Only the better-informed logistics professional will be in a position to lead and give guidance to his staff regardless of size, assuring that the corporation receives the maximum benefit available in the new and very dynamic logistics environment. The logistics manager needs to have more specific and timely information to execute his day-to-day responsibilities. He must also find the time to:
1. Identify and select the best-qualified carriers
Typically, the complete evaluation of carriers versus requirements will result in determining the best carriers overall. This will permit reductions in the number of carriers needed to provide the customer service levels required. In turn, there will be better control of all operations, such as less dock congestion, an easier auditing process, stronger negotiating posture, a greater ability to pinpoint problem areas and improved customer service.
One reason for these benefits is that each selected carrier now has a bigger share of the available revenue; therefore, it now has to work harder to be sure of retaining this more important business segment. A survey in the February 1999 issue of Transportation & Distribution found that �on shipments of one to 500 miles, most shippers use only two carriers. Shipments over 500 miles, but fewer than 1,000 miles, usually fall to one or two carriers for a given shipper. Nearly 40% of shippers in the survey group expected to reduce the number of carriers in the next two years.�
2. Identify the carrier�s preferred routes
Preferred carrier traffic lanes can affect cost and service levels severely, and the logistics manager must have a very detailed knowledge of all carriers used and also be able to identify all carriers� traffic lanes. You can be assured that the carriers are constantly analyzing the revenue obtained from each of their traffic lanes and generally will act to balance the loaded miles traveled in either direction.
Many times, balancing these lanes is difficult (if not impossible), given normal competitive pressures and seasonal fluctuations in demand. Carriers are usually willing to negotiate rates that are favorable to the shipper, which will help attract additional traffic to low-density traffic lanes in order for the carrier to achieve a revenue and tonnage balance. For the carrier, this is simply optimizing the bottom line and, of course, it has a beneficial result for the shipper. The carrier benefits through an improved operating ratio and costs, and the customer benefits with improved service, making it a win-win situation, since the shipper, customer and carrier all benefit.
3. Optimize order/shipment consolidations
The opportunities for cost savings and service improvements in effective consolidations can hardly be matched by few other efforts in the transportation area of the logistics function. Consolidation savings can easily outstrip savings gained from the negotiated rate itself.
The manager must be able to identify and optimize dynamically, on a day-to-day basis, all possible shipment consolidation opportunities. There are several existing computerized programs that greatly facilitate the consolidation process. This should always be part of any computerized order entry system. If not, then an opportunity for improving costs in the transportation area is wasted. In addition, the consolidation usually results in improved service, with a dramatic impact in total costs.
Joe Loughran, president of SmartTran, puts it this way: �Pure and simple, bundling parcels going to the same consignee reduces your shipping expense.�
Naturally, carriers discourage the practice. Here�s an example of why: two 10-pound parcels shipped within Zone 4 would cost a total of $9.24. If you bundle them using banding, you would create a 20-pound parcel that would cost $5.99 to ship. That�s a $3.25 savings!
4. Be aware of the significance of order cycle time
Knowledge of the elements that compose order cycle time and the cost impact associated with each of the various order cycle elements is critical. One also needs the knowledge of the specific party or parties who are making the decisions that affect order cycle time. Factors such as shipping location, production and planning, location and availability of product, credit review, order size, method of order transmission, mode of transportation for replenishment, terms of sale, location of receivers and customer service policies can affect order cycle time.
Also, back-order policy and even customer habits, both good and bad, inventory levels at customer facilities, and no doubt many other factors can impact the measurement criteria of order cycle time. Any factor adding any time to the order cycle time equation (good or bad), results in an immediate and often continuing cost impact on inventory levels.
Equally important is the normally expected delivery and, of course, what the fluctuation is in actual transit times between shipping and receiving destination. All and any other unnamed time elements must be known when setting up your order cycle times.
5. Know the cost effect of order size
It is important for the manager to have a continuing and current knowledge of size and frequency of orders and all costs associated with each size order. Generally, the Pareto Rule applies, showing that there appears to be a constant ratio of 80% of the dollar volume representing 20% of the orders. Order processing costs, on the other hand, would reflect that 80% of the administrative costs go towards only 20% of the dollar volume of orders. There could very well be some orders that result in losses to handle.
Without some rather resounding reason for continuing to accept these orders, steps should be taken to determine exactly if the costs to handle them really justify accepting such orders. Certainly, the �premium� for handling these orders should be tracked and reported for review.
