Emerging Logistics Strategy Essay
Emerging Logistics Strategy
The purpose of this paper is to identify and describe the emerging business logistics strategies which have emerged in the market place over the last few decades and will remain dominant well into the better half of twenty first century. Analysis through this work will argue that the two strategic concepts, namely supply chain integration and cycle time compression, represent distinctly different yet complementary approaches to corporate logistics which form the frameworks around which hundreds of firms are building successful logistics system.
Logistics Strategy is the science of evaluating the most cost effective methodology of distributing goods to market while achieving service level objectives. It is important for companies to recognize that logistics strategy can be product-specific, customer-specific, and location-specific and that supply chains for each industry are dynamic and evolving. It is always a challenge for logistics strategy planners to develop a series of logistics strategies for different clients, integrating manpower, facilities and workflow in the logistics strategies together to compromise with other clients’ logistics strategies.
The choice of an appropriate and effective logistics strategy must be guided by the objectives of the firm as well as by its capabilities and resources. In addition, the development of successful logistics strategy must recognize and deal with important factors and conditions in the firm’s external business environment. The environment of logistics has changed greatly because of global integration and the gradual shortening of lifecycles of products. For that reason a brief overview of what are, perhaps, the most significant of these factors in the business environment like increasing globalization, mergers and acquisitions, downsizing, new IT systems etc. are also discussed.
In this paper, contemporary logistics strategy and evolution of emerging strategies like SCM and Cycle time reduction will be explained. Implementation issues and other challenges like reaping the benefits of IT, choosing a trade-off between complementary strategies; integration issues etc. are elaborately discussed.
This paper will mostly discuss the logistics strategy which the companies are adopting to succeed in the emerging markets like India, China etc. Emerging markets are becoming hot destinations for carrying out business mainly because of access to low cost labors and material. However at the same time how the firm mitigates the risk associated with doing business in foreign territory and how it manages the associated cost of transportation will also be discussed. Logistics Strategy and its importance
When a company creates a logistics strategy it is defining the service levels at which its logistics organization is at its most cost effective. Because supply chains are constantly changing and evolving, a company may develop a number of logistics strategies for specific product lines, specific countries or specific customers. The supply chain constantly changes and that will affect any logistics organization. To adapt to the flexibility of the supply chain, companies should develop and implement a formal logistics strategy. This will allow a company to identify the impact of imminent changes and make organizational or functional changes to ensure service levels are not reduced. Parameters Involved in Developing a Logistic Strategy
A company can start to develop a logistics strategy by looking at four distinct levels of their logistics organization. * Strategic: By examining the company’s objectives and strategic supply chain decisions, the logistics strategy should review how the logistics organization contributes to those high-level objectives. * Structural: The logistics strategy should examine the structural issues of the logistics organization, such as the optimum number of warehouses and distribution centers or what products should be produced at a specific manufacturing plant.
* Functional: Any strategy should review how each separate function in the logistics organization is to achieve functional excellence. * Implementation: The key to developing a successful logistics strategy is how it is to be implemented across the organization. The plan for implementation will include development or configuration of an information system, introduction of new policies and procedures and the development of a change management plan.
Components to Examine when Developing a Logistics Strategy
When examining the four levels of logistics organization, all components of the operation should be examined to ascertain whether any potential cost benefits can be achieved. There are different component areas for each company but the list should at least include the following: * Transportation: Does the current transportation strategies help service levels? * Outsourcing: What outsourcing is used in the logistics function? Would a partnership with a third party logistics company improve service levels? * Logistics Systems: Do the current logistics systems provide the level of data that is required to successfully implement a logistics strategy or are new systems required?
* Competitors: Review what the competitors offer. Can changes to the company’s customer service improve service levels? * Information: Is the information that drives the logistics organization real-time and accurate? If the data is inaccurate then the decisions that are made will be in error. * Strategy Review: Are the objectives of the logistics organization in line with company objectives and strategies. A successfully implemented logistics strategy is important for companies who are dedicated to keeping service levels at the highest levels possible despite changes that occur in the supply chain.
Current logistics operating environment
Since 1990s, the environment of logistics has changed greatly because of global integration and the gradual shortening of lifecycles of products. The mode of production in enterprises has changed from the traditional mass production mode led by products into the mass customization production mode to facilitate increasing global market competition. Srinivasa (2001) pointed out three main reasons of such revolution.
