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Source : Infosys Technologies
Driving Costs Out of the Supply Chain: Inbound Logistics
Supply Chains is also known as :
Supply Chain Analysis,
Supply Chain Analytics,
Supply Chain Automation,
Supply Chain Benchmarking,
Supply Chain Best Practices,
Supply Chain Careers,
Supply Chain Certification,
Supply Chain Collaboration,
Supply Chain Companies,
Supply Chain Conference,
Supply Chain Consultant,
Supply Chain Consulting,
Supply Chain Cost,
Supply Chain Council,
Supply Chain Definition,
Supply Chain Diagram,
Supply Chain Distribution,
Supply Chain Efficiency,
Supply Chain Excellence,
Supply Chain Execution,
Supply Chain Finance,
Supply Chain Forecasting,
Supply Chain Information,
Supply Chain Innovation,
Supply Chain Integration,
Supply Chain Inventory,
Supply Chain Inventory Management,
Supply Chain Issues,
Supply Chain Logistics,
Supply Chain Logistics Management,
Supply Chain Management,
Supply Chain Management Companies,
Supply Chain Management Consulting,
Supply Chain Management Process,
Supply Chain Management Software,
Supply Chain Marketing.
Abstract
One of the most neglected areas of the manufacturing (and retail) supply chain is the inbound
logistics segment. Managing outbound logistics has always been the strength of the Supply
Chain organization (at manufacturers and retailers). The Marketing department has identified
different logistics requirements for the finished goods segment. Customizing outbound logistics
requirements (various distribution models are the outcome) based on the needs of specific customer
segments is today a routine requirement. Similar to the Marketing department, the Purchase
(Procurement) department has its own unique set of requirements for inbound raw materials/
work-in-progress and other inbound material. In addition, modern JIT manufacturing methods
push the Procurement Manager to aim to achieve lowest inventory models - often at the expense
of higher inbound transportation costs. There is an inherent conflict in balancing the Just-in-time
manufacturing practices (low inventory, shipment sizes, frequency of shipments) with inbound
logistics and transportation needs (low cost, visibility of goods). The manufacturing or Retail
organization needs to ask itself: Is it seeking the lowest integrated total logistics
cost, the streamlined (and lowest) JIT inventory for its manufacturing needs or to
strike a balance between the inherent conflict between the two aforementioned
goals aimed towards achieving an optimally balanced and efficient supply chain?
The trend of manufacturer and retailer organizations
outsourcing non-core functions (like transportation and
logistics) introduces the third party logistics service
provider (3PL) into this equation. 3PLs must master the
specifics of the industry supply chain by analyzing supplyand-
demand flows and matching them with the cost and
performance (speed, flexibility and reliability) of various
(warehouse) consolidation centers and cross-dock
options. Savings can be had by managing a complex,
labor-intensive and fragmented supply base and by
getting a grip on the supplier.s lead times. IT systems that
enable the flow of information (visibility prior to and after
shipping of physical goods, resources and available capacity
in the supply chain) may provide Logistics Managers with
just the right tools for this task.
This paper discusses best practices observed from the
most successful Inbound Logistics Programs of
manufacturing organizations in the automotive industry
and Consumer Packaged Goods (CPG) manufacturer.
It also discusses the role of a 3PL services provider (focusing
on transportation and warehousing services) in this
equation.
Inbound Logistics Programs: Best Practices
Understand and Analyze the costs headings/ items in the
overall unit cost of product/ service
Inbound logistics spend for unit costs for a product/ service
can be divided into 3 major categories:
- Inventory carrying costs
- Transaction costs
- Basic unit cost of product/ service
With the global interest rates near an all time low, inventorycarrying
costs today are negligible. At 2% p.a. weekly
inventory carrying cost is a lowly 0.04% i.e. if the item
costs $100 the interest cost is around 4 cents per week.
Transaction costs can be broken into the following
components:
- Shipment documentation
- Invoicing costs
- Receipt documents (GRN, BOL, etc.)
- Payment and supervision costs
- Receiving costs
- Loading and unloading costs (multiple in case of multimodal,
multi-carrier delivery)
- EDI costs
- Personnel costs
While deciding the frequency and lot size, a comparison of
inventory carrying costs vs. transaction costs should be
made. These costs need to be added to the basic unit cost
of product/ service to arrive at the total unit cost till point
of sale. An analysis of the basic unit cost per product/
service gives an idea of the annual consumption value of
the product.
Analyzing the total unit cost of product/ service with the
classification of raw material/ inventory classifications (ABC
type material classification) over a period of time allows a
temporal comparison of the inbound logistics cost structure.
Most procurement managers don.t have an in-depth
understanding of transportation needs. Their mantra is
inventory reduction and they typically want an all-inclusive
price from their suppliers. A review of the number of
inbound shipments at a plant of a JIT manufacturer (in the
automotive industry) revealed an enormous number of small
LTL shipments (sometimes from the same supplier) arriving
throughout the day.
