From cost center to strategic weapon a new perspective on logistics

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The rules of competition have changed dramatically over the past five years,
driven in part by a number of business trends, including globalization, out-
sourcing, and product customization. Companies can no longer compete
solely on price or functionality. Today’s differentiating factor is customer
service, which is at the heart of logistics and the perfect order metric (i.e. de-
livering the right product, at the right time, in the right quantities, and billed
correctly).

Unfortunately, logistics has traditionally been viewed as a cost $ JURZLQJ QXPEHU RI FRPSDQLHV
center within the enterprise. In other words, many CEOs have a DUH EHJLQQLQJ WR YLHZ ORJLVWLFV DV D
very limited understanding of logistics, and they fail to recog- VWUDWHJLF ZHDSRQ WR LQFUHDVH
nize the top-line benefits it can provide if leveraged effectively. UHYHQXH DQG JDLQ PDUNHW VKDUH

A growing number of companies, however, are beginning to
view logistics as a strategic weapon, or as a means to increase revenue and
gain market share. These companies are very reluctant to disclose any in-
formation regarding their operations, not even the names of the software
vendors that they are using. From their perspective, logistics is no different
than a patent or trade secret that ultimately results in a competitive advan-
tage.

In light of these trends, it makes sense to consider the following questions:

• What are the primary logistics challenges companies are facing today?

• How do you change the cost-center perception and elevate the role of
logistics within the enterprise?

• What makes logistics a strategic weapon?

These questions and many others were addressed at The Logistics Forum
E-Supply Chain Forum 2001, organized by Richmond Events and held May
14-16 aboard the renowned ocean liner Queen Elizabeth II. More than 350
senior-level executives (referred to as delegates) from leading US corpora-
tions participated in this event. The conference program included
presentation, seminars, think tanks, and workshops that addressed many of
the challenges facing today’s logistics professionals.

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ARC Advisory Group defined and facilitated several think tanks that were
conducted during the event. Think tanks were 90-minute sessions where
delegates were given the opportunity to share ideas and experiences with
each other within the context of a given topic.

This report highlights the insights revealed in the think tank titled “From
Cost Center to Strategic Weapon: A New Perspective on Logistics.” About 35
senior-level executives, representing a wide variety of companies and verti-
cal industries, participated in this think tank.

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Despite the diversity of backgrounds, many of the delegates expressed simi-
lar experiences, challenges, and ideas. The list below highlights some of the
key findings.

• Many companies still do not view logistics as a value-added part of the
organization.

• There is a general lack of understanding of what 'logistics' means.

• There is poor collaboration between logistics and other business func-
tions, such as sales and marketing.

• In order to stimulate growth, many companies are planning to expand
their operations beyond North America, but they are unsure of how to
address the challenges associated with international trade.

• Hiring and retaining talented people are the most critical factors for suc-
cess, followed by having the right processes in place.

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I’m just glad the focus is back on reality. Those words, spoken by one of the
delegates, effectively summarize the results of this think tank. During a total
of six hours of conversation, there was virtually no mention of e-business, e-
commerce, the Internet, the Web, or any other buzzword by the delegates.
Their challenges are rooted in more traditional areas, in the problems that
remain long after the hype storm blows over.



Managing costs remains the top priority for everyone, especially in today’s
economic environment. Companies are taking a short-term focus, and so
cost-cutting efforts are taking center stage as a means to improve the bottom
line. Logistics is one big mortal sin within the organization, stated one of the
delegates. It’s easy to ignore when times are good, but a focal point when times are
tough.

The C word--collaboration--was also mentioned as a big chal- ´/RJLVWLFV LV RQH ELJ PRUWDO VLQ
lenge by many of the delegates. However, while most of the ZLWKLQ WKH RUJDQL]DWLRQ LW·V HDV WR
hype surrounding collaboration has centered on working effec- LJQRUH ZKHQ WLPHV DUH JRRG EXW D
tively with external parties, the delegates were more concerned IRFDO SRLQW ZKHQ WLPHV DUH WRXJKµ
about establishing better relationships with their colleagues
down the hall, especially the sales and marketing team.