1. Change of manufacturing strategy
In the past, logistics was recognized as a distinct function with the rise of mass production systems. Since 1990s, the Japanese philosophy of distributed manufacturing and lean manufacturing has become the key technique which is widely adopted around the world. Consequently, the logistics operation is forced to change in order to fit such new Japanese manufacturing strategy. As a whole, logistics has become an extremely complicated process in which expert knowledge is required.
2. Change of customer demand
Business environment as a whole is becoming extremely volatile. As product life cycle becomes shorter, manufacturers can no longer push their products down the supply chain easily. On the contrary, it is the consumer who pulls the products along this supply chain. Price and quality are no longer sufficient to thrive in this market. As speed to market and flexibility of the supply chain become the winning criteria, logistics management has grown much more complex in order to satisfy these conditions simultaneously.
As enterprises expand their markets beyond national boundaries, the need for more sophisticated services like multi-modal transport and international trade rules compliance increases. Hence, redesign of logistics operation is essential in order to achieve greater efficiency and effectiveness on these issues. These issues revealed the complexity of logistics management in that traditional logistics operation which includes large quantity of stock storage and distribution cannot fulfill the real time, flexibility logistics service demand among the supply chain parties. Moreover, since logistics network has became more complex, it takes time to make critically decision in resource allocation and work task arrangement accurately. In the current dynamic scenario where business landscape has changed a lot and more and more business are becoming customer centric firms have realized that to remain competitive they need to consider logistics as a part of their strategy and not just another function. Companies have gained significant advantages over their competitors by focusing and crafting a logistics strategy which suits their requirement. However, there is no fixed Logistics strategy solution in place for any type of industry.
It depends on and varies from the type of goods, nature of industry, the market it serves etc. Below are some of the questions that a firm’s logistics strategy must address. Fast / Slow -A company logistics strategy must handle fast moving products differently from slow and medium moving products within their own distribution center(s) and within their distribution network. It is to be seen is it economically beneficial to set up regional “fast” facilities and a centralized “slow” facility? DSD / Non-stock – A company must have a clear understanding of all of the cost components and lost profit opportunities for products that are deemed “Direct store Delivery” or “non-stock” items. There has to be a logistics strategy in place that clearly delineates when an item should be inventoried.
Third Party Services -Does your company need to own and/or operate its own distribution facilities or is it more effective to have third party logistics providers manage some or all aspects of your logistics functions? What are the economical, service and other considerations your company needs to consider before taking these steps? Hub and Spoke -Are there economical cost of goods advantages to sourcing products into a centralized distribution center that subsequently distributes to regional facilities or branches through a hub and spoke distribution network? Inbound Logistics -Are there opportunities to reduce your landed cost of goods through improved inbound logistics strategy including load consolidation, reduced handling, backhauls, etc.?
Outbound Logistics-Are there opportunities to reduce your outbound transportation costs through improved private fleet routing? Through improved carrier rate shopping, through load consolidation opportunities, etc.? Facility Consolidation-Is your company operating too many distribution centers that are underutilized? What are the economical benefits and service impacts of closing one or more of your distribution points? Inventory reduction-Is your company carrying the right assortment and inventory levels to achieve service level objectives?
To minimize inventory assets, to minimize storage and handling costs? Supply Chain-Are there opportunities to work with your trading partners to reduce supply chain complexities and improve service levels for specific products / vendor product lines? Are there internal supply chain policies that hinder cost-effective operations? Global Logistics-Are there opportunities to improve global logistics to reduce inventory levels in the supply chain? To reduce order cycle times? To reduce supplier lead times? To reduce logistics costs?
With these questions in mind we proceed to see what have been few emerging and successful strategies and what the challenges in implementing them are.
Emerging Logistic Strategies:
Given the expanding complexities of global operations, information about logistics costs and capabilities is crucial to evaluating whether and how to leverage emerging markets as a means for increasing profit margin. Globally, there has been a trend to source from or manufacture in low-cost jurisdictions and emerging markets. This trend, however, is often offset by increased logistics costs and delivery times, along with a growing number of complexities that need to be managed. Senior management has begun to realize that lowering unit procurement costs does not translate directly to lower per-unit total landed costs — the total costs associated with importing goods or parts from distant emerging market locations. The complexities of managing logistics in emerging market locations ultimately add to the total landed costs of the associated goods. Therefore, the process of redesigning supply chain operations to establish logistics management capabilities in emerging markets is a fundamental dimension of a long-term business strategy.
