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OMSAN LOJİSTİK. Performance Measurement in Logistics and Supply Chain Processes. Strategic Logistics Management - Leadership Program -.

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performance measurement in logistics and supply chain processes

Performance Measurement in Logistics and Supply Chain Processes

Strategic Logistics Management

- Leadership Program -

companies are complex logistics systems and interact within interdependent supply chains
Complex flow of materials, information and funds within the four walls of a company require a strategic approach to logistics considering performance measures, process design, infrastructure and systems requirements and organization development

Logistics goes beyond the company frontier. Firms interact within interdependent supply chains along with distributors, manufacturers, third-party logistics providers, customers, etc.

Internal and external coordination of logistics flows is critical to capture untapped savings and cost reduction opportunities in business.

Companies are complex logistics systems and interact within interdependent supply chains…
some upfront comments
There are not perfect performance systems, but there are BAD ones!

Keeping discipline in creating, tracking and improving performance pays off

The theory of performance measures holds in any industry, any country, any business process

Be critical of your performance system, always try to reduce, consolidate, eliminate redundant inefficient ratios

Establishing key performance measures reflects the way you see things (your logistics strategy)…

Some upfront comments…
and this is the way we see the logistics function and its processes
… and this is the way we see the logistics function and its processes …

Logistics (bridge)

Consumption Point

(Factory, Store, User, Consumer)

Fulfilling your service promise, while optimizing system’s resources

Sourcing Point

(Supplier, Factory, Store, User)

Logistics

slide6
… and logistics processes are the components of the bridge that holds the stream of materials, information and funds…
slide7
Customer Service

Warehousing &

DC Operations

Inventory

Planning

Transportation

& Distribution

Sourcing

Each logistics process has a specific role to assure the support of service levels and the optimization of resources.

Define logistics service policy

Capture demand

Fulfill orders with local inventory to meet response time requirements

Define inventory levels to fulfill demand

Optimize O-D lanes to meet response time requirements

Select optimal sourcing mix to meet inventory requirements

slide8
Profiling

Descriptive system of logistics activities

Neutral numbers, statistics

Measuring System Design

Good vs. Bad

Action oriented numbers

Auditing

Internal focus

Benchmarking

External focus

Logistics Projects Justification

Logistics performance measures will basically define success in fulfilling an overall role or a specific role
slide9
Gaining understanding of your logistics activities

Stimulate creative thinking

Identify quick fixes

Order

Master

Logistics activity profiling is the analysis of historical transaction data for the purposes of projecting activity and determining resource requirements.

  • Sources of data
  • Establish relationships
  • Identify decisions to be made

Order Header

Order Detail (Lines)

slide10
Some profiles will look like this. Customer segmentation and product segmentation are examples of it. Some decisions based on profiles could be …
  • Customer Response Measures
  • Customer Classifications
  • SKU Classifications
  • Customer-SKU Classifications
  • Customer Service Policy Design
  • Inventory Management Performance Measures
  • SKU Categories for Inventory Management
  • Inventory Turnover and Fill Rate Targets by Logistics Segments
  • Forecasting Models by SKU Category
  • Inventory Reduction Opportunities by Logistics Segment
slide11
Item-Order Correlation Profile helps develop DC slotting rules. Before this analysis slotting was based on a catalog product arrangement…
  • This is the item-order correlation of a mail order retailer.
  • It looks at the probability that 2 items were ordered together.
  • First 3-digit code corresponds to item class
  • Second 1-digit code corresponds to size
  • Third 1-digit code corresponds to color
  • Do you see the correlation?
  • What would you do different in the warehouse?
slide12
DC Operations are full of opportunities to profiling. Be sure to avoid “paralysis for analysis” by making sure every profile is tied to a specific issue or decision to make
  • Warehouse Performance Measures
  • SKU Categories for Warehouse Master Planning
  • Slotting
  • Storage Mode Selection
  • Order Picking Policies
  • Warehouse Layout
slide13
Profiles are different from performance measures in the sense that they don’t “judge” the effectiveness of a process, they just describe it!