A joint analysis by the procurement and logistics personnel
aimed towards determining the potential value of freight
conversion (from LTL to consolidated FTL) should include
and be cognizant of the relative transportation pricing
leverage between suppliers and the manufacturing
organization. Freight conversion would imply changing net
prices of items being bought (from suppliers) hence treating
this process as a negotiation process with suppliers is
important.
In general, some industries (like the automotive and the
hi-tech industries) have larger information related logistics
costs (lost sales, inventory financing, no-shows or late
shows at promotions, plant shutdowns, hi-tech machinery
downtime) than other industries (for example, the Cement
industry) where bulk transportation (asset related logistics
cost like freight trucks and warehousing are high) is the
most compelling need.
Some industries are more amenable (by nature of
commodities involved) to freight conversion opportunities
(and associated benefits) as compared to others.
For example, the hi-tech industry and the automotive
industry have a large range of components needed for
manufacturing the end product. These large diversified
ranges of components lend themselves well to component
classifications based on a set of criteria (need, inventory
stocking cost, transportation cost, ABC classification). In
other industries, for example the bulk commodities
industries (cement, asphalt, chemical) commodities do not
lend themselves well to potential information and asset
related logistics costs reduction opportunities.
Understand and analyze the optimization problem for
inbound logistics practices. Do not create an optimization
problem you cannot solve. Pick your constraints and your
optimization time buckets judiciously.
Different types of industries face different logistics
management problems. For example, the chemical industry
spends anywhere between $60 and $80 billion on bulk
logistics management. Other industries with large bulk
logistics requirements, such as Agriculture and Petroleum,
present a comparable opportunity.
- Bulk logistics management is characterized by limited
options and limited leverage
- Limited options and limited leverage result in inaction
Understanding the optimization paradigm for each type
of industry helps formulate the scope of constraints
on logistics optimization. For example, Figure 1 illustrates
the scope of constraints on bulk logistics optimization. Such
constraints include:
- Many bulk products, including some chemical and
most agricultural products, are perishable and must
be delivered to customers within a fixed time. The
allocation of freight resources to ensure timely delivery
is less a question of cost than it is of customer service
- Many bulk products are produced in continuous 24/7
production processes in which plant shutdowns are
costly, and in some instances, create health and safety
risks. For instance, the shutdown of large petrochemical
plants may cost as much as $500K to $1M daily - far
more than the cost of extra hopper cars used to store
product
- Purity and quality considerations require that hopper
cars and tank cars can be used for one product unless
thoroughly cleaned between shipments. For example,
one midsize manufacturer of both industrial and
pharmaceutical chemicals is not sharing transportation
resources between the 2 groups for health and safety
reasons
- Certain hazardous chemicals, such as chlorine, are
produced right into tank cars and tank trucks
- Tank cars and trucks filled with hazardous chemicals
must take circuitous routes to minimize risks of public
exposure in the event of an accident
Put enough constraints on a problem and the constraints
tend to result in inaction. Bulk logistics is a classic example.
Shippers justify building excess inventory, holding excess
distribution assets, and, in general poor supply chain
planning because of the inefficiencies in the transportation
system. For example:
- Most shippers simply return railcars and trucks empty
back to their point of origin and make little or no effort
to look at network optimization. For example, a major
chemical manufacturer with a $100 million annual freight
bill estimates that its fleet utilization is only at 30%
capacity
- When comparing bulk options, shippers rarely take into
account internal costs associated with each shipment
option. For example, railcars are often spotted using the
shipper.s own personnel and equipment because the
rail companies are not reliable enough - and the costs
are not factored into the total shipment cost
- Demand planning and inventory management are not
integrated with distribution management at most
companies, yet significant inventory often sits in railcars,
barges and ocean going vessels
- Not enough consideration is given to distribution issues
surrounding mergers, acquisitions and adding new plants.
For example, a major manufacturer of forest product
chemicals has 30 plants scattered throughout North
America, but does not use distribution network analysis
in its strategic planning
- Production resources are optimized against orders, but
transportation resources rarely are. For example, a large
petrochemical plant optimizes its reactor run based on
the mix of products ordered, but shipment schedules are
not factored into the optimization problem
Get complete control of inbound shipments from suppliers
and review all inbound shipments for consolidation
opportunities
In many cases suppliers have control over shipments
coming into production facilities in terms of arranging for
transportation carriers, setting appointment times, actual
material loaded into trucks and the actual pickup/ delivery
times. Working with suppliers to iron out some of these
process flaws is the first step in gaining control over
inbound shipments. Retailers have tried changing the
freight payment terms from pre-paid to collect, but this
may harm the overall supplier relationship. Instead,
working in a collaborative mode with the supplier, to gain
control over inbound shipments is the way to go. If this not
done, the cost savings achieved by gaining control over
inbound shipments would be offset somewhere else on
the supplier side. Internet based inbound transportation
tools (for example the Inbound Planning engine from
Viewlocity and a similar tool from ELogex) help in terms of
visibility into which supplier is actually ready to ship, how
much quantity and web based appointment scheduling
capabilities.