Components of this strategy should include a focus on end-to-end integrated operations design and sound process discipline. Further, this focus should include a means to achieve flexibility, responsiveness and resiliency to enable more effective competition in today’s environment of increasingly dynamic global business conditions. To leverage opportunities in emerging markets, companies must transition or expand from managing logistics in a limited number of local geographies to managing them in emerging market geographies worldwide — in a very efficient, agile manner that supports the responsiveness and flexibility associated with an On Demand Business. Companies can leverage specific approaches to transforming their global logistics capabilities and better support the business goals of lower cost sourcing or fulfillment by taking advantage of emerging market jurisdictions.
Global supply chain management — a rapidly changing environment Because of competitive pressures in the global marketplace, companies are rapidly migrating to low-cost sources of labor and materials, which are typically located in countries that also represent emerging market opportunities. But the speed of this change may bring challenges associated with escalating shipping costs and increased supply chain risk, and these challenges could exceed a company’s internal skill and resource capacity. If you are adopting global sourcing practices, you may not yet have the foreign trade experience necessary to manage regulatory compliance and related global supply chain management complexities. For example, multiple, autonomous business units within an organization can contribute to a fragmented logistics process as well as create missed opportunities for leveraging economies-of-scale.
Individual business units may also lack the necessary economies-of-scale needed to establish a competitive foothold and gain sufficient influence in emerging markets. Balancing inbound and outbound supply chain logistics requires a comprehensive strategy that incorporates all the key functions of a supply chain to accelerate or expand sourcing from emerging markets. This horizontally integrated approach also helps you make strategic decisions regarding partnerships, shipping and other factors, to help ensure that savings from global sourcing are not eroded by increased logistics costs. Even more significantly, such a strategy can enable you to go beyond sourcing to position your organization to leverage your logistics capabilities to sell and distribute products within those emerging markets.
Challenges to leveraging emerging markets in supply chain cost management As you expand your geographic reach of global sourcing into emerging markets, you will likely encounter a growing number of supply chain and logistics challenges, many of which directly or indirectly contribute to a large portion of total landed costs. Each issue can be grouped into one of two categories: tangible or intangible.
Tangible challenges of working in emerging markets include obvious things such as the limited physical infrastructure of roads, bridges, harbors and airports. Other limiting items include the communications infrastructure needed to support the necessary IT connectivity. As constraints due to infrastructure bottlenecks represent a clear challenge, government agencies are more aptly able to focus on these items because the benefit for improvement extends beyond just the business sector. Enhancements to physical infrastructure help the greater population of the emerging marketplace and contribute to modernizing an entire region or industry. Physical infrastructure improvements tend to have greater visibility and political momentum, and often involve just a few government agencies. For example, the current infrastructure expansion in China as described by EFT Research in late 2005:1 • Between 2005 and 2008, more than US$70 billion per annum will be spent to create 75,000 new miles of expressways • Forty-three airports have been added since 2001, a major focus for expansion
• By 2010, China plans to double the number of shipping port berths from the 34,000 currently in use and will spend approximately US$6 billion each year to do so • Between 2005 and 2020, China will build 25,000 km of new rail lines at a cost of US$250 billion. The net effects of current infrastructure limitations in China and other emerging markets are longer-than-expected lead times and greater variability in shipment cycle times. These factors have a direct impact on owned inventory levels and the overall cash-to-cash cycle time — both of which drive the need to tie up more working capital in the supply chain. These shipment cycle time delays, which can be typical, are often offset by shifting to expedited, or premium freight service levels. However, these shifts to faster service levels are what significantly erode the expected savings in procurement and sourcing.
While tangible infrastructure and expansion challenges within emerging markets often get the most press and visibility, it is the intangible items that create the greatest headaches for global logistics managers. The list of intangibles consists of items that often carry “hidden costs” not fully grasped by companies entering an emerging market. Included are all the tariffs, duties, taxes, customs declarations processes, security and compliance requirements, and the daunting task of dealing with government agencies and multiple third parties in a foreign language. The complexity is exacerbated by variables that can constantly change and remain in a near-fluid state. Managing day-to-day events is complicated by the need to factor in multiple working locations, distant time zones, multiple handoffs of products and associated information, different national holidays, language and cultural barriers, and the ongoing regulatory changes.
For example, effective January 1, 2006, the Ministry of Commerce of China updated numerous regulations for export processing zones, while at the same time Chinese customs issued new regulations for bonded logistics parks that support export-related handling activities. Understanding how such changes impact your supply chain requires in-country operating experience and deep collaborative relationships with logistics services providers who manage daily in this dynamic environment. Not to be overlooked is the significant influence that culture and management style can have on implementing and managing a logistics operation.
