Blueprint for Success: Logistics SPECIAL ACKNOWLEDGEMENTS APQC wishes to acknowledge the Open Standards Benchmarking CollaborativeSM Advisory Council and its members for their ongoing contribution to APQC research efforts and success. We offer a special thanks to IBM Global Business Services for generously providing thought leadership in supply chain management and other areas. There would not be Open Standards Benchmarking data and benchmarks if not for the hundreds of organizations that contribute their data, benchmark to achieve world-class performance, and believe open standards will help them get there faster. APQC would also like to thank Supply Chain Visions and CSCMP for their input and updates for the second edition of this book. WRITING TEAM First edition written by Cheryl Harrity, Lisa Higgins, and Kate Vitasek. Second edition updated by Marisa Brown, Rob Spiegel, Joe Tillman, and Erin Williams. APQC 123 North Post Oak Lane, Third Floor Houston, TX 77024 www.apqc.org Copyright ©2011 by APQC All rights reserved, including the right of reproduction in whole or in part in any form. Manufactured in the United States of America ISBN 10: 1-60197-161-3 ISBN 13: 978-1-60197-161-6 Blueprint for Success: Logistics Table of Contents Logistics’ Strategic View 1 Process Classification FrameworkSM (PCF) 2 Key Performance Indicators 8 Benchmarks and Process Performance Drivers 12 Case Studies 25 Arrow Electronics, Inc. 25 ATC Logistics & Electronics 28 Office Depot 31 Carolina Logistics Services 34 APPENDIX 1 PCF Section 4.0 Deliver Products and Services 37 APPENDIX 2 Supply Chain Planning Key Performance Indicators (PCF 4.1) 41 Procurement Key Performance Indicators (PCF 4.2) 42 Manufacturing Key Performance Indicators PCF (4.3) 43 Logistics Key Performance Indicators (PCF 4.5) 43 Product Development Key Performance Indicators (PCF 2.0) 44 APPENDIX 3 Glossary of Terms ENDNOTES 45 49 Blueprint for Success: Logistics List of Figures Figure 1: APQC Process Classification Framework (PCF) Overview 3 Figure 2: PCF 4.5 Manage Logistics and Warehousing 4 Figure 3: Time and Resource Allocation by Logistics Process 5 Figure 4: Percentage of Orders Shipped on Time and Complete 13 Figure 5: Customer Order Cycle Time 14 Figure 6: Total Cost of Logistics per $1,000 Revenue 15 Figure 7: Logistics Cost Breakdown 16 Figure 8: Total Cost of Logistics per Sales Order Shipped 17 Please note that the source for all data included in Figure 3 through Figure 8 is APQC’s Open Standards Benchmarking in logistics (www.apqc.org/log). Blueprint for Success: Logistics Logistic’s Strategic View In the past, many organizations have viewed logistics activities mainly in terms of warehousing and transportation. Today’s executives are taking a much broader view, examining the logistics function as a strategic opportunity for process improvement, cost savings, and customer satisfaction. APQC’s latest benchmarking results illustrate the substantial effect top performance in logistics activities can have on these areas. This raises the questions of what can be learned from high-performing organizations to realize dramatic improvements in logistics and whether differences are due to industry-specific parameters or to the benefits of assimilating practices regardless of industry. Traditionally, organizations have focused on back-office infrastructure for efficiencies in process, productivity, and cost. Now, organizations are beginning to view supply chain processes such as logistics as the keys to competitive advantage, realizing that logistics functions and supporting processes can profoundly impact an organization’s bottom line. Many organizations are implementing systems for measuring their logistics operations that allow them to identify, quantify, and target their improvements. While focusing on measurement and benchmarking performance is good, many organizations still fail to understand a fundamental point: Improvement in performance measurement is driven in large part by implementing improved processes. As such, this document goes beyond the information in most benchmarking reports to provide insights into the actual best-practice process enablers that are driving the results, in essence outlining a blueprint for success that organizations can follow to help set them ahead of the pack. APQC’s Blueprint for Success series provides a road map for achieving best-practice performance in logistics. Included, you will find a framework for logistics activities and how they relate to the enterprise; key measures for executive, managerial, and operational views of performance; the latest benchmarks for performance; and indepth case studies demonstrating how leading organizations have achieved their performance levels. ©2011 APQC. ALL RIGHTS RESERVED. Page 1 Blueprint for Success: Logistics Process Classification FrameworkSM (PCF) Too often, organizations view the implementation of performance metrics as a cure for all their problems. Months or years later, many of these same organizations are frustrated to find that, after expending time and money to collect data and track performance, the end result is lacking the expected cost savings or performance improvement. In order to understand the results, one must first understand the process and its relationship to the enterprise. To assist organizations in understanding process-based thinking, APQC first developed its Process Classification Framework (PCF) in 1992. Today, version 5.2.0 of the PCF is one of the most widely adopted tools APQC offers and provides a framework for many organizations to develop process-based thinking and management. The PCF represents a series of interrelated processes that are socio-technical in nature, business-critical, and represent the major dimensions of an enterprise. The PCF enables organizations to understand their inner workings from a horizontal, process viewpoint, beginning with an overarching view of the enterprise. The PCF then delves into a taxonomy of categories, process groups, processes, and activities. Figure 1 outlines the entire PCF, beginning with Section 1.0 Develop Vision and Strategy and ending with Section 12.0 Manage Knowledge, Improvement, and Change. This document focuses on Section 4.0 Deliver Products and Services and will specifically address Section 4.5 Logistics. An outline of the entire 4.0 section is included as Appendix 1. ©2011 APQC. ALL RIGHTS RESERVED. Page 2 Blueprint for Success: Logistics APQC Process Classification Framework (PCF) Overview Figure 1 In many organizations, logistics is often oversimplified to include only transportation; however, logistics involves many activities that span several departments, functions, and budget areas. It is important to remember that to improve logistics performance overall, all areas must be treated with equal consideration. (See Figure 2 to understand the complete activities involved in a traditional logistics process.) ©2011 APQC. ALL RIGHTS RESERVED. Page 3 Blueprint for Success: Logistics PCF 4.5 Manage Logistics and Warehousing 4.5.1 Define logistics strategy (10338) 4.5.1.1 Translate customer service requirements into logistics requirements (10343) 4.5.1.2 Design logistics network (10344) 4.5.1.3 Communicate outsourcing needs (10345) 4.5.1.4 Develop and maintain delivery