Freight profile by location

Forecast profile for 2 SKU’s

a logistics performance system lps has some features to be considered
Logistics Performance System looks at:

Measurement Types (Porter)

Cost

Productivity

Response Time

Quality

Perspectives (Kaplan)

Shareholders

Employees

Customers

Suppliers

Society

Measuring Context

Control

Scope

Frequency

Level of Detail

Internal Coherence

Aggregation (and dis-aggregation)

Alignment

A Logistics Performance System (LPS) has some features to be considered…
slide15
Detailed Report per Employee at the Warehouse

Date: 01/27/94 Shift 2

Emp ID: 563 Sup ID: Bob Area: D2 Employee Name: Roman, Peter

Job Document Start Perf Std Dir Ind Sel Sel Pieces

Code Number Time B % Mins Mins Mins Aisle Pallets Items Pieces Weight Cube Pieces Mins /hour

START 9731 15:30 0 0 11 0 0 0 0 0 0 0 0 0

DRY 5779 15:41 98% 82 84 0 4 2 141 197 4108 118 197 84 141

MEET 1772 17:05 0 0 18 0 0 0 0 0 0 0 0 0

DRY 5842 17:23 B 95% 62 65 0 3 0 110 155 2489 106 150 65 154

DRY 6166 18:43 L 90% 64 71 0 3 2 102 169 3300 117 169 71 140

DRY 6637 20:24 107% 63 59 0 2 2 88 141 2749 114 148 59 141

BATT 7804 21:23 0 0 13 0 0 0 0 0 0 0 0 0

DRY 6671 21:36 B 20% 23 117 0 2 1 39 52 628 43 52 117 27

STOP 3829 23:48 0 0 0 0 0 0 0 0 0 0 0 0

**TOTAL** 74% 294 396 42 14 9 480 714 13274 498 716 396 108

Look at these next two charts… Both measure productivity at the warehouse. Same purpose, different context, scope, detail and frequency
slide16
This is a higher scope measurement, actually created from the individual output measures of the warehouse workforce.

Total Cases per Month (Thousands)

Hours

Cases

Total Labor Hours

7.0

6.0

5.0

4.0

3.0

2.0

slide17
Control is a principle in any good LPS. Nobody should be measured by things he/she can’t control. The control levels will largely depend on your own logistics organization design.

+

Scope

Control

Aggregation

Alignment

Management Planning Supervisor Operator

+

Frequency

Detail

Coherence

slide18
Cost of Logistics Resources + Cost of Holding Logistics Assets

People & Assets

Logistics Expenses

Views by

Resource, Activity (Output), Process

Logistics financial measurements are the most common and intuitive type of KPIs. Accounting practices however may restrain the possibility to compute logistics cost accurately.

Logistics Decision Objective = Max (Corporate EVA)

Logistics Decision = Min (Operating Cost + Capital Cost + Lost Sales)

slide19
This financial measure applies to the DC, by process and presented in a way relative to total warehousing cost

Types of Financial

Measures

Aggregate

By Unit

Relative (%)

productivity is measured at the resource level identifying the expected output of its consumption
Productivity is measured at the resource level, identifying the expected output of its consumption.

What’s the Output?

Output r

Pr =

Consumption r

What’s the resource?

slide21
The first step in determining productivity measures is identifying the logistics resources involved in every process and activity…

Machinery

Equipment

Inventory

Human

Resource

Fleet

Systems

Facilities

slide22
In reality, logistics is a system which receives input (resources) and after some activities (processes) generates output…

Corporate

Logistics

System

Logistics

Resources

Logistics

Output

Can you tell what the logistics output should be?

slide23
Productivity measures could be use to predict additional resource consumption when output will increase and performance remains equal

Disney World was predicting additional warehousing space requirements based on inventory turns reduction and equal storage density

time measurements in logistics report the velocity at which a certain process is conducted
A cycle time measurement will capture the total elapsed time of an activity from beginning to end.

