Improve the management of your company’s logistics
The management of a company’s logistics is now a fundamental element of its competitive advantage. We are moving from a model in which the global structure of all companies was in competition with each other. To a new one in which the organization and efficiency of the production and distribution system are directly confronted.
In this context, supply chain management is becoming a central element. At the heart of all the concerns of business leaders in 2021. Let us explain.
What is likely to optimize your costs, your deadlines, the productivity of your employees? The satisfaction of your customers, your supplier relations, and the profitability of your company? The answer lies in the management of your logistics.
Logistics is a succession of internal processes comprising numerous stages. From placing an order, through procurement from suppliers, to delivery to the end customer. Step by step, it is a question of estimating the right added value to be given to the product. According to the customer’s expectations and your constraints.
You can read more about the definition of logistics here.
The supply chain
The supply chain is also the main lever for managing its productivity in the market. It is at the crossroads between the strengths of its suppliers and its customers, while observing potential entrants and substitute products. It is impossible not to consider it as the key to competitiveness. In a context of opening markets and increasing competition. And with good reason: in 2021, improving logistics strategy will once again be one of the most important concerns of business leaders.
And yet, too many regret not being able to rely on logistics that are truly up to the economic and commercial challenges of our time. What are the reasons for this? What can be done about it?
Let’s find out together what you need to know to quickly and efficiently improve your company’s logistics management. Follow the guide!
1. What is logistics management?
A complete supply chain not only manages all the internal processes of a company. But it also extends far beyond that, taking care of all the flows with its environment.
Supply chain management is a set of theories and practical advice for supply chain managers. In order to improve performance in concrete terms. Numerous theoretical works concentrate on methods, means, and resources. Directly at your disposal to help you better manage and improve its performance. At each stage, you need to optimize the agility of your structure, the speed of your processes. And the match between your services and your customers’ expectations. Although we will discuss KPIs (Key Performance Indicators) later. The satisfaction rate of your customers is a compass that should never be lost sight of, the larger your company, the more complex the logistics processes. The more sophisticated the methods, and the more attention they require. An optimal supply chain, therefore, combines speed, quality, and efficiency.
Improving your logistics function is therefore an organized process. Which must be supported by your entire company’s staff and your logistics service providers. It is a vast methodical collective project for better flow management. And in particular transverse flows. However, there are many pitfalls to be aware of: bogging down your company in processes that are too restrictive, burdensome. And costly is the main risk into which it is easy to fall. Be careful not to make each step unnecessarily burdensome, and adapt the system to your needs. So it’s all about the method. Easier said than done? Let’s take a closer look at how to do it.
Before we look at how supply chain management can be improved, let’s start by looking at each step:
- Supply is the selection of the best suppliers, articles and raw materials.
- The “supplier-raw material” pair refers to the supply of raw materials to the company, with the aim of transforming them to manufacture goods or services.
- The “customer-product” pair refers to the product ordered by a final customer, whether professional or private.
- Customer management.
- Stock and warehouse management is at the heart of your supply chain efficiency.
- Transport of goods.
- Distribution of goods.
- Recycling of goods, also known as “reverse logistics”.
In the long run, your objective is to improve the quality of the service provided to your customers. In order to increase their satisfaction rate and win new market shares.
Learn more about internal logistics management in this article.
2. How to measure the efficiency of your supply chain?
Before launching a campaign to improve your logistics, you need to know where to focus your efforts. Carry out an internal audit of each stage and draw up logistics dashboards. In this way, you will have a better idea of the precise points on which it would be preferable to make corrections.
A. How can you improve customer satisfaction?
Your customers’ satisfaction must remain your top priority and is determined by the quality of your response to their expectations. To measure this, pay attention to the service rate. This is an indicator for measuring the overall efficiency of the production chain. It is a fundamental KPI for evaluating your performance. You will be able to know the number of items delivered in accordance with the conditions laid down in your sales contract (conformity of the nature and quality of the product, delivery times, etc.).
The service rate is therefore high when your orders are delivered on time when the nature and quality of the items coincide with your customers’ expectations. It is therefore a question of determining the quantity of each product to be held in stock (we will come back to this aspect in more detail later). In order to protect yourself against possible shortages. The more costly a stock shortage is (longer delivery times and possible loss of customers in the short and medium-term), the more you need to increase the number of goods in stock, and vice versa.
