in a logistics organization.
It is a "must" for a logistics organization. Be responsive. Do it faster.
Do it better. Tailor it to each customer's dictates. Information, internal
and external is vital. Integrate and develop programs with key departments
within the company and externally with customers, supplier an and logistics
service providers.
Agility mirrors logistics effectiveness. Logistics can show what they are
doing now with agility and should present what more they can do. Be strategic
in what you propose, not just tactical. Look at how the logistics group is
structured. The people must be able to quickly adapt to product, market and
customer changes. They must be empowered to act to meet the dynamics, to be
innovative.
Inventory levels. Inventory stands out on the balance sheet. This is true
whether it is raw materials, packaging, MRO, work-in-process or finished goods.
Inventory ties up working capital, capital which may have alternative uses to
benefit the company. The purpose of inventory is to buffer against uncertainty
and to compensate for the time required to manufacture and deliver products.
Determining the proper inventory levels is not a science. There are many external
and internal factors that must be recognized and dealt with.
More inventory makes the sales organization feel good so they can sell the
customer anything he wants. But companies cannot afford the luxury of having
inventory for every "just in case" situation. They cannot have money lost
with obsolete inventory, out-of-date products, or customers complaining about
your being out of stock.
Logistics is impacted more than any other department in the company by inventory.
Inventory levels reflect the responsiveness of logistics. The faster logistics
can move materials into production and ship finished good to customer's, the
less inventory which is required. With international sourcing and sales, the
length of the total inventory pipeline can be long. Logistics can develop
programs that do two things, make a flow of inventory and reduce the time
in the total pipeline. Look at entire inventory pipeline, from supplier to
customers. Present the supply chain to management.
They must understand the total length, scope and impact of the inventory
required and consumed in its business. Otherwise, if they just view select
parts of the total inventory, suboptimization and problems could occur with
production or shipping orders. Study your current operation and propose a
strategic overhaul, if needed. Look carefully at how inventory moves, the
inventory data, the internal handling of information and how this affects
time and inventory. Analyze the cost and benefit of programs that will reduce
inventory, without sacrificing customer service. Look at why and where inventory
stops flowing and how long it stays at rest and why. Freight costs, warehouse
costs, systems costs, and stock out costs should be considered in the inventory
analysis. Being proactive and showing where inventories can be reduced without
sacrificing customer satisfaction is what top management needs.
Cycles times. Do not focus on the Warehouse-to-Ship cycle or the Order Receive-to-Warehouse
cycle or other such discrete task cycles. Starting with or isolating on such
discrete tasks may result in missed opportunities because they do not show the
total picture. Look at time in the entire supply chain. Especially look at two
key cycle time--from the customer sends his order until it is delivered and
from time purchase order is placed until component is delivered to you. This
is what the customer is concerned with. Each encompasses the responsibility
of satisfying the customer and his order and of being able to manufacture timely.
Notice the customer cycle starts when the time the customer sends his order,
not the time you receive it. So if there are intermediate people who handle
a customer's order, brokers, sales person or whoever, that does not stop the
clock from ticking on when the customer wants his order.
Logistics should look at both the internal and external actions that impact
the order send-to-delivery cycle. You must especially look at how an order
is handled internally--who handles it, why they handle it, how long it takes
for them to handle it and what value each step and handling contributes to
delivering the customer's order. Delivery is what stops the customer's order
cycle. It does not stop with manufacturing the product or with shipping it.
From this analysis, develop programs to improve the flow of information that
the order generates. Technology and integrated systems, are often important
in effectively reducing this cycle time. One caveat in this cycle time analysis
is watching for customer required delivery dates. To give the customer the
service he request, you may have to actually not ship the order immediately.
So watch such situations as you analyze and measure the order send-to-delivery
time. Analysis of the two cycles may show creative opportunities with final
product finishing postponement or ship direct programs to improve times.
The issues with the production cycle running from purchase order placement
to material receipt are very similar to the customer cycle. Information transfer,
technology, external and internal product movement, and integration with suppliers
are important. With analyses of these two important cycles, creative cycle
time reduction opportunities may develop, such as finished product postponement
or ship direct.