For example, some of the fundamental differences prevalent in the Far East: confrontation avoidance, top-down decision making and agreements formed through handshakes with less regard to contractual specifics are the norm. While the Western approach to dealing with supply chain partners and vendors is to collaborate and pursue a win-win outcome, that attitude rarely prevails in many emerging market locations. Do not underestimate the impact of negotiating style and approach for dealing with suppliers found in different business cultures. In emerging market countries where rule of law can be erratic, establishing sound relationships with known entities is critical.
Getting a jump on technical obstacles to integrated supply chain management Leveraging emerging markets as both product source and product destination can be a dynamic response to global market pressures; however, many companies are not well positioned to take advantage of these opportunities. The key objectives for the technical aspects of managing logistics in emerging markets are to build flexibility into the design, develop a core competency to bring logistics suppliers on board in a seamless fashion, and to enable meaningful information capture that supports continuous improvement. For example, effective supply chain management depends on visibility into the status and location of in-transit materials and products, but many companies do not have these systems in place.
Fortunately, many technology-based solutions are available from a range of providers. Nearly all transportation companies offer some type of shipment status or information-sharing system accessible through their Web sites. In addition, there are dozens of advanced logistics planning and execution software applications that companies can install and use themselves. While there is no comprehensive solution that effectively serves all industry verticals and logistics partners across the supply chain, it remains critical that companies efficiently integrate multiple applications across diverse trading partners. Even with an integrated value chain that seeks to leverage leading applications, true visibility into order and shipment status across the logistics chain depends on tightly defined processes and the ability of all logistics partners to exchange and provide timely status reports on materials in transit.
Managing logistics within and outside of emerging market locations can make these processes even more challenging — the increase in variables makes consistent execution and the timely exchange of information very difficult to achieve. Meanwhile, the very nature of an emerging market means that the number of logistics services providers with the appropriate experience is limited. And switching logistics providers can be very expensive. So part of the challenge becomes finding partners who either have the appropriate experience or have established networks and partnerships with reputable local providers. Managing and mitigating the risks associated with emerging market logistics In order to address the challenges of leveraging emerging markets as a cost reducing, and eventually, a profit-boosting strategy, companies are finding that they need to develop a strategy for managing logistics that can support multiple service-level requirements.
As one element of such a logistics strategy, you need to determine how, where and to what extent the services of logistics suppliers should be engaged. There are several logistics management options to consider before you enter a new or emerging market. One end of the spectrum involves developing extensive multifunction logistics talent within your company, and then managing specific tactical activities and numerous contracts with logistics suppliers that provide narrowly defined services within a specific region or country.
In this scenario, pitfalls include the time it takes to develop or recruit the necessary level of logistics talent and leadership, and the administrative cost of managing dozens, if not hundreds, of logistics suppliers. The other end of the spectrum involves leveraging already established and proven capabilities of a few logistics service providers — or even one — who can orchestrate the many activities, dependencies, and relationships across a global logistics network. Companies taking this approach are able to react to new and emerging opportunities in a shorter, more cost-effective time horizon. Figure 1 summarizes the spectrum of relationships with logistics partners.
Figure 1: Logistics service provider options
While core asset-based logistics providers are critical to logistics execution, there continues to be a competitive desire among service providers to offer strategically integrated solutions with a global reach that include already established relationships in key emerging market locations. As companies decide which model to pursue and which logistics service provider(s) to engage as potential long-term partners in an emerging market, there are a number of factors to consider: • Experience with integrating logistics across the supply chain and related business functions such as direct procurement • Demonstrated ability to lead supply chain transformation in phased initiatives that align with current and future customer requirements • An understanding of the unique characteristics of the emerging market(s) where you are considering expanding sourcing activities or establishing operations and distribution capabilities
• Familiarity with your industry vertical and the nature of your supply chain requirements • Proven capabilities to advise on support and manage international trade and customs regulations • The capacity to offer robust middleware as an enabler of cross-functional IT integration with multiple supply chain partners • The experience and capacity to act as information broker between you and your supply chain partners • Infrastructure and business process designs that are highly scalable and redundant • A track record of solid financial health and sound corporate governance A global logistics view in alignment with a top-down business strategy helps to avoid a piecemeal logistics contracting or outsourcing management approach that could exacerbate the challenge of integration and shipment visibility. Your approach to outsourcing should help you develop a responsive, plug and play, logistics management capability that will support your entry into emerging markets. This is also a key capability for enabling an adaptive global supply chain footprint and competitive advantage.
