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CONTEMPORARY LOGISTICS,
FROM PRE-MANUFACTURING TO
ACCEPTABLE DELIVERY

By Charles C. Poirier


As a business analyzes its costs of operations, logistics typically appears as the second
largest element, following the cost of purchased goods and service. Most companies
have been pursuing improvement in this critical element of cost for half a century or
more, often with very credible results. Many organizations continue the pursuit of
logistics excellence with the aid of trusted partners or external constituents, including
those companies interested in assuming the responsibility for some or all of the process
steps.

From a modern perspective, these costs are now considered as part of an end-to-end
supply chain network, and businesses pursue together the means to optimize those costs
across the extended enterprise. Some extremely impressive gains have been recorded as
these efforts move forward. The purpose of this paper will be to briefly explore this
contemporary approach to a fairly standard and stable business practice, that of
packaging, loading, storing and transferring goods across an extended supply chain.
The Pursuit is for Total Cost of Logistics
For a typical firm, total logistics costs can vary between 5 and 15 percent, or higher, of
the total revenues. A recent study showed these costs, after a period of decline, have
risen and are now over 10 percent of revenues for a large sample of companies and
industries. Transportation is the largest component of this segment of cost, generally
being more than half, and receives the greatest focus. Included in that category are the
costs of ownership of the assets involved, equipment maintenance, driver wages and
benefits, fuel (a particularly troublesome issue in times of rising oil costs), and
miscellaneous items such as tolls and insurance. Warehousing and storage follow that
element, including the associated costs for space, taxes, obsolescence, depreciation,
interest; and insurance on the inventories held in the system.

Reducing these costs is a never-ending business quest. Most firms are successful in
lowering these costs when they move through the early levels of supply chain. As efforts
mature, however, a new level of sophistication enters the logistics discipline and
companies move to more complex arrangements including network alliances and
multiple business constituencies. These arrangements bring focus to all of the logistics
costs that occur before manufacturing, including inbound freight and storage, unloading
and handling. They extend through the manufacturing processes, as logistics are
involved in the movement of work in process and internal inventories, and then proceed
to the final deliveries to customers and consumers. Should any materials or goods need
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to be returned, the function continues through reverse logistics and any return shipments,
until the cycle is completed. Hence, the area under consideration is termed: from pre-
manufacturing to accepted delivery.
Models Change With The
The logistics models being applied by businesses are becoming more sophisticated.
Early efforts were directed solely toward reducing internal costs, particularly outbound
freight. Consideration was given to the many options to be used across multiple serving
and receiving locations for a particular business or division of a large firm, and the use of
equipment and facilities to make the necessary deliveries. Companies analyzed their
distribution efforts by looking at specific internal facilities, perhaps at a divisional region,
to determine where to locate a distribution center (DC), and how best to serve that
divisions customers.

While the original models were primarily strategic in nature, more contemporary models
are used for ongoing dynamic tactical planning and execution. Simulations are applied to
consider alternative approaches before adopting new strategies and systems. With
business complexity now including multi-tiered suppliers, sub-contractors and original
equipment manufacturers, this advantage brings a new, higher dimension to the
opportunities while lowering the risks inherent with new logistics systems. It also ushers
in the need to think well beyond the confines of internal logistics and to consider external
partners and network options in a quest to get closer to end-to-end optimized conditions.

Entire extended enterprise networks are now analyzed to consider all aspects of
transportation, warehousing and delivery. These analyses are digitally based (on network
extranets) and include the impact of inventory and the associated carrying costs. The
effect of seasonality is factored into the newer models to create inventory-stocking rules.
From a contemporary view, logistics has become a vital tool in extended enterprise
efforts, from both a cost and customer satisfaction viewpoint.

As a firm moves forward with its logistics effort, it generally pursues a transformation,
which follows the five levels of supply chain evolution. Exhibit 1 presents a framework
based on such a progression, from whatever initial position might exist for a company, to
whatever is the most appropriate advanced level of logistics excellence. We call it the
supply chain maturity model.