service policy (10346) 4.5.1.5 Optimize transportation schedules and costs (10347) 4.5.1.6 Define key performance measures (10348) 4.5.2 Plan and manage inbound material flow (10339) 4.5.2.1 Plan inbound material receipts (10349) 4.5.2.2 Manage inbound material flow (10350) 4.5.2.3 Monitor inbound delivery performance (10351) 4.5.2.4 Manage flow of returned products (10352) 4.5.3 Operate warehousing (10340) 4.5.3.1 Track inventory deployment (10353) 4.5.3.2 Receive, inspect, and store inbound deliveries (10354) 4.5.3.3 Track product availability (10355) 4.5.3.4 Pick, pack, and ship product for delivery (10356) 4.5.3.5 Track inventory accuracy (10357) 4.5.3.6 Track third-party logistics storage and shipping performance (10358) 4.5.3.7 Manage physical finished goods inventory (10359) 4.5.4 Operate outbound transportation (10341) 4.5.4.1 Plan, transport, and deliver outbound product (10360) 4.5.4.2 Track carrier delivery performance (10361) 4.5.4.3 Manage transportation fleet (10362) 4.5.4.4 Process and audit carrier invoices and documents (10363) 4.5.5 Manage returns; manage reverse logistics (10342) 4.5.5.1 Authorize and process returns (10364) 4.5.5.2 Perform reverse logistics (10365) 4.5.5.3 Perform salvage activities (10366) 4.5.5.4 Manage and process warranty claims (10367) 4.5.5.5 Manage repair/refurbishment and return to customer/stock (14195) Figure 2 ©2011 APQC. ALL RIGHTS RESERVED. Page 4 Blueprint for Success: Logistics So how are organizational resources spending time today? APQC’s most recent research indicates that 59 percent of organizations’ logistics resources are consumed by warehouse operations, 19 percent by outbound transportation, and the remaining 22 percent by defining strategies and planning inbound material flow (Figure 3). The following sections outline each of the major activity areas. Time and Resource Allocation by Logistics Process 10% 19% 12% 59% Define Logistics Strategy Plan Inbound Material Flow Operate Warehousing Operate Outbound Transportation N = 118 Figure 3 4.5.1 DEFINE LOGISTICS STRATEGY Defining logistics strategy is at the heart of any logistics organization and should be the focal point for developing logistics operations. In order for a logistics department to function as a best-in-class organization, communication is the key to bringing these groups together, building a shared vision, and recognizing improvements.1 Defining logistics strategy is the process during which logistics networks are designed, key performance indicators are defined, and outsourcing needs are communicated to the procurement department. This is also when a decision must be made regarding automation and technology implementation. APQC research shows that only 10 percent of logistics-related resources are allocated to this function. Unfortunately, in many organizations, executives don’t understand the logistics functions as well as they should and don’t know enough about the logistics processes to understand what drives the costs and overall performance.2 It is important that today’s professional logistician perform the key practices associated with developing a solid logistics strategy. Once an organization’s logistics strategy is defined, it becomes critical to clearly communicate the logistics ©2011 APQC. ALL RIGHTS RESERVED. Page 5 Blueprint for Success: Logistics strategy and to be able to collect and compile the data necessary to ensure good performance metrics. 4.5.2 PLAN INBOUND MATERIAL FLOW Inbound material flow processes focus mainly on the receipt of material coming into the organization and returned product. Included in this process are activities such as planning inbound material receipts, managing inbound material flow, monitoring inbound delivery performance, and managing the flow of returned products. According to APQC research, only about 12 percent of FTEs within a logistics support organization are involved in this process. The process typically requires coordination and communication with the procurement department and collaboration with external suppliers to ensure acceptable on-time delivery performance and quality of the product being received. 4.5.3 OPERATE WAREHOUSING The most resource-intensive logistics process is warehouse operations. As such, it is not surprising that this process consumes an average of 59 percent of an organization’s FTEs. This process includes receiving, inspecting, and storing inbound deliveries; tracking product availability; picking, packing, and shipping products; tracking inventory accuracy; and tracking third-party logistics storage and shipping performance. This process is the most involved and usually has the greatest opportunity for process improvement. 4.5.4 OPERATE OUTBOUND TRANSPORTATION The outbound transportation function encompasses activities such as transportation and delivery of product, delivery performance, fleet management and maintenance, and freight payment processing. Organizations in APQC research allocate 19 percent of their logistics resources to the area of outbound transportation management. In today’s world, customer requirements for shipping are becoming more customized and complex, especially in the high-tech and retail sectors. As such, many organizations are finding it more and more challenging to meet customer requirements for the physical delivery of their products. Case in point is the complexity of sorting through what it means to be on time. A recent Warehouse Education and Research Council study found that a lack of agreed-upon standards for defining on-time delivery is challenging for shippers, with on-time delivery definitions ranging from on the agreed-upon day (17.9 percent), on the requested day (26.3 percent), or—most stringent—at an appointment time (22.7 percent). Still others define on time even more vaguely.3 With many choices of carriers in the market today and the emergence of organizations specializing in freight payment, outbound transportation is often a ©2011 APQC. ALL RIGHTS RESERVED. Page 6 Blueprint for Success: Logistics function that many best-in-class organizations prefer to outsource to organizations that excel at transportation management. 4.5.5 MANAGE RETURNS/MANAGE REVERSE LOGISTICS Reverse logistics is an area that is mostly ignored because it is not a revenue generating function. However, with Internet and catalog sales exploding, there are more than 100 million packages a year that are being returned by consumers. The total estimated cost of these returns is $100 billion, and these numbers are growing each year. As more consumers utilize television, catalogs, and the Internet to make purchases, reverse logistics will continue to be an area that can be a lost opportunity to improve margins if it continues to be ignored.4 Even in the best organization, there are sometimes customers that either do not get what they ordered or receive a product that is defective. It is imperative to customer satisfaction that a clear process is in place to either replace the product or credit the customer for the return. Included in the returns process are the activities of authorizing and processing returns, performing reverse logistics and salvage activities, and managing and processing warranty claims. ©2011 APQC. ALL RIGHTS RESERVED. Page 7 Blueprint for Success: