DISCOVERING THE DARK CONTINENT OF LOGISTICS

How is it that logistics and supply chain management can make such a difference? After all, isn’t logistics “merely” a company’s management of material, product, and information flows in the supply chain? Those who work in the field of logistics recognize the difficulties associated with getting the right product to the right place at the right time in the right quantity and condition at the lowest possible cost. It involves not only a lot of heavy lifting, but also deep thought and decisive action to provide promised service at the lowest cost. Back in 1962, renowned management guru Peter Drucker once referred to logistics as an untapped source of innovation and opportunity, calling it the economy’s “dark continent.”* Four decades later, logistics management is only somewhat better understood among business practitioners and the general public. It is regarded as an afterthought among many companies, a necessary cost of doing business that has little viable input on corporate strategy. Yet, ask the CEOs of the leading companies noted above what role logistics plays in their enterprises. Excellence in logistics provision not only supports the missions of these companies but, in fact, also serves as a focal point in their very competitiveness. Take Wal-Mart, for instance. How well does its model of “every day low pricing” stand in the absence of cross-docking and economies of scale in transportation, keeping costs below those of rival retailers? And, at the end of the day, what good are “every day low prices” if the products are not on the shelf in sufficient quantity and quality? So, it is not only the low prices but also the exceptional service that differentiates Wal-Mart from rivals.

Too often, companies fail to deliver on the implicit promises that are made to customers. What is worse is when an explicit promise is left unfulfilled. Consider the promotional advertisements and fliers that appear in newspapers almost daily. What happens when the retailer promoting the product depletes its inventory? If the retailer is lucky, customers facing the empty shelf will accept a rain check or the promise to accept the order at a later date when inventory is replenished. However, in many instances, the customer knows that he or she can take the promotional flier to a rival store that will honor the deal offered by the first retailer. What might such an experience mean for the future relationship between the retailer and that particular customer? For one thing, the retailer is likely to order greater quantities of product in the future to overcome the stockout situation. However, the customer may not return in the future, knowing that a rival store down the street will honor the deals promoted by the first store. In this instance, the second retailer actually benefits from the promotions of the first store. Meanwhile, what happens when the consumer in question tells a few people about this experience? The impact of that original stockout can be amplified dramatically as others consider similar action in the future, bypassing the promotion-happy retailer in favor of the customer-responsive one. So, simply adding inventory is not the answer but, in fact, is a big step backwards.

Wal-Mart enjoys fewer product stockouts than its competitors not because of higher inventories but because of better inventory management achieved through high-frequency replenishment. Order cycle times (the time from order placement to order delivery) are forty-eight hours or less for U.S. stores, allowing store shelves to be replenished as much as four times faster than competitors. Not only does frequent replenishment of stores support in-stock objectives, but it also provides for “fresher” products. Like availability, the timeliness of product delivery have become a key differentiator in many markets. “Freshness” is obviously important for perishable consumer products like fruits, vegetables, dairy products, baked goods, and infant formula, but now it is also commonly advertised as important for products like soft drinks and beer. The waste of obsolete inventory is created when supplies are left unclaimed at the time of their expiration.

To take the concept of timeliness a step further, it is important to get the goods in the hands of customers while the product is in peak demand or “hot.” This is especially true of fashion goods or products with very short life cycles. Getting the product to market first can often serve as the make-or-break moment for many products and perhaps the make-or-break moment for entire companies when their future hinges on a critical product introduction. Customer loyalty finds its roots in the first experience that customers enjoy (or despise) with a product and company. Being first to the market with a product or service that meets a previously unmet need offers a way to establish satisfaction that, over time, leads to loyalty. The benefits accrued by having loyal customers are well documented, including openness to new products, interest in collaboration, resistance to competitors’ claims, price stability, and lower cost of sales.

Being first to market means having the first crack at being the industry leader. Logistics plays an important role in support of bringing innovative products and services to light. By effectively coordinating material flows with suppliers and managing distribution with intermediaries and customers, the logistics organization can help the company to “make the boat” rather than miss it. Along with a thorough understanding of internal operations, this physical connection to suppliers upstream in the supply chain and customers downstream allows logistics to assume a leadership role in the realm of supply chain management. This relationship is described next.

THIS THING CALLED “SUPPLY CHAIN MANAGEMENT”

Beyond the management of physical inventories and information in the domain of logistics is the way that products are developed, marketed, and sold. Add in the relationships formed with suppliers and customers and you have supply chain management.* When viewed in this light, supply chain management is clearly much more than logistics. This integration of a company’s planning and execution functions represents not just a way to achieve efficiencies, but a holistic strategy for doing business.

While much talk has surrounded the concept of supply chain management, very few companies are seizing the potential found in broad-scale adoption. Why? First, the concept of supply chain management is not well understood. Much debate has surrounded the very meaning of the term, with a lack of consensus existing even today. Even the functions that belong in supply chain management have been debated. Another reason supply chain management is not widely practiced is that it is not easy to accomplish. As noted, it involves coordination of planning and operational activities throughout the company as well as coordination of activities with suppliers and customers.

