2.4 The Deliverables of a Modern Logistics System
To design a high-performing logistics system, you need to begin with the end in mind. What do your customers expect of your logistics system? The best way to find out is to ask them. To verify what you hear, collect and pour over their supplier A scorecard documents and communicates a supplier’s performance on key measures a company uses to evaluate performance. . Then look downstream and ask, “How can we use logistics to help our customers perform better so that they win more business?” This analysis will reveal that your logistics system needs to deliver some mix of the seven rights of logistics: the right product in the right condition and right quantity at the right time and right place for the right cost to the right customer. This is the essence of customer service: providing customers what they expect.
Good customer service leads to customer satisfaction, which in turn leads to customer loyalty. Translated into operational targets, your logistics system needs to provide the following:
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Product Availability
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Timely Delivery
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Transparency
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Protection Against Disruption
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Operational Efficiency
Product Availability
Creating demand via great marketing without being able to deliver damages brands and relationships. Your ability to assure product availability is basic and essential. Many factors influence your ability to deliver. Some factors are out of your control—think rivals' competitive moves, sudden shifts in customer preferences, and extreme weather. The good news: You have many tools such as data and inventory management to help you assure product availability.
Data Management
Many companies share Information collected at the point of sale—typically as a product barcode is scanned at a check out register. POS information helps track sales and inventory levels. , use A supply chain practice that shares information across functions and supply chain partners to improve the accuracy and timeliness of forecasts. , and employ The practice of looking for hidden patterns from very large data sets to identify trends and predict outcomes. to improve availability. Using a system called RetailLink, Walmart shares real-time POS information with suppliers so they know exactly what is selling. 1 Best Buy uses weekly A periodic call, among company members, to share information and coordinate decision-making. Cadence calls often occur at a set time each week or month. with suppliers to discuss forecasts and promotions to help everyone work off a single forecast developed from the best available data.with suppliers to discuss forecasts and promotions to help everyone work off a single forecast developed from the best available data. 2 Data analytics, often called "Big Data", can help you sift through huge volumes of data to discover what influences demand. Kroger uses loyalty cards to discern customer habits. Linking customer profiles to external data on such things as weather or demographics helps Kroger identify which products sell under specific circumstances. 3 Close working relationships, open information sharing, and better analytics are improving product availability.
Inventory Management
Your company’s inventory policy influences day-to-day availability. With enough inventory, you could achieve close-to-perfect availability. However, inventory is expensive. You cannot simply say, “We will meet 100% of all orders.” The tradeoff between inventory costs and stockout costs is the type of tradeoff highlighted in Chapter 1. Tradeoff analysis begins with recognizing that not all products should be treated the same. You might be willing to buy a car missing a floor mat, but not one without a windshield. Thus, you never want to stock out of windshields, but might be willing to run out of floor mats. Careful analysis will help you decide on the right inventory levels.
Timely Delivery
By delivering on time, you help customers minimize costs, maintain efficient operations, and support sales. Consider Toyota: A line stoppage can cost an automaker $10,000 to $100,000 per minute. 4 Yet, Toyota carries only two to four hours of inventory to support production. How does Toyota do this? Toyota uses just-in-sequence delivery, expecting suppliers to deliver multiple times per shift. Product is sequenced in delivery racks so that the racks arrive just in time and are moved straight to the assembly line. Parts match up with the vehicle being produced. Toyota asks suppliers to locate facilities within 200 miles of Toyota’s assembly operations, works with them to reduce production lead times, and shares exact production schedules. Suppliers must ship via dependable carriers and, if necessary, hold extra inventory.
The Toyota example highlights two points: First, timely delivery is a cross-functional, inter-organizational capability—everyone who touches a product as it moves through the supply chain must perform. Any glitch, anywhere, can jeopardize delivery, creating a costly disruption. Second, customers care about three aspects of delivery: speed, consistency, and agility.
Speed
Speed refers to the length of the order cycle. Fast cycles make a customer’s decision making easier (think less inventory; better forecasting). But, faster delivery can cost more. This tradeoff is why you might have chosen 5-day delivery from Amazon.com. Offering speed customers that don’t value is the dark side of speed. 5
Consistency
Consistency means dependability. To achieve it, you need to remove process variability. Because consistency allows costumers to plan with confidence, they may value it more than speed. For Toyota, the ability to count on on-time delivery is what matters.
Agility
Being agile means you adapt to the unexpected. If your customer requests expedited delivery to support a surprisingly successful promotion, can you deliver quickly enough to build the sales momentum? If a natural disaster disrupts supply, can you still meet demand?