Other common challenges included:

• Dealing with the effects of mergers and acquisitions. A leading elec-
tronics distributor is struggling to standardize processes across many
warehouses and distribution centers, especially after acquiring more than
40 companies over the years. Providing a single, consistent view to cus-
tomers is a related issue, complicated by the fact the company has close
to 20 different software packages.

• Keeping up with increasingly aggressive customer requirements. A
high tech manufacturer has been forced by its customers to reduce its
cancellation window from 30 days to 2 days, and customers are trying to
drive it down to zero days. Since many of the products are custom-
configured for each customer, a last minute cancellation could potentially
result in millions of dollars of obsolete inventory.

• Changing the perception of logistics within the enterprise. Logistics is
not perceived as a value-added part of the organization at an automotive
parts manufacturer. From management’s perspective, their job is to
chase orders, expedite shipments, and run a warehouse. The company
has never recruited externally for logistics professionals, and they don’t
have any relationships with leading universities in the field. Most of
their logistics people have come from other business functions, such as
finance and engineering. “Many of our people have been placed in logistics af-
ter failing in other roles,” joked the delegate (but with a hint of truth).

• Understanding and effectively managing the challenges of interna-
tional trade. Some companies believe that in order to navigate safely through



trade regulations, you simply need to hire a lawyer that specializes in interna-
tional trade, stated one of the delegates. However, since lawyers typically
lack an understanding of supply chain processes, they cannot apply trade regula-
tions to supply chain activities. You need both a legal understanding of trade
regulations and practical supply chain experience to effectively manage trade
compliance.

While the delegates had an appreciation for technology, and
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many were actively looking for software solutions to address
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specific problems, they also realized that having the right peo-
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ple and processes are in many ways more important. As one
delegate stated, the first inclination is to find some technology to fix
a problem, but the root cause is always a faulty process.

In short, logistics professionals are dealing with the same issues that have
existed since before the e-business era. The only difference is that today
these challenges are in the forefront, playing a critical role in the so-called
new economy. The following sections highlight many of the ideas, experi-
ences, and recommendations shared by the delegates.

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There is a general lack of understanding within the enterprise of what logis-
tics actually means. Many executives equate logistics with only
warehousing, while others treat it as a black box with a dock. In other
words, all they know is that goods arrive and depart from a dock, preferably
on time and as cheaply as possible. In short, logistics is typically at the bot-
tom of the pecking order, “right next to the maintenance guys.

For example, a manufacturer of diagnostic equipment reported that logistics
was viewed as something that was done in the back of the building. Man-
agement was reluctant to invest in the group, until shipment volumes
increased from 300 to 3,500 shipments per day and it became painfully obvi-
ous that their current infrastructure could not scale. The company is now
considering shipping orders directly to end-customers, effectively increasing
the number of destination points from 45 distributors to over 18,000
veterinarians. This change will undoubtedly create new challenges and
force management to make additional investments.

People who work in logistics often feel like they get no respect from upper
management, and lower-level employees are rarely provided with a big-
picture view of how their role impacts the overall success of the company.



From their perspective, their job is simply to pick items from a shelf, drive a
forklift, or load and unload trucks. Obviously, such a perspective does not
create much excitement or pride among employees, leading to turnover rates
as high as 35 percent in some industries.

Change begins with creating a better image, opined a logistics manager that has
taken a bottoms-up approach at his company. Because virtually everyone
referred to his group as warehousing, he banned the use of the term and
officially named his team Global Logistics Operations. This name obvi-
ously conveys a greater sense of importance than simply warehousing. He
also created a logo, distributed tee shirts, and initiated a training program to
educate employees on how they contribute to the company’s success. While
these simple measures did not result in radical changes, they certainly
brought positive attention to the group and instilled a sense of pride among
its employees.

Virtually every delegate agreed, however, that dollar signs are what attract
management’s attention the best. Before tackling any big issues or initiatives,
you first have to determine your baseline costs for logistics. And it has to be
relatively granular. In other words, cost must be broken down into inbound,
outbound, and international operations, as well as by mode. Without this
information, you have no leverage.