Logistics Key Performance Indicators How does an organization go about analyzing and improving logistics functions? The process begins by determining which key performance indicators (KPIs) are the most important to its business model, analyzing the relationship between performance indicators, tracking performance in the specific KPIs, and using the data to help drive process improvements where needed. The following section discusses some of the top KPIs being used in organizations today. It also looks at best practices from organizations that have already begun measuring these KPIs. Key performance indicators should be at the heart of every logistics function. Without the ability to measure, improvement is—at best—very difficult, if not nearly impossible. KPIs can be difficult to measure if one is trying to compare apples to oranges, and can often end up becoming subjective and confusing instead of objective and quantifiable. That is why APQC, with the assistance of a crossindustry advisory council, created Open Standards BenchmarkingSM for process frameworks, measures, and benchmarks. The Open Standards Benchmarking database was created to help organizations compare their practices to those of other organizations, regardless of industry, and currently provides executive, management, and operating measures along with corresponding benchmarks for more than 60 functions and 250 processes that span the enterprise. This tool helps organizations ensure that metrics and measurements are being handled in a manner that will promote objective and quantifiable results. Moving far beyond the numbers, the Open Standards repository also identifies enabling factors driving high performance across a wide range of industries. These factors include business models, technological enablement, process characteristics, and management practices. There are literally hundreds of possible metrics that organizations can use to measure their performance. No matter what is being measured, it is important to measure not only internal performance, but also performance of suppliers. Talk to any organization that has a world-class logistics department, and they will all agree that cost is only part of the price paid for logistics services. Beyond these key indicators, APQC also provides a balanced and meaningful set of measures that have been widely adopted for operational aspects of logistics. (See Appendix 2.) APQC recognizes the following as essential performance indicators that organizations should use in assessing logistics effectiveness and efficiency. On-time and complete delivery Total cost of logistics per sales Order accuracy order shipped Order cycle time Perfect order index Warehouse cost as a percentage of revenue ©2011 APQC. ALL RIGHTS RESERVED. Page 8 Blueprint for Success: Logistics Each KPI is described in the next section with definitions and calculations for tracking. ON-TIME AND COMPLETE DELIVERY Traditionally, organizations have focused on two key operating metrics—on-time shipments and line or unit fill rate. While these measures are good, APQC believes they are too internally focused and instead encourages organizations to focus on ontime and complete delivery. This measure is the number of orders delivered on time and complete per the customer-requested arrival date. This is a measure that sometimes causes controversy; many organizations calculate delivery based on when a product leaves the facility (i.e., is shipped), not when it is actually received by the customer. However, a true calculation of this measure will take into account the actual delivery of the product to the customer. Calculation: Total orders on time and complete/Total orders shipped Because this measure emphasizes delivery, it becomes very important to have an integrated and tight connection with the outbound transportation functions. It also becomes important to have a good method for tracking the performance of carriers and good visibility into product availability to promise for delivery, since one cannot ship what one does not have in stock. ORDER ACCURACY This indicator primarily measures the accuracy of the warehouse. The definition of this measure is the percentage of orders that are picked, packed, and shipped perfectly. In a nutshell, this measure examines whether the customer received exactly what he or she ordered. Calculation: Orders shipped without errors/Total orders shipped ORDER CYCLE TIME The order cycle time metric can involve many departments and functions. It is defined as the time from order placement to delivery of product. It may include order entry, purchase of components and raw materials for production, time to receive raw materials and convert to finished product, time to pull components and manufacture product, time to pick finished goods and prepare for shipment, and ©2011 APQC. ALL RIGHTS RESERVED. Page 9 Blueprint for Success: Logistics transit time. The clock starts on this metric when a customer places an order and stops when the final product is delivered to the customer. Calculation: Actual delivery date - Customer order date WAREHOUSE COST AS A PERCENTAGE OF REVENUE Warehouse cost as a percentage of revenue measures the total cost of warehouse operations as a percentage of total organization sales. This is an indicator of logistics profitability and includes both the fixed and variable costs of warehouse operations, including but not limited to labor costs, rent for building space, equipment depreciation, and cost of supplies. Calculation: Total warehouse cost / Total revenue TOTAL COST OF LOGISTICS PER SALES O RDER SHIPPED The total cost of logistics includes the four key logistics processes: define logistics strategy, plan inbound material flow, operate warehousing, and operate outbound transportation. Within each process, the following cost categories should be included: personnel, systems, overhead, outsourced, freight (for Operate Outbound Transportation), and other costs. The cost per order measurement is composed of both fixed and variable costs. It is calculated as the total logistics costs divided by the total number of orders shipped. This measure takes into account things such as space rent, utilities, equipment depreciation, labor costs, and cost of supplies. Logistics and operations professionals have traditionally used unit rate metrics, such as cost per package, cost per line, cost per pound, cost per order, and similar terms. While these measures make sense at the operations level, they are not helpful for finance when looking at the bottom line. As costs within the logistics department are reduced, gains must be translated into such things as impact in cost of goods sold (COGS); sales, general, and administrative (SG&A) costs; operating income; and net operating income (NOI) in order for the chief financial officer to understand the numbers. This is where static-free, inter-departmental communication is imperative. Best practices can help meet any organization’s requirements for logistics cost performance, and industry contacts can help identify the most appropriate practices to emulate.5 ©2011 APQC. ALL RIGHTS RESERVED. Page 10 Blueprint for Success: Logistics Calculation: Total Cost of Logistics/Total Orders Shipped PERFECT ORDER INDEX The perfect order measurement is