Category: University of Mumbai BMS Notes

There has been much written about outsourcing over the years. The topic originally gained much notice in articles discussing how Japanese freight forwarders placed people in their customers’ offices to do the export shipping. In reality, if you have an outside firm do things for your company, it could be considered outsourced.

Even before the stories about Japanese forwarders, firms outsourced logistics services. If you hire a trucking company to make deliveries instead of using your own fleet and own drivers; if you use an outside warehouse to store and ship orders; if you use a bank or other service to audit and pay bills, you could be considered as outsourcing these activities. However these were not defined as outsourcing. The advent of the 3PL gave it a different panache.

Given that experience, how well has outsourcing of logistics services to 3PL worked? How well has it delivered expected improvements and benefits? What has worked and what has not worked? There are no real empirical studies of the extensive scope needed. Many surveys are with the buyers only; there are no corollary reviews with the sellers, the providers of the outsourcing service to get a balanced overview of how well the outsourcing did or did not work and why. In addition, press releases are issued when a provider is selected to provide a service for a customer; no press release is issued when the relationship does not work, is terminated or not renewed.

Also with many outsourcing surveys, it depends on the size of the company being questioned, its position in its market and industry, its experience at outsourcing, role in the outsourcing and other issues. And the answer also depends on how high or low, you set the bar. Plus, there are no absolute performance measures.

Outsourcing is really creating a relationship. And like all relationships, some work well; some hang on for reasons only known by the two parties and some fail badly. Each outsourcing action is unique. Since outsourcing should be a designed response by a service provider to a defined requirement by the buyer, outsourcing should not be a commodity service, like forwarding, trucking and other logistics services are viewed, where price is the key delineator to measure a firm.

In addition, there are different levels of outsourcing. Outsourcing is not a one-dimensional, homogeneous effort. That lack of progress reflects several issues, ranging from the limited outsourcing scope and requirements sought by buyers of supply chain outsourcing services, skill sets of outsource supply chain management service providers and those supply chain organizations that are not defined as “core” by their companies.

What is outsourced, why it is outsourced, what is expected and how it is achieved can be significant. These differences create the various levels of outsourcing and the need for a value proposition.

Levels of Outsourcing

Basic Transactions -> Increasing Level -> Zenith Strategic

In some regards, these are like a variation of Dante’s Nine Circles of Hell. With each increase, buyers of outsourcing move up into more complex and more important areas. Much outsourcing however is done at the lower levels and the resulting lesser impact of importance to the buyer’s firm.

The level of supply chain outsourcing needs be escalated. To put the value proposition in perspective, a step back is needed to lay the foundation for the outsourcing effort. The focus on the value proposition moves into outsourcing into an advanced stage, beyond traditional discussions of RFPs, Service Level Agreements (SLAs), contracts, work plans, governance, etc.

Real supply chain management outsourcing is dramatic and creative. It is used to-

• Drive change-as an agent of change, create new or when an organization is very resistant to change
• Gain significant short-term benefits
• Utilize and blend different service providers into a new capability to manage complex supply chains, with both international and domestic requirements
• Transform a strategic shift or paradigm

With the significant reasons shown above, contacting the “usual suspects” of service providers may not be the avenue needed. New solutions may demand new providers.

When firms going into arenas of outsourcing, the standard approaches will only drive the standard responses. Flexibility is demanded in developing the agreement and the evolving key performance indicators (KPIs) because the parameters, scope and measures will evolve as the outsourcing relationship grows and expands. Relationship is an important term and concept; contracts do not create relationships. Contracts are static and establish walls and barriers. Relationships are dynamic and have no such boundaries.

Companies can be afraid to move into these needed relationships to design and develop the changes they should have in their business model. Losing control is a concern and can be masked by Sarbanes-Oxley or similar issues.

Lowest cost is not the factor here; value is. Collaboration is the vehicle used. Clear objectives of where the outsourcing is to go and the expected result is important and go beyond standard SLAs in advanced outsourcing. Broad outcomes are established early. All parties stay focused on the objective. Rigid structure to the governance is not used; active governance is used.

