Why best practices matter in logistics and distribution.

Recent escalation in energy and materials costs have challenged many companies to look for ways to control or reduce these costs. Logistics and distribution operations, heavily impacted by input cost increases, are one area where companies can look for increased efficiency to at least partially offset cost escalation.

In the paper industry, the cost of distribution often accounts for 10-20% of the total delivered cost of a product. Yet, many companies view the cost of distribution more as a given--a cost of doing business--and don't give this area of their operations the attention and focus it deserves. Paper companies have long sought to improve manufacturing efficiency and reliability and achieve the cost benefits associated with strong performance in this part of their operations. One must wonder if improving logistics performance has received even close to its share of proportional scrutiny compared to the manufacturing side of the organization. If your organization has not seriously reviewed the logistics and distribution part of the business in years, it is likely that meaningful improvements can be made.

Before one can consider logistics efficiency improvements and cost reductions, consider the basics of logistics strategy, and how this fits with overall business strategy and goals. In particular, logistics and distribution is only one component of the supply chain, and activities in other areas of the supply chain will have a direct impact on what occurs in the distribution side of the operation. The old adage shared amongst seasoned warehouse and shipping personnel about "everything runs downhill" often holds true regarding logistics and distribution operations. Considering logistics or distribution except as one component of the supply chain can lead to wrong conclusions and projects that cannot succeed.

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ORDER SOURCING DECISION

As an example, one of the more significant drivers of logistics and distribution costs involves the order sourcing decision. Often, a company can source a particular order from several different geographic locations--whether these are mill or warehousing operations, or both. The decision on order sourcing location has a large impact on warehousing and distribution costs, and on the activities necessary to fulfill the order. Often, systems and processes are set up with a fixed "rule" on order sourcing--for instance, picking the location that is closest geographically and locking this decision in at time of order entry--that ignores the other factors involved in determining the cost to deliver the product

Such an approach assumes that the conditions at the time of order placement will be static and still exist when the order must be manufactured and/or shipped. The other factors that may influence the order sourcing decision include the receipt of subsequent orders, manufacturing costs, trim, backlogs, availability/reliability of transportation, cost of transportation, and product quality.

The lead time until product delivery is also important, as any time not needed for manufacturing or distribution can be used to revisit the sourcing decision to ensure the overall best location is selected. A poor decision on order sourcing will have a large negative impact on logistics costs, which cannot be overcome regardless of logistics efficiencies.

When considering a logistics strategy, being a low cost provider is only one of several possible alternative goals; the cost of distribution must be weighed against the customer service levels the company wishes to provide. The logistics cost/service tradeoff is a well known principle of physical distribution. Service levels can be defined in terms of product availability, the lead time from order placement until receipt of product, expediting policies, information availability and accuracy, performance levels/guarantees, and other aspects of customer service.

Besides cost and service levels, logistics strategy can also be based on providing value-added services, flexibility, or innovation. By providing value-added services, a supplier performs additional packaging, assembling, labeling, service, or distribution activities that make it easier for the customer to market or utilize the product.

An example might involve packaging and labeling a product so that it can be shipped directly to retail stores without additional handling and re-packaging at an intermediate warehouse. With a flexibility strategy, the organization attempts to customize its logistics activities to meet the specific needs of a customer or market segment. Such a logistics strategy seeks to provide many possible logistics and distribution options, depending on customer need, without an undue increase in costs.

Finally, an innovation strategy involves a capability to continually re-invent and redesign logistics capabilities as market or customer needs change. This takes a flexibility strategy one step further and recognizes that dynamic market conditions will require successive logistics changes over time in order to remain competitive. In practice, logistics strategies must strike a balance between conflicting interests, and the statement of strategy defines what is most important given scarce resources and time.

UNDERLYING PROCESS DESIGN

When logistics strategies are implemented, it is tempting to focus on obvious actions without examining underlying process design that can lead to longer-term results. Yet, it is in the design of processes that strategies are implemented in a lasting way. For instance, suppose that the primary logistics strategy of an organization is to lower its distribution costs. An obvious way of reducing costs is to seek concessions from transportation providers. This may reduce costs for a time, if market conditions are favorable. Yet if such a strategy is not coupled with other initiatives that help suppliers in turn control their costs, this strategy will likely prove ineffective over time.

Also, if this is the sole or primary focus of the company attempting to lower its costs, many more lasting process improvements will have been missed. These process improvements will not be noticeable until an alternative process is identified or proposed. In short, it may look like a great job is being done when in fact things are headed in the opposite direction. Therefore, implementation of any logistics strategy should start with overall process design, and ensure that the right tools, incentives, and procedures are in place to make the strategy an operational reality.

