Category Archives: Logistics

A Brief Introduction to the Components of Logistics Management (LMI Part 2)

In our last article we noted that Logistics Management is something that many procurement professionals overlook because most larger organizations have a separate logistics department, but it’s something that they shouldn’t because they won’t understand the true cost, the true delivery times, or the true risk of their sourcing decisions, which may, because of this, turn out to be more costly, more risky, and considerably less efficient than they expect.

In addition to being costly and risky, Logistics Management is not an easy ordeal. In order to manage logistics effectively, you need to:

  1. determine what you need and when you need it
  2. determine how to package it and how much room the packaging takes, and this requires the organization to calculate
    1. how many packages you can get on a pallet
    2. how many pallets you can get in a truck / container / rail car
    3. how many trucks / containers / rail cars you need
  3. determine the viable lanes for shipping from the suppliers to your warehouses and get quotes
  4. select the providers and plan the transport
  5. accurately cost the orders, shipments, and tariffs to make sure you have enough cash on hand to meet your obligations when your invoices come due

This typically requires five different systems, and/or modules. Namely a(n):

OM/FS: Order Management/Forecasting System
This integrates with your MRP system, looks at the production plan, looks at the inventory level, and determines the order quantities needed by week for the next X weeks based on how far out the production plan goes (which, in most systems, typically isn’t that far out, maybe a few months) and then uses the forecasting capabilities to project out a few months ahead of the average transportation time. It will also allow a user to override plans and projections, override default suppliers and carriers if there are options, and calculate any ramifications. And any related functions the organization needs around order management and forecasting. (We’re not going to go deep on any particular capability in this article.)

PMS: Package Management System
Logistics management is not as simple as calculating an order and contracting a carrier. You have to know how much space you will need for the shipment, which will dictate how many trucks, rail cars, or containers. That will depend on how many packaged units you can fit in the space, and that’s often more than a simple volume calculation, as you have to fit parts to boxes, boxes to pallets, and pallets to containers/cars. This requires more sophisticated volume and weight calculations than one would expect, which are not easy to do in a spreadsheet. Plus, if you have multiple options, you have to figure out which is best to minimize your shipping requirements.

FQMS: Freight Quote Management System
Once you know what you need, where it’s coming from, where it’s going to, how it’s going to be packaged, what kind of transport you need, and how many units (trucks, rail cars, containers, etc.), you need to find, and contract, a carrier. But the first step is to get inclusive quotes (costs per mile, fuel surcharges, handling charges, etc.) from carriers, compare and analyze them, contract one or more carriers, and then mark their quotes as contract rates, and others as quotes, but not guarantees.

TMS: Transportation Management System
Once you’ve determined your shipping needs, selected a carrier, and contracted a quote, you need to manage the transportation. You need to provide all the appropriate information to the carrier, get the pickup dates and expected delivery dates, receive and track updates, manage any issues that arise or reroutings that need to be done, identify any delays that will cause production or customer delivery risks and determine resolutions, and so on.

FPS: Financial Planning System (Cash Flow Planning)
Finally, you need to track all of the current and projected costs, and changes, so that you can manage your cash-flow and have the necessary cash when the invoices come in.

In other words, Logistics Planning and Management is currently quite an involved process that requires quite a few modules and process steps to do (reasonably) well.

A Brief Introduction to the Importance of Logistics Management (LMI Part 1)

Logistics Management is something that many procurement professionals overlook because most larger organizations have a separate logistics department. Logistics should not be separated from the whole of supply chain operations management because not only can you not compute a total cost of acquisition (which is the minimum calculation you should do during sourcing) without a solid understanding of the true logistics cost, but underperforming logistics teams costs an organization much more than Procurement thinks (and way more than the Logistic Division’s estimate of getting a product from point A to point B).

Logistics represents a significant part of Cost of Goods Sold (COGS). It’s more than just the transportation costs quoted by the carriers in each multi-modal leg in the journey. (Truck to the outbound port, ocean freight to the inbound port, rail to the regional distribution center, truck to your warehouse.) For an average shipment, costs also include:

  • (special) packaging (sur)charges
  • fuel surcharges
  • surcharges
  • loading/unloading/cross-docking fees
  • interim storage/inventory fees
  • insurance
  • loss (damage or theft)
  • tariffs (dictated by route)
  • losses from unplanned delays
    (loss of sales due to stock-outs; losses from production downtime due to missing parts)
  • inventory fees due to overstock

And all of these costs are variable depending on:

  • the route
    determines legs, length of legs, costs for the leg, tariffs, etc.
  • the carrier
    determines rates, surcharges, risk/OTD expectation, etc.
  • the transportation timings
    determines intermediate inventory needs, risk of delay, risk of loss, etc.