It’s like having customers and suppliers with mental stop watches…

Time measurements in logistics report the velocity at which a certain process is conducted

t5

t0

t3

t4

t2

t1

slide25
Customer order cycle times will begin at the first point of contact with a customer until the order is delivered and collected

Elapsed Time in Hours

total manufacturing cycle time this chart comes from a coca cola bottler computing their real
Total Manufacturing Cycle Time… This chart comes from a Coca-Cola Bottler computing their real
slide28
The DC is full of response time measurements. Dock-to Stock times, Order Picking Times, Warehouse Order Cycle Times, etc.
slide29
“Manufacturing” perfect orders is the real goal of a logistics system. LPS includes quality measures to address this objective. The “POP” is a close approximation to TQM in Logistics

What is takes to “create” a perfect order?

slide30
is entered correctly

has available inventory

has the right amount of the right products

is damage free

arrives on-time

arrives at the right location

is communicated electronically

has no invoice/collections errors

IS PERFECT:

97%

80%

95%

96%

72%

94%

89%

93%

48%

The probability of shipping a perfect order is the multiplication of the probabilities of the 8 independent events. All logistics functions are represented in this KPI!

slide31
Complete Order (Discrete Measure 1 or 0, Not Continuous Measure as Case Fill)

On-Time Delivery (1 hour +/- range (FDI) or 30 min +/- range (GMA))

Damage-Free Shipment

Accurate Invoice (Non-Invoiceable Items have Accurate Invoice =0)

Perfect Order in Food Logistics by Grocery Manufacturers of America and Food Distributors International (FDI)
slide32
Fill Rate (by unit of measurement)

Total Fill (Binary)

Unit Fill (Percentage)

Case Fill

Order Fill

Fill Rate (by location)

Global

Local

Fill Rate (by time period)

Initial

At x-hours

Final

One key quality measurement in logistics is fill rate, yet this specific measurement can be computed in several different ways
slide34
The logistics performance gap analysis is used to compare logistics key performance indicators with benchmark indicators.

The gaps are used to assess strengths and weaknesses; to identify complementary logistics benchmarking partners; and to develop a cost-benefit justification of a world-class logistics initiative.

LCSR (17%/10%)

5

VU (65%/95%)

LWFP (2.4/1)

4

3

2

POCT (24/72)

IT (2/8)

1

Company X

0

World-Class

VAS (5/5)

SD (8/6)

POP (45%/75%)

COCT (42/24)

IA (90%/97%)

Once the LPS is in place a company can begin the auditing process with itself or other companies. A good way to capture the disparities found in an audit is through a Gap Analysis

benchmarking logistics performance measures
Process vs. Performance Benchmarking

Internal vs. External Benchmarking

Public vs. Private vs. Competitive Benchmarking

Major Issues in Benchmarking

Selecting Partners

Selecting KPIs

Comparability

Benchmarking Logistics Performance Measures
some public performance benchmarks global logistics cost logistics cost as a of gdp in the u s
$1 Trillion+

Billions

15.7%

$1000

12.3

$900

11.4

USA

10.4

10.3

$800

10.1

10.1

9.9

10.1

$700

$600

$500

Japan

$400

$300

Germany

$200

France UK

$100

1980

1985

1990

1995

1996

1997

1998

1999

2000

$0

Some public, performance benchmarks: Global Logistics Cost & Logistics Cost as a % of GDP in the U.S.

Robert Delaney, Cass Information Systems, Inc

slide38
WALL STREET & SUPPLY CHAIN GLITCHES

Stock drop of 8.62% = $120 million decrease in shareholder value

861 companies reviewed 1989 through 1998: Georgia Institute of Technology, http://gtresearchnews.gatech.edu/newsrelease/CHAINR.html

data source for dc inventory turns in the u s is werc warehousing education and research council
65% increase!!!