In Level 1, the firm typically begins to focus on reducing the overall costs of logistics
from an internal viewpoint. This position is labeled Calibrate the Beginning to capture
the need to know where the firm is starting and how far it might proceed. A company
looks at its cost of shipping and receiving, the techniques used for loading and unloading
at various sites, how orders are managed, and how the firm could find better ways to
control the amount of inventory used to support operations and customer satisfaction.

The traffic department rises in importance in this level, as solutions are discovered
leading to better yard management systems (often reducing the need for equipment), the
pooling of freight for pick up, and balancing the miles-per-week with needed pieces of
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equipment. Operational metrics such as cost/mile, backhaul percentage, space utilization,
percent of trips out of route and number of empty miles all move in the right direction.

Exhibit 1 A Logistics Framework


A side benefit is found as the amount of non-productive time is minimized. Common
carrier opportunities are investigated as most large firms combine the control of freight to
a central position and measure the performance of many carriers and consolidate their
orders with strong regional companies. With central control comes the desire to consider
more permanent external partners, which can reliably handle the delivery requirements
without disruption to customer satisfaction.
Order Management
Inventory Mgmt
Support Facilities
Service Requirements
Capital Investments
Cycle Times
X
X
X
X
X
APS
3PL
Customer
Satisfaction
Systems
Rationalization
Supplier Integration
Traffic Optimization
WMS, TMS
CPFR
Outsourcing
Core Competency
VMI
LLP
Network Planning
Extranet Systems
Dynamic Tactical
Planning
Decision Support
Software
Glass Pipeline
Global ??
Virtual
Manufacturing
Cyber Channel
Distribution
e-Fulfillment
Supply Chain
Partnerships
Logistics Model
(Multi-Tier)
Warehouse
Management
Event Management
GSP Network
Connectivity
Total Logistics Costs
Virtual Directory
Management
Simulation
Techniques
Perfect Orders
Global Deliveries
Calibrate the
Beginning
Achieve
Logistics
Capability
Leverage e-
Commerce
Tap Network
Opportunities
Build an
Advantage
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APS - Advanced Planning & Scheduling
GSP - Global Satellite Positioning
CPFR - Collaborative Planning, Forecasting & Replenishment
VMI - Vendor-Managed Inventory
3PL - Third Party Logistics Provider
LLP - Lead Logistics Provider
WMS - Warehouse Management System
TMS - Transportation Management System
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In Level 2, dubbed Achieving Logistics Capability, firms establish a logistics center
where the total organizations costs are evaluated. As the firm begins to consider its
ability to leverage transportation and storage the same way as its purchasing volume, it
moves closer to traffic optimization with attention turned to how the overall capability
can be improved. An examination is made of service requirements, on both the inbound
and outbound side of manufacturing, to determine if another supply chain partner can
make the deliveries on a more economical and efficient basis. Leasing equipment to keep
maintenance costs fixed and conserve cash becomes an option. Dedicated carriers having
responsibility for heavy traffic routes are used. Work is most often performed in this
level as a special study, frequently done with the help of a third-party advisor.
Significant, deeper data collection typically accompanies these studies.

This type of investigation can extend beyond transportation and the use of trucks, rail
cars, ships and planes, as serious consideration is given to the total assets tied up in
warehouse space and distribution centers. Now those in the logistics center question: Are
the facilities in the right place? Do we have more space than we need? Are the facilities
performing the correct function? Do we have the best total cost of delivery and storage?
Would we do better to turn over this part of the function to a more qualified partner?

Most firms find ways here to significantly reduce their investments, without harming
delivery capability. Software programs are applied to determine where the warehousing
should be located, how much space should be involved and which company should have
ownership of the facility. Using data on where suppliers are located, where the
manufacturing plants are situated, and where key deliveries must be made, this analysis
includes how much inventory is required to meet demand, how the goods should be
stored and retrieved, and often leads to rationalization of the total system and the
installation of a Warehouse Management System (WMS) for those assets deemed
important.