much more boundary-spanning than other traditional, functional metrics. The perfect order index refers to flawlessly taking and fulfilling a customer order. It includes taking the order correctly, allocating inventory immediately, delivering product on time, and sending an accurate invoice. Perfect order performance is calculated by APQC as follows: (percentage of complete orders) multiplied by (percentage of orders with on-time delivery) multiplied by (percentage of orders damage free) multiplied by (percentage of orders with accurate documentation) then multiplied by 100. Appropriate values are in the range of 0 to 100, for example: 0.98 x 0.97 x 0.99 x 0.82 = 0.7716 * 100 = 77.16. Calculation: % of orders complete * % of orders delivered on time * % orders damage free * % of orders with correct documentation ©2011 APQC. ALL RIGHTS RESERVED. Page 11 Blueprint for Success: Logistics Benchmarks and Process Performance Drivers Benchmarking, a widely embraced improvement methodology, is the systematic process of searching for best practices, innovative ideas, and highly productive operating methods that lead to preeminent performance. Benchmarking facilitates the comparison of similar processes across organizations and industries in order to measure operational performance, establish performance targets, and assess operational progress. APQC believes that to successfully improve productivity, quality, and sustainable growth, an organization must first understand its current position and limitations in terms of cost, productivity, and efficiency. Once this is understood, benchmarking provides the ability to compare to others in such a way that results in understanding successfully demonstrated practices, the factors that enable high performance, and adaptation and deployment of results in rapid improvement. APQC houses and maintains the Open Standards Benchmarking as a result of this belief. In a climate of rapid global innovation, methodically studying the metrics, practices, and strategies of top organizations can expedite the average organization’s progress and improvement. Organizations that use benchmarking effectively discover ways to reduce costs as well as increase efficiency, profit, and performance. In the process, they learn how to make better-informed decisions and manage change more effectively. APQC can provide a detailed assessment of your organization’s performance compared to APQC’s robust Open Standards database: www.apqc.org/osb. BENCHMARKS FOR PERFORMANCE The following are key benchmarks for performance in logistics. On-time and complete delivery Order accuracy Order cycle time Logistics cost as a percentage of sales Total cost of logistics per sales order shipped Perfect order index On-Time and Complete Delivery When examined across a set of indicators, APQC’s benchmarking data shows that top performers have a much higher percentage of orders shipped on time and complete than organizations in the bottom quartile. In fact, top performers deliver close to 10 percent more complete orders on time. Figure 4 shows top performers ©2011 APQC. ALL RIGHTS RESERVED. Page 12 Blueprint for Success: Logistics with 98.0 percent of orders shipped on time and complete versus only 88.8 percent for lower-performing organizations. Percentage of Orders Shipped on Time and Complete 98.0% 100% 95.0% 88.8% 80% 60% 40% 20% 0% Top Performer Median Bottom Performer N = 179 Figure 4 One contributing factor separating the top performers from the rest of the pack is the use of warehouse management systems (WMS), which increase the order fill rate. The mean performance in order line fill rate is 94.6 percent for organizations that have adopted WMS versus only 89.4 percent for organizations that have not adopted WMS. Order Accuracy Order accuracy is a metric that is directly tied to customer satisfaction levels. If customers do not receive the correct product, they are likely to become dissatisfied and do business elsewhere. Inventory accuracy is very important because organizations cannot fill an order for something that they do not have. According to APQC’s benchmarking study, Order Management: a Core Competency, including Johnson & Johnson Health Care Products, Higbee Inc., Lever Brother Inc., and Rhone-Poulenc Rorer, 100 percent of the study’s best-practice organizations operate on centralized systems and use common data files. This aids in expediting orders and improving order accuracy. ©2011 APQC. ALL RIGHTS RESERVED. Page 13 Blueprint for Success: Logistics Order Cycle Time Order fulfillment cycle times (also known as lead times) are critical performance indicators denoting an organization’s ability to fulfill orders quickly and meet customer demand. The results of APQC’s research show a nearly 15-day (14.9) difference between top and bottom performers and a nearly 11-day (10.9) difference between median performers and bottom performers (Figure 5). Customer Order Cycle Time (in days) 20 17.9 15 10 5 7.0 3.0 0 Top Performer Median Bottom Performer N = 338 Figure 5 One of the enablers of success within high-performing organizations in order cycle time is their ability to develop and deploy their own practices to compensate for unreliable supplier deliveries. High performers experience the same rate of supplier on-time delivery as low performers: a median of 90 percent as compared across industries. However, high performers put processes in place that are designed to compensate for late supplier deliveries and are able to fill orders at higher levels. The following section will look at the process drivers that allow top performers to perform at high levels despite similar on-time delivery rates for top and bottom performers. Logistics Cost as a Percentage of Sales Cost measures are the most traditional measures used to evaluate process performance, but they must be balanced with measures that target customer service levels. Figure 6 contains the results of APQC’s research in total logistics cost per $1,000 revenue. ©2011 APQC. ALL RIGHTS RESERVED. Page 14 Blueprint for Success: Logistics Total Cost of Logistics per $1,000 Revenue $70 $63.64 $60 $50 $38.95 $40 $30 $20 $20.60 $10 $0 Top Performer Median Bottom Performer N = 50 Figure 6 Many organizations are using this measurement as a way to justify the addition of or upgrades for technology. Cost reduction was one reason unanimously cited by Open Standards Benchmarking participants as the main reason to upgrade or implement technology. APQC research shows that using systems such as advanced planning and scheduling (APS) software can help an organization work more efficiently. Organizations with APS in place need fewer FTEs for both planning inbound material flow and operating warehousing because the software helps the organization better manage making decisions in the face of multiple constraints. Similarly, warehouse management solutions enable organizations to manage inventory in real time with visibility into current inventory locations and levels. APQC’s research shows that this visibility enables organizations to streamline the processes related to shipping and delivery. So what are the cost drivers? Figure 7 illustrates that after freight, personnel and overhead costs continue to be the largest costs within logistics, with 35 percent of