A Structured Approach to Logistics Improvement

(Originally published in the May/June 2000 issue of Computer Service & Repair.)

By Leo A.P. Moerkens and William K. Pollock

Logistics, or supply chain management as it is called nowadays, is one of the business areas where significant business improvement is still possible in terms of customer satisfaction and cost.

Based on our experiences in working with numerous companies, we have seen that a significant portion of customer dissatisfaction is caused through the use of less than optimal logistics systems. At the same time, by designing an optimal logistics system, costs can be reduced significantly, while maintaining or improving customer satisfaction levels.

But, be aware that high customer service levels do come at a cost and, usually, increased service levels translate into increased logistics costs in terms of inventory, transportation and investments in supporting systems.

Before you can begin to initiate improvements, you first need to examine how your logistics system was designed and how the different modules work together. The most critical aspect of the logistics system is the integration of all the individual logistics functions and information flows (Figure1). In the past we have seen that different functions may operate independently from one another. This leads to sub-optimalization of the different functions and, as a result, high overall logistics costs, combined with low customer satisfaction levels and high levels of slow moving inventory.

Figure 1: Logistics System

In recent decades, we have seen a focus on the manufacturing and procurement segments of the logistics operation as most companies have implemented manufacturing-oriented logistics systems based on JIT principles using KanBan or similar approaches. That leaves the biggest opportunities at this moment to the distribution function and in the full integration of all logistics functions into an overall business strategy.

However, to improve both customer service levels and to keep costs under control, we need to focus on the following aspects):

  • Integration of all logistics functions
  • Distribution operations
Integration of all logistics functions
All logistics functions should be driven by the business forecast, which is based on the strategic objectives of the company. By doing this you can turn logistics into a competitive advantage because it will allow you to provide predetermined service levels to your customers at the lowest possible cost.

The forecast determines what to produce, and at which time to meet the market demand. However, this is easier said then done. In most companies, forecasting is the weakest link in the chain. If the forecast is off, we can see symptoms like:

  • Low availability of the right product
  • High inventory levels
  • Low inventory turns
  • Obsolescence
  • Reactive organization ("firefighting" mode)
So what to do about it? First we need to create a forecasting function that is an integral part of the business planning process. The forecast gets input from, and has to work closely with:
  • Marketing (future requirements)
  • Sales (immediate requirements)
  • Manufacturing (capacity constraints)
  • Distribution (inventory and transportation constraints)
  • Senior management (strategic objectives)
Based on the input, a realistic plan (forecast) can then be created with the following components:
  • Logistics plan
  • Manufacturing plan
  • Procurement plan
  • Inventory deployment plan
Creating a realistic and accurate plan will be dependent on the quality of the input from the different business functions and we have not seen a 100% accurate plan yet. On the other hand, the better you plan, the higher the customer satisfaction, and the lower the overall cost will be. This makes it worth it, in our opinion, to invest in a good functioning forecasting function, which will then integrate all of the logistics functions. The cost of not doing this can be tremendous; however, the use of information systems allows us to improve this area.

Distribution Operations
The distribution operations consist of the following functions (Figure 2):

  • Order Management
  • Warehousing operations
  • Outbound transportation
  • Inventory management
Figure 2: Distribution Operations

Based of these functions, business processes and tools are in place, and actions can be taken can be taken to improve customer satisfaction and lower the logistics costs. These improvements should be focused on:

  • Accuracy and consistency of the process output
  • Speed of the process
This is accomplished through a process review and, if necessary, a process redesign that utilizes the appropriate implementing tools to support the overall processes and minimize all of the inherent steps. Examples are:
  • By utilizing links to your customer via EDI or Internet access, the order management process can eliminate certain steps and the lead-time can be reduced from days to minutes, while at the same time the accuracy increases. The result is a faster, more accurate process that requires less capacity to perform.
  • Bar coding implementation increases the speed and accuracy of the warehouse operation, reduces the risk of picking the wrong products and increases the inventory accuracy.
  • The inventory management function can link all aspects of the distribution operation together and avoid such decisions as choosing a lower-cost carrier with a lower performance. In this example, the increased inventory requirements and their associated costs are likely to be more than you will save in transportation costs, while the reliability of delivery to the customer will most probably deteriorate.
These examples indicate that, usually with the help of new technology, significant improvements can be made, while at the same time, costs can be reduced. Ultimately, the improvements that are most possible in your organization will depend on how well you forecast, and how well you integrate and manage, each of the different logistics functions.