Third party logistics providers (3PL), companies skilled at taking over the responsibility
for equipment, maintenance, and drivers, and arranging transportation across the system,
are brought in to discuss transfer of ownership of this function. Advanced Planning and
Scheduling (APS) begins to occur at this time, as these providers are given access to
actual planning schedules, so they can have the right equipment and drivers available at
the right point of need.

Concepts involved in product flow analysis enter the picture. That means the involved
parties consider how much to buy and ship at any one time, adding a dimension around
what is the right quantity to flow through the enterprise. Smaller shipments reduce
inventory costs but can raise transaction, shipping and handling costs. Working on how
to achieve lowest total costs and optimized conditions, business partners begin to share
cost information to achieve a balancing of costs across the full business network.

In short, the logistics function becomes a serious part of the firms strategic framework.
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As supply chain strategy is fused with the business strategy and operating plans in this
level of the model, the elements required to attain logistics excellence are fused to the
supply chain strategy.
Digital Commerce Enters Level 3
When the firm crosses over the cultural barrier that inhibits use of external resources, it
enters the third level of the model termed Leverage e-Commerce. The intention is to
use Internet technology and cyber-based tools, internally and externally, to enhance
logistics processing. Now the company takes advantage of its internal data analysis and,
with the help of external advisors, starts its move toward the virtual logistics network.
With some of its most trusted allies, a firm performs a network cost analysis and develops
the end-to-end visibility so important to a contemporary logistics model. The logistics
function considers decision support software that includes real-time data transmission on
order and shipment conditions and requires the involvement of supply chain partners to
coordinate shipments and deliveries with demand data. Internally integrated modeling
occurs to pull the total needs together in a manner that allows the firm to consider many
more options than previously accessed. Event tracking of shipments versus what the
business plan called for becomes an attribute. Better event management becomes one
added feature in this level.

Dynamic tactical planning tools are applied in Level 3 to match manufacturing and
delivery schedules with actual consumption and come up with executable plans. This
planning is set up on a quarterly, semi-annual or annual basis, and allows the firm to track
results against a more reasonable budget. As implied, the tactics are adjusted as market
conditions change and special needs with key customers arise. Electronic communication
systems with enterprise partners come into existence as the firm begins serious
collaboration with its best suppliers and customers, often including some key distributors.
Together, these partners look at network planning and delivery as a means of
distinguishing the collaborating firms in the eyes of the final customer or end consumers.
A Model Helps Define Further Progression
To capture the progression being considered, Exhibit 2 illustrates the elements of an
advanced logistics model. Beginning with the supply phase, with its internal logistics
house in order, the firm considers the design-source-buy-store sequence of supply chain
improvement. This means the company is taking both an internal and external view to
logistics and making certain the connections and collaboration extend upstream to those
firms involved in designing products and innovations. A cooperative internal
arrangement between logistics and purchasing involves key suppliers in the designing
and sourcing process, while determination of storage and deliveries are done in an
optimal manner. With all of the complexity of todays business networks, a series of Tier
1 to n suppliers could be involved in this activity.

Depending on the network and its products and services, there could be other players
active on the supply side. Wholesalers for beverages and spirits, distributors of food
products and supplies, and logistics providers might be very helpful in bringing the
necessary upstream materials and products to a manufacturer. In the contemporary view,
all of these constituents must be operating with some form of online order processing,
order management, and tracking technique, while doing planning interactively. In the
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part of the model, inbound logistics is thoroughly considered. Dispatching signals are
sent to the key suppliers electronically.

Exhibit 2 Moving Logistics to Advanced Levels of Interaction



Transportation and distribution are coordinated to meet manufacturing schedules and to
match delivery with actual consumption. Tracking of inventory and shipments is online
and diversions are made (often in transit) to meet emergency needs. Expediting will
always be a part of any model and can be accommodated to meet real emergency needs.
Special shipments can be arranged, accessing virtual networks to find open capacity on
transportation equipment. At the manufacturing or transformation site, internal logistics
takes place in an optimized manner.

