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You need to know where you're going: before companies can begin to integrate their supply chain, they first need to know their costs. (Insights).

To paraphrase a well-known line from The Wizard of Oz: "If you don't know where you're going, then any road will get you there." Some recent research on logistics and supply chain costs reminded me of this line. Or, to take that idea even further: If you don't know what your costs are, then it doesn't matter what you do when it comes to supply chain integration.

During the summer of 2001, The Ohio State University developed its annual "Career Patterns in Logistics" questionnaire and mailed it to a select list of Council of Logistics Management executives. The questionnaire included a separate page asking for logistics and supply chain costs as a percentage of sales in hopes of updating some earlier research on logistics costs. The cost categories included both traditional logistics costs as well as costs for other supply chain functions, such as purchasing, materials management, and customer relationship management.

The response to the costing questions was enlightening in its absence. We received a total of 134 responses to our complete survey. Of those, only 80--approximately 60 percent--sent back the logistics cost page with their completed questionnaires. Although half of those respondents (40) provided at least some data on their costs as a percentage of sales, only 28 identified "inventory carrying cost" as a logistics cost. Furthermore, only 11 respondents provided specific data on their inventory carrying costs.

In the supply chain part of the cost questionnaire, 41 of the 80 respondents checked at least one cost category, indicating that their companies tracked these costs. Only seven of the 41, though, provided specific cost-as-a-percentage-of-sales data. A total of 21 respondents checked "inventory carrying cost" as a supply chain cost, and four provided some specific cost-to-sales data.

Why the disappointing response to the costing segment of the survey? There could be a number of explanations. We might argue that the respondents consider cost data proprietary and are reluctant to provide specific data for their company, even for this anonymous survey. Undoubtedly this reasoning influenced some respondents. However, we did not ask for specific sales data in a way that would allow us to use the data except in a macro analysis of cost impact.

Another explanation might be that we targeted too many logistics executives and not enough supply chain executives. However, more than half of the respondents who returned the cost page identified various supply chain functions as activities that fell under their companies' supply chain umbrella. In spite of this response, only seven people could provide specific cost numbers for those functions. Again, we might surmise that the questionnaire went to some individuals who were not in a position to respond to it. But if that were the case, why would they complete the other four pages?

Even taking into account these considerations, the lack of response is disturbing. And how about the inventory cost findings? Incredible! How can you propose to run a logistics network or develop and implement supply chain relationships without having inventory carrying cost information at your fingertips? Perhaps this is a bit harsh, but everything I know about supply chain management suggests that the big payoff for the company and its partners is inventory reduction. And if you don't measure the largest cost component, how can you manage it?

Needless to say, this part of the survey was a bust when measured against our original objective. But in terms of sending a message to practitioners, consultants, and academics, it provides some powerful information. If we are going to go through the pain of culture change, process redesign, and customer and channel integration--we must find a better way to put a pencil to the results.

Bernard J. "Bud" LaLonde is professor emeritus of logistics at The Ohio State University.
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Author:LaLonde, Bud
Publication:Supply Chain Management Review
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 1, 2002
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