To further support this goal, it is important to consolidate and align your supply chain management infrastructure, processes and procedures to reduce costs and improve efficiency. Leading logistics providers now have the resources and expertise to help you design your network and make location decisions that optimize the tradeoffs in cost, service level and risk; but you should be aware that such companies may also be driven by their own business goals. When you receive advice about which emerging markets to target, ask yourself whether this advice is aligned to your business goals, or whether it reflects the logistics supplier’s own growth strategy.
It is very important to look for an objective logistics partner who can establish clear business performance metrics and accountability for the entire ship-to deliver cycle. This includes activity from the shipping dock in the source country through each leg and mode of shipment. Such information should be a key part of the overall supply chain performance management dashboard — your logistics service provider should be able to supply you with a range of data and performance metrics such as on-time delivery, damage rates, error rates, cost/sales percentages and related financial metrics that drive continuous improvement efforts.
IBM Case Study — overcoming emerging market implementation hurdles Strong global partnerships with leading logistics suppliers are a highly valued asset when it comes to entering emerging markets. IBM offers a case in point. Several years prior to the sale of their personal computing division to Lenovo, IBM shifted PC fulfillment operations to low-cost jurisdictions and emerging market locations. IBM had been conducting business in China for many years, which provided a leverage point for establishing the necessary legal entity and business model to support a manufacturing operation that could act as a global fulfilment center for a limited line of products. Setting up shop in one of China’s free-trade zones offered proximity to key suppliers and abundant availability of low-cost labor during a time of intense, industry wide cost pressures. But from a logistics management perspective, the implications seemed daunting.
IBM needed to design and implement the capability to ship from a factory in Shenzhen to customer locations in the United States, Europe and the rest of Asia. This effort required robust process design with multiple logistics suppliers, not to mention the trade-management-related complexities associated with exporting from a free-trade zone to numerous other countries — most of which had their own unique entry and customs-related procedures. In the high-tech industry, the supply chain must be responsive and fast. In logistics, this means pre-clearing shipments through customs while flights are in-transit. The most minor of data inaccuracies on the commercial invoice or shipping manifest during the entry process can delay shipments for hours. While an import delay of only a few hours may not seem drastic, the result can be a missed cutoff time with the in-country ground service delivery provider.
This means an entire day can be added to the shipment cycle time. IBM found that design and implementation challenges resided at the most basic levels. The infrastructure and necessary processes just for getting the trucks from the manufacturing site to the Hong Kong airport caused delays. The frequency and timing of the flight schedules became the hard constraint that all other cutoff times were forced to meet. Getting the necessary level of lift capacity during the high-volume, end-of-quarter seasonal peaks required frequent communication and forecast updates with freight forwarders. Continuous design improvements were needed to reach the necessary process and system integration needed between the freight forwarder, broker and customs agents in the designated country.
For small shipments, IBM took advantage of integrated services provided by UPS and FedEx, both of which have ground and air assets for multi-leg shipment continuity. More problematic were larger shipments requiring multiple third party logistics organizations in a series of freight and information handoffs. IBM believes that a core logistics objective should always be to design and implement an integrated end-to-end solution that includes a process and technology design spanning all involved parties, from the shipping site to the final customer delivery location. Other emerging-market implementation hurdles faced by IBM
China is not the only major emerging market with strategic significance to the IBM supply chain and global business model. For many years, IBM has sold and distributed products in East European countries. Over the past two years, IBM has expanded operations in countries such as Hungary and the Czech Republic. IBM’s most recent effort included going live with assembly and fulfilment operations with an OEM partner in Hungary. Prior to making a decision about the final location, IBM conducted a network optimization study. Its purpose: to understand the tradeoffs between fulfillment costs, logistics costs, inbound transit times from supplier locations, and outbound transit times to customers throughout Europe. The longer transit times and greater variability were key to understanding if entering the Hungarian marketplace to seize the benefit of lower fulfillment costs was an optimal supply chain decision.
The distance from the manufacturing site to the primary airport in Budapest is a three-hour commute on a two-lane highway. For time-sensitive orders, this long transit time effectively pushes back the cutoff time for shipping to around noon, a loss of nearly a half day. Once the decision was made to operate and ship finished products from Hungary, several supply chain and logistics design points became important to the overall cost reduction strategy. Here are some key elements that helped enable logistics management for IBM in an Eastern European emerging market location: • Extended vendor managed inventory (VMI) programs and pricing agreements with OEM partners to ensure purchase-order flow continuity and control
• Extended IBM’s logistics contract agreements to components suppliers on inbound lanes in order to mitigate rising logistics costs and transit time variability • Formed strong partnership with logistics service provider to allow for vendor on premises activity — service supplier resources and systems that manage the flow of finished goods off the back dock • Utilized the network of experienced logistics management professionals in the European region to ensure operational communications and continuity within the same time zones • Took advantage of IBM business presence in-country and local resources to ease the language, culture, and knowledge barrier during transition and initial set up. The above examples reflect IBM’s ability to efficiently enter and enable logistics operations as a strategic component of our global business operating model.