Shared risks and leveraged gain-sharing of the new activity or enterprise can relieve such concerns because both parties have a vested interest in the results and in the success. In these relationships, leadership on both sides is important, as is trust, open communications, shared objectives, flexibility and mutual accountability.

Value proposition

The concept of a value proposition is not unique to outsourcing. It is something that all logistics service providers should have to distinguish them and to draw the attention of potential customers. This applies to 3PLs, logistics centers, trucking companies, freight forwarders, warehouses, and others.

Note, the topic is value proposition, not value-added. Value added is essentially giving something away for nothing, often some kind of technology application. Nor does it involve a creep effect where some buyers attempt to get something.

What is often missing in discussions of outsourcing is the value proposition that the provider is offering. The value proposition is what sets his service apart from others. “Reducing freight costs by 10%” is not a value proposition, or, at best, a weak one. Reducing a commodity service cost is not unique from the competition and puts the service provider back into the realm of being a commodity service provider, back into being what the provider is trying to escape from with the logistics company he is part of.

“Improving inventory turns by 30%” or “increasing market share by 2 points” are value propositions. The scope and complexity goes beyond a function and crosses the organization just like the process that supply chain management should be. Value propositions create the opportunity to move up the levels of outsourcing toward strategic.

Selecting the right logistics service provider can be a tough experience for companies. Don’t shortcut the process though, because the reputation and success of your company may soon depend on your logistics provider’s reliability.

Avoid a potential logistics nightmare by using these 5 elements in selecting your perfect logistics provider (such as a third-party logistics company, or “3PL”).

1. Capabilities

A prospective logistics provider must be competent in the specific service areas that meet your company’s needs. Just because a provider is a rock star in one area, it’s not a forgone conclusion that they can service your firm properly.

Also, they should have a set of abilities that can satisfy your both your short-term and future requirements. For instance, EDI-capability may not be a requirement for you today, but what if it does become required for you in 12-24 months? Do you really want to unwind all the onboarding and integration work invested in a new relationship? Dig a little deeper and ask:

• Are truckload lanes repetitive, originating from a limited number of shipping points and terminating to a relatively limited number of consignees?
• Are shipments time-sensitive and/or do they require drop trailers? A mid-sized, asset-based carrier would meet these needs without getting sidetracked by their exceedingly large list of clients.
• Are truckload lanes sporadic? Is there live loading/unloading or do shipments come from a high number of origins that terminate to a high number of receivers? If so, a 3PL provider or broker might be a better fit.
• Do you require access to dedicated trucking assets and 3PL? A logistics provider that possesses both assets and a 3PL division may be able to offer optimal solutions.

If a provider claims to possess all the capabilities “under the sun” but your organization requires only a few core services… be wary of a company that is a “jack of all trades” and master of none.

2. Customer Service

Does the logistics provider prioritize customer service, responsiveness, fluid lines of communication and effective problem solving? These elements can be difficult to ascertain early on but do your homework.

Virtually all companies claim to have excellent customer service, but how do you know? You ask their customers. Ask for references, preferably from companies in similar industries and needs. Good customer service is no accident. If the customer service is consistently excellent, it’s likely a result of a well-documented and repeated process that will continue over the years.

Another yield of good process execution is safety. It is uncommon for a logistics provider to achieve excellent results in customer service and poor results in safety or vice versa. It can be deduced that a safe logistics provider, probably provides good customer service.

3. Safety Record

Due to the ever-changing landscape of safety regulations, it is imperative that you select a carrier with a strong safety record. A review of safety ratings and statistics is available to the public here. Also, see how we value safety.

4. Company Stability

Whether your supply chain is simple or complex, select a logistics provider with overall company stability. Top suppliers are consistent suppliers. Quality can be jeopardized as companies experience rapid change. How long has the company been around?

Furthermore, if one high-liability event occurs and your provider cannot withstand the fallout, the liability often shifts, in effect, to you the shipper. This concern can be eased if the provider’s “word”, name and reputation has remained intact through decades of market turbulence and economic uncertainty.

5. Company Reputation

In a new business arrangement, you can rest assured that at some point the relationship will be tested. Often it as at this juncture, that the character of the service provider’s leadership will be revealed.

