Logistics Quarterly Magazine - Volume 15, Issue 3, 2009 - LQ Archives
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Are You a Master of Logistics?

This article provides an overview of logistics managers and companies and focuses on how they have become masters of their profession and demonstrated leadership.

By Dr. Mary C. Holcomb and Dr. Karl B. Manrodt

Mastering something implies that one has become skilled, proficient and even superlative at every aspect of that activity. The “Master of Logistics” title requires performance that excels in the face of extraordinary challenges including increasing transportation costs, driver turnover, changing customer requirements, and global market shifts. These challenges have created an environment of increased uncertainty and risk. The future will likely bring even more uncertainty. In fact, the viability of the transportation infrastructure—highway, rail, air, and inland waterway—appears to be compounding the situation. Global supply has increased the risk of an unplanned disruption for many firms. Only a Master of Logistics will be able to successfully navigate this turbulence. This article focuses on the logistics managers and their companies that have indeed become masters of our profession. It is our desire that by examining what these masters do differently, others may be able to move their firms into this elite territory.

Background

The sixteenth transportation and logistics trends study was completed in 2007 conducted by Georgia Southern university and the University of Tennessee, in partnership with Capgemini and logistics Management magazine. From its inception, a major purpose of the study has been to examine the gaps existing between prevailing and leading edge practice, and to provide insights and proven solutions to close those gaps. At the time of the inaugural study, it was widely believed that large firms with high sales revenue were the leaders in logistics and transportation practice. After all, they had the necessary deep pockets to acquire the resources to tackle the changing business conditions of that time. In-depth interviews were conducted with numerous Fortune 500 firms considered to be at the forefront of developing and implementing innovative logistics and transportation solutions. Because this group also spends considerably more on domestic transportation than their counterparts, they were categorized as the “Giants of Shipping.” The analysis in 1991 and in the following years indicated that size of firm did indeed make a difference when it came to logistics and transportation practice and performance. Initially, the performance of the Giants was significantly different than that of mid-to-small size companies.

As would be anticipated, everyone wanted to know what the Giants were doing, regardless of whether or not they themselves should do it. For instance, with Dell’s growing success throughout the 1990s, some firms wanted to design and operate their logistics and supply chain network similarly even though this approach was not aligned with the strategic objectives of their firms. One vice president stated that their firm should also be able to achieve the same logistics cost as a percent of sales as Dell, even though they were in the commodity paper business characterized by bulk purchasing and continuous mill operations.

Why did the Giants have an advantage? In the 1990s the cost of systems, technology, installation, and training were quite high. It was not uncommon for firms to invest tens of millions of dollars in technology that integrated financial and operating processes across the various departments and business divisions of the firm. While most projects were successful, there are numerous examples of failed implementations. Many projects required additional funding just to be completed. In this environment, small and medium size firms simply did not have the financial resources to purchase the tools needed to transform their businesses. Even if they did, many of them could not afford the risk of failure that seemed to be a part of these endeavors.

Yet, as has typically been the case, technology costs continued to drop. Simultaneously, this same time, transportation management systems (TMS) and warehouse management systems (WMS) were becoming more prevalent as multiple vendors entered the market. The systems were more user friendly, easier to install, and more powerful than spreadsheets or legacy systems. In addition, TMS and WMS were more affordable as a host of options for acquiring this technology were made available. This allowed the mid-size market to start adopting the same software tools that just a few years earlier were beyond their grasp.

The result? By the late 1990s our research findings indicated that the differences between the large, medium and small size firms had essentially disappeared. While medium size firms couldn’t afford an entire ERP suite, they could install “best of breed” solutions for transportation and distribution at a more affordable price point. These solutions were relatively easier to install often with fewer delays as well.

The late 1990s were the good times in logistics and supply chain. All good times tend to end sooner or later. September 11, 2001 was the date that changed the logistics environment as well as many others. Since then, rapidly changing business conditions have tested the mettle of every logistics and supply chain professional. It is not surprising to find that under such stressful operating conditions the significant differences between large, medium and small size firms have begun to re-appear again in 2006.