costs spent on people and overhead. These personnel are mainly supporting distribution operations, transportation, and warehousing. ©2011 APQC. ALL RIGHTS RESERVED. Page 15 Blueprint for Success: Logistics Logistics Cost Breakdown Personnel Cost, 21% Systems Cost, 3% Freight Cost, 51% Overhead Cost, 14% Other Cost, 2% Outsourced Cost, 9% N = 50 Figure 7 Cost per Order When looking at the difference between top and bottom performers in the area of cost, the differences are dramatic. APQC research shows that top performers have a cost per order that is more than $878 less per order than those organizations performing in the bottom quartile. As Figure 8 shows, top performers have a total cost per order of only $86.75, as opposed to $313.69 for the median performers. The spread is much more dramatic when looking at bottom performers; this group has a staggering cost of $965.12 per order shipped. ©2011 APQC. ALL RIGHTS RESERVED. Page 16 Blueprint for Success: Logistics Total Cost of Logistics per Sales Order Shipped $1,200 $965.12 $1,000 $800 $600 $400 $200 $313.69 $86.75 $0 Top Performer Median Bottom Performer N = 44 Figure 8 Perfect Order Index The perfect order index is a boundary-spanning measure that views achievement of an organization’s success across the entire fulfillment process. The measure is a compilation of organizations’ performance in the areas of on-time delivery, completeness, damage, and correct documentation/invoicing. According to research, it isn’t uncommon to see this number within the 50 percent to 60 percent range when it is first measured.6 The Warehouse Education Research Council found that the average perfect order performance is between 84 percent and 87 percent.7 What this means is that between 13 percent and 16 percent of all orders being shipped have some form of failure. This may be an eye-opener for many organizations, especially those that use functional metrics such as on-time shipments and line/unit fill rate as a proxy for customer satisfaction. ©2011 APQC. ALL RIGHTS RESERVED. Page 17 Blueprint for Success: Logistics PERFORMANCE DRIVERS So just how do top performers manage to perform so well? What are they doing differently? APQC’s research reveals there are 11 key drivers to high performance. Each of these drivers is explored next in detail to help shed light on what highperforming organizations are doing differently and how this can be used to drive performance improvements. APQC looks at what drives performance in four discrete categories: 1. people, 2. process, 3. technology, and 4. organization structure. While technology certainly plays a crucial role in improvements, it is not the only thing that makes a difference. Communication and collaboration should also be key areas of focus when driving change within a logistics organization. People Performance Drivers Use Collaboration When Dealing with Suppliers, Customers, and Employees Supplier performance is an important element in meeting order fulfillment cycle time goals with minimal levels of inventory. An organization’s relationship and collaborative practices with its suppliers can be a key to ensuring best-in-class supply chain responsiveness. One organization that uses collaboration to improve processes, both with suppliers and employees, is ModusLink. ModusLink realized that its global customers expected a consistent level of quality from its manufacturing and distribution operations regardless of location; that is, global customers wanted consistent quality standards. ModusLink believed that having globally consistent quality processes and measurements across its facilities would be a key competitive advantage and benefit for clients. Both the processes for completing the work as well as the outcomes should be consistent, transparent, and standard. As such, ModusLink began to build in a framework and systemic method to leverage knowledge and create stability through global process standardization. In order to achieve this, the organization knew it had to fully understand its global, regional, and local processes. These processes had to be benchmarked internally, with competitors, and with world-class firms. ModusLink standardized process terminology definitions, which allowed it to constructively analyze and prioritize the plethora of tasks in a way that could be mutually understood and prioritized. Results of this effort were identified in several areas. First, a greater understanding of how benefits were delivered to the customer was identified. This led to overall corporate savings by reducing waste and redundancy. In addition, ModusLink was able to reduce inventory levels while increasing customer service levels. For ©2011 APQC. ALL RIGHTS RESERVED. Page 18 Blueprint for Success: Logistics instance, one project—a supply chain conditioning and execution project—was recognized by the Supply Chain Council with a Supply Chain Award of Excellence for realizing a 64 percent reduction in working capital, a 35 percent reduction in inventory costs, and a 61 percent reduction in order turnaround time.8 Develop and Maintain Good Relationships with Outsource Partners Organizations that develop and optimize relationships with their outsource partners, treating them as long-term partnerships rather than just organizations that provide individual services, experience a more efficient and cost-effective level of service.9 One best-in-class organization that understands the value of maintaining good relationships with outsource providers is Jaguar. Jaguar maintains its leading position and quality brand image with excellence in aftermarket and service support, something the Jaguar team delivers through a long-standing partnership with Unipart Logistics. The two companies have worked together for more than 20 years. Unipart Logistics delivers global logistics services to more than 700 Jaguar dealers by investing in the creation and implementation of unique processes and products to maintain continuous improvement to its service for Jaguar. It supports the car maker’s expansion into emerging markets, such as China and Russia, by project managing the delivery of new warehouse facilities. After the facility has “gone live,” Unipart continues to deliver ongoing aftermarket parts logistics and business services support. Unipart Logistics is fully vested in Jaguar’s business, from a new model’s development through to its launch, and the support continues throughout the car’s lifespan.10 Process Performance Drivers Use Demand Planning Techniques to Aid in Inbound Material Planning and Management As organizations continue to explore ways to improve the quality of delivery to customers and to reduce the costs of providing high levels of responsiveness, it is clear that the what, where, and when of logistics assume even higher levels of importance. Today’s customer, from the retail or business consumer to the distributor to the original equipment manufacturer (OEM) all the way back through the supply chain to the component suppliers, insists on the availability of the desired product at the desired place and time. The only way to ensure this requirement is met is by properly anticipating and planning for demand. The common practice of forecasting requirements based on historical usages, with a limited vision into