Before it is too late, investigate whether the provider is likely to respond with integrity and honor. Time will reveal whether the firm has a good, bad or ugly reputation with customers, suppliers, and employees.

• How do they treat their suppliers and employees?
• Are they an active and positive force within their community?
• What type of reviews do they have online?
• What are the consistent themes that appear again and again in their marketing material?
• How long have they been in business?

The answers will go a long way to determining how the provider will be as a supplier and partner.

Bonus: Double-check all elements if a supplier’s price is significantly lower than the market.

• What good is a cheap price if a provider doesn’t deliver consistently or provide an adequate response in the event of mishap?
• What good is a cheap price if service failures cause you to lose revenue?
• What good is a cheap price if your team spends countless hours resolving claims and problems?

Think about the total cost associated with selecting a long-term solution provider. The provider that offers you the overall lowest cost of working together is the partner you want around for years to come.

Strategic analysis of logistical networks is designed to reduce costs, increase client service levels, and maximize profits. To achieve these goals, strategic decision making must be balanced between procurement, production, inventory management, and transportation.

Objectives of Logistical network analysis

Logistical network analysis is fundamentally aimed at determining the number of production sites, warehouses, and depots. It is also used to develop scenarios for assigning not only a capacity to each of these sites, but also an optimal geographic location in view of specific network constraints.

From both a local and global perspective, logistical network analysis is aimed at determining supply sources, production volumes, and inventory levels for each site being studied. As this pertains to transportation, logistical network analysis is used to weigh the merits of various transportation modes.  It is also used to develop a transportation plan with a view to determining the most suitable modes for each segment of the network.

Logistical network analysis: Proposed methodology

Given the need to jointly optimize various logistical aspects, such as production levels, inventory levels, and supply sources, adopting a systemic methodology is essential to the success of such a project.

Collect data

It is very important that data be collected concerning the current network (site location, node typologies), products (nomenclature, weight and volume), constraints (client demand, production capacity, delivery lead times, service levels, etc.), network costs (facilities, storage, production, transportation, etc.), and the transportation modes utilized.

Determine distribution strategy

The distribution strategy is used to determine the service level sought by the organization in response to demand in various markets. This strategy also stands at the forefront of considerations concerning the desired network transportation structure.

Determine scenarios

Determining scenarios forms the central pillar of strategic analysis. By varying site locations, network structures, client demand levels, and service levels, an array of scenarios can be developed to model a large number of situations with a reasonable likelihood of occurring. For example, you can determine the impacts of soaring client demand on network costs, significantly increasing service levels in certain regions or delocalizing your production activities.

Evaluate scenarios and select one

Once various scenarios have been established, they should be evaluated. To this end, you should develop an evaluation scale, including parameters to be considered and appropriate weighting factors. Once the criteria have been established and the scenarios have been evaluated, you can decide which scenario is most suitable this will be the future logistical network.

Implement scenario

Implementing the scenario requires meticulous planning, not only in structural terms, but also in terms of change management and training, two intangibles that remain a key component of project success.

Evaluate performance

After the scenario has been implemented, performance evaluation is used to provide the feedback required for project analysis. Evaluating financial factors (effective cost of the new network) or client service factors (delivery lead times, inventory outs, etc.) facilitates competitive benchmarking and ensures continuous improvements in our logistical network.

The source of a competitive advantage

From a perspective of globalized supply chain management, logistical network analysis thanks to the role it plays in reducing costs and improving client service is likely to be a major source of competitive advantages.

1. Network design is prime responsibility of logistical management since a firm’s facilities and structure is used to provide products and materials to the customers.
2. Logistics facilities typically include manufacturing plants, warehouses, cross-dock operations, and retail stores.
3. Determining how many of each type of facility are needed, their geographic locations, and the work to be performed at each is an important part of network design.
4. In certain situations, some of the facility operations may be outsourced to service specialists. Regardless of who does the actual work, all facilities must be managed as an integral part of a firm’s logistical network.
5. Network design, not only determines the number and location of all types of facilities required to perform logistics work but also determines what inventory and how much to stock at each facility and where to assign customer orders for shipment.
6. The network of facilities including information and transportation forms a structure from which logistical operations such as processing of customer orders, maintaining inventory and material handling performed.