Figure 2: IBM logistics cost savings 1995–2004
The cost savings illustrated in Figure 2 were realized during a time when IBM was entering emerging market locations to enable an integrated global footprint. The largest portions of savings were in procurement by utilizing fewer core service providers, and the physical network design efficiencies of operating in key emerging market locales. Realizing competitive advantage from logistics transformation You can prevent rising costs and complexities from eroding the benefits of your global sourcing strategy. The advantages of a strategic approach to logistics are broad and can result in a significant increase in shareholder value. In fact, managing logistics costs, service-level lead times and overall supply chain security is critical to your marketplace competitiveness.
Figure 3: IBM Global Logistics Operating Model
The IBM model for managing global logistics highlights its capabilities as a Global Trade Orchestrator. IBM is able to scale this capability for both internal divisions and external customers. The key to managing global logistics is to enable your company’s supply chain with the capability to efficiently unplug from one location or operating scenario, and enter a new or emerging market location. This capability will be both a strategic requirement and a competitive advantage, as long as worldwide business, economic and socio-political variables remain dynamic. Enabling this strategic capability requires cross-function process design, technology integration, and subject matter expertise ranging from network optimization, logistics contract and operations management to global trade and compliance management. This level of orchestration and collaboration is very scalable when merged seamlessly with a global governance model and strategically oriented leadership.
Cycle time compression
Logistics managers have long recognized the importance of order cycle time, and this concept has entered into the planning and operation of inventory control and distribution systems for decades. More recently, logistics executives have come to recognize the strategic significance of planning, and indeed reducing, the cycle times in their systems. Throughout many different industries, and taught by the examples of successful Japanese competitors, firms are working to reduce the total time required to bring products to marketplace. As George Stalk and Thomas Hout explan in their best-selling book competing against time, today, time is on the cutting edge of competitive advantage. The ways leading companies manage time- in production, in sales and distribution, in new product development and introduction- are the most powerful new sources of competitive advantage.
A cycle time compression logistics strategy can be applied to distribution and production, and firms have also shown how the strategy can be employed in product development and roll out. In one frame of reference, cycle time can be thought of as the time which elapses between the point at which a customer places an order and the point at which the property is received. Traditionally, logistics managers have attempted to control or reduce this order cycle time by increasing in stock availability rates, pre-positioning field inventories close to customers, or using premium flight services to speed delivery. While effective, these tactics are not without cost. From another point of view, customer order cycle times are obviously important, but they do not measure the true response time of the firm since the finished goods inventory performs the function of uncoupling the demand process from the production process.
From this point of view, the cycle time is the length of time material remains in the firm as it flows from raw material, to production, to finished goods, and on to delivery to the customer. Attacking this cycle time has several benefits. First, it makes the firm more responsive; that is, the firm may be able to produce and distribute a product to a given customer more quickly. Second, cycle time reduction will reduce the time that material is held as inventory, and hence will increase inventory turnover and return on assets. Firms have employed many different tactics to achieve cycle time compression in their logistics processes, but most successful applications share these common characteristics:
(1) The responsiveness of the total system is increased. The firm can more quickly respond to changing customer requirements because the logistics system has become more flexible and adaptive, and more easily able to react to changes in plans.
(2) Inventory levels are reduced at all points in the system as on-hand stocks come to reflect more closely true customer requirements.
(3) Risk and the associated costs of risk are reduced. As the cycle time falls, the demand forecasting horizon can be reduced, which reduced the risk of stock out, lost sales, obsolescence, redistribution, expediting, and all the other problems associated with forecast error.
(4) The information content of the system increases. The system comes to rely on fast and accurate transmission of information as a substitute for the inventory previously used to operate the system.
To reduce cycle time companies need to look at the four major discrete cash cycles within their firms. <— Sales Cycle —> <– Delivery Cycle–> <–Billing/Collection Cycle –> <–Make/Buy Inventory Cycle –> The sales cycle is the first one to tackle. How long does it take from first contact with a customer to get a signed purchase order? Typically you’re incurring, and paying for, sales expenses during that process. If your normal sales cycle is three months, is there any way to collapse it to two months? One of the best ways to answer that question is by bringing together people within the organization who both work in the sales arena and interface with it. It can also be helpful to have someone from the outside who is not all that familiar with the process in the review. Benefits of cycle time reduction are common in all four areas. The result will be reduced cycle times that translate into a more effective organization and additional money in the bank.