Product cost and Sourcing. Logistics has a key impact on product costs, even
under traditional cost accounting practices. (We are differentiating here between
standard accounting and activity-based costing which better reflects logistics
costs.) Most logistics organizations have leveraged their transportation costs
and made some serious cost reductions. Now the challenges are to go beyond those.
Logistics costs, whether it be freight, pallets, labor or whatever, impact product
costs and company profitability. Cost reductions can therefore have significant
impact. Inbound freight cost is often still an area for reducing freight costs.
Much of the original attention and leveraging went to outbound shipping. Inbound
has sometimes been more of a challenge to reel in but is definitely worth doing.
Sourcing is a frequent method to reduce product cost with alternative suppliers
or components. Inbound freight is often calculated into the cost of a product,
regardless of the terms of sale and freight for the finished item. Transportation
costs are a factor of the mode used and the distance from origin to destination
and the product characteristics of what is being shipped. Simply put, it costs
more to ship an LTL size item from Chicago to Memphis than it does from Los
Angeles or from Shanghai.
Sourcing changes impact logistics costs and lead times. Sourcing components
from another country extend the supply chain and the key issues of logistics
effectiveness are very important. Freight, duties, broker fees and other costs
must be recognized. You must work closely with purchasing as they actively
investigate new supply options. Their changes may require new modes or carriers
for the company. A multi-modal concept may work best to balance cost and service
needs. Management must also understand the cost and time issues with any sourcing
change, particularly if it is significant, such as shifting from a U.S. supplier
to a foreign vendor. You must clearly explain these to them so, if freight
costs do go up, they can expect and understand what and why it is happening.
Sales. A good way to increase sales is export. The global marketplace. Logistics
is vital here. Freight and related costs can mean the difference between getting
export orders and not getting them. With the length of time it takes to actually
ship an export order, from the time the shipment is booked until it is delivered
to the customer, there are cycle time issues here also that should be recognized.
Remember the customer is looking for his goods, not just that they are shipped.
Export sales extend the supply chain and the key issues of logistics effectiveness
are very important.
New markets and new customers may require new logistics practices to meet
and satisfy the customers. Logistics must be proactive to develop programs to
satisfy the new requirements. Look at the needs for warehouses in foreign countries
to increase customer service. You cannot be reactive and respond after there
are customer complaints. Get ahead of the curve here. Lead the way in providing
customer satisfaction.
Other opportunities. Logistics effectiveness can build competitive advantage
by providing excellent service to customers, even a value-added service capability.
Product differentiation and price differentiation are important to customers.
But so is service. If all you really focus on is price issues, you could be
treating your products as a commodity. And with commodities, the only that distinguishes
competitors is price.
Logistics can create competitive advantage. Shipping orders complete, accurate
and on-time can set you apart from the competition. Ease in communicating with
customers on their orders and shipments makes you more friendly to deal with.
Go beyond to develop tailored, customized logistics programs for customers,
rather than offering a vanilla approach, shows true customer service.
Doing this will require significant internal teamwork. The internal barriers
with the functional silos, the organization chart, and accounting silos, the
difficulty of cost accounting systems to measure logistics costs must be recognized
early in this effort. Logistics effectiveness is not a quick fix. It will take
time, determined effort and cooperation, both internally, with suppliers and
with customers. The end result could be increased sales and higher profit margins
because customers may be willing to pay a little more to do business with you
because you are a desired supplier.
Conclusion. Senior management may not speak of logistics in their corporate
goals and programs. But logistics is often a key factor in the success of these.
Logistics must exercise a leadership role in demonstrating creative vision and
programs to top management. Be committed to the corporate programs. Make sure
your corresponding logistics programs are aligned with and support the corporate
plans.
Recognize and develop the internal relationships necessary for your programs
to get their proper due. Develop them with the input of the marketing, sales,
operations financial and information executives. They each benefit and play
a role in the successful implementation of the programs. Get support for these
logistics initiatives before presenting them to the CEO or COO.
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Tom Craig of LTD Management has been invited to be a member of Expert Committee for the Lean Six Sigma Institute in China.
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