The design of network must consider geographical variations. In context of global logistics, issues relating to network design become increasingly more complex.

The factors influencing modification of network design are:

• Change in demand and supply
• Product assortment
• Changes in Supplier’s supplies
• Manufacturing requirements.

Roll-on/roll-off (RORO or ro-ro) ships are cargo ships designed to carry wheeled cargo, such as cars, trucks, semi-trailer trucks, trailers, and railroad cars that are driven on and off the ship on their own wheels or using a platform vehicle, such as a self-propelled modular transporter. This is in contrast to lift-on/lift-off (LoLo) vessels, which use a crane to load and unload cargo.

RORO vessels have either built-in or shore-based ramps or ferry slips that allow the cargo to be efficiently rolled on and off the vessel when in port. While smaller ferries that operate across rivers and other short distances often have built-in ramps, the term RORO is generally reserved for large oceangoing vessels. The ramps and doors may be located in the stern, bow, or sides, or any combination thereof.

Description

Types of RORO vessels include ferries, cruiseferries, cargo ships, barges, and RoRo service for air deliveries. New automobiles that are transported by ship are often moved on a large type of RORO called a pure car carrier (PCC) or pure car/truck carrier (PCTC).

Elsewhere in the shipping industry, cargo is normally measured by the metric tonne, but RORO cargo is typically measured in lanes in metres (LIMs). This is calculated by multiplying the cargo length in metres by the number of decks and by its width in lanes (lane width differs from vessel to vessel, and there are several industry standards).

Advantages of a ro-ro ship

A ro-ro ship offers a number of advantages over traditional ships. Some of the advantages are as follows:

• For the shipper, the advantage is speed. Since cars and lorries can drive straight on to the ship at one port and then drive off at the other port within a few minutes of the ship docking, it saves a lot of time of the shipper.
• It can also integrate well with other transport development, such as containers. The use of Customs-sealed units has enabled frontiers to be crossed with the minimum of delay. Therefore, it increases the speed and efficiency of the shipper.
• The ship has also proved extremely popular with holidaymakers and private car owners. It has significantly contributed to the growth of tourism. A person can take his car from one country to another by the sea with the help of a ro-ro vessel.

Roll-on/Roll-off Ships Stowage and Securing of Vehicles

Principal Sources of Danger

Though Ro-Ro vessel’s make a very small proportion of the Merchant marine tonnage, there have been many accidents involving these, giving rise to far worse consequences. It is very important to understand the “Sources of Danger “which leads to such petrifying situations. These sources of danger don’t only affect the safety of roll-on/roll-off vessels but also the passenger/crew in it.

• The unacceptable condition of the consignment constraining it to be properly lashed for Sea. Example: insufficient number and incorrect positioning of securing points, Weak securing points etc.
• The free surface effect in tank vehicles and tank containers which are slack;
• Poorly maintained ramps, lifts and bow and stern doors;
• Poorly maintained, inadequately illuminated or badly planned decks;
• Wet Decks;
• Vehicles being moved negligently on vehicle decks and ramps;
• The reversing of road vehicles on vehicle decks and ramps;
• Insufficient or incorrectly applied lashings or wrong use of Lashing equipment or of inadequate strength having regard to the mass and centre of gravity of the vehicle and the weather conditions likely to be encountered during the voyage;
• Free play in the suspension of vehicles;

Lighter Aboard Ship is the name of a type of vessel that carries standardised pushed barges. The pushed barges, that can weigh up to 600 tons when loaded, are loaded and unloaded by means of a heavy-duty gantry crane onboard the ship. Once the pushed barges are loaded in the water, they are interlinked to form major pushed convoys.

LASH vessels are used only in areas with large deltas (the Maas Delta, The Mississippi estuary) as the large pushed convoys can travel deep into the hinterland of these regions.

