If you haven't improved your logistics network for a while, it might be time for an examination. Here's a five-step method that can cut logistics costs by 10 to 20 percent.
If your company has not made substantial changes
to its logistics functions in several years, it may be
time for a checkup. Given today's dynamic business
environment, it is more important than ever to periodically
re-evaluate a company's network by comparing
its services and performance to the requirements
of customers and markets.
This evaluation—known as a "logistics audit" or
"potential analysis"—examines the capabilities and
capacities of operating locations, logistics processes,
and the structure of the entire logistics network.
Figure 1 shows one example of the locations, services,
and relationships that could be subject to this type
of audit.
Article Figures
[Figure 1] Possible areas of improvement in a consumer goods logistics networkEnlarge this image
to discover the areas that provide the greatest
opportunities for improvement,
to identify the weak points and potential ways to
address them, and
to assess the economic value of improvements,
including cost savings.
Depending on the company's current situation, an
audit can produce potential savings of between 10
and 20 percent of its total logistics costs. In specific
areas and under certain circumstances, the potential
savings can be even higher. Even a savings of 10 percent
can have a notable impact on profits. Consider:
For a company with an operating margin of 2 percent,
where logistics represents 10 percent of the total
costs, a 10-percent reduction in its total logistics costs
will result in a profit improvement of 50 percent. This
level of savings is always welcome, but in times of
financial crisis it is likely to be especially attractive to
top management.
This article, which is adapted from our book,
Comprehensive Logistics,1 will explain how to conduct
a logistics audit by completing the following five
steps:
requirement analysis
performance analysis
process analysis
structure analysis
benchmarking
Depending on the size of the company, these steps
can take between four weeks and three months to
carry out. Thanks to the resulting cost savings and
increased profits, companies generally can expect to
achieve a return on investment in less than one year.
Step 1: Requirement analysis
The first step is a critical assessment of the logistics
services and performance levels required by customers,
markets, and internal departments such as
sales and marketing. The audit team should answer
the following questions:
Are the current requirements for logistics performance
necessary, given the overall service goals of the
company? For instance, is it necessary to offer 24-hour
delivery if only a few customers require this level of service?
Another example: Is it necessary to permanently
offer the highest level of production capacity and stock
availability if it is only required during peak times?
Do the benefits of fulfilling those requirements
outweigh the costs?
Are you prioritizing correctly? Are you providing
sufficient service to your most important market segments?
Do the most profitable customer segments get
the best service?
Are the current assortment of articles—parts,
products, or merchandise—and the range of services
adequate? Are they too diversified? Does the assortment
include unprofitable articles or services that
could be eliminated without affecting the company's
competitive position?
To what extent could logistics services and quality
be reduced, and what would be the consequences of
such a reduction?
When analyzing your requirements, it can be helpful
to keep in mind the adequacy principle:
The cost of providing any service improvement
must be measured against the additional sales and profit that can be achieved as a
result of that improvement.
For example, it may not be worth the expense to
offer 24-hour delivery to every customer, or customers
may demand higher reliability levels than you can
provide at costs that are acceptable to you.
By revealing the costs and benefits of various logistics
service levels, the requirement analysis can help
you address one of the major conflicts within a company:
What the sales organization promises versus
what operations can actually do. If salespeople are
ignorant of the costs to provide a logistics service, it
will be tempting for them to set a goal of 100-percent
delivery availability, even though an average availability
of 98 percent may be good enough. For example,
if you make the costs of providing special services
clear to the customer, perhaps by explicitly charging
an express surcharge or a packaging fee, you may
find that many customers will decline those services,
and you can adjust service requirements accordingly.
After examining the requirements, the audit team
can recommend a balanced assortment of articles and
services, establish what service levels are adequate,
and develop differentiated quality standards.
Step 2: Performance analysis
In the next step, the auditors examine how well the
operative and administrative "stations" and "performance
chains" of the logistics network—including
procurement, production, distribution, and sales—fulfill
those requirements, and at what cost. A "station"
can be a single physical location, such as a warehouse
or distribution center, transshipment point, manufacturing
plant, or sales office, where orders, materials,
and resources enter as inputs and products or services
leave as outputs. A "performance chain" is a series of
linked stations that executes specific functions.