Cross-docking: The need for speed
In today’s high velocity supply chain world, companies are increasingly focusing on distribution methods that will drive efficiency and increase customer satisfaction. Gone are the days where customer service was merely a buzz word. With the focus on customer service, companies have moved away for a supply driven business towards a demand driven business. Companies are also constantly searching for ways to reduce inventory and holding cost. The increase in speed has forced companies to search for ways to reduce product cycle time and move product quickly and cost effectively. Over the years, companies have seen a dramatic increase in the number of stock keeping units (SKU).
The increase in the number of SKUs has added complexity to the business and also has increased the cost and time needed to manage the business. Department heads face additional pressure as they are required to stock shelves with the right products and ensure that customer demand is met all times. In today’s high speed world, shipping windows are changing rapidly, as retail clients demand increased speed to meet store requirements. To achieve these goals, cross-docking has been pushed to the frontline of the distribution strategy.
What is cross-docking?
Cross-docking is a system that relies on speed and agility and is normally used in hub-and-spoke operations. Cross-docking, in short, is the shipment and receiving of goods by bypassing the storage facility. In the process of cutting out the need for a storage facility, inventory can move quickly from one end of the supply chain to the other. Cross-docking is a fairly simplistic way of handling inventory that involves loading and unloading inventory from an incoming truck onto an outboard truck. During cross-docking storage time varies. However, most experts would agree that anything less than two days can be considered as cross-docking. In some cases staging also takes place.
For all of its simplicity, cross-docking requires detailed planning and collaboration with partners. Companies require advance knowledge of product shipment and final destination of goods. Setting up the required infrastructure and systems can take time and capital. Logistic managers are increasingly making use of technology such as Warehouse Management Systems (WMS) and automated processes. It is important to note that technology is not the key to success. However, the right system can smooth out problems and increase visibility in the chain. Companies now have the ability to send products on a Friday night, receive them on Saturday, and sell the products later in the day.
How is it used?
Cross-docking is used in a variety of strategies that include consolidating loads of less-that-truck load (LTL) carriers, consolidate loads from multiple suppliers and/or plants, deconsolidating orders, and preparing for shipping. Cross-docking can be divided into different complexity levels including one-touch, two-touch and multiple-touch. One-touch is considered the highest productivity as products are not loaded on the dock, but is loaded directly on the truck. During two-touch the focus is on load optimization and driving efficiencies. Inventory is received and staged on the dock, without making use of a storage facility. During multiple-touch, products are received and staged for reconfiguration and customization. An increasing number of companies are starting to use cross-docking in their operations.
In a 2008 cross-docking trends report in the US, 52 percent of respondents stated that use cross-docking with a further 13 percent planning to start cross-docking in the next 24 months. A number of companies are outsourcing cross-docking. By doing so, they avoid the challenges of setting up and running a cross-docking operation. Many companies start small and pilot projects are common as they explore the configuration that best fits their needs. For cross-docking to succeed it needs to be a coordinated effort that relies on close partnership and collaboration.
What are the advantages?
One of the key advantages of cross-docking is that companies are reducing their need for warehousing space, which reduces inventory holding cost. Cross-docking facilities are much cheaper to set up and run than warehouses and companies can save on the capital investment in warehouses. In some cases, companies can reduce warehouse floor space and sell off or lease out underutilized facilities. Companies like Toyota have designed and built their own cross-docking facilities. Normally these facilities are strategically located to reduce distance and maximize support. Some of the biggest advantages for companies are transport related. Companies can achieve significant cost savings, by consolidating loads of LTL carriers. Pallets that are heading for the same destination are consolidated and staged by order sequence. By doing this, companies can reduce the distribution cost of the total supply chain and pass the savings on to the consumer.
By making use of cross-docking, companies can furthermore reduce the impact of rising energy cost. Companies like Toyota have used this strategy to great effect. With the increased reliance on Just-in-Time (JIT), parts are being shipped at higher frequency and lower quantity. By making use of cross-docking, Toyota has reduced distribution cost by consolidating smaller part supplies into consolidated loads. Cross-docking has allowed companies to increase JIT and remove waster or muda in the organization. The increased speed in the supply chain helps companies to reduce product cycle time and move product quickly and efficiently down or up the chain. In Toyota’s case, this has allowed them to increase delivery frequency and in some cases even double delivery cycles. Cross-docking also have some major benefits where inventory is limited. As inventory is not kept in storage, companies require less stock.
