Logistics–Five Key Issues for Logistics Effectiveness

Logistics is a process which interfaces and interacts with the entire company and with external companies, vendors, customers, carriers and more. Logistics is responsible for the movement of products from your vendors right through to the delivery at your customers door, including moves through manufacturing facilities, warehouses, third-parties, such as repackagers or distributors. It is not shipping and receiving, nor is it traffic or warehousing. It is more.

Logistics must make work effectively. This is required by your customers and, in turn, by your company. For effective logistics, there are five key issues–

Movement of product. This is often the way that logistics is viewed in many companies. Rush ship an order. Expedite in a component. But there is more. Products moves should complement the corporate strategy. If the emphasis is on cost reduction, lower inventories, customer service or whatever, then products must move in a way that is consistent with the emphasis. Product must also flow, not just move, from, to, between and among vendors, manufacturing sites, warehouses and customers. If it does not flow, then there is not a supply pipeline. Instead there are imbalances in inventories with components and finished goods not being where they should be.

The movement may be extremely broad in geographical scope. Raw materials and completed units can move between and among all regions of the world. While other departments in the company may focus on select geographical regions for sourcing, manufacturing or sales, logistics must deal with all of these. Everything must move.

The movement plan must be flexible. Forecasting may be the weak link in all corporate planning and execution. So the movement must be able to adjust and deal with the swings in business activity. This may require a multi-mode, and/or a multi-carrier and/or multi-level service program to keep the global supply chain moving smoothly. For example, it may require a mix of ocean and air modes to keep a smooth pipeline, especially if there are significant swings in volumes and requirements. Or a mix of fast-boat and slow-boat transit time ocean carriers, trading off transit time and freight costs for sea freight service. Or, if the destination is on the East Coast, a mix of MLB service and all-water, similar to the multi-carrier approach but staying, perhaps, with the same steamship line.

Movement of information. It is not enough to move product and materials. You must know where they are. You must know what inventories are where and if critical action is required. You must know what orders are coming in and when they must be delivered. Information–timely and accurate– is vital for sound decision-making.

The information must flow between the company and its suppliers, carriers, forwarders, warehouses and customers. It must also move internally among purchasing, customer service, logistics, manufacturing, sales, marketing and accounting. And doing this goes beyond Email, faxes and phone calls. Investment in information technology is not an alternative anymore; it is a requirement for logistics and corporate effectiveness.

Systems should exist at the macro or corporate level and view. Since logistics is a process which interacts with many other groups in the company, it is fundamental that a corporate system be in place. It has to be dynamic for handling customer orders, production planning, material requirements planning, distribution requirements planning, finance and sales forecasting. It must be able to receive orders via EDI, transmit Advance Ship Notices, accommodate multiple warehouse and plant locations in both a single site and aggregated views, track inventories at various levels, such as eaches and cases, and more.

There must also be systems at the micro, or logistics level and view. Programs are needed for warehouse management, cross-docking, shipment tracking for example. Each in turn takes technology, with bar-coding and scanning. These satisfy the operations/reactive and the planning/anticipatory needs.

Time/service. The ability to respond to the dynamics of the global marketplace–changing forecasts, customer requirements, new product introductions, new sourcing, and how to manage all these changes–must be done quickly. Raw materials and components must be ordered and arrive completely, accurately and quickly. Orders must be filled completely, accurately and quickly. It is no longer months or weeks for lead times. It may not even be days. Hours may decided customer service, competitiveness and value-added. Back orders are not tolerated. If your company cannot properly respond, your customers will look for those who can.

Service is more than having to expedite a shipment. Time/service is a factor of competition, customer requirements, your companys position in the industry, your corporate culture, how well everyone in the global supply chain works together, and how well everyone works together in your company. Logistics is the link among all this. And the more diverse the geographical scope of vendors, manufacturing, warehouses and customers, the more critical is time. Distance means time. Yet time delays are not acceptable. Movement of product and movement of information show their impact here.

Cost. Cost is the key measure by which logistics effectiveness is often measured. Freight, warehouse labor, public warehouse charges and other items on the P&L. Or inventory, a balance sheet item. Cost control, containment, and management is important for corporate profitability. Fiscal stewardship is a duty of all managers. The highest price does not mean the best service, and it may not be the service you need. Nor does the lowest price necessarily meet your needs.

There is no doubt about how important costs are. But the company must be careful. Minimizing the cost of the various logistics elements, such as freight and warehousing, can suboptimize the effectiveness of the logistics group and of the company in satisfying its customers.

Cost has a relation to service. They go hand in hand. As you define your service against your costs or costs against service, the give and take develops into your operating costs and budgets. Then you have to make sure that the cost can be managed. Otherwise costs can go out of control, or seem to.

However, there is no ready mechanism which really makes proper recognition in costs for time/service or for adjustments in any part of the company plan. There is no item in the P&L or balance sheet for Time/Service, which is the driver of a companys logistics efforts. Logistics cost measurement is a shortcoming in the present accounting systems. There were designed when the Model A was being built and are not adequate in todays competitive business world. They make discreet cost buckets in a weak attempt to measure a dynamic, global logistics process.

In addition there may be other issues such as currency conversion and fluctuations. Air freight is quoted in the currency of the origin country. Ocean terminal and other accessorial origin charges are also in origin country currency. Warehouses in other countries will invoice in origin currencies. Currency conversion and dynamics can create unfavorable or favorable cost variances which have nothing to do with logistics performance.

Integration–within your company, between you and your customers and between you and your vendors. Integration–bringing it all together–within your company is vital. Logistics is a process. Effectiveness requires that each relevant element of the organization do its part. However there is a problem with doing this. The organization chart. The traditional organization with its boxes and defined responsibilities is a collection of functional silos. Each silo segments and collects different parts of the vendor purchase/manufacturing/sales activity and stores it. Hence there is no process. There is a compartmentalization, a fragmenting of the process. This creates an anti-process effect.

In addition to internal integration, you must bring together and work with the external players. Your vendors, including your carriers and warehouses, must understand what you are doing and why. You must share your logistics vision and plan with them. This sharing and understanding will better enable them to cooperate with and assist you. They may be able to offer ideas and gainsharing to further improve the logistics effectiveness and the key issues with it.

Integration with customers is important. You and everyone in your company must be working and satisfy your customers. You should review written customer requirements with everyone in the logistics department and with everyone in the company. It is not enough to a company to tear apart the written requirements and hand them to various departments. That is not integration. That is functional silos.

Meeting with key customers is very good. A face-to-face discussion with him about his requirements and how you will meet them is important. This shows how much you value him and want to work with him. What does he need? How does he need it? Why does he need it? When does he need it? The more you know about your customer and his needs, the more valued of a supplier you are to him. This is a competitive advantage. Partnerships and alliances can be developed or enhanced.

Conclusion.Logistics is a process which runs from the vendors door through to the customers. It interacts with almost every group within the company and with many companies outside the company, including its customers. Effective logistics revolves around five key issues–movement of product, movement of information, time/service, cost and integration. Each of this is critical to the success of logistics and to creating value-added to the company and improving competiveness.