Optimizing Logistics

Logistics in the entire process of managing the purchase, storage and movement of goods. Resources including physical items such as equipment, materials, and food, and abstract items need to be moved between points of origin and points of utilization. All this movement comes within the logistics process. Logistics is also often defined as the management of inventory both at rest and in motions.

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In this article we will look at 1) defining logistics, 2) categories of logistics, 3) optimizing logistics, and 4) logistics best practices.

DEFINING LOGISTICS

Originally a military term used to refer to the acquisition, transportation and storage of supplies, and equipment, it has been widely adopted in the business world and is applied to resources. Processes such as integration of the flow of information, handling of materials, production, packaging, inventory control, transportation, warehousing, and the security of these goods are all part of logistics.

Necessary for nearly all types of business, an efficient supply chain and logistics process can help a company operate more efficiently and reduce costs.

Inbound and Outbound Logistics

At any point, a company may be managing inbound logistics, outbound logistics or both at the same time.

1. Inbound Logistics: This is the flow of relevant materials from a supplier to the business. This can include the purchase and delivery of materials, parts or finished items from the supplier to the manufacturing or storage location of the company.
2. Outbound Logistics: On the other hand, outbound logistics deal with the storage and delivery of the complete or final product from the company or manufacturer to the end user. This could be delivery directly to the end user to a retail location.

CATEGORIES OF LOGISTICS

• Procurement logistics: Procurement logistics include such things as market research, requirements gathering and planning, make or buy decisions, management of suppliers, order, and order management.

• Production logistics: This category of logistics is the connection between procurement and distribution. Here production capacity is utilized to serve distribution logistics with activities such as layout and production planning. 

• Distribution logistics: Simply, distribution logistics is tasked with the delivery of final products to the end user. Here activities such as processing of orders, warehousing and transportation are performed.

• After-sales logistics: Any required after sales movement of goods is included in after-sales logistics. This could involve taking an item from a consumer back to the producer for repairs within a warranty period.

• Disposal logistics: Often, there is a need to dispose of waste materials or items that have reached the end of their useful life. Disposal logistics deals with this aspect in the most cost effective way possible.

• Reverse logistics: The area of logistics that deals with the re-use of any products or materials is called reverse logistics. This can also include managing and selling surplus items and those items being returned by the consumer. This can be the flow of goods from point of consumption to the point of origin for capturing value or for proper disposal.

• Green logistics: This category of logistics handles the work that goes into measurement and minimization of the ecological impact of any logistics activities.

• Global logistics: Logistics processes for global movement of goods and services brings with it a host of issues and complications. These can include import and export rules, regulations and duties, delays, safety and security and modes of transportation.

• Domestics logistics: Domestic logistics handles issues related to the movement and storage of goods and services within the country. This also has important issues within it such as security, delays and infrastructure. 

OPTIMIZING LOGISTICS

Key Issues for an Efficient Logistics Process

The logistics process is relevant to the entire company and interacts with external stakeholder such as vendors, suppliers and customers. Given its importance to the company and to the consumers, it is imperative that the process work as smoothly and as efficiently as possible. To achieve this end, there are five key issues that need to be highlighted:

Product Movement

Often, this is seen as the only real job of a logistics function. While there are other aspects to the area, the movement of products itself is not as straightforward as it is made to appear. The way the material is moved from point A to point B needs to follow the direction and strategy of the organization. If the ultimate goal is to make sure that the product reaches the consumers as fast as possible, then cost reductions may not be a concern. On the other hand, if a company is focusing on cost efficiency, then the goods will need to be moved in the best possible way at the least possible cost.

In addition, there is a need for a balance between planning and flexibility in moving goods. The movement plan must be able to adjust according to any potential changes in the business plans. It must also be able to manage changing environments and possible obstacles and delays. In movements to geographically dispersed locations and their particular peculiarities.

Information Movement

Adding to the generic concept of logistics, there is a step beyond the traditional movement of materials and this is the movement of information. This includes current location information about the products, as well as the incoming orders and delivery timelines. This information is crucial for good decision making and needs to be both timely and accurate.

This information must flow openly between suppliers, warehouses, consumers and the company itself. There also needs to be a flow of information internal to the company between various departments and stakeholders. Ideally, an IT system should be in place to ensure this flow of information. This system needs to be dynamic and able to handle all ends of the process from production, material and requirement planning to financial and sales forecasts. These systems need to be present at both a macro level and a micro level, with both types of views available so that the right information is available for the right person.

Timely Service

The importance of time in the world of logistics cannot be stressed enough. In order to operate in the global market and its ever-changing forecasts, customer requirements, product launches and a multitude of other issues, there needs to be an ever present focus on time. Any raw materials need to be ordered accurately and need to arrive on time and as ordered. Any orders places must be filled quickly and correctly. Lead times are shrinking in all areas and in all fields and may make the difference between a successful company and one on the way out.

Cost

As with all matters of business in today’s world, cost is a key measure of logistic success and effectiveness. Containing costs in all areas such as freight charges, warehouse space and labor among other things is vital to corporate profit margins. There needs to be an understanding that high prices do not mean the best quality. Conversely, the lowest price may also not make good business sense. Instead, there need to be solutions that offer the best value for money and value to the business.

Integration

Bringing all stakeholders and elements of the logistics process together is an important elements of logistics optimization and is called integration. This is a vital point for the continued success of the process. For the process to work well over the long-term, all its relevant parts need to perform at an optimal level.

Traditionally, organizational chart driven organizations will find it difficult to integrate since different areas will be locked into pre-defined silos. Internal integration being vital to efficient logistics, this compartmentalized way of work needs to be re-imagined since it fragments a process and slows down development.