How Best to Approach the Problem
Before you can make these improvements you need to understand four things:

  • What are the exact customer requirements?
  • How do you measure up against the competition?
  • Where are you at this moment?
  • What are the gaps and opportunities?
To define this we recommend that you execute the following actions on a periodic basis:

Verify the customer requirements
Through the use of regular customer needs and requirements assessments, you can identify and define their total logistics services needs. In addition to that, periodic customer satisfaction surveys will allow you to track just how well your organization is perceived at meeting their logistics needs.

Track the competition's performance
Through competitive assessments and comparative logistics organization profiles you can compare your organization and its performance against the most appropriate competitive vendors to determine exactly how you measure up in the perceptions of the marketplace.

Have an internal assessment conducted
An internal assessment will be critical to your organization's total understanding of its present and projected logistics capabilities. In order to keep the assessment totally objective, it is always recommended to have it conducted by an outside expert who can independently identify both the gaps and opportunities, and compare them against the best practices in the industry.

Create an improvement plan
The results of the first three steps will provide you with a gap analysis and identified opportunities from both an internal and external business perspective. Based on these, a logistics improvement plan can then be developed to close the gaps and seize the opportunities, tempered by the various limitations and constraints of the organization, such as investment funding, timeframe, etc.

Implementation Phases
Once you know where you are and where you want to go, based on the outcome of the business assessment, it is our recommendation to involve the process owners in your organization as much as possible in the solutions development. This will create both buy-in and ownership of the new processes and will simplify the implementation as well as increase the chances for success. We have developed and designed a structured approach for improvement with the following steps (Figure 3):

Figure 3: Implementation Phases

Process Re-design
The purpose is to re-design the different processes to meet the strategic and service level objectives, and close the gaps identified in the assessment phase. Via brief, but focused, internal workshops, the identified gaps and opportunities will help to identify:

  • New processes
  • Functional requirements to perform the process and an initial indication as to whether the function should be performed internally or externally
  • System requirements to utilize new technology to improve performance and reduce costs
  • Key performance indicators to measure the process
System/Tools Requirements
Based on the system requirements defined during the development of the processes, a gap analysis will need to be performed to determine whether the existing systems can be re-configured or whether additional system functionality is necessary. This will be documented in a systems plan with an estimate of investments and implementation costs.

Organizational Requirements
Based on the functional requirements and the strategic objectives, an organizational gap analysis should be made and a transition plan should be developed. This includes decisions such as which functions will be performed internally, and which functions should be outsourced.

System Selection or Reconfiguration
Based on the systems requirements plan, existing systems can be reconfigured and/or selected, system interfaces written and the entire new systems environment tested.

Training
Before implementing the new organization, systems and processes, the employees will need to be trained, and the goals and objectives will need to be fully understood.

Partner Selection
Dependent on the decision as to whether the new activities will be performed in-house or be outsourced, one or more logistics partners may need to be selected to perform certain activities. The partner selection should be made primarily on a price/performance basis as a part of the integral logistics requirements.

Implementation
Again, dependent on the individual situation, the processes, organization and overall system may either be phased in, or implemented all at once. In either case, it will still be critical to immediately implement effective measurement systems that can monitor ongoing performance and identify new opportunities for improvement.

Although this approach is not necessarily a guarantee for success, it will give your organization a structured methodology with clear milestones and decision points that will help it focus its efforts on the most appropriate aspects to reduce risks, improve efficiency and focus its efforts on the aspects that will have the greatest impact on the bottom-line.

And last but not least - once this is all successfully implemented, the world will have changed again, and you will need to start the process all over.


About the Authors

Leo A.P.Moerkens is president of Hands-on Management Consultants, Inc., an international management consultancy firm with offices in the USA (Oxford, CT) and Middle East (Cairo, Egypt). They focus on mid-size, high-tech companies and assist them in developing and implementing business improvement programs. Leo Moerkens can be reached at 203-888-1671, or via e-mail at LMoerkens@hands-onmanagementconsultants.com.

Bill Pollock is president of Strategies For GrowthSM, a full service management consulting firm based in Westtown, Pennsylvania USA. Bill has consulted to more than 180 client organizations throughout the United States, Canada, Europe, the Middle East and Australia, involving customer surveys, market and competitive analyses, and services marketing consulting. He can be reached at 610-399-9717, or via e-mail at wkp@s4growth.com.


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