Logistics Organizational Structure

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					Logistics Optimization
A Guide to Assessing and Improving Your
Logistics Operation
Today’s Challenges
The ability of an organization to effectively move and store materials from and to a
complex network of suppliers and end users is not a simple task, and the success of
any world class supply chain is heavily dependent upon the effectiveness of its logistics
network and delivery capability; in essence, its logistics function, comprised of
inventory, warehouse, and transportation management.

Do you know how your logistics organization compares to your industry peers? Do your
performance metrics indicate you are a 1st quartile performer, or perhaps a 4th
quartile one? How much improvement could be made in your logistics organization in
terms of cost, quality and service? All of these are good questions that will eventually
be asked of you, so you better find out. That is precisely the purpose of this white
paper… to present a holistic approach to assessing your logistics operations and
developing a new strategy for the future.

Several fundamental drivers of logistics optimization have seen significant change in the
past 2-3 years, and most are likely creating the need to adjust logistics network designs
and overall material management strategies. Several key factors affecting this include:
           Higher fuel costs: while fuel prices have eased slightly in recent months they
           are currently at or near all-time highs
           Constrained trucking capacity: the truck driver shortage has and will cause
           further price pressures on transportation costs
           Evolving 3PL/4PL capabilities: as third and fourth party options continue to
           expand, new opportunities are being created to explore logistics outsourcing
           Expanded global sourcing will create new logistics challenges

Logistics optimization is typically based on algorithms that “optimize” logistics costs
based on multiple variables. Essentially, optimization models balance the lower
inventory and warehousing investment costs associated with centralized network
designs against the lower transportation costs associated with decentralized network
designs to create the “optimal” combination. The theoretical “optimal” design is then
adapted to take into consideration sunk facility costs, customer response time targets,
and other customer or corporate requirements.

One of the most important variables in logistics improvement initiatives is transportation
cost. Given the dramatic fuel cost increases of the past two years, combined with the
recent national truck driver shortages (and associated cost increases), there is very
likely a need for Logistics managers to re-evaluate their logistics strategies and network
designs in 2008 and beyond.

Other considerations that will drive the need for new logistics strategies include the
evolving 3PL/4PL provider capabilities, and the continued trend toward global sourcing.

Specific activities associated with these trends that we recommend include:

           Assessing your entire operation in terms of logistics effectiveness. While
           many logistics managers have been fighting fires to deal with fuel and
           transportation cost increases, now is the time to reevaluate your operations
           and find ways to improve service, reduce costs, and maintain quality.
           Benchmarking metrics and practices to help develop strategies for becoming
           a top performer.
           Considering re-sourcing or re-evaluating your transportation or other
           contracts that had significant fuel surcharges in 2006.
           Educating yourself on what’s happening in the 3PL/4PL space. New
           capabilities could open new opportunities for your logistics operations. Just to
           clarify the difference between 3PL’s (3rd Part Logistics Providers) and 4PL’s
           (4th Party Logistics Providers), 3PL’s focus on providing specific functional
           support (i.e. transportation, warehousing, etc.) to logistics organizations,
           while 4PL’s focus on the entire logistics process, and are often considered
           business process outsource (BPO) providers, combining several functions,
           technology and management.
           If you’re considering expanding global sourcing in 2007 and 2008, review
           your current logistics providers to ensure that they are the right partners to
           support your global logistics requirements; the global logistics space is a very
           different world than that of domestic logistics.

Assessing and Improving Your Current Logistics Operation

The approach to assessing and improving your logistics operation includes several key
elements. The Denali Consulting methodology is designed around a 4-phase process
that includes a qualitative assessment of logistic processes and practices, combined
with a quantitative assessment of key logistics costs, metrics and benchmarks. The
qualitative and quantitative assessments serve as the basis for understanding the
opportunity that exists to improve the logistics network and/or function, and deliver upon
your organization’s goals.

  Current State                Future State               Logistics                Implementation
  Logistics                    Logistics                  Option                   Planning
  Assessment                   Design                     Development &
                                                          Selection                Process and
  Qualitative &                Development of                                      resource planning
  quantitative                 specific                   Business case
  benchmarking, gap            improvement                development, risk
  analysis, process            recommendations,           analysis and
  analysis and focus           options and                option selection
  group reviews                designs

                              Change Management
    • Stakeholder management                  • Skills development
    • Communication planning                  • Transition management
    • Project management infrastructure       • Performance tracking
Typically, the objectives of a logistics assessment and strategy project are to identify
opportunities to:
       • Increase logistics operational efficiency
       • Increase inventory efficiency
       • Provide adequate levels of service and quality to meet customer requirements

To that end, the strategic elements of a typical initiative are to:
       • Assess the physical inventory and warehousing network, including the
          corresponding transportation network, evaluate alternatives, and make
          recommendations with an associated business case
       • Assess the possibilities of select “outsourcing” and its implications
       • Identify other strategic improvement planks that will move the organization to
          a “best in class” logistics operation

The logistics assessment process is typically performed by a cross functional team of
Logistics, Customer, and potential 3rd party participants. Our approach to assessing and
improving Logistics operations is explained in more detail below:

1.    Current State Logistics Assessment. The current state assessment includes
      three key activities: A qualitative assessment of your current logistics processes
      and practices, a quantitative assessment of current logistics performance
      benchmarks (cost, efficiency, quality & service), and a process review of the
      current logistics supply chain. The team first conducts a qualitative assessment
      across our Logistics Effectiveness Dimensions. During this assessment phase,
      attention must be given to a broad range of logistics considerations.

