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Logistics Process Reengineering

Author(s):

Peter A. Crosby, CMC
Peter A. Crosby, CMC, Principal, CGR Management Consultants, Century City, CA 90067, (310) 553-6837.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

ABSTRACT
Logistics process re-engineering is defined as the fundamental overhaul of an enterprise's basic purchase to customer delivery process in order to remain competitive. New approaches to re-invented supply chain strategies, strategic supplier, customer, and third party partnering, and technological innovations will be covered addressing the fundamental rethinking and radical re-design of logistics management systems.

SUPPLY CHAIN MANAGEMENT
Logistics processes revolve around the flows of products and information between suppliers, manufacturing plants, distribution centers, regional warehouses, and customers.

People, facilities, carriers, intellectual property, and equipment are the physical and cybernetic entities that drive, control, store, and move this information and these products during their journey through the network. Customer demand, or sales, are the "magnets" which "pull" the items on their "incredible journey" (with apologies to Walt Disney & Company) on their way to the end user.

Examples of supply chain logistics processes are:

  1. Customer order to delivery
  2. Inbound logistics
  3. Third party provider selection
  4. Facility location network design
  5. Inventory deployment

In the remainder of the talk today, we will discuss some major breakthroughs some successful companies have had in the above mentioned areas, and some of the critical factors in their success.

CUSTOMER ORDER TO DELIVERY
A wholesaler of hospital and industrial products was shipping its products through a multi-echelon network of facilities. A central distribution center (CDC) kept backup safety stock for the regional distribution centers (RDC's) and acted as a consolidation and trans-shipment point for vendor inbound items. A large stock list was maintained, in the tens of thousands. Some RDC's only served certain classes of trade, and some stock items were sold to both classes of trade. Many items had highly sporadic or erratic demand, other items turned out to be very slow movers. Not all items were stocked at all RDC's or the CDC.

Customers complained of out-of-stocks, slow backorder shipments, split shipments form multiple facilities, and order errors. Clearly the Company had to do something to survive. Lost sales, lost customers, and poor employee morale were contributing to the creation of an undesirable environment.

The company has considered or is in the process of consideration:

  1. Consolidating safety stocks into fewer stocking locations to improve fill rate, reduce split shipments, and reducing the overall order to delivery time for a complete order.
  2. Centralizing customer order processing and service.
  3. Cross-docking and consolidating vendor inbound shipments for lower inbound freight costs.
  4. Capturing higher purchase quantity discounts and backhaul allowances.
  5. Using third party logistics services to provide specialized customer delivery programs.
  6. Greater use of EDI, scanning, and bar coding with customers and carriers.

We're using this client as an example because it is in the process of redesigning all of its overall supply chain processes that were mentioned previously in this talk. It is a big task, but has CEO backing, an important ingredient for success.

INBOUND LOGISTICS
Hundreds of vendors across the nation provided product supply to the wholesaler. Many provided drop shipments or indirect shipments to customers of non-stock items which cross-docked at the company's facilities to be consolidated with stock customer orders. An investigation of vendor volumes confirmed Pareto's Law, 80% (55) of the volume was being provided by only 10% of the vendors (You thought I was going to say 80/20, didn't you!)

The freight terms employed by many of these vendors are FOB destination or collect with the supplier choosing the carrier. Since these shipments weren't coordinated, opportunities for inbound consolidation through multi- vendor pickups or cross-docking were being missed. We recommended vendor programs negotiation where FOB origin terms would be arranged, with backhaul allowances and carrier control by the consignee.

THIRD PARTY LOGISTICS
Third party providers of specialized delivery services can offer customers specific programs that air freight, package express, and common motor-carriers are not capable of providing or choose not to provide. These programs can include day and time specific frequencies of delivery and special put-away and stock rotation services. Use of these "outsourced" private fleets can be a key to improved customer satisfaction. The economics of this carriage can provide a "win-win" situation, with lower delivery costs yet higher customer service.

Bob Delaney of Cass Logistics says the third party market is $374 billion in size, but only penetrated by 3%. Even if Bob was far off, its still a huge opportunity to allow companies to focus on what they do best, retailing, for example, for chains, and manufacturing for production oriented companies. There are still a host of hurdles to cross in areas such as control, trust, quality of personnel, etc.

FACILITY LOCATION NETWORK DESIGN
Reengineering facility locations for manufacturing and distribution companies can provide dramatic, even breakthrough levels of operating savings. These savings can range in the ten to twenty percent range. If your company's logistics costs are ten percent, what sales would a rep need to generate to add one to two points to the bottom line, equal to the one to two percent total logistics savings?