And that’s just the cost considerations. You also have to consider delivery times, inaccurate estimates, improper performance measurements and lack of end-to-end visibility here can lead to:

  • part shortages
    which can cause production line slowdowns/shutdowns
  • stockouts
    which can lead to lost sales
  • inventory build-up
    if too many shipments come in too fast, and this drives up costs and can cause space constraints for other orders
  • unexpected cost increases
    if you have to expedite

And then there’s the risk factors. Depending on the route, and the carrier, you could have increased risk of:

  • natural disaster
  • geopolitical disruption
  • port slowdown or shutdown
  • provider bankruptcy
  • cost increase due to currency exchange fluctuations, new regulations coming into effect, etc.

In other words, you should not overlook the implications of logistics cost to serve and service levels when sourcing. You don’t necessarily have to lock in the contracts, but if you already have contracts locked in, only have a few options, or need to use certain routes or carriers to keep costs down, you will need to ensure that the suppliers, and locations, you select are congruent with any options you may be restricted to. And if you are unrestricted, then you should know the assumptions you are making when sourcing, capture them, and pass them on to the logistics team at order/fulfillment time to make sure that the logistics team is planning and contracting appropriately.

2030 is too late for Center-Led Procurement!

Especially since 2020 was too late! And organizations should have been there by then since center-led procurement was being discussed as the next generation model in the mid-2000s and, more importantly, as the futurists were predicting that the future of work, and companies, was remote and distributed last decade, every company should be “center-led” by now.

(Note that we mean “center-led” and not “centralized” where one central office handles all major procurement projects globally. We mean center-led where a centralized function determines the best procurement path for each category — which could be centralized, distributed, multi-level, or mixed — and provides guidance to all of the global teams and makes sure they build the right procurement — and supply chain — models up front.)

In fact, by now, all organizations should be working off of a virtual center-led model where the “center” is the Procurement A-Team, where the members could literally be spread out over the 6 continents to “locally” absorb the situations in each geography before making decisions and to always have someone available to answer questions on not just a follow-the-sun but follow-the-local-business hours model.

And while virtual / remote / distributed work still seems to be an entirely new thing that most companies didn’t think of before the pandemic and that most companies are trying to eliminate entirely now that the pandemic has been declared over (even though the next pandemic is just around the corner and, yet again, no one is prepared for it), those of us in IT and Supply Chain have been doing it for two decades (and the doctor has been primarily been working remote for the past 19 years — the tech has been there, and has worked, for two decades … and now that high speed is in just about every urban area globally, there’s no reason a hybrid/virtual model cannot work and work well).

The reality is that the pandemic not only brought global supply chains crashing down but brought to light the high risk embedded in them a few of us saw a decade ago, which went beyond the obvious risks of “all your eggs in one basket” (even though Don Quixote was published in 1605) and “The Bermuda Triangle“*1, but also included the risks of relatively centralized procurement where one team in one part of the globe made the all-our-eggs-in-the-China-basket*2 and managed the relationship with one team at one factory in another part of the globe; so if either team got completely locked down with little remote/virtual support (and we saw some countries limit people to 1KM from their homes and China lock down entire cities and not even let people leave their apartments), the entire chain was shut down even beyond the worst case that some of us were envisioning a decade ago (and made our definitions of bad — which was factory goes out of business, shipping lane closes, or ship sinks — look good by comparison because, at least then, you could still go to work and travel to find a new factory, organize a new lane, or spin up the factory 24/7 until you remade the order).

However, with virtual center-led, you not only have a team that knows how to work distributed and remote, and who knows how to use that setup to better mitigate operational risks, but who also has a risk-mitigation mindset that any supply base should also be distributed and different locations remote from each other (two factories in the same town is not risk-mitigation; an earthquake destroys the roads, the entire town gets quarantined, or political borders shut and its effectively one cut-off source of supply) and will help the different parts of the organization design more risk-adverse, or at least risk-aware, supply chains — tapping into local expertise in each part of the world to make the best decision and allowing the organization to move management of the chain around as needed and local teams (because you’re not sourcing your Canadian snow-plow and igloo building services from India, for example) to always have remote access to guidance and best practices in snow-removal services RFP construction (and know how from Norway and Japan).