Some of these orders are designed to develop a future prospective increase in business, which is perfectly legitimate. The rationale for the handling of small orders should be established. Recommendations should be developed and appropriately and routinely documented with costs and effect on customer service levels to cover future handling of small orders. Tracking and reporting to appropriate personnel for review and corrective action is essential in the management of this activity. �If you don�t track it, you don�t manage it!�
Corporate policies which set terms of sale, such as minimum order limits and discounts for payment of charges if paid by a certain date, contribute to the bunching of shipping dates during a shipping month. This results in peaks and valleys in shipping activity and an increase in the average cost to process an order.
A study of a major corporation found that 60% of all orders were scheduled to ship in the last 10 days of the month, with 10% scheduled in the first 10 days of the month and 30% in the middle of the month. Rarely, if ever, was product availability, warehouse throughput, transportation facilities or rates the cause of the disproportionate cluster of shipments. They were, however, the victims (with higher unit costs), resulting in excessive costs from such monthly peaks and valleys in order release occurrences.
Order size is also affected by sales promotions and dated sales programs. Oftentimes, payments are deferred and all merchandise unsold after a certain date is returned to the supplier. Sales contests can have a substantial influence on the small order syndrome. The criteria usually involve sales objectives related to volume of sales dollars. As a result, orders are sought in the highest possible dollar combinations and, in some outlandish instances, without regard to the actual needs of the customer. This may sound astonishing, but it happens.
In many instances, the customer is permitted to return all unsold residual merchandise at a later date. In the meantime, the sales contest was closed the previous month! So here again, the individuals responsible for creating the small order numbers are rarely aware of the costs that their actions can incur. This is just another example of a split of responsibility for activities and dollars that collectively affect total logistics costs and effort.
Unfortunately, many of these are poorly identified or unidentified in many financial reporting systems. These costs tend not to be perceived as significant cost drains � perhaps because they are not tracked or reported, but rather lumped into large categories of costs. Another reason for the failure to track these excess costs is that they are incrementally small individual cost elements and unless tracked as a byproduct of a regular order handling system simply are not worth the effort to identify and manage.
Often, it is difficult to determine it worthwhile to track these hidden costs simply to find out if the existing systems are feasible to continue using. However, it is important to be aware, track and report the impact on costs and to bring these so-called �hidden costs� to the attention of appropriate individuals for review and corrective action where appropriate.
6. Be aware of real customer service needs
Knowledge of the real customer service criteria as well as how best to respond to these needs so as to satisfy the actual customer service requirements is essential. There is a general misconception that a ship next- or same-day policy is a golden rule of the �ultimate� customer service.
Truthfully, they may be justified in terms of a marketing program, but in too many cases, these policies are meaningless in terms of defining real customer service wants or needs or satisfaction. Worst of all, they can create costs for compliance, which are totally unnecessary in a substantial number of shipments needed by customers. Even so, this still does not dictate when the product is to be delivered, nor if that is in fact when the customer expected the shipment to be received. To illustrate the situation we are describing (unless you have an EDI-centered order acceptance and release system), let�s say that the sales department holds orders for one day and relays the order to the central order processing group. Credit control holds the order for two days to clear up a delayed payment for a prior shipment, and production control holds the order for back-ordered production for another five days. Order processing holds orders for batch processing or transmittal to the distribution group perhaps twice a day (or more often, depending on the volume).
In this scenario, the days used in processing the order from customer release to customer delivery represents more time than the shipment takes from the shipping point to the receiving point. How to avoid these unnecessary extra costs can be the responsibility of any of several different parties in the logistics loop.
Obviously, there is a need for an intense review of the order trail to determine where these delays can be avoided or reduced. These delays often are responsible for premium transportation handling of those orders, but the costs are attributed to the logistics area. The shipment should be released on the basis of a required customer delivery date. This gives the transportation personnel an opportunity to select the type of transportation mode that will provide exactly the delivery required to achieve the customer service requirements.
The delivery date puts the professional on the hook to accomplish a customer�s need, instead of merely executing the requirements for compliance with a shipping date. Shipping dates are much too often set as a result of a clear misunderstanding about what effects the shipping date really can accomplish in terms of real customer satisfaction or real service needs.
Editor�s note: This is an excerpt from a paper on logistics entitled �Third Party Service Options for the New Millennium Logistics Executive.� Part two will be published in the next issue.
Lee Cisneros is president of Transportation Consulting Associates. For more info, call 508-646-1000 or e-mail lctranscon@aol.com.