The ultimate aim to achieve total control over inbound
shipments would allow the retailer to eke out cost
advantages from the supply chain.
In many manufacturing organizations that have purchasing/
procurement de-centralized (as well as a mixed structure),
there are varying criteria used for deciding truckload
shipments. For example, at a leading food manufacturer
based in Wisconsin, there were at least 6 different weight
breaks for deciding truckload shipments and other criteria
like warehouse location only added to the in-consistency.
In addition, because of the problem of not having the
correct information, an analysis revealed that a good
percentage of shipments moving as FTLs were actually LTL
shipments. This pointed to potential consolidation
opportunities (of LTL shipments) gone a begging. Lack of
visibility into which suppliers are ready to ship and the
actual quantity being shipped was one of the main reasons
for the above problem. In part, the problem can also be
traced to lack of education/ training on the benefits to be
realized from freight consolidation. An interesting scenario
is created by the use of cross-docking locations used as
inbound supply chain network solutions. The flow is
depicted in the Figure 2.
One of the strategies is to bring in full loads of products
into a regional consolidation center (or a cross-dock center)
and consolidate these into full truckloads to be sent out to
multiple destinations.
There are several visibility problems associated with this
flow:
- The initial freight movement need is created at the end
destination (plants, facilities) and the cross-dock
location as well as the carrier would not know of the
possibility of the shipment being cross-docked until well
after it has been created (in the system) and picked up
(dispatched)
- The cross-dock location would not have complete visibility
into which shipments are scheduled to come into the
cross-dock center until they land up at the door-steps
- The activity of dynamic switching of freight at the crossdock
location (shifting a shipment from one truck to
another truck at the premises of a cross-dock location,
without even unloading it at the cross-dock center)
creates even more severe issues of freight visibility and
tracking
- The visibility of freight leaving the cross-dock location
and when it is supposed to arrive at the end destination
allows production schedules to fine-tuned to the last
detail - relating what came into the cross-dock location
and what came away is one of the reasons this flow is
problematic
The best inbound logistics programs worked on getting
their hands around the visibility issues created by a
Cross-dock situation. The cross-dock/ consolidation center
inbound supply chain network design is an innovative way
of consolidating inbound shipments, however, the above
mentioned issues create a visibility (lack of) situation more
often as compared to direct inbound movements.
Study the 3PL (Core carrier) concept and evaluate its impact
on your business
Most manufacturing organizations today work with multiple
carriers in different lanes, geographical regions and based
on different rate schedules. More importantly, they also
work with different warehouse operators in most of these
regions. There are multiple carriers that a manufacturer
would work with in the truckload space and LTL space. For
example, a Foods manufacturer (based in Rochester, NY)
worked with 7 different warehousing operators at 7 Pool
consolidation locations and 65 different carriers (LTL as
well as TL) in different geographies and lanes. This places
the burden of having to negotiate the carrier contractual
agreements with a host of carriers on the manufacturer. In
addition, warehouse operators and freight forwarding
organizations also negotiate freight contracts with the
manufacturer (for their warehouse, regions), which means
that the organization negotiates with a complex bunch of
carriers, freight forwarders and intermediaries on rates,
appointment times, equipment types, differing information
flow requirements, building IT interfaces with multiple
organizations, different EDI standards requirements and
on promised freight volumes.
Using a single carrier (Core carrier) and eventually a 3PL
organization that is able to leverage economies of scale by
providing complete transportation services as well as
warehousing, inventory management and distributed order
management capabilities allows the 3PL to pass on the
savings (accrued from economies of scale) to the end
customer.
The Core carrier handles all the freight requirements of
the manufacturer and is responsible to handle relationships
(freight rate negotiations, capacity requirements, setting
appointment times, tracking information) with a bunch of
other carriers (in geographic regions, specific lanes).
Manufacturers would work with a pre-decided rate
schedule (for example annually revised rate schedule) with
the Core carrier and get billed as per the pre-decided rates.
The Core carrier would need to handle settlement and
payment transactions with the 3rd party carriers. Most
successful core carriers have evolved 3rd party carrier
evaluation techniques that help monitor carrier performance
of on-time pickup/ delivery and appointment times setting.
Another important reason why developing relationships
with a Core carrier makes sense is to avoid/ minimize
handling transactions between multiple carriers. In the
global supply chain context, handoffs between multiple
modes (for example ocean and trucking) cannot be avoided.
