DEVELOPPING A LOGISTICS PERFORMANCE ASSESSMENT TOOL FOR SMEs: A Closer Look at Logistics Costs… Ruth Banomyong Centre for Logistics Research Thammasat University, Thailand

Agenda Background Framework Development Methodology Findings Some Comments... A closer look at logistics costs...

Background Logistics management is recognised as a key opportunity to improve profitability and firms’ competitive performance (Lambert et al., 1998). However, It is important for firms to be able to assess their own logistics performance as a starting reference. Current assessment tools are not user friendly.

Background The purpose of this presentation is to introduce a logistics performance assessment tool (LPAT). The objective of the LPAT is to measure the performance of a firm’s key logistics activities under different performance dimensions.

Background The literature on the subject of performance measurement in logistics had common theme (Bowersox et al., 1989; Byrne & Markham 1991; Keebler et al,. 1999; Griffis et al., 2004):  Most firms do not comprehensively measure logistics performance, Even the best performing firms fail to realise their productivity and service potential available from logistics performance measurement, and; Logistics competency will increasingly be viewed as a competitive differentiator and a key strategic resource for the firm.

Framework: 9 Key Logistics Activities Order processing & Logistics communications Customer service & support Demand forecasting & planning Purchasing & procurement Material handling & packaging Inventory management Transportation Facilities site selection, warehousing & storage Return goods handling and reverse logistics Source: Grant et al., 2006

Framework: Performance Measurement Dimensions Source Effectiveness Efficiency Productivity Profitability Equity Adaptability Rossenbloom (1983)  Magreth and Hardy (1987) Stern and El Ansary (1996) Coelho, Easingwood, and Coelho (2003) American Marketing Association (2005)

Reliability Dimension Framework Development 9 Logistics Activities Time Dimension Cost Dimension Reliability Dimension Framework for Logistics Performance Indicators

Logistics Activities Development Framework Logistics Activity Cost KPIs Time KPIs Reliability KPIs Customer service & support Customer service cost/sale Average order cycle time Delivery in Full & on Time Demand forecasting & planning Forecasting & planning cost/sale Average forecast period Forecast Accuracy Purchasing & Procurement Procurement cost/sale Average procurement cycle time Supplier in Full & on Time Inventory management Inventory cost/sale Average inventory days Out of Stock rate Order processing & logistics communications Order processing cost/sale Average order processing cycle time Order accuracy rate Material handling & packaging Value of damaged goods/sale Average material handling & packaging time Damage rate Transportation Transport cost/sale Average delivery cycle time Facilities site selection, warehousing & storage Facility cost/sale Average inventory cycle time Inventory Accuracy Return goods handling & reverse logistics Return goods value/sale Average cycle time for customer return Rate of returned goods

Methodology A questionnaire was developed based on the logistics activities performance framework. 25 SMEs respondents were selected to answer the questionnaire while one Thai multinational was also requested to answer the assessment questionnaire. The 25 SMEs were composed of firms in the automotive sector, electronic, jewelry, furniture, and rubber industry.

Methodology Respondents understood data requirement well. However only 2 were able to fill the whole questionnaire. Cost data was the most difficult to complete. Respondents with ISO have more available data. Data provided by Thai MNE could serve as a reference point.

Findings The data collected was compared with an existing logistics and supply chain benchmarking database http://www.benchmarkingsuccess.com The logistics performance out put based on the 3 performance dimensions are illustrated in the following slides…

Cost KPIs = Group Average Top Thai company W O R L D C A S Performance Customer service cost per sale Procurement Info processing Disadvantage Parity Advantage W O R L D C A S Transportation Warehousing Forecasting cost per sale Inv holding cost Value damage Returned goods > 10 % 1 – < 5 . - 8 3 = Group Average Top Thai company

Time KPIs = ‡Group Average Top Thai Company W O R L D C S Performance Avg order cycle time Avg procurement cycle time Avg order processing Disadvantage Parity Advantage Avg delivery Avg inventory Avg forecast period day Avg material handling and packaging cycle time Avg cycle time for customer return > 10 days 7 – < 18 13 2 1 3 6 hr hours N . A 40 d W O R L D C S = ‡Group Average Top Thai Company

Reliability KPIs = ‡Group Average Top Thai Company W O R L D C A S Performance DIFOT ( CS and Support ) < 80 % - 95 Disadvantage Parity Advantage W O R L D C A S Supplier In Full and On Time Rate Order Accuracy Rate Transportation Inventory Accuracy Forecast Accuracy Inventory Out of Stock Rate Damage Rate Rate of Returned Goods > 90 98 – 99 60 2 10 1 5 . = ‡Group Average Top Thai Company

Some Comments... The LPAT tool could still be further simplified to make data collection easier. Key logistics activities are not equal in importance Further refinement of the logistics activities performance framework is needed…

Some Comments... The objective would be to identify maybe not more than 2 or 3 key logistics KPIs per performance dimension that could illustrate firms’ overall logistics performance. A composite performance metrics is currently under consideration. The development of this tool is an ongoing process.

A Closer Look at Logistics Cost... Difficult to identify all logistics activity cost. ABC can support the identification of cost of each logistics costing. However, difficult to implement. Logistics cost ratio per sales is the most common indicator... National Logistics cost? C2C metric to reflect supply chain performance? An example.

Logistics costs relationship

Ratio of selected export logistics cost (FOB) in ASEAN Industry Sourcing Cost Inventory Holding Cost Warehouse Costs Transport Cost Export Process Cost Total Export Logistics Cost Food 0.3% 0.2% 0.5% 2% 5% Textiles 4% 6% 3% 17% Wood 11% 24% Auto 1% 16% Electrical goods 10% Average cost 2.5% 1.4% 1.7% 4.8% 14.4% Source: (USAID, 2006)

Export Logistics costs component / Total Logistics costs Procurement Inventory 13 % 4 % Export Warehousing 45 % 7 % Transport 31 %

Macro Logistics Costs Framework

National Logistics Cost Framework

Thailand Logistics Costs/GDP Source: Ruth Banomyong (2007)

Some Future trends... Macro Logistics cost is increasing Transport cost Inventory carrying cost Thammasat Annual Logistics Index (3rd quarter)

The C2C cycle in the supply chain: Thai shrimp export to the US

C2C definitions Source Definition Stewart (1995) A composite metric describing the average days required to turn a dollar invested in raw material into a dollar collected from a customer Moss and Stine (1993) Days between accounts payable and accounts receivable Gallinger (1997) The cash conversion cycle measures the number of days the firm’s operating cycle requires costly financing to support it. Lancaster et al. (1998) MDM (2000) Schilling (1996) Soenen (1993) Inventory days of supply + accounts receivable – accounts payable Source: Farris II and Hutchison (2001)

C2C time (days) in the US Best-in-class Median Computers and electronics 25 106 Consumer packaged goods 45 88 Defense and industrial 17 70 Pharmaceuticals and chemicals 59 Telecommunications 46 127 Source: MDM (2000))

The shrimp export supply chain

Summary of C2C Thai shrimp suppliers Thai exporter US importer Customers Cash-to-cash cycle + 108 days + 120 days - 50 days + 18 days

Thank you for your attention Questions & Answers