Activity-based costing seeks to relate all relevant expenses to the value adding activities performed. For example, costs are assigned to a customer or product to reflect all relevant activity cost independent of when and where they occur. The fundamental concept of activity-based costing is that expenses need to be assigned to the activity that consumes a resource rather than to an organizational or budget unit. For example, two products produced in the same manufacturing facility, may require different assembling and handling procedures. One product may need an assembly or packaging operations that requires additional equipment or labor. If total equipment and labor costs are allocated to the products on the basis of sales or units produced than both items will be charged for the additional assembly and packaging operations required by only one of them.

In case of logistics, the key event is a customer order and related activities and relevant costs that reflect the work required to fulfill the order. In other words, activity based costing in logistics must provide managers the insights needed to determine if a specific customer, product, order, or service is profitable. This requires matching specific revenue with specific costs. The guiding criteria for effective logistical activity-based costing are relevancy and consistency. Relevancy is important in the sense that the costs assignment helps managers to better understand the major factors affecting logistics expenses. Consistency is important in terms of comparing related activities over time. In the final analysis, activity based costing in logistics  has to make sense only to the managers who are using it as a guide to decision making.

(I) Cost Identification:

All costs associated with the performance of logistics function should be in the activity- based classification. The total cost associated with fore casting and order management, transportation, inventory, warehousing, packaging must be isolated. Typical logistics costs can be categorized under two headings direct and indirect costs, cost of capital and overheads.

1. Direct Costs:  These costs are those expenses specifically caused by the performance of logistics work. Such costs are difficult to identify. For example, the transportation costs for an individual truckload order can be directly attributed to a specific order. Likewise only minor difficulty is experienced in isolating the direct administration cost of logistical operations.
2. Indirect Costs: These are more difficult to isolate. For example, the cost of capital invested in real estate, transportation equipment, and inventory- just a few of the areas within the capital structure of logistics- must be identified to arrive at a comprehensive total cost. The manner by which total costs are attributed to logistics activities are determined by managerial judgments. One approach is to allocate the overhead cost on the basis of the average cost per unit.  All expense paid to support capital investment in logistical operations are relevant to activity-based costs. The judgment applied in arriving at cost of capital will greatly influence logistical system design. Thus procedures and standards used to calculate indirect logistical costs are critical. They are also essential for potential outsourcing.
3. Cost of Capital:  Capital investment Expenses for logistical activities are relevant to logistical activity- based costs. Cost of such capital also needs to be included in your logistical cost.
4. Overhead: An enterprise incurs considerable expenses on behalf of all organizational units, such as for light and heat in various facilities. Judgement is required to determine how and to what extent various types of overhead should be allocated to specific activities. One method is to directly assign total corporate overhead on a uniform basis to all operational units. At the other extreme, some firms withhold all overhead allocations to avoid distorting the ability to measure direct and indirect logistical activity- based costs.

(II) Cost Time Frame  

A basic concern in activity based costing in logistics is to identify the period of time over which costs are accumulated for measurement. Accounting principles call for accrual methods to relate revenues and expenditure to the actual time period during which services are performed. Expenses associated to raw material procurement through finished product distribution and almost all other logistical operating costs are incurred in anticipation of future transactions, making accrual methods difficult to administer.

To overcome the time problem, accountants attempt to break costs into 2 groups- costs assigned to a specific product and costs associated with the passage of time. Using this classification an attempt is made to match the appropriate product and time period costs to specific periods of revenue generation. From a logistical perspective, a great many of the expenses associated with procurement and manufacturing support can be assigned and absorbed into direct product cost.

In situations where a considerable period of time elapses between production and sales, such as in highly seasonal businesses, significant costs of maintaining inventory and performing logistical operations may not be associated with revenue generation.

(III) Cost Formatting  

The typical way to format activity-based costs is to assign expenses to the event being managed. For example, the object of analysis is a customer order, than all costs that result from the associated performance cycle contribute to the total activity cost. Typical units of analysis in activity based costing in logistics are customer orders, channels, products and value added services. The cost analysis will vary depending on which analysis unit is selected for observation Logistical expenses can be presented in a number of ways for managerial use. Three common ways are;

