1. Global Logistics Management Shihyu Chou National Taiwan Normal University 1 Unless noted, the course materials are licensed under Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Taiwan (CC BY-NC-SA 3.0) Attribution-NonCommercial-ShareAlike 3.0 Taiwan

2. 2 Unit 9 Measuring and Managing Logistics Performance

3.  Logistics involves the following activities: sourcing and purchasing inputs, managing inventory, maintaining warehouses, and arranging transportation and delivery.  There are three key flows within supply chains: –Flows of materials –Flows of information –Flows of involving resources such as people, equipment, logistics partners and financial flows.  Note: Logistics involves getting, in the right way, the right product, in the right quantity and right quality, in the right place at the right time, for the right customer at the right cost (8Rs)

4.  Traditionally managers in LSPs and related companies do not commit much of their time to measuring and managing performance.  They focus on getting the job done and meeting only those very basic and measurable criteria.  However, due to competition and customers’ demanding on being assured of effective management of their business, LSPs and companies alike have to pay greater attention on performance then before and design a complete set of performance measuring metrics.  This unit is about the measurement and management of performance in the logistics context. 4

5. 5 Learning objectives  Introduce some basic performance measurements used in a logistics context  Illustrate the necessity about measurement of a wider array of activities and the driving forces behind  Discuss why LSPs tend to share key performance data with customers in recent years.  Discuss the importance of benchmarking of logistics performance management  Identify which KPIs to track, how they are embedded within the organization to fit company objectives, where the data come from, and who should get access to the information generated from KPIs  Discuss particular warehouse / inventory metrics and the concept of total landed costs

6. Basic Performance Measurement

7. 7 Basic measurement  Traditionally, LSPs used performance measures that were either very basic from an operational viewpoint, or required by law.

8.  Meet statutory requirements  Comply to financial obligations for preparing and filing annual accounts  Make sure tax affairs are in order  Ensure that correct returns to government agencies are made The traditional attitude regarding performance measurement in logistics

9. The tachograph  A tachograph is a device fitted to a vehicle that automatically records its speed and distance, together with the driver's activity selected from a choice of modes. The drive mode is activated automatically when the vehicle is in motion, and modern tachograph heads usually default to the other work mode upon coming to rest. The rest and availability modes can be manually selected by the driver whilst stationary. 9 Source: http://en.wikipedia.org/wiki/Tachograph

10. 10 The tachograph  It is a device installed onto a truck to record its speed, distance travelled and any breaks taken  It is used by police forces in many countries to make sure that drivers obey the maximum hours of driving in a continuous journey –Most nations set rules to limit continuous driving time and detail minimum breaks and rest periods for truck drivers  By law, tachographs need to be regularly tested to ensure they are in good working condition.

11. 11 Resource Utilization Measures  At the company level the primary inventory measure: –Inventory turnover (reflecting how long inventory stay in the warehouse)  Warehouse utilization measures –number of pallet or carton spaces consumed versus total spaces available –Total space consumed within the warehouse –Throughput rate, e.g. total number of shipments received  Road transport utilization measures –Total number of deliveries successfully completed versus ‘dropped deliveries’ (i.e. failed deliveries) These traditional measurements are traditionally not shared with customers and are for internal use.

12. A Contemporary Viewpoint

13. 13  In today’s business environment, in addition to demonstrate expertise in operational management, 3PLs also need to be good at keeping track of each transaction and ensure that they and their customers and agents can get access to information relating to the physical product flow when it is required  The information is used to develop performance metrics and indicators.

14. 14 Key performance indicators  Nowadays KPIs are shared with staff at all levels and in all functions within a company, with partners, agents, and customers  Many companies now hold formal business reviews with their 3PLs where the presentation of KPIs is a key part of the reviewing meeting  Logistics companies now consider performance measurement of all operational areas a common requirement from their customers

15. 15 Driving Forces for Performance Measurement  Increased dependence on contract manufacturers  Strategic importance of LSPs to supply chain success  Implementation of manufacturing management philosophies –JIT, TQM, six sigma, lean,...  Influence on customer experience  Increased competition  Information technology improvements  Empowerment practices  Employee motivation

16. Selecting the best measures

17. 17  ‘measure results, not activities’ –People tend to focus on just assimilating data without necessarily understanding how this data may be used –When we try to establish KPIs, we should concentrate on what benefit we hope to obtain as a result of having these measures in place –Don’t focus on what data may be easily available

18. 18 Quantitative vs. Qualitative KPIs  Most of the performance measures should be focused on quantitative results –Performance measures based on raw data are better for accurate comparison over time, and indeed for prediction –Quantitative data is reliable when comparing over time, as long as the data is error free  Sometimes, qualitative measures can also be used to supplement the quantitative results.