Transparency
Your customers rely on you to seamlessly perform a variety of tasks. Nobody cares if your delivery is fast, dependable, and responsive if picking errors mean you deliver the wrong product. If you ship the right product but it arrives unfit for use, you have failed your customer. Your customers want perfection—a reality that led to the development of the “An order that is received, processed, picked, packed, shipped, documented, and delivered on time without damage. ” concept. A perfect order is one that is received, processed, picked, packed, shipped, documented, and delivered on time without damage. A simpler definition is an order that is on-time, complete, damage free, and correctly documented. When the perfect-order metric was introduced in the 1990s, perfect-order rates were in the 30-40% range. 6 Today, companies hit 85-95%.
Transparent service can help your customers compensate when the unexpected happens. If your customers know that delivery will be delayed, they can plan around the new delivery schedule. Customers value this ability to make adjustments. 7 Modern technology—e.g., bar codes, Radio frequency identification tags are part of an automatic identification system that uses small tags to track the movement of people or products (or anything else). , and satellite tracking—not only makes real-time transparency feasible but also affordable. If you’ve ever shipped a package via UPS, you may have tracked it from order to delivery, following its progress each step of the way. You even knew when the recipient signed for it. Order transparency improves planning, execution, and evaluation.
Protection against Disruption
Because service failures are inevitable, you need to establish contingency plans to recover from disruptions. A well-conceived plan will help you anticipate many potential disruptions, keeping them from ever happening. For those disruptions that do occur, having considered the “what-if” scenarios before the service failure occurs will help you recover more quickly and effectively.
Consider the online retailer that suffers a stockout of a fast-selling item. By knowing the availability and costs of various transship, drop-ship, and expedited transportation options, the retailer may still be able to meet delivery promises affordably. The result: Research shows that companies that aggressively resolve problems can avoid a negative hit to their service reputations. 8 In fact, some companies resolve service failures so successfully that customer satisfaction actually increases following a disruption. This reality is known as the The fact that some companies resole service failures so effectively that customer satisfaction actually increases following a disruption or service failure. . You may be interested to know that customers cite a company’s empathy and proactivity as critical positive influencers in the resolution process. 9 The process of anticipating potentially disruptive events (e.g., earthquakes or late deliveries) and making plans to help either prevent negative effects like line stoppages or facility downtime or restore operations to normal as quickly as possible. is critical to protecting your business from disruptions.
As 2011 came to a close, Tetsuo Iwamura, head of Honda’s North American unit, looked forward to a brighter 2012. In 2011, U.S. sales had plummeted, dropping Honda’s U.S. market share below 10%. Honda’s problems had begun in March when an earthquake struck off the northeast coast of Japan. A tsunami and nuclear disaster quickly followed. Without warning, supply came to a sputtering halt.
Only four months later, heavy rains inundated Thailand. The resulting floods caused a second catastrophic disruption. The operations of key suppliers had been shut down. The flooding caused acute shortages of electronic parts including computer chips used in subcomponents like headlight and navigation systems. Without these critical parts, Honda’s production and sales were dramatically curtailed.
The twin crises had laid bare unexpected connections in Honda’s complex global supply chain, revealing that Honda knew relatively little about its upstream supply chain. Mr. Iwamura explained, “That weakness became evident this year as we discovered different parts makers relied on the same subcomponent manufacturer.” He concluded, “We need to rethink just-in-time as a matter of basic risk diversification.” Honda had discovered that it is impossible to make and sell cars if critical parts from upstream suppliers aren’t available.
The bottom line: When parts that have always arrived reliably stop coming, it is time to ask, “Have we pushed lean supply too far?” The twin disasters of 2011 suggest that the unexpected has become the “new norm.” In such a world, excessively lean operations may be a liability.
Operational Efficiency
As a logistics manager, your mandate is to efficiently provide the service customers need. Although different customers want, and are willing to pay for, different kinds and levels of service, they always expect to pay as little as possible for the services they seek. A simple two-step process can help you match service offerings to customer needs.
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Identify Tradeoffs: Identify the relevant cost-service tradeoffs associated with meeting each customer’s needs.
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Run the Numbers: Run the numbers to assess the cost and benefits of each service offering.
For instance, airfreight costs more than shipping by containership—or even by rail or motor carrier. But, airfrieght may make sense for high-value items like iPhones or time-sensitive products like high-fashion clothing. Reducing Also called in-transit inventory is the inventory that is being shipped from origin to destination. Thus, you have to pay for it, but it is not yet available to deliver to a customer. can reduce total costs. Likewise, timing deliveries so that the product hits the market just right may increase revenues (and reduce Occur when you have too much inventory—i.e., more than you can sell in a timely fashion at full price. Overstocks lead to price discounts and reduce profitability. ). You need this intimate understanding of your logistics system to help you take costs out of The logistics process (sequence of activities) responsible for delivering customer orders in a way that meets their needs. when and wherever you can. Because logistics is typically evaluated as a cost center, minimizing costs will be one of your constant challenges.
To conclude, your company’s service identity—and future profitability—is defined by its ability to keep customers happy by delivering what they want, where they want it, and when they want it. And don’t forget, you need to do this at the lowest possible cost.
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