For each station, the team should determine the
performance limit—that is, the maximum possible
throughout or output; the operating, processing, and
throughput times; the available size and space; the
location of resources, facilities, and stocks; and the
buffer and storage capacities. By conducting an inputoutput
analysis of the stations, or locations, it is possible
to see what resources are required and what it
costs to fulfill an order. Through this analysis, the
team can identify which locations are not performing
in an optimal manner; they can then develop initial
ideas for improving, strengthening, or even eliminating
these weak points.
The following are some common types of problem
areas that can cause process delays and increase performance
costs:
Bottlenecks are stations with insufficient capacity,
which operate in peak times above 95 percent of
their performance limit. They cause long queues and
waiting times for incoming orders, material, and/or
logistics units, such as parcels or pallets. This can
limit the output of a system, network, or even the
whole company.
Excess-capacity stations operate for long periods
below 70 percent of their maximum throughput or
output. Even in peak times they do not reach capacity. Often they are overstaffed
and drive up costs without generating value.
Failure points have an availability level far below
90 percent. They cause frequent or long-lasting interruptions
that block upstream stations in the supply
chain. They also cause downstream locations to be
underutilized and can be the source of severe delivery
delays and missed deadlines.
Redundancy stations that duplicate the functions
performed at one or more other locations in the network
are generally necessary in order to have alternatives
if a breakdown should occur. However, companies
should assess whether the existing degree of
redundancy is really necessary.
Delay points greatly exceed required throughput
times and completion dates. They are often bottlenecks
or failure points that put promised delivery
dates at risk and cause additional costs downstream as
the supply chain tries to make up for lost time.
Fault points cause serious errors with unacceptable
frequency. They negatively affect performance and
costs by causing delays, disturbances, inefficiencies,
rework, and extra effort at subsequent stations in the
supply chains.
Main cost areas generate the greatest share of the
total logistics costs. These areas offer the largest
potential savings, which can be achieved by reengineering,
improved organization, rationalization,
mechanization and automation, and/or advanced
information technology.
Step 3: Process analysis
Companies must assess not only the performance
within the various stations of the supply network but
also the flow of orders and material between those
points. To assess the end-to-end flow of orders and
material, it is necessary to document and review the
existing order, logistics, and performance processes.
The process analysis begins with order acceptance,
followed by order scheduling, procurement, production,
and distribution. The last step involves delivering
the product or service to the customer. However,
when assessing logistics processes, it is advisable to
apply the following rule:
Scrutinize the order processes by following the
order flow, but analyze the logistics processes
against the flow of goods.
Starting the analysis of order processes with the customer
ensures that the analysis will assess the real
value contribution and customer orientation of each
of the stations that will be involved. Analyzing the
flow of the logistics units (the shipments, load units,
or individual items) upstream, from their destinations
to their sources, helps to reveal the goal orientation of
the individual process steps within the supply chain.
Figure 2 presents a checklist of the most important
subject areas and questions to be asked during the
process analysis. (For more questions, precise definitions
of the terms, and detailed explanations, please
consult our book, Comprehensive Logistics.)
The process analysis results in recommendations for
process optimization and more efficient use of
resources as well as outsourcing decisions. It also is a
useful means of estimating the economic value of
potential changes.
Step 4: Structure analysis
After analyzing logistics requirements, performances,
and processes, the audit team next should examine
whether the current structure of the logistics network
satisfies present and future demands. For this purpose,
the team must map out the company's network and all
subsystems of interest. (See Figure 1 for an example.)
During the structure analysis, the following questions
need to be answered:
What is the optimal number of plants, storage
locations, logistics centers, delivery points, and sales
outlets?
Are the plants, storage locations, logistics centers,
transshipment points, and delivery points optimally
located?
Are the functions, tasks, and inventories correctly
allocated among plants, logistics centers, and trans–shipment
points?
Which functions should be executed centrally,and which should be executed
locally?
How would consolidating local inventories and functions at a logistics center
reduce costs and improve performance?