Part of the solution is to create an awareness program. “People are just not
aware of how expensive certain practices are,” stated one of the delegates. His
company determined that they were spending an average of $300,000 per
month on airfreight (sometimes the cost was over $700,000). A cross-
functional team defined seven acceptable reasons for shipping an order via
airfreight. If an order did not meet any of these reasons, it had to be shipped
via a different mode. After implementing this policy, the average spend on
airfreight dropped to less than $100,000 per month (an annual savings of
over $2.4 million).

In certain industries, however, the ROI of logistics projects is only a fraction
of what can be achieved in other areas, thereby making it difficult to receive
much attention. For example, building a 300 mm semiconductor fab will cost
a manufacturer about $6 billion over four years. However, the ROI will be
about $30 billion over ten years. Obviously, a logistics project promising to
provide $500,000 in savings is just not as impressive.



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To make logistics a strategic weapon, you must first understand customer
requirements, and then align people, process, and technology to consistently
meet those requirements. It also requires you to understand your competi-
tion so that you can establish performance objectives that are best in class.

Unfortunately, companies sometimes
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pedited truck (at one-fifth the cost).
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“The challenge was convincing the sales
force to approach the customer and propose
the change.” Sales did not want to create any waves with the customer. They
subscribed to the “if it isn’t broken, why fix it” mentality.

Similarly, a manufacturer assumed his customers wanted consignment in-
ventory. In reality, the customer just wanted to have product available when
they needed it. By providing next day service, the company was able to
eliminate virtually all consignment inventory from its supply chain.

“However, if you don’t share cost savings with customers,” advised a delegate,
“you’re really not creating a strategic advantage. Customers have to realize some
benefits too.”

Companies with a strategic view of logistics are leveraging their operations
to create new sources of revenue. For example, a manufacturing company in
the jewelry industry realized that it could market its logistics capabilities to
customers (primarily jewelry retailers). The company was very experienced
in picking, packing and shipping orders received by 5 PM (customer time)
for next-day delivery. The logistics team, therefore, approached the sales
team with an idea. In short, they could serve as the fulfillment center for
jewelry retailers that want to establish their own e-commerce site. The re-
tailer would pass them the order, and they would ship the product directly
to the consumer, using the retailer's box, logo, and invoice.



Leading companies are also applying logistics to solve business problems.
“We asked ourselves, how can we use logistics to save money at the store level,”
stated a delegate from a large apparel retailer. Labor cost was one area of
focus. Each store would plan between 4 and 6 hours of labor to receive in-
coming shipments. Why so much time? Because deliveries would arrive
randomly throughout the day, stores had to make sure they had enough em-
ployees available to simultaneously unload trucks and staff the selling area.
In short, unpredictability resulted in additional labor cost.
Therefore, the logistics group decided to implement specified ´6DOHV 2SHUDWLRQV 3ODQQLQJ ZDV
WKH VLQJOH PRVW LPSRUWDQW WKLQJ
time windows for deliveries. While this policy raised transpor-
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tation costs, it significantly reduced labor costs, thereby resulting
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in net savings. “Sometimes spending more is a good thing, but con-
vincing people is not easy.”

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Despite all of the hoopla surrounding collaboration and cross-functional
teams, it is apparent that many companies are still operating in silos. The
cost of not including logistics in business decisions can be substantial, as il-
lustrated by the following examples:

• A manufacturing company decided to expand the number of vendors
from one (which supplied about 70 percent of the products) to twelve in
order to save $20 million in procurement costs. Unfortunately, they did
not realize that by expanding the supplier base, transportation costs
would increase by $38 million, due in part to a greater number of less-
than-truckload (LTL) shipments.

• A semiconductor manufacturer was experiencing heat dissipation prob-
lems with one of its chips. The short-term solution devised by
engineering was to increase the size of the heat sink, which tripled the
weight of the product. As a result, fewer products could be packed in a
box and 10,000 additional bins were required in a capacity-constrained
warehouse. The impact on transportation costs alone was $19 million.