The service rate must therefore be calculated over the duration of a financial year in order to be truly representative. To measure on-time delivery, divide the number of orders delivered on time by the total quantity of orders. To measure the quality of service, divide the number of order disputes minus the number of orders delivered out of time by the total number of orders. Be sure to weigh each criterion carefully to obtain reliable results.
Assign a letter to each product
To improve your service rate, you can assign a letter to each product according to its degree of priority in achieving your turnover:
- “A” for the top 20% of items, these are known as critical products.
- “B”, for the next 25%, are intermediate products.
- “C”, for the remaining 50%, are called secondary products.
Otherwise, it is possible to directly compare the costs generated by storage with the cost of a stockout. It is difficult to really assess the consequences and losses generated by a stock-out, especially in the medium term. Wherever possible, therefore, it is appropriate to seek to improve the service rate of category A goods, or those where the cost of a stock-out is very high.
Conversely, it is also strategic to study the out-of-stock rate, which measures a company’s ability to have products in stock. Out-of-stock situations have a direct impact on customer satisfaction, so it is important to avoid them as much as possible. A customer who cannot find the product in your company may quickly go to your competitor, and in the end, this could have direct consequences on the competitiveness of your company.
To calculate this KPI, you can use this formula: Number of orders not filled due to stock-outs / Total quantity of orders.
This ratio can be calculated according to your different products for a better view of the proportion of your stocks.
B. How to optimize your stock management?
Each stage has its own KPI. There are some to evaluate the efficiency of your entire logistics. The management of your stocks is a key element in reducing logistics costs. Not only do you need a warehouse, you also need all the necessary machine tools and infrastructure to make it work. The larger the warehouse, the more equipment you need, and the higher your capital and operating costs will be. The point is not to reduce stock levels at all costs, but to make them as close as possible to your needs.
Therefore the issue of replenishment is central. Wilson’s formula is an effective way to make the most of your capacity while keeping order costs down. Also known as the Economic Order Quantity (EOQ), Wilson’s formula determines the optimal replenishment quantity for a production unit. The optimal balance is reached when an order is placed in such a way as to reduce the cost of carrying inventory, avoiding shortages. Only 3 parameters need to be taken into account to achieve this: the quantity demanded over the period (D), the cost of an order including transport and receipt of goods (CC), and the unit cost of holding stock (CS).
The optimal quantity to order is given by the following formula:
Wilson’s formula applies mainly to regular orders with identical quantities. Also, the variation in the price of supplies is not taken into account. Sometimes replenishments are anticipated in anticipation of an increase in the price of items.
Another KPI to determine is the safety stock (or “buffer stock“). This is the minimum quantity of a product needed to optimize your storage costs while limiting the risk of stock-outs. It is important that it does not fall below this level so as not to put the smooth running of the production line at risk. It is particularly useful in this period of market volatility. During which firms need to be ever more agile. It, therefore, helps to limit stock shortages due to unforeseen events. Not all items are subject to the same volatility, which is why it is preferable to replicate the ABC grading system, which we have previously described.
The safety factor is determined by the normal law and depends on your chosen service rate. For example, for a service rate of 99%, the safety coefficient is equal to 2.326. For a service rate of 98%, the safety factor is equal to 2.05. To know at what amount to reorder, you only need to know the threshold at which you want to be reordered. The reorder point is obtained by multiplying the average demand per period by the replenishment lead time plus the safety stock.
C. What other KPIs should be checked?
Another important point is the calculation of the transport price of your goods. You can opt for a tax by weight. This depends on the actual weight in tonnes and the volume in cubic meters occupied by your goods. These two parameters are used to establish the taxable weight of your goods. Alternatively, you may prefer to pay a flat rate tax, calculated for a container for example. This depends on the weight of your items and their volume.
Finally, here is a list of other logistical KPIs and production indicators to inspect carefully:
- Unused manufacturing capacity is calculated by subtracting the standard available volume from the actual volume produced in the period.
