LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

SERVICE--Now You See It; Now You Don't.

World Wide Shipping
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

Service. Better service. Faster service. More dependable service. More services. Time compression. Just-in-time. Order velocity. Meet the customer's order-delivery window--or else.

Service has become a critical issue. Companies are making things happen faster. Product life cycleshave become shorter. Customers, not suppliers are setting the demands for service. They dictate to theirsuppliers as to when they want their order and how they want their order. And they take no excuses forfailures to perform. Vendors are given short, defined order-delivery windows. They must deliver theorder on time, complete and accurate. Suppliers who do not meet the customer's expectations can bedropped as a vendor. In some cases, this loss can mean significant sales.

Every day logistics managers are working to meet the service demands of their customers. Thesecustomer demands are translated into demands on manufacturing, purchasing, and vendors to performso as to meet the demands. Carriers must also perform so the supplier can meet the customers' demands. And on it goes. A service domino theory.

But there is a problem. For 30 days in the month, the logistics manager works to provide service. Hemay pay higher freight to meet special service delivery dates. He may incur overtime and higherwarehouse costs to pull and ship orders. (Everyone in the supply chain may pay extra to meet andprovide the service required.)

Now what happens at the end of the 30th day of the month? The firm closes the books and tallies up therevenues and costs. But here is the problem. Service doesn't exist. At least not on the firm's accountingsystem. There are ledger account items on the P&L for freight, warehousing and other distributionrelated expenses. But ther is no line item for Service. Service--now you see it; now y9ou don't.

Oh, there is a line on the balance sheet for inventory, which can be dramatically affected by service. Yetagain, there is no line on the balance sheet for service. Service--now you see it; now you don't.

The books are closed; and, the logistics manager is now responsible for the costs, not service. How doyou hold a logistics manager accountable for service and yet have no cost item for Service? Service--now you see; now you don't.

While service is an ongoing requirement for a successful business, the firm then takes a snapshot atmonth end, quarter end and year end of its costs. So where is service? If it is so important, why isn'tthere a cost item for it?

Logisticians are burdened with an antiquated accounting system. It reflects the business ways datingback to the Model T automobile, and it is that out-of-date. It is not in step with today's globalmarketplace with fast response. But unfortunately the accounting community is satisfied with itsdinosaur approach.

In discussions with various logistics managers, there is some agreement on the problem. Manycompanies define air freight, for example, as premium freight. This has very negative connotations. Airfreight is a mode of transport which meets a specific need, either for that particular shipment or as a wayof doing business for the firms. A good practice may be to use both surface and air freight to keep asupply pipeline flowing effectively. Dual modes may be a sound logistics approach. But using wordslike "premium" can negate a sound practice.

Shippers may set an arbitrary price for service. One importer we talked with tells an ocean carrier whohas faster service that as long as he is no more than $100 higher than a carrier who has a slower service,then he will get the business. Not precise, but a way. Yet it does not address the issue of not measuringservice.

So what is a logistics manager to do? How does he succeed when he is measured against perhaps twocontradictory measures--service vs cost?

Or you can place a value on transit time, considering the cost of a day's shipment. He can calculate thecarrying cost of inventory and what each day of transit time means. Or he can calculate whatthe financialbenefit of being able to ship and invoice orders more quicky. But we still have the basic problem. While these approaches are interesting and useful, it still does not show up on the P&L.

There is a concurrent issue for the carriers, warehouses and other providers of logistics services. Whatdo you do? If service has no position on the P&L for the supplier, how, in turn, do you price it? Or isthere an inescapable fact, that in the end it just comes down to price--period? There may be somethingto this question. Shippers send out RFQ's, request for quote. They do not send out RFS's, request forservice.

This is a discussion that will not be resolved in one article. It is too complex and enigmatic. We willbe continue it in future articles. In the meantime, we request and welcome feedback from thoseresponsible for logistics on how they and their firm handle the service versus cost quandry. We alsorequest input from logistics service providers.

We will also explore the question as to what is service? What all does it include? What doesn't itinclude? Generally firms are talking about speed, accuracy and quality of the movement of product andthe movement of information. But what does this really mean? Is there more to it? If so, what?