Interestingly, it is often easier to achieve the coordination with outside members of the supply chain than within the company. For that reason, companies are often inclined to start with suppliers because they can always tell them what to do! They might even have great success in bringing customers around to their way of thinking, but achieving collaboration among a multitude of functional areas within a firm — well, that is another animal entirely! However, to enjoy any big, sustainable gains from supply chain management, a company must first get its own house in order. Supply chain management is about working the levers of a company and getting them in sync with the levers of trading partners in the supply chain. Manipulating the levers of the outside parties will only get you so far, and the gains may not be sustainable if you are unwilling or unable to work the levers within your own four walls. That is why the change must come from within the company first and then transcend to the up- and downstream parties. It is no coincidence that the leaders in supply chain management tend to be companies that have strong cultures that emphasize cohesive, coordinated action. They also tend to be companies that others, including their own suppliers and customers, look toward for leadership, making it viable for integration to occur at the cross-enterprise level.

This cross-enterprise level of integration has been met with much curiosity and skepticism. Some have even speculated that competition will extend beyond horizontal levels in the supply chain. For instance, we may no longer think of soft-drink giants like Coca-Cola and Pepsi competing against one another, but rather Coca-Cola’s supply chain competing against Pepsi’s supply chain. That proposition holds great bearing on the way in which companies structure relationships with suppliers and customers. While it is unlikely that suppliers serving both beverage makers would choose to serve only one at the loss of the other, there are clearly opportunities to structure a closer, more fruitful relationship with one. A supplier may choose to develop customer-specific ingredients or engage in cooperative promotional efforts with the preferred customer. Therefore, even while inputs might be gathered from the same source, the final product can be differentiated and so can the services provided to that favored customer. When advantage is gained based on the way in which the companies interact, supply chain management is at work.

What is also interesting is that while products can often be duplicated through reverse engineering, relationships are far more difficult to duplicate. Have you ever tried to reverse engineer a relationship? Once the bonds of collaborative effort and shared gains are formed, they can be very difficult to disrupt through simple interloping. So while the challenge is great to get one’s own house in order and then extend the ropes of coordinated action to outside parties, the benefits can be even greater. Unfortunately, companies often find themselves tangled in their own ropes.

It is easy to say that a company must first get its own house in order, but, as suggested, this can be the most difficult aspect of supply chain integration. How can a company get on the same page without imploding? Not all companies are blessed with a culture that is driven from top to bottom and end to end by overall company performance. Rather, most companies are driven by functional performance — striving for excellence within each of the various functional areas, like manufacturing, procurement, customer service, finance, and logistics. Clearly, excellence must be achieved throughout the company in order to survive and thrive, but it is coordinated action toward a worthy objective that sets really great companies apart from everyone else.

As in life, business is about managing trade-offs. Trade-offs are found not only across the business functions but within each one. For instance, in manufacturing, it is commonly recognized that small batches provide greatest flexibility in accommodating customer demand, yet incur higher per-unit costs of production. So, there is a trade-off found among small and large batches in production. In marketing, small-budget promotions tend to enjoy lesser impact than big-budget promotions, but obviously cost less — another trade-off. Logistics is full of trade-offs. The most commonly held trade-off in logistics is the one between the level of service offered to customers and the cost incurred in providing that service. Occasionally, something comes along that can improve service and reduce costs. Technology advancements are often credited with the creation of these rare but beautiful moments when you can have your cake and eat it too. Lean Six Sigma Logistics can bring about these beautiful moments too, by maximizing the capabilities and balancing their contribution to logistics excellence, leading to overall enterprise success.

Lean Six Sigma Logistics is about capturing the trade-offs present within logistics and between logistics and other functions found in the company. Once you can manage these trade-offs effectively, you have the beginnings of integration at a higher level — supply chain management, where the levers at work in your company match up with the levers at work in trading partner companies. When you do this, you are essentially putting the environment to work in your favor rather than working against it. And it is through this level of coordination that your supply chain can outpace the supply chains of rivals.

In sum, logistics is a necessary function for all companies. No business can live without it. Companies that do not do it well, in fact, threaten their very survival. Companies that recognize and manage the trade-offs by measuring total cost can extend this “systems” thinking to the larger environment, the supply chain in which they operate. In the absence of integrated logistics and total cost perspective, the logistics wastes are inevitable. These wastes are overviewed next.

THE LOGISTICS WASTES

We have all heard the phrase “You can’t make something out of nothing.” Resources are necessary to accomplish anything great or small, but problems arise from using resources unproductively, applying the wrong resources, failing to tap into necessary resources, or directing resources toward the wrong outputs. In each of these instances, waste is created. Costs are incurred, people’s time is consumed, opportunities for value creation and growth are lost, and customers are left less than satisfied.

While much has been said and written about the wastes found in a manufacturing environment, relatively little is mentioned about the wastes in logistics. The wastes in logistics are just as prevalent as in any other functional area of a firm, although they are not always as visible given the scope of logistics activity. In fact, it has been suggested that more than 80 percent of the work of logistics takes place outside the view of supervision, suggesting all the more that precise yet robust processes must be developed for logistics. The next section illustrates the potential wastes found in logistics. The sources of waste in logistics include:

We will discuss each of the wastes in the next section. As you read through each chapter, take personal account of how many of the wastes you recognize in your current business.

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* Drucker, Peter, The economy’s dark continent, Fortune, pp. 103–104, April 1962.

* For an excellent treatment of supply chain management, see Lambert, Douglas M., Ed., Supply Chain Management: Processes, Partnerships, Performance, Supply Chain Management Institute, Sarasota, FL, 2004.