The reduction in inventory will reduce holding cost and at the same time satisfy demand. One of the major benefits of cross-docking is also the reduction of labour cost. With the downturn in the economy, companies will increasingly look at cross-docking as a possibility. Cross-docking can reduce staff numbers and their associated labour cost and also gives the organization greater flexibility during an economic downturn. Many companies, however, do not start cross-docking primarily for cost reasons. They start to improve customer service. Today’s customers require greater speed and are also more demanding. Companies should establish clear goals and be willing to test different options. For companies that want to streamline operations and increase the supply chain velocity, cross-docking may be the right solution.
Implementation Issues and Conclusions
Many firms have embraced and employed supply chain management and cycle time compression strategies in their logistics operations with dramatically positive results. However, not all such attempts have been successful, nor has every implementation proved straightforward or simple. In this section, I will list observations and conclusions drawn from scores of firms which have implemented these logistics strategies: (1) Supply chain management and cycle time compression are complementary strategies.
The logistics manager is not forced to choose between these two strategies in and either/or basis. In fact, the two strategies are often mutually supportive and self-reinforcing. The strategies so frequently are seen together that it can be difficult or arbitrary to distinguish between them. In practice, the distinction between the two strategies is often blurred. A principal reason to develop supply chain management is often to capture and amplify the benefits of cycle time compression by applying the strategy at all levels in the chain.
(2) Each strategy has common barriers to successful implementation.
There are many pitfalls involved in employing these strategies, but the most significant problems are generally of two types: High complexity. The new systems are usually much more complicated than the systems and procedures which they replace. Supply chain management, as embodied for example in a quick response system, requires co-ordination of SKU-level item flows across firm boundaries in near real time with great precision and reliability. Low inventory levels place the entire operation at risk to errors at any level in the system. New data systems and communications systems are needed to drive the logistics flow, and these systems are needed to drive the logistics flow, and these systems must perform flawlessly. In a successful cross docking operation, vehicle schedule and despatching is crucially important as well, and completely reliable carriers must be found. High trust.
Supply chain management and cycle time compression must be based on high levels of trust within the various parts of a given firm, such as between production and distribution and between sales and distribution. In addition, very high levels of trust must be established and maintained between buyers and sellers in the supply chain, as well as between shippers and carriers and warehouses. Supply chain members must share and safeguard highly sensitive data, and all parties must be given candid estimates of production schedules, shipping status, and delivery dates. Inability or unwillingness to share these data will generally frustrate meaningful attempts to establish the close co-ordination implied by these strategies.
(3) Information technology is the key enabling technology. Another common thread in the successful implementation history of these strategies in American firms is the reliance on fast and accurate information technology. Most such logistics systems use barcode scanning or some other form of automatic identification to provide input of SKU-level transaction data onn sales, inventory and shipments. Data are normally telecommunicated between various operating locations, usually by EDI. In addition, some form of high-level logistics system software is needed to guide the operation of the strategy.
(4) Inventory reduction as a benefit. Most successful case histories of supply chain management or cycle time reduction will include inventory reduction, but inventory reduction will not be the whole story. Generally, inventory reduction will be one item on the list of benefits and cost savings which were sought or obtained. In many cases savings due to inventory reduction will be substantial, while in other cases inventory reduction may be a relatively minor consideration.
(5) Successful logistics strategies must be integrated with production, marketing, and total corporate strategy. Supply chain management and cycle time compression are strategies which are often highly compatible with the overall strategy being pursued by the firm. Compression of the logistics component of the firm’s total cycle time is an integral component of the firm’s overall strategy of time-based competition. Logistics cycle time compression and supply chain co-ordination are also highly supportive of the general strategy of flexible manufacturing towards which many firms are moving.
Many other firms are moving towards a marketing strategy which looks beyond mere ―customer satisfaction in an attempt to move past the competition by ―delighting the customer. In this context, compression of logistics cycle time increases the responsiveness of the logistics system to the customer’s desires. Incorporating the customer into the formal supply chain system should improve the level of support provided to the customer as well as increase the customer’s ability to convey its needs and wants to the firm and have them acted on. In this way supply chain approach will work to reinforce the marketing strategy.
Supply chain management and cycle time compression are complementary logistics strategy which progressive firms are employing in many different ways and in many different settings. These strategies are not simply or easily developed, but the results achieved through their use are often dramatic. Any firm which is truly serious about competing in the marketplace should very carefully consider the implications of these strategies for its operations.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 15 October 2016
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