19. 19 Benchmarking  Firms should always try to emulate the best in class –This is the spirit of benchmarking  The logistics industry is somehow different from others, logistics companies not just rely on the referrals from customers but also from competing firms –The referring firm may not have the required capacity but wants to fulfil their customer’s requirement –Therefore, it is important that some benchmarking of performance can first take place

20. 20 Benchmarking  To benchmark against the industry, a company has to use the similar set of measures to map performance against the companies being benchmarked  The time to first consider benchmarking is when a firm is putting together a set of performance measures  It is a continuous process, and not a one-off event  The logistics industry is very dynamic, so benchmark levels of performance must be adjusted frequently to respond to the changes

21.  Too many metrics will lead to an unnecessarily large scorecard with unwanted background noises.  The optimum scorecard includes the important performance indicators needed to monitor the progress of a firm.  Logistics companies are very much process- focused so they need to ensure first that all processes and procedures are well documented before developing their performance metrics. 21

22. Commonly Used Performance Metrics 22

23.  When designing a set of KPIs, a logistics company should of course consider the requirements its customers. However, the customer requirements should not be the only inputs since they may not understand the full business offering.  We need to differentiate the KPI measures reported to different levels within an organization. 23

24. Examples of Commonly Used Metrics (Senior Management Level)  Warehouse utilization (in percentage, %)  Weeks of stock  Receiving OTD (on-time delivery)  Profitability / net revenue 24

25. Examples of Commonly Used Metrics (Operational Management Level)  Warehouse utilization (in percentage, %)  Aged stock reporting  Picking efficiency (in percentage, %)  Labor and resources used  Receiving OTD (on-time delivery)  System downtime 25

26. Examples of Commonly Used Metrics (Functional Operations Level)  Number of receipt processed same day / next day  Pick requests by unit, carton and pallet  Order backlog opening, mid-day and close of business  Number of pallets / cartons stored  Days product in storage  FTE (full-time equivalent) and temporary labor used by functional area 26

27. 27 Source: Kaplan, R. & Norton, D. (1992) The balanced scorecard – measures that drive performance, Harvard Business Review, January–February

28. Inventory / Warehouse Related Metrics

29. 29  In general receiving metrics are the first to be recorded, because receipt of product into the warehouse is the most important transaction –If the receiving process is well implemented, then stock accuracy and product integrity can be well managed and the subsequent picking process will be very likely problem free  Receiving metrics –Receiving time –Receiving On-Time Delivery –Delivery paperwork detail is correct –Part numbers, lot numbers and purchase order numbers match that on the paperwork and as against the ASN (advanced shipment notification) –Product is physically inspected with unit / carton or pallet count completed, product inspected for any signs of in-transit damage, repackaging, etc

30. 30  Put-away metrics –Number of pallets, cartons or units put-away Compared against the resource available to produce a productivity measure –Percentage of product put-away within a stated time Many warehouses might have good receiving metrics, but have product sitting on the floor yet to be put away

31. 31  Inventory accuracy –Inventory metrics act as a measure of operational performance, and reflect the adherence to processes, rather than the performance of the inventory team who conduct cycle counts –Cycle-counting of product is an activity that customers usually are interested in because the material being counted generally sits on their balance sheet rather than the 3PL’s balance sheet –Cycle-counting measures the length of time that inventory is sitting in the warehouse aged stock report: detailing the number of weeks product is in stock a report outlining the number of inventory turns

32. Logistics Costs Performance

33.  Total landed costs –Material procurement costs Component cost Direct material procurement cost –Logistics costs Transport cost Warehousing costs Duty Reverse logistics costs  Cost of materials on an ‘ex-work’ basis is not adequate to make a buying decision! 33

34. 34 3PL cost models  Cost plus margin –preferred model for 3PLs –Advantages: It provides complete transparency for all parties involved Risk is reduced for both parties –Disadvantages: Often a reluctance for the 3PL to drive continuous improvement Resources may be fixed at a level that meets the peak season demand Resources employed may not be adequate to meet business requirements Little opportunity for 3PLs to make high profits

35. 35 3PL cost models  Transactional Pricing –3PLs will use all their available resources across multiple customers and quote a unit rate for standard warehouse activities –Advantages: Resources are generally not fixed by the customer The 3PL will be highly motivated to drive efficiency at all stages of their process as any savings made will result in higher profits –Disadvantages: The customer may not always get the customer service that they require The 3PL needs to ensure that special requests are charged separately The customer does not have transparency