      Denali’s Ten Dimensions of Logistics Effectiveness:
      For this qualitative portion of the assessment, a combination of interviews,
      process and route flowcharting, workshops and questionnaires is used to
      conduct the assessment. Typically, interviewing a broad cross-section of
      participants from the Logistics, Internal Customer and Supplier communities
      provides the most accurate assessment results.

      The team must also conduct a quantitative analysis of various operational data
      such as capacity, utilization, resources, operational costs, inventory levels and
      turns, and other relevant metrics. Understanding current state qualitative and
      quantitative aspects to logistics operations is integral to the next phase of
      analysis, identifying logistics improvement opportunities.

2.    Future State Logistics Design. At this point in the process both quantitative
      and qualitative benchmark comparisons are made with your industry and other
      industries. Additionally, to determine the future state Logistics Design, the team
      will evaluate future demand patterns and requirements to determine the impact
      of such requirements on the current state logistics processes. The team will
      evaluate forecasts against capacity in order to develop alternatives that optimize
      the warehouse location(s) and layout, material routing, equipment, use of
      technology, suppliers, 3rd party logistics providers, and staffing. The team will
      also identify operational and capacity improvement opportunities that can
      minimize the need for future capacity expansion.

      Below is a graphical example of the qualitative assessment resulting from
      comparison of company logistics processes to best practices in your industry and
      other industries.

                                               Example of Logistics Effectiveness Scoring

     Client X Supply Chain Performance Versus Benchmarks

               3                                                                                                                               Leaders all
                                                                                                                                                 Leaders all

                                                                                                                                                 Utility Leaders
                                                                                                                                                Client X
               2                                                                                                                               Client X

       Score                                                                                                                                   Industry-Specific
                                                                                                                                                 Utility Average


                            ut                    in
                                                     g                                         &           s           r                  ce
                         yo           &
                                     p gy       us s               ag
                                                                     e          &            g            LÕ         ie n
                       La ign      ui olo     ho ces             or           p           in
                                                                                        dl w           3P          pl tio              an
                    ity s        Eq hn      re ro             St            ns ing     n lo         of          up gra               rm gt
                 cil De                    a                l             ra out     Ha F                      S te               fo
                                   c      W P            at              T R
                                                                                                  e                             er M
               Fa &              Te                    M                                                        In          P

                                                   Logistics Effectiveness Dimensions
       “Best practice” identification will form a major part of determining the most
       desirable future state. To identify best practices and performance metrics, your
       company should solicit data and practices from a reputable third party. They
       should bring their experience and knowledge of best in class logistics and supply
       chain leaders to help you identify gaps and improvement opportunities.

3.     Logistics Option Development & Selection. To determine the potential for
       improvement, your cross-functional team will use best practices from each of the
       dimensions to illustrate any performance gaps that exist in your company. The
       impact of capacity and operational improvement opportunities identified in Phase
       2 will be evaluated using decision-making tools in order to prioritize those most
       strategic for your enterprise.

       The team should then develop the cost/benefit analysis and business case for
       major recommendations. This should document the strategic rationale for each
       decision, including risk management planning. Strategic options should be
       evaluated to determine those most feasible for your company; ultimately
       recommendations are made, modified based on executive feedback, and
       ultimately approved.

4.     Implementation Planning. Finally, the team should prepare implementation
       plans that address the resources and timing for selected improvement
       alternatives to be implemented.

Common Improvement Areas

Some common improvement areas that we most often see are listed below. These
improvements typically result in significant cost savings, service improvement, and/or
quality enhancement.

Inventory Management
          Inventory optimization
          Use of service level agreements
          Enhanced supplier value-added services
          Business process outsourcing
          Improvement of data accuracy
          Collaborative demand planning
          Critical spare identification and management

Warehouse Management
        Warehouse consolidation
        WMS implementation
        Proper use of Advanced Shipping Notices
        Robust use of warehouse performance metrics
        Use of service level agreements
        Business process outsourcing
Materials Transportation & Routing
          Carrier performance metrics
          Revamped internal transport routes & guidelines
          Full use of Transportation Management Systems (TMS)
          Integration of a Transportation Management System (TMS) with a
          Warehouse Management System (WMS)
          Real time tracking of carrier shipments

Organization and Culture
          Center-led organization structure
          Aligned goals and objectives
          Continuous improvement mentality
          Focus on training and skill development

Performance Management
         Clearly articulated savings and performance targets
         Line of sight goals that tie to departmental goals
         Performance goals and incentives tied to compensation
         Use of total cost modeling and management
         Collaborative effort to reduce inventory levels

So, there you have it – an overview of Denali Consulting’s thoughts on uncovering value
through logistics optimization. True supply chain innovation requires continually paying
attention to the business and economic trends impacting the supply chain environment.
We hope that our insight will help you to create a logistics strategy that will lead your
organization to Supply Chain excellence.