1. Functional Grouping: To format costs by functional grouping requires that all expenditures for direct and indirect logistical services performed for a specified operating time be formatted and reported by master and sub account classifications. Thus, a total cost statement can be constructed for comparison of one or more operating periods .It is important to identify as many cost accounting categories as practical and to develop a coding system that will facilitate assignments to these cost accounts.
2. Allocated Costs Grouping: This consists of assigning overall logistical expenditures to a measure of physical performance. For example, total logistical cost can be generated on a per ton, per product, per order, or on some other physical measure that is useful for comparative analysis of operating results.
3. Fixed Variance Grouping: This is the most useful for identifying the logistics cost implications of current or alternative operating practices. This method of formatting consists of assigning costs as either fixed or variable to approximate the magnitude of change in operating expenditure that will result from different volumes of logistical throughput. Costs that do not directly vary with volume are classified as fixed. In the short run, these expenses would remain if volume were reduced to zero. Costs influenced by volume are classified as variable. For example, the cost of a delivery truck is fixed, however gasoline to operate the truck is variable.

Inventory means all the materials (may be raw or finished parts/components, in process or finished products, castings and consumable tools, electrodes etc.) recorded on the ledgers/books of the organization and kept in its stocks (in the store or warehouses) for some period of time.

So inventory is an essential part of an organization. Every enterprise/business or manufacturer concern however big or small has to maintain some inventory.

Functions

From the definition of inventory, it is clear that it is related to stock of raw materials, semi-finished and finished products/items maintained by the enterprise/business/organization.

The following points will explain the concept and functions of inventory:

(i) Inventories Serve as Cushions:

Against shocks due to demand/supply fluctuations, it separates different manufacturing operations from one another and makes them independent so that each operation can be performed economically.

For example, an organization has to deal with several consumers and vendors and due to their unpredictable behaviour there are always fluctuations in demand or supply of goods which disturbs the schedule of the enterprise.

Inventories absorb these fluctuations and help in maintaining undisturbed production i.e., we decouple the manufacturing activities from the consumer and vendor successfully by cushions of stocks.

Furthermore purchasing/order of raw material can be carried out independently of the finished products distribution and both of these activities can be made low cost operations say by ordering raw material and distributing products in one big lot than in small batches. Thus it leads to better utilization men and machines besides economy.

(ii) Inventory, a Necessary Evil for Any Enterprise:

Inventories require valuable space, capital and other overheads for maintaining it. The invested capital remains idle till the stocks are not consumed. On the other hand, smooth working of the organization is not possible without inventory so it is a necessity. Further it has been observed that costs of not having inventory (stock out conditions) are usually greater than costs of having them. Thus inventory is a necessary evil.

(iii) Inventory Provides Production Economies:

Purchase in desired quantities nullifies the effects of change in prices or supply. Stocks bring economy so purchase of various inputs due to discounts on bulk purchase.

(iv) Maintenance of Smooth and Efficient Production Flow:

Maintains smooth and efficient production flow thus keeps a process continually operating.

(v) Creation of Motivational Effect in Decision Making:

Creates motivational effect in decision and policy making e.g. a person may be tempted to purchase more if inventories are displayed in bulk.

Importance

The following points give the importance of inventory to an organization:

(i) Good consumer service can be provided and maintained in the organization.

(ii) Enables smooth and efficient production flow of goods/items.

(iii) Provides protection against uncertainties regarding demand and supply of materials and output.

(iv) Various production activities can be independently and economically performed,

(v) Ensure better utilization of men, machines and materials.

(vi) With bulk purchases quantity discounts can be availed.

“Mission” is a set of customer service goals to be achieved by the system within the specific market/product context. A successful achievement of defined mission involves a large input from various activity centres of the firm. Hence the logistics costing should be able to identify the total costs of meeting a desired mission. This is referred as Mission Based Costing.

Essentially Mission Based Costing seeks to identity unique costs that are generated as a result of

Specific logistics activities aimed to achieve certain objectives in a specific customer/market. There is no point in incurring additional costs if the additional benefits do not justify the same.

Functional Inputs to Logistical Management

There are four stages in implementing an effective Mission Based Costing.

• Define the customer service segment This is required as all customers do not have the same service requirements
• Identify factors that produce variations in the cost of service: for example – reducing the frequency of delivery .will reduce the costs.
• Identify the specifies specific resources used to support customer segments.
• Attribute activity cost by customer type or segment.