A CEO's View of Logistics

World Wide Shipping September 2000
www.ltdmgmt.com

By THOMAS CRAIG
President LTD Management

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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