The 2007 Study Profile

Since 1991 the study has continued to grow and develop in terms of functions examined, and just as importantly, the number of participants. The number of respondents and demographic profile of the study participants is critical for ensuring that the findings and results are indeed representative of the broader logistics and supply chain population. The 2007 study solicited responses to the survey from 1,326 domestic and global shippers. Those respondents accounted for an estimated $32.5 billion in transportation expenditures, and nearly $14 billion of international transportation spend. Thirty seven percent of the respondents work for firms with less than $250 million in annual sales, and 13.7 percent of the respondent pool report that their firms' annual sales were $1 – 3 billion. Firms with revenues greater than $3 billion annually represented 22.8 percent of the participants.

More than 14 industry sectors from energy/chemical/mining to retailing participated in the 2007 study. As in past years, the core group of participants was the manufacturing sector, representing 50.3 percent of the respondents. This group included such sectors as general manufacturing, high tech, consumer products, and automotive. The number of participants and the size of firms and industry sectors they represent indicate that the 2007 study results are generalizable to all of logistics and supply chain management.

The Changing Face of the “Giants of Shipping”

Each year the study results are analyzed using demographics such as industry sector, size of firm, strategic objective of the firm, and level of visibility. These analyses are performed to determine if a particular demographic accounts for significant differences between the groups. Even though there weren’t any statistically significant differences found by size of firm since the late 1990s, we were not surprised when this demographic began to re-emerge as significant in 2006. When the transportation environment became turbulent in 2004 it was obvious that business as usual would not be a successful logistics and supply chain management strategy. The confirmation of this fact was seen in the 2005 study results. The findings indicated that large firms (revenues greater that $3 billion) were doing something that was significantly different than their counterparts. They were either in the midst of, or in the final planning stages of, a network design project. Extraordinary times demand fresh and innovative approaches to meet the challenges. Furthermore, the large firms were significantly different in that they were investing more in tools and technology that would provide them with end-to-end supply chain visibility.

Another difference was starting to emerge as well. While the large firms were still spending the most in absolute dollars on domestic transportation, the measure of transportation spend as a percentage of the cost of goods sold (or percent of sales) didn’t increase as much when compared to mid-and-small size firms. In fact, the data for 2006 indicated that transportation as a percent of the cost of goods sold for many of the large firms has stabilized.

These findings suggest that the Giants have changed in other ways as well. The Giants have begun to create a competitive advantage in logistics and supply chain management relative to mid and small size firms. While this can partially be attributed to tools and technology as was previously the case, this was not the sole factor in creating the gap. It is our belief that when the turbulent transportation environment began, large firms took immediate strategic action. While they were experiencing the shock of fuel surcharges and transportation capacity shortages just like the mid and small size firms, they realized that the circumstances necessitated drastic changes. They recognized that reducing operating costs wouldn’t be sufficient in the long run for the challenges they faced. That is, they couldn’t “save” their way out of the situation due to the fact that many of the issues were not within the control of the company. The actions and results of those actions earned this group a new title as “Masters of Logistics.”

Masters of Logistics

How do you rate against the best? Do your current operations qualify you for this distinction? The following criteria can be used to determine how you measure up to the Masters of Logistics.

Control of activities within the Firm

The typical activities that are within the control of most logistics and supply chain managers include inbound and outbound transportation, order fulfillment, finished goods inventory, distribution and returns good handling.

What distinguishes the Masters is that the following functional activities are also a part of logistics and supply chain management for their firms:

  • Parts/service support is managed by supply chain management, and not procurement.
  • Customer service is least likely to have sales/marketing in control of this activity.
  • Network design/facility location is the primary responsibility of supply chain management.
  • Capital budgeting is nearly twice as likely to have supply chain management involvement.
  • Least likely to have only manufacturing in charge of production planning. As size of firm increases, so too does the probability of having supply chain management in charge of this activity.