the ultimate endconsumer demand, creates multiple opportunities for problems due to mismatched supply and demand. One organization that is using demand planning techniques to drive improvements is Foster Grant. Foster Grant was able to significantly improve its short- and medium-term forecasting by simply reconfiguring its existing system to be more ©2011 APQC. ALL RIGHTS RESERVED. Page 19 Blueprint for Success: Logistics flexible and to provide a more accurate picture of customer demand. This new system has become the basis upon which Foster Grant has built their entire supply chain management strategy. As a result, Foster Grant has seen month-to-month inventory levels decrease by 33 percent. Year-to-year peak inventory is down 46 percent, and order fill rates are up to 98.9 percent from an average of 94 percent. It is also possible for the organization to forecast consumer demand up to five months in advance with only 30 percent to 35 percent forecast error. This new system has also allowed Foster Grant to close all overflow warehouses because warehousing space requirements are down 40 percent as a direct result of better forecasting.11 Consolidate Inventory and Processes In best-practice organizations, geographical requirements are considerations in consolidation initiatives.12 One best-practice organization in the area of consolidating inventory is Toyota Motor Company. Toyota Motor Company used consolidation efforts to develop a new distribution network that has given it a partslogistics network that supports business growth and maximizes customer satisfaction. Toyota uses a two-tiered approach to providing after-sales support to 1,200 car dealers, 200 Lexus dealers, and 100 forklift dealers throughout the United States. The first tier is made up of two large distribution centers that feed parts to nine smaller sites around the country. In addition, Toyota discovered that it could improve customer satisfaction levels at the dealers and cut costs by opening a new distribution center that handles only Lexus parts. This allowed Toyota to eliminate the need for high-priced expedited transportation of parts to Lexus dealerships and resulted in $2 million in savings for the organization. This new distribution facility has already paid for itself not only in financial gains but in increased levels of customer satisfaction by providing faster deliveries of parts at a lower cost.13 Another example of a best-in-class organization that has used consolidation of inventory and processes is Delta Faucet Company. Delta was able to consolidate orders by adding a centralized distribution center (CDC). The CDC allowed Delta to send single shipments to customers at a lower cost rather than making multiple shipments from several warehouse facilities at a much higher cost. According to Delta, the organization has been able to respond in near-real time to changes in demand while still maintaining a 100 percent on-time shipment rate.14 Use Lean Warehouse Processes Such as Cross Docking More and more organizations are searching for ways to eliminate waste in their logistics operations. One technique organizations are using is to apply Lean principles to their warehouse and logistics operations. Lean techniques, most noted for their success in improving manufacturing operations, are now becoming an effective tool for improving efficiencies in logistics and supply chain areas.15 ©2011 APQC. ALL RIGHTS RESERVED. Page 20 Blueprint for Success: Logistics One Lean technique organizations are using is cross docking. Cross docking is a planned activity in which an inbound shipment has a planned outbound shipment already scheduled. Using cross docking eliminates touches and cost associated with putting inventory away and then pulling it again for scheduled production jobs. When an item is received and electronically scanned, the system will look to the open order file to find its outgoing order. The item is then moved from receiving directly to the order staging area, order pick area, or an outbound vehicle. In some cases, shippers will send an advance ship notice (ASN) via electronic data interchange to alert the receiving facility that the material is coming. This allows the receiving facility to more productively schedule order picking and outbound deliveries. Many types of cross docking exist, most based on the time it takes to move the inventory through the facility. However, all are intended to either minimize or eliminate the need to put incoming inventory into storage. Another goal is to minimize the number of touches for each order. The key to accomplishing this is to link the receiving activity with open order status.16 Cross docking is the ultimate example of a touch-once philosophy in action. “The idea of cross docking is simple,” said Chuck Waddle, the executive vice president of FKI Logistex’s sales, warehouse, and distribution group. “You’re receiving a product that’s already in demand. Rather than put it into storage and then pull it back out later, it’s put immediately on a conveyor system and delivered to the shipping station.”17 Some organizations use a cross-docking technique known as pool distribution. By utilizing this technique, organizations are able to maintain cycle times, hold down freight costs, use fewer distribution centers, and minimize the chance of damaging products because the number of touch points are reduced along the way. Pool distribution is sending a full truckload of product to a regional less-than-truckload (LTL) carrier. The LTL carrier then breaks down the full truckload into individual shipments and transfers the product directly to the outbound trucks for delivery to the final destination.18 Implement Specific Practices That Focus on Inventory Accuracy According to APQC research, the keys to inventory accuracy in high-performing organizations include: regular and frequent inventory cycle counting, order receiving accuracy measures (i.e., count and receipt entry accuracy), storage and handling accuracy measures (location and movement record accuracy), shipping accuracy measures (selection accuracy), and return receipt accuracy measures (count and disposition record accuracy). ©2011 APQC. ALL RIGHTS RESERVED. Page 21 Blueprint for Success: Logistics One of the easiest ways organizations can improve inventory accuracy is through a good cycle counting program. Instead of doing one large, annual inventory count, many organizations choose to count smaller numbers of items more often, even daily. According to the APICS Dictionary, cycle counting is “an inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. Tangible and intangible assets must be well documented and reported accurately.”19 By counting small amounts of inventory on a daily or weekly basis, the year-end manual inventory of all stock may be avoided. Additionally, by examining where errors are made, a root cause may be found and corrected. Only by learning from mistakes can organizations avoid future errors. Technology Performance Drivers Use Radio Frequency Bar-Coding, Automated Handling Systems, or RFID in the Receiving, Warehousing, Picking, and Shipping Functions According to the Council of Supply Chain Management Professionals (CSCMP), best-practice organizations have fully automated information exchange (via Internet, XML-based standards, or EDI) that is used in conjunction with bar code, automated material handling, or RFID-compatible systems.20 The use of RFID technology improves order accuracy and helps reduce order cycle times—especially in terms of improving efficiencies in the receiving process. This, in turn, helps to decrease labor costs, which positively impacts cost per order. Giant Eagle is one organization that is successfully using automation to improve performance. The organization has implemented the use of technology in the form of robotic pallet trucks in its distribution facilities. A robotic pallet truck follows a predetermined transportation grid system to its assigned location where it will unload and return to the dock or another location for a pickup. The technology has allowed the organization to increase work force productivity and reduces on-the-job injuries. This has resulted in a documented time savings of one minute per pallet in terms of daily putaway, and it has reduced human travel from 750 miles a day to 250 miles.21 Progressive organizations are turning to RFID as a method for asset management, capturing data, improving inventory accuracy, and enhancing visibility of a product’s flow through the supply chain. Recent reports are that the market for RFID technology is expected to grow at a compounded annual growth rate of 19.5 percent through 2014.22 A common deployment in the warehouse setting involves installing read portals at each dock door. When product is unloaded from the trailer and onto the dock, the systems reads the product, or captures data, at the pallet (case or item) level as it passes through the portals. Several pilot studies with retailers, such as JCPenney’s, found four common uses for item level RFID: locating product, signaling out of stock occurrences, loss prevention, and inventory counting. Specifically, tagging individual retail items has helped retailers in the pilots to improve inventory accuracy from about 62 percent to more than 95 percent.23 ©2011 APQC. ALL RIGHTS RESERVED. Page 22 Blueprint for Success: Logistics RFID technology is expected to have an enormous impact on the supply chain, especially for warehouses. In addition, organizations that ship goods from overseas or use contract manufacturers between the supplier and OEM will have the ability to more closely track materials. Organizations will also benefit from the improved data regarding consumption and lead-time of inventory.24 Implement a Warehouse Management System When properly used, the WMS produces tangible results: It provides a way to automate and fundamentally account for all of the various procedures in the warehouse, from receiving to put-away to picking and shipping. The software liberates the use of storage, permitting random storage throughout the facility to maximize space and inventory instead of relying on pre-assigned storage locations. The improved quality and accuracy of deliveries that ensues from using a WMS results in reduced returns and back orders and improved customer satisfaction. These execution systems accomplish all of this while providing a real-time snapshot of the facility’s activities, resources, and inventory levels. While the level of improvement varies from organization to organization, those implementing WMS typically see improvements in service levels. APQC research shows that the average order line fill rate is 95 percent for organizations that have adopted a WMS versus only 89 percent for organizations that have not adopted a WMS. By introducing discipline and consistency into the process, the implementation of a WMS can also improve performance of returns and reverse logistics by integrating these processes into the overall business. Use of a WMS can also provide better and timelier feedback about returns, which can then be directly tied back to the consumer through order management.25 Moving from a traditional warehousing organization to a fulfillment organization was a challenge for Dart Warehouse Corporation. In initiating this move, Dart had to develop a sound and comprehensive method for managing customer returns. The organization accomplished this successful transition with the help of a WMS. The WMS was particularly valuable in helping Dart improve its returns process. At every step, the returns process is controlled by the WMS. After a return is received, it is sent via automated conveyor to a processing center equipped with a computer and scanning table. The product bar code is scanned to bring up the original order and an inspector determines the reason for the product return. This is logged as a reason code within the WMS. Once this has been accomplished, the information is passed electronically to the customer service department so that a replacement or credit can be initiated. By implementing this automation and technology, Dart has been able to reduce labor and has been better able to organize the processes associated with returns.26 Use an RMA System for Returns to Increase Visibility and Level Workloads By using a return material authorization (RMA) system for returns, organizations can have better visibility into what is coming down the road. Obtaining information ©2011 APQC. ALL RIGHTS RESERVED. Page 23 Blueprint for Success: Logistics about a return before the product is received allows for more level loading of workers and can help to reduce spikes in workload schedules.27 The use of both an RMA process and technology has helped Corporate Express process returns much more effectively. Each of the organization’s 1,400 trucks that make deliveries across the United States and Canada are equipped with a handheld computer/bar code scanner. The driver can use this mobile computer to print a return label, which is then adhered to the package. The label is generated by the driver from information scanned off of the original package label. The driver then takes the package from the customer and delivers it back to one of the organization’s 38 distribution centers, where the return is processed.28 Organizational Structure Performance Drivers Outsource All or Part of Logistics Services to Lower Warehousing and Labor Costs and Reduce Space, Equipment, and Labor Needed As business models become more and more complex, organizations are finding that they have a growing need to outsource. Third-party logistics providers (3PLs) have played a growing role in meeting this need. Since the 1990s, 3PLs have been developing from simple providers for various parts of logistics functions into key drivers in supply chain management. With more than $100 billion being spent on 3PLs every year, outsourcing logistics functions has become a major focus area for many organizations in their efforts to increase productivity and decrease cost.29 The top 25 3PLs control about 30 percent of the world’s logistics budget. However, with the expected growth of logistics outsourcing comes the introduction of new players into the market. There are hundreds of mid-market and smaller 3PLs emerging that specialize in a variety of logistics functions and focus particularly on niche activities.30 Many organizations are choosing to look at these smaller 3PLs to help meet their needs and are finding them to be flexible and cost-effective. Even some of