The Manufacturing Value Chain

The IndustryWeek Value Chain Survey: Logistics And Distribution -- Rough Road Ahead

Logistics and distribution managers face an unmarked path in their pursuit of a strategic advantage.

Over the next three years what logistics and distribution strategy will have the greatest impact on your company? A) Network restructuring. B) Collaboration with supply-chain partners. C) New information technologies. D) Outsourcing.

Wouldn't you like to know?

It's a trick question of course. We intentionally left out the most probable answer: E) All of the above. But that's essentially what participants in the IndustryWeek 2002 Value-Chain Survey told us. When asked to pick their primary strategy from the above list, logistics managers were almost evenly divided. Roughly a quarter each said they will be making structural changes to their distribution networks (28%), adopting new IT applications (26%) and redoubling their supply-chain collaboration efforts (27%). A significant portion (15%) also expects to turn increasingly to outsourcing.


See the full report: The IndustryWeek Value Chain Report: Getting Down to Brass Tacks


Absent a single, clear strategy for success, managers will be pushed to make progress on all fronts. Their ultimate quest: make logistics a source of genuine strategic advantage that actually contributes to the bottom line and is not-as many corporate executives currently view it-pure overhead.

It's a difficult challenge that starts at the most basic level, not with controlling but simply knowing your logistics costs. Two out of five respondents to the value-chain survey have no idea what their total costs are. Without this knowledge, it's impossible to intelligently make many other decisions.

"If you don't know what it costs, then you can't even have the discussion on whether or not [logistics] is a core competency," states Don Turner, vice president of distribution and technology for Draw-Tite Inc., a Canton, Mich.-based manufacturer of trailer hitches and other automotive and truck accessories. Turner admits that he's struggling himself to unearth an accurate cost figure for his operations. "A lot of times you're purely focused on getting the product delivered and taking care of day-to-day problems."

Though they might not be able to calculate total cost, most logistics managers can say how they're doing compared with previous years. For example, over the last three years 40% of survey respondents report that their transportation costs have increased. They cite policy changes, higher customer service requirements, and fuel prices as reasons for the rise. While minimizing these costs is critical, Turner points out that "freight is a commodity," and prices in the trucking industry are not coming down. A company may eke out some savings by renegotiating shipping contracts, but it won't gain any competitive advantage.

That said, many firms could be doing a better job of managing their costs. Of those who say they've reduced their transportation costs in recent years (about a fourth of all respondents), a large majority (80%) attribute their success to changing expensive processes and policies.

"Folks will move product at all cost to get it to the right place at the right time and all of that," notes Thomas Madigan, a vice president in Oracle Corp.'s consumer and energy business. "At the same time they'll negotiate bitterly and aggressively on the actual cost of the tangible product."

The problem isn't the desire to do whatever it takes to serve the customer. It's that such decisions are made without understanding the facts and how such decisions impact profitability. The solution, according to Madigan, is real-time visibility across the value chain, so make/don't make and ship/don't ship decisions can be made based on accurate demand and supply information.

"To truly enjoy the benefits of collaborating up, down and around the value chain, in the enterprise and the extended enterprise, [manufacturers] are going to need one view of the truth," states Madigan. "Today they can't have that."

To their credit, manufacturers know that they need to collaborate more and make more fact-based decisions. When asked to identify the keys to the success of their operations, survey respondents singled out "customer and supplier collaboration" and "real-time information." A fair percentage are already sharing some information with their customers, including freight rating and quoting (46%), real-time product tracking information (44%), demand data (41%) and inventory data (41%).

But this is only a start. Greg Spears, senior consulting manager with PwC Consulting, IndustryWeek's research partner on the value-chain project, believes that all manufacturers need to be sharing such information to some degree, with their best customers at the very least.

"I think in any business there are some suppliers and some customers that it would benefit you to get in bed with. I'm not saying everybody because that's just not practical," Spears observes. He cites the "80/20 rule," the 20% of customers that a company does 80% of its business with."Those are the [companies] you need to get linked with."

Perhaps what's missing is an understanding of how collaboration and information sharing can contribute to that most important of all measures: profitability. Logistics managers report that their primary objectives, after minimizing transportation costs (29%), are controlling inventory holding costs (19%), reducing inventory stock outs (17.5%), and reducing transit times (17%). Customer and supplier collaboration and the sharing of real-time information support these latter initiatives.

"Everybody wants to reduce inventory because inventory is cash," notes Draw-Tite's Turner, whose company ships directly to big-box retailers such as Wal-Mart, distribution centers, as well as many smaller outlets. "Real-time data allows me to keep my inventories lower, refill more frequently, and ultimately win the inventory/dollars balance game."

Asleep At The Wheel? What are your logistics and distribution costs as a percentage of sales?

Less than 3% 12%
3% - 5% 22%
6% - 10% 13%
11% - 20% 5%
More than 20% 2%
Don't know 40%
Refused to answer 7%

Collaboration Critical To Success How much do the following items contribute to the success of your company's logistics and distribution operations?

  A great deal A fair amount
Collaboration with Customers and Suppliers 53% 38%
Real-Time Information 50% 38%
Lean Inventory Pipeline 44% 30%
Value-Added Services 27% 47%
Integrated IT Systems 37% 36%
Asset Optimization 25% 39%
Outsourcing 11% 37%
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