36. 36 Service Level Agreements (SLA)  A mutually agreed and understood agreement between both the firm buying the service and the firm providing the service  SLAs include: –duration of the service being purchased –Scope of services –Areas of responsibility –Performance metrics

37. PageWork LicensingAuthor/Source 4 They focus on getting the job done and meeting only those very basic and measurable criteria. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p185) 4 competition and customers’ demanding on being assured of effective management of their business Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p185) 5 Illustrate the necessity about measurement of a wider array of activities and the…the concept of total landed costs Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p186) 7 measures that were either very basic from an operational viewpoint, or required by law. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p186) 10 It is a device installed onto a truck to record its speed, distance travelled and any breaks taken Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p186) Copyright Declaration 37

38. PageWork LicensingAuthor/Source 10 It is used by police forces in many…minimum breaks and rest periods Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p186-187) 10 By law, tachographs need to be regularly tested to ensure they are in good working condition. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p187) 11 At the company level …versus ‘dropped deliveries’ (i.e. failed deliveries) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p187) 13 In today’s business environment, in addition to demonstrate expertise in operational …relating to the physical product flow when it is required Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p187) 14 Nowadays KPIs are shared with staff at all levels and in all functions within a company, with partners, agents, and customers Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p188) Copyright Declaration 38

39. PageWork LicensingAuthor/Source 14 Many companies now hold formal business reviews with their 3PLs where the presentation of KPIs is a key part of the reviewing meeting Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p188) 14 Logistics companies now consider performance … requirement from their customers Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p188) 15 Increased dependence on contract manufacturers…Employ ee motivation Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p188) 17 ‘measure results, not activities’ People tend to focus on just assimilating data without …what data may be easily available Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) 18 Most of the performance measures should be focused on… comparing over time, as long as the data is error free Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) Copyright Declaration 39

40. PageWork LicensingAuthor/Source 19 Firms should always try to emulate the best in class Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) 19 rely on the referrals from customers but also from competing firms The referring firm may …benchmarking of performance can first take place Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) 20 To benchmark against the industry, a …against the companies being benchmarked Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) 20 The time to first consider benchmarking is when a firm is putting together a set of performance measures Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p191) 20 It is a continuous process, and not a one-off event Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p192) Copyright Declaration 40

41. PageWork LicensingAuthor/Source 20 The logistics industry is very dynamic, so benchmark levels …to respond to the changes Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p192) 21 Too many metrics will lead to an unnecessarily large scorecard with unwanted background noises. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p192) 21 The optimum scorecard includes the important performance indicators needed to monitor the progress of a firm. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p192) 21 Logistics companies are very much process- focused …are well documented before developing their performance metrics. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p192) 23 When designing a set of KPIs, a logistics company should of …should not be the only inputs since they may not understand the full business offering. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p194) Copyright Declaration 41

42. PageWork LicensingAuthor/Source 23 We need to differentiate the KPI measures reported to different levels within an organization. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p194) 24 Warehouse utilization … Profitability / net revenue Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p194) 25 Warehouse utilization… System downtime Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p194) 26 Number of receipt processed same day / next day…FTE (full-time equivalent) and temporary labor used by functional area Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p194) 27 Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p195) Copyright Declaration 42

43. PageWork LicensingAuthor/Source 29 In general receiving metrics are the first to be recorded, … and the subsequent picking process will be very likely problem free Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p196) 29 Receiving metrics Receiving time… for any signs of in- transit damage, repackaging, etc Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p196) 30 Number of pallets, cartons … available to produce a productivity measure Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p197) 30 Percentage of product put-away within a stated time… on the floor yet to be put away Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p197) 31 Inventory metrics act as a measure of operational performance,…performa nce of the inventory team who conduct cycle counts Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p197) Copyright Declaration 43

44. Page Work LicensingAuthor/Source 31 Cycle-counting of product is an activity that customers …generally sits on their balance sheet rather than the 3PL’s balance sheet Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p197) 31 Cycle-counting measures the length of time that… a report outlining the number of inventory turns Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p198) 34 preferred model for 3PLs Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p200) 34 Advantages: It provides complete transparency for all parties involved Risk is reduced for both parties Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p200) 34 Disadvantages: Often a reluctance for the 3PL to drive … Little opportunity for 3PLs to make high profits Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p201) Copyright Declaration 44

45. PageWork LicensingAuthor/Source 35 3PLs will use all their available …quote a unit rate for standard warehouse activities Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p201) 35 Advantages: Resources are generally not fixed by the customer… savings made will result in higher profits Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p201) 35 Disadvantages: The customer may not always get… The customer does not have transparency Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p201) 36 A mutually agreed and understood …buying the service and the firm providing the service Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p202) 36 SLAs include: duration of the service being purchased Scope of services Areas of responsibility Performance metrics Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p202) Copyright Declaration 45