• A customer of a manufacturing company canceled two very large orders
after they were shipped. The sales team promised the customer a quick
credit on their account, but failed to inform the logistics team that the or-
ders were being returned. Because the orders arrived at the dock without
warning, it completely disrupted operations for several days, as there
was limited dock space and resources available to handle the restocking



process along with the planned activities. Nonetheless, sales could not
understand why it was taking so long for the customer to receive his
credit.

• A manufacturer of medical products typically has to ship surgical tools
overnight to hospitals in order to prevent cancelled surgeries, even
though surgeries are scheduled weeks in advance and the sales team,
who are in constant contact with the hospitals, have visibility to these
schedules.

Several delegates addressed the collaboration issue by implementing Sales
Operations Planning, a well-defined process that brings together executives
from sales, marketing, product development, finance, manufacturing, and
logistics to align their business plans on a monthly basis. “Sales Operations
Planning was the single, most important thing we’ve done, stated one of the
delegates. It didn’t cost us anything but time; no technology involved.”

Many companies have also implemented a checklist procedure, whereby at
each stage of the product lifecycle there are specific tasks, defined by a cross-
functional team, that must be completed before the project can progress to
the next stage. This checklist process has been very successful in preventing
costly oversights.

Cross-training programs are another way to promote collaboration. For ex-
ample, one company requires all new salespeople to work in various logistics
positions prior to engaging in any sales activities. They work in the ware-
house, accompany drivers on deliveries, and handle administrative duties.
This experience provides salespeople with a better understanding of how
sales decisions impact logistics.

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The outsourcing of logistics services continues to be a popular trend. How-
ever, the delegates highlighted several pitfalls associated with outsourcing,
such as losing the ad hoc processes that have historically kept the operational
wheels turning. “No matter how good your processes are, there is a lot of human
glue that holds everything together,” stated a delegate. In other words, prob-
lems that were once solved by John simply walking over to Mary’s office
now have to be solved in a more formal manner, involving people at differ-
ent companies with different goals and priorities. Therefore, you must train
your employees on how to work effectively with outside parties.



Outsourcing also requires process changes and/or process compliance.
Third parties are going to work according to what is written on the contract.
Hidden problems caused by poor processes or non-compliance will reveal
themselves. For example, a manufacturing company outsourced the distri-
bution of intra-company mail to an outside party. Whenever employees
changed location, they were responsible for entering their new mail stop into
an online company database. Unfortunately, many people would
forget to complete this task. Prior to outsourcing, the internal dis- ´0RVW FRPSDQLHV ZRXOG QHYHU
tribution team would simply call the employee to determine his WKLQN RI KLULQJ VRPHRQH RII WKH
new location and forward the mail. When the outside party took VWUHHW IRU D ILQDQFH SRVLWLRQ EXW
over, however, the practice of hunting employees down was dis- WKH VRPHWLPHV GR IRU WUDGH
continued because it wasn’t covered in the service contract. A large FRPSOLDQFH SRVLWLRQVµ

pile of undeliverable mail began to accumulate and the problem
quickly spiraled out of control.

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It takes nine months to a year to train someone in trade compliance (i.e. to
the point where they understand and can apply trade regulations). Although
trade compliance has a direct impact on the overall success of a business,
many companies view it as simply filling out paperwork. “Most companies
would never think of hiring someone off the street for a finance position, but they
sometimes do for trade compliance positions,” stated a delegate responsible for
trade compliance.

At a retail company, new buyers were not being trained to capture countries
of origin, thereby resulting in delayed shipments. The logistics group, there-
fore, had to revamp the training manuals created by purchasing to include
these regulatory-compliance procedures. At another company, 82 percent of
the countries of origin were incorrect, a problem that did not get highlighted
until shipments started to get detained at customs.

Trade compliance information must be considered in any business decision that in-
volves cross-border movements, advised a delegate from a semiconductor
company. He speaks from experience. Since the company has similar fabs
around the world, it would occasionally ship in-process wafers to other facili-
ties in order to work around capacity constraints. In one instance, the
company shipped wafers from the US to Israel to complete a process step,
and then back to the US for completion. Unfortunately, when the product
was shipped to Malaysia for final testing, the product was held at customs
and denied entry. The company failed to realize that Malaysia does not al-



low any products to enter the country that have been manufactured (in
whole or in part) in Israel. The product had to be re-shipped to a testing fa-
cility in Latin America, resulting in unnecessary shipping costs, delayed
orders, and unhappy customers.