What is the optimal number of stages for procurement
and distribution?
Are there avoidable handling or transfer activities?
Are the right criteria applied for choosing direct
delivery or delivery via transshipment points and
logistics centers?
The structure analysis may produce suggestions for
improving or redesigning parts of the network or even
the entire logistics network. It also offers proposals for
centralization or localization of various functions and
inventories. The analysis should give you an idea of
how the proposed recommendations will improve
costs, service, performance, and competitiveness.
Step 5: Benchmarking
Benchmarking is the final step in the audit process.
By benchmarking, we mean the comparison of costs,
performance, quality, and other key performance indicators
among several companies, business units, or
supply chain stations with similar activities and functions.
It can also include a comparison of operational methods, organization, and
strategies.
But benchmarking can be tricky. It is essential that
the business units being compared have similar tasks,
functions, and key performance indicators, as relatively
small differences between companies, plants, or
even single operative stations can lead to quite different
key performance indicators (KPIs).
External benchmarking compares the key indicators of different companies'
performance units. It is difficult, however, to ensure that they are
truly comparable. For example, benchmarking against another
company's reported logistics costs
as a percentage of revenue can be
misleading, as companies define
and record those costs differently.
Moreover, due to differences in
products' size and value, logistics
costs that relate to the value of the goods on a pallet
or other load unit can differ by a factor of 10 or more,
even when the logistics costs per load unit are equal.
In addition, the results of external interviews or
trend surveys can be misleading because they do not
necessarily reveal the specific circumstances and goals
of the other companies. The answers you get, of
course, reflect the opinions, competence, and intentions
of the people who participated in the interviews
or filled out the questionnaires; they are unlikely to
give deeper insight into their companies' performance
and strategies. Even if all participants answer honestly
and in-depth, the value of external benchmarking
remains debatable. Companies that only follow trends
and other companies' examples will be simply average
and inevitably will make the same mistakes as others.
In order to become the best in class and to have a lead
over competitors, a company has to develop its own,
unique strategies.
Internal benchmarking within the same company
compares the key performance indicators of operations
and administrative offices that have similar
tasks and functions. For this reason, it can only be
carried out in larger companies that have several
operative stations of the same kind. The advantage of
internal benchmarking is that it allows you to assess
whether the stations' goals, assigned tasks, and functions
are sufficiently similar. It also allows you to
make sure that the KPIs are defined and measured
throughout the company in the same manner. In
short, internal benchmarking shows how well the
compared plants, storage locations, or logistics centers
fulfill their jobs and the degree to which they differ
in costs and performance.
An even better approach may be analytical benchmarking,
which compares the key performance indicators of an existing business unit
with those of an optimally planned and organized unit—in other
words, comparing current performance against the
ideal. Analytical benchmarking allows companies to
recognize their options, assess the changes that will be
needed to make improvements, calculate the costs
and investments required, and identify the necessary
actions needed to achieve the options that have been
identified. It requires companies to develop their own strategies
and company-specific solutions.
From a medium-term perspective,
analytical benchmarking helps companies see how they can
improve their current performance. It can also help them beat
external competitors and achieve sustainable competitive advantage
by leaving the common path of following a "me too" philosophy or industry "best
practices" without assessing whether they are suitable
for their own operations or goals.
Closing the gap
There continues to be a gap between logistics theory
and business practice in terms of knowledge and execution.
Accordingly, logistics practices at most companies
still offer a great deal of room for improvement.
A logistics audit, such as the five-step approach
described in this article, provides a method for discovering
those possibilities.
However, it is important to remember that the
logistics audit by itself does not offer solutions. Only
strategies, which are procedures for reaching a certain
goal, can help to find the optimal solution. Once an
audit has been completed, companies can realize the
potential improvements they discovered during the
logistics audit by implementing solutions with the
help of rules and tools designed to optimize their
logistics performance.
Endnote:
1. This article is based on Chapter 4 of
Comprehensive Logistics, by Timm Gudehus and
Herbert Kotzab. The 891-page book (ISBN: 978-3540-
30722-8), published by Springer in 2009,
includes 282 illustrations.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”