Both internal and external integration are vital to success. External integration with suppliers and vendors ensures that they become partners who understand how things work and why they work that way. When logistics vision is shared, there is a higher chance of success. Similarly, integrating with consumers offers its own benefits. These include a better understanding of their needs and a higher chance of satisfying them. Forming relationships with a customer makes them feel values and important and forms a competitive advantage for the company.

Rules to Optimize Logistics

Logistics and supply chains often offer the biggest opportunity to reduce costs and increase efficiency. For many companies, better decision making can lead to cost reductions by up to 40 percent. Over the years, through automation and process improvement, many organizations have managed to reduce human effort but in order to achieve true results, the following rules must be observed.

• Set Quantifiable and Measurable Objectives: Objectives are the end results any optimization effort aims to achieve. These objectives need to be clear and precise. It is important for any effective goals to be easily quantifiable and hence east to measure. This is the only way a target return on investment can be set and then measured.

• Explicitly Consider Variability: It is a given that there will be variability in all possible logistics processes. This means that a trip along the same route may take different times according to external factors along that route such as traffic or construction. Also, there may be a different number of items delivered each day along the same route between the same entities. An assumption that no variability exists may lead to incorrect decisions and poor logistics management.

• Ensure that data is Accurate, Timely and Comprehensive: The right data is essential to any optimization decision or process. Any solutions based on incorrect data will lead to more damage than benefits. Regarding any parts of the process, there needs to be detailed and comprehensive data regarding all the different parts of an activity to ensure that no important elements are left out.

• Ensure Integration of Automated Data: The amount of detailed data required for optimized logistics needs to not only be automated but also to be unified and integrated. This will ensure that there are no difficulties and errors in manual data entry and that comprehensive data is available to those that need the information.

• Ensure Efficient Execution of Optimization Plans: Optimization is only as successful as the people who are tasked with executing the plan. Field teams, as well as relevant stakeholders need to be able to follow simple directions and execute them as directed. These actions then turn into measurable items that can be used to gauge the return on investment for any optimization endeavor.

• Educate and Train People: Any technical or complicated aspects of a logistics system or process can only be successful if the people running them have all the knowledge, skills and expertise required to execute the plans.

• Ensure that Processes Exist to Support Optimization: Logistics optimization needs to be an ongoing supportive effort that needs to continuously monitor both the current process and the current problems. There needs to be analysis on whether the system in place is still supporting the current problems of the marketplace. This will allow the company to keep a streamlined process in place, benefit from any potential opportunities and avoid any potential disasters.

• Provide Proof of Return on Investments: Management will always expect a substantial return on their investment into the optimization of a logistics process. This needs to offset the cost of technology, people and operations in a significant way. For this, there first needs to be a true depiction of the total cost of optimization activities as well as a benchmark comparison to best practices. The second step is to identify metrics before the implementation of an optimization programs and compare these to figures after the process optimization.

LOGISTICS BEST PRACTICES

In the increasingly globalized world of today, logistics management offers a unique advantage to the company, both in terms of its function and its potential to act as cost management center. Some of the best practices from industrial companies include:

Strategy Integration

All aspects of the logistics process including service level agreements, production locations, warehouses, and outsourcing decisions are integrated with overall company strategy. The entire logistics process is regularly evaluated to ensure that it remains aligned strategically with the direction of the company.  Any service levels are kept relevant to the customer and all relevant strategy is shared with the right external partners and stakeholders.

Customer Interface Management

In the best companies, the supply chain is customized for every segment of customers or different product categories. The highest revenue generating customers will receive the most customized service while others may receive the same service but with some variety of choices in pricing or timing. There may be relationship building activities with the customers such as scheduled regular meetings to understand their needs and optimize processes accordingly.

Inventory Management

Most effective companies will ensure that demand and order forecasts are based on real time data. This helps ensure strategic inventory management and prevents instances of over or under stocking.

Inbound Logistics

This end of logistics is usually the responsibility of the vendor or supplier. Suppliers are incentivized to keep costs low and efficiency high. There may be rewards for complying with service level agreements while there may be penalties for delays or poor quality of service or materials. Contracts often have flexibility to allow for quick responses to changes in demand or requirements.

Outbound Logistics

This part of logistics is usually controlled centrally by the company. Defined processes and established benchmarks are required to ensure optimal performance. Expertise is developed among teams to ensure that the right people are running processes.

Measurement and Control of Performance

Regular checks are performed on the supply chain performance to ensure compliance with established and metrics that are defined through the overall company strategy. There are plans defined to manage performance gaps both internally and externally.

Risk Mitigation

There are several stages in the logistics process and not all of them can be controlled one hundred percent. Instead, there is usually a plan of action for identifying and managing risks and this plan needs to be evaluated every month to ensure relevance. The probability of a risk occurring also need to be assessed. Contingency plans can then be developed for those events most likely to occur or those likely to cause the most loss or damage. Responsibility for risk management and authority for quick decision making also need to be defined and communicated across the company.

Automated IT Systems

It is now necessary to have a comprehensive supply chain management system in place. This system needs to fulfill all the company’s logistics requirements and needs to fully support the process in place. Once the system and process are cohesive, the IT systems can then be connected to both customers and suppliers ensuring a completely integrated supply chain environment. Any IT systems need to be regularly re-evaluated and updated to keep them relevant.

The importance of the logistics function for the global company of today cannot be emphasized enough. Though globalization has meant that many production functions are outsourced to other countries, it has also meant that the need for effective global logistics is even greater now. For this reason, it remains pertinent for a company to create and maintain a strategically focused logistics and supply chain network.