COMPONENTS OF LOGISTICS PROCESSES

Logistics and distribution strategies are built around 4 primary process components: design, purchasing, planning, and asset management. Each of these component areas consist of a set of activities and processes that should support the overall strategy (see Figure A). Organizations should regularly assess logistics operations in each of these component areas to ensure that strategies and goals are being supported. We will now examine each of these logistics process components in more detail and some of the best practices that companies might pursue in each of these process areas.

DESIGN

The design component of logistics is concerned with both the physical distribution network as well as the organization that manages and executes logistics activities. The physical distribution network includes the site selection, sizing, and design of warehouses, the inventory management practices at these warehouses, and the transportation of product through the network. While the possible distribution designs are numerous, once designed the physical network is not easily changed. The design component also considers whether activities will be performed and managed in-house, or whether third party services will be used. Some options or practices the organization may wish to consider in logistics design are shown in Table A.

Table A: Examples of Best Practices in Logistics Design

* Consistency of Logistics Design with Business Goals and Strategies

* Undertaking an End-to-End Supply Chain Review

* Thorough Understanding of "As-Is" State prior to Redesign Activities

* Taking Service Model into Account prior to Design Tasks

* Understanding all Components of Order/Delivery Lead Time

* Postponement of Resource Commitments based on Lead Times

* Substituting Information for Inventory

* Appropriate Design of Warehousing Space

* Capture and Entry of Information at Its Source

* Regular Review of Physical Distribution Network

* Appropriate Use of Mixed-Mode and Crossdock Distribution

* Visibility and Use of Logistics Costs in Decision-Making 

* Continual Search for Improvement Ideas

In reviewing the practices and techniques used by organizations that excel in logistics design, there are many common themes. Logistics and distribution is not looked at in isolation, but as one piece in a much larger puzzle. There is an openness to consider new ideas, and unless information is sensitive, it is freely shared across the organization. Distribution and warehousing alternatives are regularly reviewed and assessed. Lead times are understood and resources are committed based on these lead times. These kinds of practices help ensure an appropriate logistics design that helps an organization be successful.

PROCUREMENT 

In the procurement component, the organization attempts to secure the resources and suppliers needed to implement the choices selected in the design component. This includes not only having the appropriate internal staff but also the selection of carriers, warehouses, and possible 3rd party logistics providers. This component does not just stop with selection of a supplier base and negotiation of contracts, but should also include the monitoring and management of performance with chosen suppliers. Communicating clear expectations in this step helps ensure that customer needs are met. Some examples of best practices which may be utilized in the procurement component of logistics are shown in Table B.

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Table B: Examples of Best Practices in Logistics Procurement

* Appropriate Use of Suppliers and Supplier Selection

* Purchasing Goals that Compliment the Logistics Strategy

* Increased Collaboration and Information Sharing with Logistics Providers

* Regular Monitoring of Each Supplier's Performance

* Clear Communication of Expectations with Suppliers

* Developing and Sharing Usage Forecasts with Suppliers

* Supplier Certification Programs to ensure Consistent Quality

* Supplier Assessment of Capabilities, Strengths, and Weaknesses

It is easy for the purchasing of logistics and distribution services to become disconnected from the rest of the business organization. While purchasing of logistics services often involves some specialized knowledge and skills, do not lose sight of the overall logistics strategy and design it is intended to support. Overall, best practices in logistics procurement involve securing the right resources to implement logistics strategies and the appropriate management of these resources and suppliers.

PLAN

The planning component is where the organization establishes and lays out its short-term operating schedule. This includes details on inventory replenishment and levels as well as transportation plans. Determining the mode and loading configuration of shipments to distribution centers and customers is one objective of the planning component, which has a large impact on overall logistics costs. The planning component must work within the confines of the network design, the carrier base that has been established, and the organization's requirements for customer service. Some ideas that many organizations have utilized to improve the planning component of their logistics operations are shown in Table C.

Table C: Examples of Best Practices in Logistics Planning

* Inventory Management in Aggregate before Detail

* Inventory Check Prior to Pegging to Schedule

* Automatic Load/Bay Management

* Projection of Inventory Levels

* Forecasting Vehicle Needs in Advance

* Considering all Constraints in Shipment Planning

* Use of Lead Times and Freight Rates in Shipment Planning Processes

* Load Pattern Management

* Appropriate Load Consolidation and Optimization 

* Shipment Planning Basis Matches Customer/Order Requirements

* Use of "Fill" Vehicle Options

Best practices in the logistics planning area are concerned both with the appropriate delivery of product per customer needs and expectations as well as the efficient utilization of logistics assets. The logistics planning component determines how inventory is managed and how logistics assets and resources are used in moving product through the distribution network. While logistics planning decisions must work under constraints imposed from design and purchasing decisions, the planning and asset management processes are where the feedback on the effectiveness of these prior decisions are obtained.

