STRATEGY

Any efficient logistics sequence begins with a clear link to the company's strategy for delivering customer value.

Just about the time the first cave people figured out how to acquire sharp rocks from one group and long sticks from another, and then to deliver spears to a third, the first supply chain was created. Soon after that, it's likely that the first chief logistics officers were born, who immediately began determining how to acquire rocks and sticks faster and cheaper.

Until recently, the basics of supply chain logistics hadn't changed much since those early days. But the world has grown increasingly complex. Companies are sourcing product globally far more often than before, and supplying customers whose expectations for timely delivery and rock-bottom pricing have increased exponentially. Competitive pressures are mounting to squeeze out costs for "product at rest and product in movement," and now the race is on: Every player in the supply chain wants just-in-time everything. And even companies that traffic in intangible offerings, such as services, can learn from the efficiency mentality with which consumer packaged goods and other product-focused companies approach their supply chain logistics.

The most fundamental measure of efficient logistics is your efficiency ratio: Are your revenues growing faster than your inventory? If revenue growth equals inventory growth, your efficiency ratio is 1. If inventory is rising faster than revenues—your ratio is less than 1—you have a problem. Anything over 1 is therefore pretty good—until you consider that Wal-Mart Stores Inc. has a torrid efficiency ratio of 2.4, and its closest competitor can muster only a 1.7. That's a competitive advantage you can take to the stock market—exactly what Wal-Mart has done.

Experts say it's possible to get savings of up to 10 percent on logistics costs if a company has yet to focus on an end-to-end improvement drive. But increased efficiencies in the supply chain must first be linked to a corporate strategy that's maniacally focused on providing value to the customer, such as delivering products by a certain time once a firm order is placed. Only then can you determine the ways in which you can compress time and cost to create the most flexible and responsive supply chain possible.

"If you look at the leaders in any industry," says Art Mesher, a former Gartner Inc. analyst who's now chief logistics officer for software vendor Descartes Systems Group, "the top leaders are becoming great at logistics, because they're finding they can get a competitive advantage."

Tell Your CEO: We can use our goods-related capital more efficiently—but only if we can link our logistics plans to a clearly defined corporate strategy.

Ask Your Chief Logistics Officer: Where are the "pain points" in our supply chain, so we can determine exactly how much of an improvement we think we can deliver?

Tell Your CFO: We need to set dollar targets for savings to be generated so we have some goals to shoot for.