However, minimizing such handoffs results in minimum
transactions costs and better visibility across the supply
chain. Exceptions can also be better defined and managed
due to lesser number of parties involved in moving a
shipment.
Most Core carriers (freight forwarders, consolidators) in
the market today have built freight consolidation expertise
by handling freight movement for multiple organizations
over a period of years. The economies of scale are a
compelling argument in favor of utilizing the core carrier
concept.
The move from utilizing the Core Carrier concept to evolve
into a larger and more mature relationship with a Lead
Logistics Provider (LLP) organization (offering the complete
range of outsourced logistics and transportation services
like warehousing, inventory management, transportation,
order management) is a logical move and shortens the
learning curve in managing outsourced relationships in
order to harness the full benefits from an outsourced
relationship.
Understand how the JIT manufacturing method is affected
by Inbound transportation
An important trend in the US Manufacturing industry
over the past decade has been the adoption of the JIT
manufacturing concept. A broad definition (among
companies adopting the JIT manufacturing method) of
the JIT concept (as pertaining to the Inbound supply
chain/ logistics and manufacturing) that we found is a
system of production and inventory management in which
inbound raw materials and/ or parts arrive at the
production site from the suppliers just in time to be used
in the production process.
Especially in a JIT manufacturing setup, the transportation
(and logistics) of inbound materials (raw materials, interplant
raw material transfers, inter-plant raw material WIP
transfers, pallet accounting, dunnage) and the Supply chain
planning concept of postponement directly affects the
ability to produce when little or no buffer inventory exists.
To gain the most of an Inbound logistics setup for JIT
manufacturers, it is important to analyze who controls the
inbound transportation, size and frequency of shipments,
lengths of haul, mode and carrier choice and the utilization
of the core carrier concept. The Core carrier concept, if
applied correctly in this kind of a setup has immense benefits
to be achieved. However, understanding the IT systems
capabilities of the core carrier is an important criterion to
be used in such an information-sensitive/ critical inbound
supply chain. The information related logistics costs (plant
shutdowns due to critical raw materials not arriving -
leading to lost sales, inventory financing, detention costs,
truck ordered but not used) in an Inbound supply chain
model aimed at JIT manufacturing methods should be
carefully analyzed before deciding on the utilization of the
Core carrier concept.
Analyze the overall inbound supply chain structure to
understand the nature of shipments (inbound, re-supplies,
inter-plant transfers, cross-dock movements). A study
conducted for a $.2.6 billion automotive manufacturer
based out of Minnesota revealed that a large percentage
of inbound shipments (from suppliers) are continuous,
repetitive in nature. An IT system that allows Schedule
management capabilities for such freight movements and
reports on the variations on the actual immensely benefits
the manufacturing organization.
Conclusion
Companies are turning their attention to their inbound
supply chain operations and realizing that there is a lot of
money that can be saved. Most manufacturers and
retailers have realized that advanced Purchasing practices
(supply chain concepts) have resulted in suppliers
arranging for the transportation of inbound shipments.
A company often ends up paying high freight costs for LTL
shipments from multiple suppliers who are close to one
another. Implementing a successful inbound logistics
program requires a transportation management system
(TMS) with proven capabilities to consolidate/
optimize shipments via a Optimization engine, strong
visibility capabilities/ tools, transportation schedule
management, tendering and booking capabilities. However,
embarking on an inbound logistics program requires more
than just a good TMS solution. It is important for the
manufacturer or retailer to look internally and align the
goals of the purchasing department and the goals of the
operations (logistics and transportation managers)
of the business. A successful program that was run for a
leading Foods manufacturer and distributor aligned
purchasing and logistics with an incentive structure,
metrics to measure the overall success and buy in from
both sides. The program created a collaborative
environment by involving suppliers because it affected
their revenues and operations.
References:
- Current Purchasing Practices and JIT: some of the
effects on inbound logistics By Mark Vonderembse,
Michael Tracey, Chong Leng Tan and Edward J. Bardi
The College of Business Administration, The University
of Toledo, Toledo, USA
- Selling Inbound Logistics Services: Understanding the
Buyer.s perspective By Arnold B. Maltz (Arizona State
University) and Lisa M. Ellram (Arizona State University)
- Inbound Logistics drives strong demand for
transportation systems
www.warehousemag.com
Warehousing Management/September 2002
- JIT and Inbound Transportation By Donald V. Harper
and Karen S. Goodner
- Online transportation systems drive control of inbound
freight By David Hannon, News and Transportation
Editor
www.purchasing.com
Purchasing. November 21, 2002
About the Author:
Atul Ankush Chatur is an Associate in the Solutions Consulting group of Transportation and Logistics practice at Infosys
Technologies Limited. Atul is currently specializing in RFID solutions for the Transportation and Logistics domain. He has
extensively worked on transportation management solutions and business process consulting engagements in the supply
chain space.