The central idea is to match the flow of incoming materials and supplies with the
manufacturing schedules. Work-in-process could be a very important feature as it is in
large steel and other metal-making operations where huge coils of semi-finished
materials are transferred between operations. Order planning and scheduling are shared
Speed of integration
Knowledge transfer
Shared risk & reward
Comprehensive solution
Key Attributes
Project management
Single point of contact
Enhanced capabilities
Broader service offering
Focused cost reduction
Resident client
knowledge
Global supply chain integrators
Pan-regional integrators
Multiple locations (intra- or
inter-regional)
Location(s) specific
Infrastructure
Geographic Coverage
Insourcing
LSP
(Logistics Service Provider)
3PL
(Third-Party Logistics)
LLM
(Lead Logistics Manager)
J OM
(Joint
Operating Model)
Source: Third-Party Logistics Study 2001, Georgia Institute of Technology, Cap Gemini
Ernst & Young Ryder System Inc.
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with key upstream and downstream partners so all parties are aware of the flows and
disruptions that may be part of operations.

Movement and storage are tracked and signals sent to important partners like contract
manufacturers, co-packing operations and sub-assembly partners, often using radio
frequency identification techniques. Once the products and goods are ready for transfer
downstream, the firm and its allies work on outbound logistics. Here the emphasis is
again on efficient movement and storage, but a closer look is given to order fulfillment.

With many channels of distribution being considered today, the advanced firm is
matching the best delivery method with the needs of its segmented customer base. J ust
how much time is correct between order and delivery, for example, is defined and
execution done accordingly. This means that if 24 hours is the appropriate best delivery
cycle for the highest priority customer group, all systems work toward that target. If 72
hours is an acceptable standard, then that becomes the target. The concept is to keep the
promises made so customers can plan accordingly and not be burdened with excess safety
stocks.

Transportation systems, warehousing and distribution considerations and inventory
management reach very sophisticated levels in the model, as order visibility the ability
to view and track shipments, make delivery promises, and manage inventories through an
electronic system becomes a reality. Channel partners of importance and the logistics
providers responsible for outbound logistics are key users of this system.

In the advanced model, the firm and its allies add another phase, that of service logistics.
Now the focus is on customer and end consumer receipt of the flow of goods and services.
The model questions how good that receipt has been, and whether there are maintenance
needs on the products delivered. Parts and spares logistics could be a part of the model,
particularly in industries like automotive and aerospace. Removal and replacement of
obsolete or damaged parts may be a requisite feature. Several large carriers have created
new businesses to handle the return, refurbishing and re-shipment of computers and high
technology equipment and parts.

Across the top and the bottom of the model there are requirements for success. There
must be some form of network connectivity through which communications are
channeled. That stipulation demands a compatibility of systems and software, making
technology integration a key element. Demand management, or the better analysis of
actual replenishment needs, must be coordinated carefully with supply capacity and
withdrawals from storage made in synchronization with current planning needs.
Inventory deployment, storage and management must be a network responsibility with
each player managing its part of the sequence, from supply to final delivery. And above
all, there must be online end-to-end visibility of what is going on across the extended
enterprise. That leads to collaborative excellence, a mark that will distinguish the
network in the eyes of the final customer or end consumer.