16

14

12

10

12.1

14.5

10.3

8

6

11.3

14.4

8.4

4

2

6.2

8.1

10.2

0

1995

1998

2000

52 Wholesalers

189 Manufacturers

40 Retailers

Data source for DC Inventory Turns in the U.S. is WERC (Warehousing Education and Research Council)

WERC, 2001

slide40
Average

2000

Transportation

$.068

$.035

$.033

$.058

$.020

$.021

Inventory Carrying Charges

Warehousing

$.048

$.024

$.020

Admin. / Order Processing

$.015

$.016

$.012

Logistics cost components have evolved over time. Herb Davis database has been recording Total Logistics Cost since 1970. This could be a good source of public, performance benchmarks

Mfg

Cost Components

1975

2000

TOTALS

$.189

$.095

$.086

Herbert W. Davis, 2001

slide41
DOCK TO STOCK

4 to 48 HOURS

ORDER CYCLE TIME

2 to 24 HOURS

INVENTORY ACCURACY

95.5 to 99.98

LINES / HOUR

2.5 to 13.2

ORDERS / HOUR

.1 to 6

CASES / HOUR

.7 to 117

PIECES / HOUR

1.2 to 1435

ERRORS PER CASE

.15 to 1

ERRORS / ORDER

.05 to 3.5

ERRORS PER LINE

.03 to 1.2

Department Stores Publishing HardwareTelecommunications & Utilities Medical Electronics ManufacturingService Parts Health, Beauty & Cosmetics Food & BeverageMail Order Public Warehouses

GEORGIA TECH METRICS

the amat benchmarking exercise story from public to private from standard to normalized
Increasing top management concern over inventory planning and financial implications

Decision to evaluate current performance at similar companies and operations

AMAT Inventory Turns = 1.8

AMAT Line Fill Rate = 92%

Logistics at AMAT qualified as a support organization for service parts in the high-tech electronics segment.

Some results…

The AMAT benchmarking exercise story: from public to private, from standard to normalized…
slide43
AMAT public benchmarking effort. We used sources such as Cass Logistics, Herb Davis, and the IOMA Report.
slide44
AMAT public benchmarking effort. In this case we were looking for line fill rate by industry, being careful with the way companies calculate this KPI
slide45
Good, but not good enough. We look terrible, we need more specific comparison points, because we are more complex that all of the other companies…
we are different sure we are more complex sure lets see what makes you more complex
1.number of commodities and part numbers

2.SKU introduction and purging rates

3.SKU substitutability and interchangeability

4.response time requirements

5.number of suppliers and customers

6.availability of timely, true consumption data

7.geographic spread of the logistics network

8.risk of obsolescence

9.demand variability

10. inventory management risk

We are different… (sure)We are more complex … (sure)Lets see what makes you more complex
slide47
Grading complexity in all benchmarking data points using the 10 factor analysis. Control points Coca-Cola (5) and Defense Logistics Agency (40).
slide48
We processed the raw data to create an Inventory Performance Index (IPR) and then plotted the IPR vs. Complexity
slide50
Process benchmarking may look like a gap chart against world-class practices. This is an example from Disney’s Warehousing Audit
keep it in perspective
“A (potential) problem with benchmarking (to be sensitive to) is that it can restrict the team’s thinking to the framework of what is already being done in the company’s own industry. By aspiring only to be as good as the best in the industry, the team sets a cap on its own ambitions. Used this way, benchmarking is a tool for catching up, not for jumping ahead.”Keep it in perspective…

Hammer, M. & Champy, J. “Reengineering the Corporation: A Manifesto for Business Revolution”, 1993

logistics initiatives financial justification analysis

Logistics Initiatives: Financial Justification Analysis

Disney’s Distribution Center

Spartan Stores’ Logistics Operation

AMOCO’s Transportation Performance Analysis

slide53
Disney’s DC performance objectives show potential savings by improving productivity, quality, and response time.
slide54
Spartan Stores computed financial savings through logistics initiatives using KPI improvements and resource reduction calculations
slide55
Amoco calculated a financial improvement of getting better fleet utilization numbers and tied those improvements to TMS functionality
final words
Logistics measures must be “in harmony with a company's overall business strategy”. For example, “Speedy delivery (and timely) order status (updates) are part and parcel of Amazon's brand identity. If Amazon drove its logistics activities with measures focused solely on reducing delivery costs, it would cripple its ability to serve customers. (Smart managers) are fusing their logistics plan(s) with their business strategies, ensuring that what is measured in the field is valued at the top of the organization”.Final words…

From Keeping Score: Measuring the Business Value of Logistics in the Supply Chain, CLM, 1999

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