There is a great opportunity to apply regulatory compliance knowledge at the front
end, stated another delegate. For example, duty drawback is an after the
fact process that should only be applied after other options are considered.
In other words, companies are paying brokers as much as 15 percent in fees,
and customs another 1 percent, to process duty-drawback claims, although
these fees (along with the duties) could have been avoided if the goods were
shipped in-bond or if a free trade zone (FTZ) was established ahead of time.

Finally, achieving international logistics excellence requires establishing
strong relationships with freight forwarders. For example, one manufacturer
requires its freight forwarders to spend a week at their plants. This enables
the freight forwarders to better understand their products and manufactur-
ing process; it’s a base of knowledge that is critical for resolving customs-
clearance issues. The net result is a more efficient forwarding process.

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“People are going to make us successful, not technology, stated one of the dele-
gates. Therefore, he focuses on hiring talented employees and paying them
well, creating reasonable work schedules, and developing a pleasant work
environment. While the up-front costs may be higher, it pays off in the long
run because you have less employee turnover, fewer fulfillment problems,
and happier customers.

“You also have to understand how introducing new technology will impact employ-
ees,” advised another delegate. Introducing too much change at once will
result in failure. Also, it is important to have a system in place for employees
to submit suggestions and to implement those ideas that make sense or do
not require much time or expense. This shows the employees that you re-
spect their input, and as a result, they will be more inclined to embrace your
initiatives. It’s a quid pro quo relationship.

In addition, people are generally unfamiliar with the capabilities of their cur-
rent systems. For example, at one manufacturing company, warehouse
employees were using Excel spreadsheets to record certain information be-
cause they were unaware that their WMS system had the same (in fact,
better) capabilities.



You can save a lot of money just fixing your processes, without having to invest in
new technology. Processes are typically poorly documented, which becomes
a big problem when people that serve as the single source of knowledge
leave the company. It also hinders the training of new employees. At one
company, for example, warehouse employees that worked during the week-
end were not trained to receive product. Therefore, employees occasionally
placed backorders for products to fulfill customer demand, not realizing that
truckloads of inventory were sitting outside the dock waiting to be received.

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Despite all the hype surrounding the so-called “new economy,” logistics pro-
fessionals are still facing many of the same issues that have plagued them for
years. Chief Executive Officers and other top-level executives do not fully
understand the role of logistics, and they often fail to recognize its strategic
importance. Hiring and retaining talented employees remains an issue. In-
stead of recruiting proven logistics professionals, many companies simply fill
available positions with people that have under-performed in other func-
tional areas. Finally, although everyone seems to be talking about
collaboration, most companies are still operating in silos.

What is different today, however, is that these challenges have become more
critical in light of the changes occurring in the competitive landscape. Spe-
cifically, companies are increasingly outsourcing non-core business processes
such as logistics, entering new geographic markets to stimulate growth, and
merging with each other to create new efficiencies. These trends are forcing
companies to change their perspective on logistics (albeit slowly) from being
a cost center to serving as a strategic weapon.

In light of these challenges and business trends, the delegates identified five
key attributes that will ultimately define a successful logistics operation:

1. Having a thorough understanding of logistics costs, across all operations
and modes. This knowledge establishes a baseline for improvement and
serves as leverage to initiate strategic projects.

2. Employing a team of experienced logistics professionals, with educa-
tional backgrounds in supply chain management. Competitive salaries,
reasonable schedules, and a work environment that instills pride are also



important. The later implies an accurate understanding of logistics
across the enterprise.

3. Collaborating effectively with sales, marketing, manufacturing, and other
functional groups.

4. Having the appropriate resources, especially trade compliance experts, to
manage international trade. Leveraging trade compliance information
across the enterprise and in other functions such as procurement, prod-
uct development, and network design.

5. Aligning people, processes, and technologies to meet customer require-
ments. This implies having an accurate understanding of customer
requirements, and collaborating more effectively with suppliers, 3PLs,
and other business partners.

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