StrategyBy Gary Bolles | Posted 02-14-2003
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 revenuesyour ratio is less than 1you have a problem. Anything over 1 is therefore pretty gooduntil 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 marketexactly 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 efficientlybut 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.
Any effort to improve logistics through technology begins with the business processesand the peopleit's designed to transform.
The real goal of efficient logistics is demand-based replenishment, which depends on projections for demand being initiated where the goods are neededthe end customerand rippling back through the supply chain. With that in place, the thinking goes, every supplier throughout the chain could perform the most effective action at the best possible time.
Yet that "100-percent optimized" supply chain is a myth. A supply chain is simply a series of decisions and actions, each of which can change based on new business requirements. The goal of logistics should be to increase the amount of information flowing throughout the chain, and to create the most flexible structure possible to adapt to changing conditions, rather than to drive for some fixed and unattainable level of optimization that inevitably will falter under the pressure of changing circumstances.
Unfortunately, human factors can grind even the best-designed logistics system to a halt. Suppose your grocery clerk decides to take the four different cans of soup you're buying, and scan the bar code of a single can four times. There goes your supply chain visibilityand with it your ability to effectively move the right amount of product to that store in the future. "You can have the most wonderful information system in the world," says Ed Feitzinger, senior vice president of logistics outsourcer Menlo Worldwide Technologies, "but you're still dependent on a clerk typing something in somewhere."
Ask Your Counterparts in Partner It Groups: How are you dealing with process improvements in your organization?
Ask Your Staff: What are we doing to make sure we've incorporated an understanding of human factors into the technology we're delivering?
Ask Your Chief Logistics Officer: What do I need to learn about logistics?
There's software to focus on every part of the logistics management process. The trick is to make sure it's all synced up.
In the past, key parts of the logistics process have been managed using a hodgepodge of techniques, from paper forms to custom-designed spreadsheets to enterprise-class applications. But now, software can automate just about every component of the sequence, including order entry and processing, requisitioning and procurement, strategic sourcing, warehouse management and partner relationship management.
Consider cross-docking, the practice of coordinating supplier shipments so they can be mixed, matched and immediately shipped out again without requiring goods to be warehoused. It's theoretically possible to do this without software managing such complex handoffs, but few chief logistics officers would want to attempt such a feat without systems to support their efforts.
However, this proliferation of applications has for many companies created a mishmash of software that keeps logistics managers from getting the timely information they need. According to AMR Research Inc., the average U.S. manufacturer and retailer has 12 order management systems. That means many companies have substantial holes in their ability to get their supply chain logistics in order. Because many companies' ERP systems never really dealt with the myriad of logistics implementation issues like shipping optimization and transportation purchasing, there's currently a wave of upgrades and consolidation taking place that's similar to the series of integration steps many businesses went through with their earlier ERP efforts.
Yet even when such software is consolidated, lack of external integration is a problem. "You can put in a beautiful system that provides you with real-time information," says Menlo's Feitzinger, whose company controls about $7 billion in annual freight purchases. "But if your transportation carriers can't give you reliable information, then you have a great systembut you don't have great information."
Ask Your IT Staff: How many systems do we have that touch logistics, and what are the major stumbling blocks to integrating information from them?
Ask Your CFO: How much are we spending on services such as shipping, and how timely is the information we receive about what we're spending?
Ask Your Chief Logistics Officer: What tools do you think you'll require to get the information you need for better logistics?
Ultimately, your ability to create flexible logistics processes with suppliers and customers will come down to standardsand there's the rub.
If the linchpin of supply chain logistics is the flow of information, then the standards used to exchange information between players in the supply chain are key. In the early 1990s, large companies known as "channel masters" were able to force their suppliers to adopt Electronic Data Interchange standards, or simply stop being suppliers. But many suppliers who adopted EDI are less than eager to shift over to newer standards such as XMLin part because there are so many standards to choose from. "There are hundreds and hundreds of different standards that exist," says Descartes' Mesher, "and everybody has a business issue of not subordinating to someone else."
How will the inevitable disagreements over standards be resolved? Mesher points to several strategies for companies attempting to put together next-generation supply chains. The first is the channel master, the 800-pound gorillas such as Dell and Wal-Mart who can simply mandate standards that its suppliers must follow. The second Mesher calls "the chameleon," characterized by companies such as FedEx Corp. Using varying levels of business process customization, these companies present whatever face is most appropriate for the customer, adapting heavily for larger customers and guiding smaller customers toward more homogenized services.
The third approach is "the grange member," smaller members who band together to aggregate their buying and selling power in hopes of mandating standards. But historically, such initiatives fail miserably because their members often can't remain consolidated forever. The last approach is the "Zen master," which is a company that assumes it will continually be buffeted by the decisions of its larger customers. Ultimately, most companies will need to have at least some characteristics of the Zen master, designing their logistics processes to support continuous improvementand to be able to interact with new and existing channel partners as flexibly as possible.
Ask Your Chief Logistics Officer: Which industry standards do our customers and suppliers want to supportand which ones do we want them to support?
Ask Your Business Strategists: Which standards approach is most clearly linked to our company's strategic goals?
Ask Your Chief Technology Officer: Which standards should we support to keep from being buffeted by the winds of change?