In other words, center-led procurement (of which you can find a lot of guidance on in the archives here and over on Spend Matters, especially since, now retired, Peter Smith of Spend Matters UK was a guru on this as well as sustainability) of the virtual kind is what you need to be doing now if you want to last until 2030.

 

*1 which, while statistically no more dangerous than any other part of the oceans, exemplifies the fact that even the biggest ships, with an entire year of your inventory on board, can sink, especially when oceanographers have finally realized [even though mathematicians working with wave models understood this concept decades ago] that rogue waves are not a once a in decade occurrence, but a DAILY occurrence on this planet, it’s just that the ocean is so big that the fraction ever covered by ships is so microscopic that the chances of any ship encountering a rogue wave are infinitesimal on a ship-by-ship basis)

*2 likely thanks to McKinsey, although many of the Big 5/6/8 followed suit quickly thereafter and proclaimed China the future

Sixteen Hundred and Ninety One Years Ago Today …

Constantine’s Bridge was officially opened in the presence of emperor Constantine the Great (who ruled Rome between 306 and 337 AD when he was acclaimed emperor after his father’s death). This was a 2,437 m Roman bridge over the Danube, 1,137 m of which spanned the riverbed, that is currently considered the longest ancient river bridge and one of the longest of all time — especially considering it was a wooden arch bridge with wooden superstructure (with masonry piers). [The longest pure arch bridges today barely exceed 500 m’s in length.]

While it only lasted four decades (which is still impressive given its mostly wooden construction), it is still a feat of ancient engineering and an accomplishment in logistics as it allowed for horse and cart delivery of goods (and men) in place of boats.

How Time Critical Does Your Transport Need to Be???

Expedited transport is definitely the hot topic in the consumer world, and time-critical transport is still a hot topic in the JiT manufacturing world. But just how critical is the topic of “time-critical” transport?

We addressed this topic in the past, and looking at it again (as a result of some vendors promoting real-time logistics visibility), the reality is still that, for any Procurement and Logistics organization that is with the times and using the right technology, time-critical / expedited / rushed transport is easy but should only be needed very, very rarely.

Traditionally, time critical transport was needed when something went awry in the supply chain and a shipment had to be expedited to prevent a disruption or stock-out that could be disastrous to a company’s bottom line. Otherwise, unless you were talking about perishable deliveries on a non-refrigerated truck, proper planning mitigated the need for expedited shipment. This situation, of course, worsened with the introduction of JIT (Just in Time) Manufacturing and delivery in the supply chain, especially considering that not only have natural and financial disasters been on the rise since this paradigm became popular, but, as expected, so did disruptions as there were no longer weeks worth of buffer inventory to absorb a minor supply chain shock.

But if you have good visibility, proper planning, and the right tools at your disposal, whether or not you are JIT makes no difference — the odds of a disruption being so significant as to require expedited shipping are low.

Specifically, if you have:

  • multi-tier supply chain visibility,
    like the kind multi-tier risk management or supply chain visibility providers gives you (like Resilinc or SourceMap), and know about a disruption the minute it happens three levels down in your supply chain, and not the day after a product was supposed to reach your warehouse
  • access to modern platforms to find and secure transport in real time,
    like FreightOS or TenderEasy, then you can quickly get a truck when you need a truck and
  • license to global trade document platforms,
    like Integration Point or Amber Road that handle import and export compliance, including advance notification, that help you to insure there are no delays at the border

then you will be notified of potential disruptions well in advance and in time to take appropriate actions, and in the situation where it was an unpredictable disaster (such as a fire, earthquake, or flood) at your supplier’s DC just as product was about to ship, and a new shipment has to be made immediately from another location, your immediate ability to secure a new truck almost always alleviates the need for an expedited shipment — a need which is further alleviated by your ability to get your import, export, and compliance documents in order before the product ships, preventing unnecessary delays at the border.Basically, about the only time you should have to do an expedited shipment is if you were a medical organ transport company and a new donor heart, needed halfway across the country, just became available. Other than that, with all of the options available to you to prevent the need for unanticipated (rushed) shipments, or to get them under control as soon as the need arises, there just isn’t that much of a need for overpriced time-critical transport anymore. (Unless you’re still living in the eighties and using paper and fax to manage your logistics.)

Your thoughts?