- The cost of downtime per equipment is calculated by adding up the total costs generated by the downtime of one or more equipment. Sometimes they increase when several pieces of equipment are shut down at the same time. It is also interesting to look at the average duration of downtime.
- Product costing is the sum of the costs associated with the production cycle. It allows you to deduct your gross margin.
- Queue density (in %) is obtained by the following formula (Volume of production in progress / Total production)100.
- Average production cycle time is calculated as follows Sum of the production cycle times / number of planned orders.
- Equipment utilisation (in %) is obtained by the formula: (Total actual production time / Total theoretical production time)100.
- Fluidity of production (in %) is obtained by the formula: (Volume of production carried out on time / total production for the period)100.
- Loss rate (in %) is obtained by the formula (Quantity or value of production losses / Quantity or value produced)100.
3. How can you optimize your stock management?
There are a number of practical ways to improve your stock management, the first of which is DDMRP, which allows you to set up dynamic management of buffers. Logistics management is entirely demand-driven, and buffers are fully integrated into production flow management. By introducing buffers at strategic points, you can ensure that your organization is highly responsive and always keeps a close eye on demand. This method allows you to mitigate market fluctuations by 20% to 30%. Companies with high volatility, long lead times, and complex assembly processes are well-advised to use this method.
“Pull production” consists of placing the customer as the generator of production orders. The customer issues a request, and the company supplies the desired product. This limits the stock, and in some cases can even eliminate it completely. Other items require too long a lead time and cannot be subject to this practice (e.g. cars or agricultural goods). For this reason, it is possible to apply one or more intermediate stocks along the production chain.
In contrast, “push flow” is based on demand forecasts to organize production. The product is manufactured before the customer has placed an order. The company does not have the certainty of selling its items and builds up stocks. This method allows the customer to be delivered very quickly after the order is placed.
Finally, cross-docking is a method that is growing rapidly in France and internationally, particularly among retailers, distributors, wholesalers, and distribution centers that do not hold stock. In concrete terms, you move goods from the unloading platform to the shipping dock without passing through the storage warehouse. The articles are therefore only in transit. No more order picking, forwarding, picking, and packing. The advantages of this method include the speed of processing and cost reduction. This system is widely used in the retail sector or by daily newspaper delivery staff, for example.
What other good methods and practices can be adopted?
Let’s start with logistics picking. This is an essential, and all too often neglected step. It refers to the moment when a product is taken from the stock and then put together before it is shipped in an order.
The organization of items in the warehouse is therefore essential. It must be strictly consistent, with a precise reference for each product. Some WMS (Warehouse Management System) software can be used to optimize picking by choosing the best route to take to pick each product and not return to the same place several times.
The management of several orders at the same time must also be based on an efficient information transmission solution. Tracking the preparation of orders is possible thanks to onboard computer terminals equipped with a barcode system.
WMS software can improve the operation of your entire warehouse. Indeed, it must not only allow you to store goods in the best possible way but also operate easily in this space and to perform inventory operations. Some items require specific attention. Therefore, good warehouse management involves human resource management, division of labor, specialization of workers, and prioritization of items. Each product should have a specific area and should, if possible, be transported via cross-docking without passing through your logistics warehouse. Finally, ensure long-term quality control by regularly measuring your performance.
E-commerce logistics is the focus of much attention, with many of its own challenges. The competition in the market forces companies to always guarantee the availability of items while optimizing storage costs. In the eyes of customers, shipping costs have a very important symbolic dimension. A rate of less than €5, or €10 for a large item, is recommended. Beyond that, it is a major obstacle. Finally, make sure you offer a range of delivery methods at various rates and times, to adapt to your customers’ needs. Finally, your returns policy must be flexible and well organized to gain their trust. More and more e-commerce players are deciding to outsource certain low-value-added tasks.
The supply chain is now a major concern for many business leaders because of the strategic importance it has for the growth of the company. The many practical examples cited in this article are proof enough that good supply chain management is a decisive competitive advantage for increasing your market share and maintaining the sustainability of your company. Visible and significant progress can be made in a very short time, provided that the right methods and tools are used. To go further, please consult our guide, to have an overview of all the solutions.
We hope that this guide will help you manage the logistics of your business.
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