ASSET MANAGEMENT

It should be a goal of all logistics operations to utilize the assets that have been acquired in an efficient and effective way. Logistics assets include the use of warehouse space, distribution personnel, and vehicles hired for transportation of product. The use of logistics assets can be measured, although it is sometimes difficult to determine cause-and-effect relationships as the design, purchasing, planning, and asset management components are all inter-linked in many of these measures. Given the resources and assets that have been assembled, good management of logistics assets requires good processes and information sharing. Several practices in use by organizations striving to improve the utilization of logistics assets are found in Table D.

Table D: Examples of Best Practices in Logistics Asset Management

* Monitoring Vehicle Capacity and Utilization

* Monitoring Warehouse Space Usage and Utilization

* Capture and Tracking of Productivity Measures

* Tracking and Research of Product Damage Reasons

* Re-use of Packaging and Loading Materials

* Bay Cycle Counting

* Tracking Physical Inventory Locations

* Inventory Assignment Practices

* Monitoring and Ensuring Inventory Accuracy

* Accuracy of Logistics Plans

* Ability to Fulfill Logistics Plans, Capture of Deviations from Plan

* Analysis of Logistics Activities and Impact on Asset Utilizations

* Monitoring of Actual versus Planned Deliveries

Best practices in logistics asset management center on the monitoring of logistics asset usage and the identification of areas for improvement. In utilizing logistics assets, the organization should be able to fulfill the plans that have been laid in the design, purchasing, and planning components. If for some reason these plans cannot be fulfilled, the plans are inaccurate or unreasonable, or fulfilling the plans involves inefficiencies, this feedback should be captured and available for corrective action as well as later analysis. Once opportunities are identified, action should be taken to correct the inefficiency of the plan or the process. Without an effective feedback loop, and the analysis required to make sense of this feedback, the organization will not be able to improve upon current results.

APPLYING BEST PRACTICES

Best practices, whether applied to the area of logistics and distribution or to other areas of the operation, can help a company meet the demands of the marketplace and achieve important goals and objectives. The best organizations are continually seeking and evaluating best practices, and aren't constrained by a "not invented here" mentality. Since there is no monopoly on good ideas, organizations that do not look beyond themselves will have a hard time keeping up with competitors. Creating a culture that seeks and encourages evaluation of best practices can often provide a competitive edge.

It is not difficult to generate, find, and develop lists of best practices. The difficult part is in evaluating these "best" practices, in determining whether they apply to the organization in question, and figuring out how to implement these as appropriate. This is where companies typically falter and fail. Here it is important to remember that many best practices are only "best" in a particular context--they may only apply in a particular type of manufacturing environment (like make-to-order versus make-to-stock), a specific market segment, with a particular type of customer, with a certain mix of orders, or with a particular supplier.

Logistics and distribution cannot be understood in isolation, but must be considered as part of a larger supply chain and business strategy "whole." The results from any project can only be foreseen to the extent that the entire process is understood and how the new practices will impact related aspects of the operation. Before implementing any new logistics practices, be sure to understand the surrounding environment first. Doing so will ensure not only the success of the project but allow one to forecast the benefits with more accuracy and precision.

WHAT YOU WILL LEARN

* The basics of logistics strategy and how it fits with overall business strategy and goals.

* How logistics and distribution strategies are built around 4 primary process components; design, purchasing, planning, and asset management.

* Why logistics and distribution cannot be understood in isolation.

ADDITIONAL RESOURCES

* This article is based on a section of Supply Chain Best Practices for the Pulp and Paper Industry, by Paul Lail. It is available in a 205 page, spiral-bound book, or on a CD-ROM, or both the book & CD-ROM. 2003. To order the publication, go to www.tappi.org and type in the following Product Code in the search field: 0101R308SET TAPPI Member Price: $115.00. Non-Member Price: $175.00.

PAUL LAIL, INTERNATIONAL PAPER

ABOUT THE AUTHOR

Paul Lail is operations service manager in the coated & SC papers division of International Paper Co., Loveland, Ohio, USA. He has 25 years experience in various supply chain, customer service, and IT roles in the paper industry. Lail holds an MBA from Vanderbilt University and a B.A. in mathematics from Mt. Vernon Nazarene University. He can be reached at [e-mail].

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