"Breakthrough" and "dramatic" are the words of Hammer and Champy, the authors of the now famous runaway best seller, "Reengineering the Corporation". Some people say reengineering is a misnomer, "since it wasn't engineered in the first place! ". Restructuring facilities locations is truly "reengineering" and requires the proper tools to plan and implement the consolidations and relocations.

At CGR we use a logistics reengineering tool called SITELINK. The SITELINK design team was headed up by one of my partners, and the work was conducted for a Fortune 100 client in the beverage business. The features of SITELINK are that:

  1. SITELINK is multi-echelon, in that it considers all product flows from vendors to plants to DC's to regional customers. It also considers plant to customer direct shipments. Product lines can be treated as "bundled" or "unbundled" (translation: unbundled product lines ship alone, bundled products ship together).
  2. SITELINK considers private fleet economics, which are nonlinear in comparison to most outside common carriage freight rate structures.
  3. SITELINK takes into account supplier, DC, warehouse, and plant capacity constraints.
  4. SITELINK is a total logistics cost (manufacturing, materials, inventory, all freight, warehousing) optimizer, not a cumbersome to use simulator or unreliable heuristic model.
  5. SITELINK clusters demand into meaningful groups and clusters, which simplify the data analysis process
  6. SITELINK employs regression analysis for freight rate structures, limiting the number of point-to-point rates needed to be entered into the model.

Anyway, we at CGR are all traveling around, demonstrating SITELINK to our clients, friends, and neighbors, who all wonder at the speed and power of today's PC's.

INVENTORY DEPLOYMENT
Multi-level inventory systems are trickier to manage and control than single level stocking systems. Turns can be low with this backup. Our client was experiencing half the turns of its competitor with a CDC. Its margins may have been better with lower cost of goods, however. Double handling and inventory carrying costs could be eating up those advantages, however. Stocking rules can favor the CDC rather than the RDC, resulting in split or reassigned shipments. Inventory deployment systems are more easily simulated rather than optimized, since optimization models for multilevel inventory are highly complex. We use some diagnostic tools developed by some Michigan State and SRI people, and their best feature is that they use daily in/out order streams for inventory demand and replenishment. Techniques such as joint ordering and balancing inventory carrying, purchase price, and warehouse receiving cost can be tested in the computer prior to actually using in actual practice.

Now that we've reengineering the Company's logistics processes, we are now ready to take on the company's organization and culture. These are more difficult problems than the technical quantitative analyses, since they involve people. Streamlining these processes involve yesterday's buzzwords of "downsizing", "rightsizing", corporate culture change. Many of these organizational issues are found to "drop out" from the operational processes once they are reengineered. Examples: Centralizing order processing and customer service means a shift of personnel from the branches to the central office. Facility moves change people's domiciles. Centralized purchasing dictates buyers being grouped together. New inventory systems can change the number of re-order buyers needed. And so on.

A Few Last Words. Remember, when you reengineer (according to Hammer and Champy):

  1. Work units change from departments to process teams
  2. Jobs change from single tasks to multi-dimensional work
  3. People's roles change from controlled to empowered
  4. Job preparation changes from training to education
  5. Focus of performance measures and compensation shifts from activities to results
  6. Executives change from scorekeepers to leaders

Logistics process reengineering the supply chain won't automatically make the above happen. But with the proper executive, technical, and business champions heading you reengineering team you may just be able to bring your organization kicking and screaming into the 21st century!

Thank you for your time, attention, and thoughts. Questions please?

BIOGRAPHY FOR THE AUTHOR PETER A. CROSBY
Mr. Crosby is a Certified Management Consultant (CMC) who specializes in business logistics, physical distribution, and materials management.

He has twenty-five years experience as a management consultant and in industrial management. Mr. Crosby has experience as a logistics inventory analyst for Ford Motor, an operations research analyst for Food Machinery & Chemical (FMC), and a Division General Manager for Collins Food. He has had direct line management responsibility for sales, customer service, order processing, warehousing, transportation, inventory control, and purchasing requirements. Mr. Crosby co-founded CGR Management Consultants with his partners in 1984.

He has conducted 170 management consulting engagements for clients operating in twenty-seven industries. Mr. Crosby's work focuses on strategy, reengineering, and information systems issues, primarily related to logistics and inventory management.

He received a Bachelor's degree in engineering from the University of California at Berkeley, a Master's in operations research from Stanford University, and an E.D. from the Schools of Engineering and Business, also at Stanford.

Mr. Crosby is a member of the Institute of Management Consultants, the council of Logistics Management, and the Association for Corporate Growth. He is a frequent speaker at trade and professional association conferences and workshops.

A native Californian, Peter lives with his wife, daughter, and son at home in Pacific Palisades, California, a suburb of Los Angeles near Malibu.


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