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The benefits from executing such a model have been clearly documented. They include:

Attaining the highest customer service and satisfaction ratings
Reducing the need for working capital through lower investments in inventory
and capital equipment now shared or outsourced with supply chain partners
Reducing total logistics costs through much greater efficiency in storage,
shipment and use of equipment
Achieving higher asset utilization by aggregating the total needs across the
network and taking advantage of the most useful facilities and gaining higher
utilization metrics
Gaining a better measure of risk management, as the network partners are
online working real-time to reduce the aberrations and emergencies that
plague supply chains.
Developing new revenues as the superior performance leads network partners
into non-traditional markets and increase business with existing customers.
Bringing greater profits to the operating statement by virtue of being the best
and lowest cost network of choice by the best customers
Network Opportunities Become the Level 4 Objective
In the fourth level of the evolution, logistics strategy truly becomes a network experience
with integration of efforts extending to multi-tiers of partners. Now the firm enters an
area called Tap Network Opportunities. With the assistance of key allies and data
readily accessed internally and externally, the focus moves to the extended enterprise and
the shipments and storage occurring across many organizations. The major feature of this
level is the glass pipeline that develops, through which the partners can view the entire
supply chain flow, from the earliest important supplies to final consumption. Global
Satellite Positioning (GSP) devices are used here to track shipments and storage of
products. Radio-frequency identification technology (RFID) comes into play, with
equipment mounted on warehouse trucks to link the communication right to the point of
picking the correct items for any order. All inventories of merit are online, accessed
through an extranet on a 24/7 basis.

Virtual inventory management becomes a reality rather than a dream as the partners are
operating closely to meet delivery needs without excess inventory. The overall focus is
on the perfect order with all partners working back from consumer and customer needs
to provide the best possible solutions. Metrics are established to measure these perfect
orders and used to solicit new business from other customers.
The Greatest Advantage Occurs in Level 5
Not all firms need to progress as far as Level 5, which has been termed Build an
Advantage. The opportunity is to achieve more benefits, particularly in terms of
customer and consumer satisfaction. This area is for the most sophisticated of networks,
requiring the formation of joint logistics models and involves full communication
connectivity across the extended enterprise. Total logistics costs are evaluated through
the connecting electronic communication system. Since the firms have applied activity
based costing and balanced scorecard techniques to determine the costs per unit across
the end-to-end network, they work together on the most cost-effective methodology while
keeping customer ratings at industry-best standards.
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A robust integrated multi-tier capability is what distinguishes the linked players, as all
key members are working together online, in a real-time basis to match deliveries with
actual demand. Simulation techniques are applied to study, evaluate and test alternative
delivery scenarios, and to alert partners of relevant changes occurring within the system.
Tight upward and downward propagation with regard to plans and changes are an
element that brings further advantages.
Summary
In conclusion, logistics is maturing as a business technique, especially as a key element
of creating the most effective supply chain network. Most firms progress through five
levels of improvement maturity, although not all firms need to achieve the highest level
of that progression. Models help guide the progress as firms carefully put the internal
house in order and then select trusted partners to build advanced systems. Overall
logistics costs decline in the process and customer satisfaction increases as the linked
partners find the way to best any competing network in meeting actual delivery and
replenishment needs.



About the Author
Charles C. Poirier is a partner with CSCs National Supply Chain Management practice
with over 40 years of experience in a variety of positions including CEO. Chuck is an
expert at helping companies increase value through more efficient and effective supply
chain management, and is a nationally sought after speaker. His compelling style and
real world examples have made his presentations and briefings noteworthy and topical.
Additionally, Mr. Poirier has authored a number of books that have guided supply chain
professionals for over 15 years. Included in his repertoire are: Supply Chain
Optimization, Advanced supply Chain Management, Using Models to improve supply
Chains, The Supply Chain Managers Problem Solver, E-Business: The Strategic Impact
on Supply Chain and Logistics, The Networked Enterprise, Business Process
Management Applied, RFID Strategic Implementation and ROI, and The Wall Street Diet.

About CSC
Computer Sciences Corporation helps clients conduct network analyses and achieve
strategic goals and profit through the better use of information technology. With the
broadest range of capabilities, CSC offers clients the solutions they need to manage
complexity, focus on core businesses, collaborate with partners and clients, and improve
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with real-world experience to work with them. CSC is vendor-independent, delivering
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clients in industries and governments worldwide have trusted CSC with their business
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The company trades on the New York Stock Exchange under the symbol "CSC."