Trade-off Decisions

For the Masters of Logistics, procurement and inbound transportation strategic decisions are made by meeting regularly to discuss the issues. The largest percentage of other firms reported that purchasing and procurement decisions tend to drive inbound transportation execution. This was followed by a sizeable portion of companies that stated inbound transportation and procurement decision making is not integrated and trade-off issues are rarely discussed.

Process Integration

One would expect that leading edge logistics and supply chain management practice would be noted for having high levels of process integration. This supposition was confirmed by the analysis. All critical processes for the Masters of Logistics are integrated to very integrated. This includes: order management to ERP, transportation and warehousing; demand management to order fulfillment, distribution, and manufacturing; warehousing to transportation; manufacturing to supplier relationship management; and order management to transportation and warehousing.

Technology

The complexity of transportation management combined with the current operating challenges requires sophisticated tools and techniques to ensure that the money being spent on this activity is leveraged to the extent possible. This would imply that firms would rely more on commercially available technology than on spreadsheets or manual techniques. This was very much the case for the Masters of Logistics in that they significantly use:

  • commercially available “best of breed” transportation software to manage domestic transportation.
  • Enterprise Resource Planning (ERP) transportation solutions for international transportation management. Least likely to use manual/spreadsheets.

Transportation Management

The Masters of Logistics have a number of transportation capabilities that set them apart from others. It is not just an individual capability, but rather the total package that makes the difference. The capabilities include:

  • Tracking of inbound shipments
  • Global visibility of orders
  • Electronic tendering of shipments
  • Drop ship programs
  • Cross docking at distribution centers (DCs)
  • Outsourced freight payment for better audit capability
  • Increased spend on TL (10-20%) while decreasing the spend on national and regional LTL (<10%)

Distribution management

Distribution management is another area where differences between the Masters and their smaller counterparts are evident. The Masters of Logistics are noted for:

  • More shipments directly to the customer
  • Most likely to ship customer orders from regional warehouses/DCs
  • Less obsolete inventory write-offs
  • Overall decline in the amount of inventory held companywide
  • Broadened pickup and delivery times as possible

Becoming a Master of Logistics

The fact that the Masters of Logistics are firms with revenues greater than $3 billion should not be a limiting factor to those seeking to improve their supply chain. The Masters’ strategic and tactical approaches to dealing with the same social, environmental and infrastructure issues have resulted in a supply chain network that is more efficient and effective than others. Faced with these conditions, the Masters began to devise new strategies and tactics to navigate the seemingly chaotic transportation environment. There is no reason that other firms can’t, and shouldn’t, follow the same path.

For small firms, the path forward is not as clear. Because they do not have the same resource base as their larger counterparts, small firms must be even more selective in logistics and supply chain investments. It is critical then, to determine exactly what the customer wants, and how these benefits can be delivered to the customer. One tool that can be used effectively in these situations is a voice of the customer survey.

From our perspective, firms with sales between $500 million and $3 billion are those that have the most to gain or to lose. They have the resources available to invest in their future. What they need is a vision and a strategic plan that will help them understand where to make logistics and supply chain investments that will be transform the way they do business.

What can they do? First, make sure that everyone knows the company’s strategy, and how they support the strategy. This is easier to write than to implement, but critical to moving the organization forward in an organized manner. Second, it must determine which markets it will compete in, and which customers it will serve. In more than one case firms that analyze the profitability of customer segments walk away surprised regarding how much of their profits are used to support large customers. Finally, firms should define and communicate how they will compete in the marketplace. This will help managers make better decisions as to where facilities should be located, or the service levels they will be providing each customer.

Regardless of size, supply chain excellence is becoming a primary concern in the boardroom. The changes that are required must be understood at the highest level of decision making. Investing in the cornerstones of supply chain excellence—people, processes and technology - will help you become a Master of Logistics.

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