the larger organizations are finding the mid-market 3PLs to be capable. Outsourcing can be a very effective way to reduce overall costs. For example, chemicals manufacturer Hercules Inc. was looking to reduce distribution costs on a worldwide level across its 38 manufacturing plants and chose to outsource logistics to Odyssey Logistics and Technology. In order to reduce cost, it negotiated a fiveyear contract that offered gain-sharing opportunities to Odyssey and partnered with the logistics organization to increase the level of service. In addition, Hercules reduced its overall number of transportation organizations to leverage freight volume and secure lower rates. Hercules also installed transportation planning software to help with the automation of the shipping process and provide better data on shipping patterns. The result is that Hercules has saved $4.5 million by using outsourcing to leverage shipment volumes and external expertise to gain efficiencies and cost reductions.31 ©2011 APQC. ALL RIGHTS RESERVED. Page 24 Blueprint for Success: Logistics Case Study Arrow Electronics, Inc. Embracing a methodology for continuous improvement drives leading-edge customer support at Arrow Electronics. Continuous improvement is a way of doing business at Arrow Electronics, a $14.6 billion global provider of products, services, and solutions to industrial and commercial users of electronic components and computer products. When Chairman, President, and CEO William E. Mitchell joined the organization, he came with a mission: establish a business strategy that would ensure the company’s shortand long-term success. As part of that strategy, Lean Six Sigma Continuous Process Improvement (or as it is referred to at Arrow, “CPI”) was adopted as the driving force for raising customer service levels and achieving operational excellence in all aspects of the company, including Arrow’s logistics operations. As a participant in APQC’s Open Standards Benchmarking, Arrow’s North American Components (NAC) business, responsible for $5.2 billion of Arrow’s overall revenue, rose to the top in logistics performance. Bruce Moser, director of logistics planning and engineering at Arrow, said that the Open Standards Benchmarking results helped to validate their focus and uncover additional areas where there were opportunities for improvement. At Arrow, to understand what customers need, Moser said they begin by defining customer requirements. The end goal: continually exceed customer expectations—and do so in the most costeffective way possible. Arrow embraces CPI and believes that embedding it within the organization is one of the keys to top performance. Moser explained that being supported by talented people good at analyzing costs helps his group to focus on processes and functions, trying to make them as efficient as possible. He continued, noting that robust systems—such as Arrow’s warehouse management system, transportation management system, and bar coding— as well as a continual, strategic assessment of the company’s logistics network, are key to running a successful logistics operation. Moser believes that Arrow’s primary distribution centers in Reno, Nev. and Ontario, Calif. exemplify operational excellence. “Our primary distribution centers progressively raise the bar in service and performance and always meet the challenge,” said Moser. These operations set the standard for customer response capability: same-day receiving and put-away of inventory with the capability to make that inventory available for sale within only a few hours after delivery. Further, each facility can select and ship customer orders on the same day the order is received. Arrow NAC put a mechanism in place to understand what customers want by tracking and fixing any issues in quality and satisfaction. There is a system to ©2011 APQC. ALL RIGHTS RESERVED. Page 25 Blueprint for Success: Logistics communicate and control response to any quality and satisfaction issues, measuring them against a target timeline for resolution. The group tracks average response rates against an aggressive goal, which includes initial investigation of root cause and corrective action. Employees also collect data from customers—automatically setting the stage for improved satisfaction and ongoing improvement in operations. Even more beneficial to the organization is the teambuilding that results from collaborative problem solving—finding ways to work with others to determine “why”— for example, “Why is our cost per line item higher in certain regions?” Or bigger issues like, “How can we further reduce the effort required to pick orders?” Or even bigger, “What practices can we set in place to meet our corporate objectives to continuously reduce costs, but always exceed our customers’ expectations?” As part of its collaborative practices, the organization formally identifies and disseminates best practices internally, globally. Supervisors from different distribution centers are frequently brought together to meet and share ideas and practices and to collaborate on areas for improvement. To follow through, cross-functional teams are assembled to spearhead the implementation of improvements identified in these collaborative activities. The organization’s approach to Lean and Six Sigma principles, coupled with the cultural embracing of continuous improvement in everything they do, sets the environment for effective implementation of change. To oversee this activity, Arrow has established a CPI organizational entity with global representation and sponsorship by the company’s executive committee. Formalized benchmarking is another aspect of continuous improvement at Arrow. The organization uses survey participation like the APQC Open Standards Benchmarking research as well as networking with other organizations that have similar operational parameters. In addition, Arrow reaches out locally to form mini consortia to share site visits and exchange data, best practices, and processes. To enhance this practice as well as his associates’ professional growth, Moser challenged management team members in primary distribution centers to network and gain organizational relationships with three external companies each year. This approach helps ensure that Arrow is continually expanding its network of benchmarking partnerships and sharing best practices. Internally, Arrow has established an ongoing global benchmarking program to ensure that logistics operations around the world communicate and share best practices. A critical element has been the establishment of standardized metrics and reporting. “Having a common language of metrics and consistent reporting provides the basis for comparing operational performance in North American, European, and Asian operations,” Moser explained. “In turn, the metrics provide substantiation of best practices and help prove the value proposition of a particular process, approach, or technology.” One best practices adoption came as a result of a benchmarking study that Arrow did in Europe. Tim Kolbus, director of NAC Logistics at Arrow, said, “Our ability ©2011 APQC. ALL RIGHTS RESERVED. Page 26 Blueprint for Success: Logistics to visualize the benefits of improved workstation designs and improve workload balancing resulted from this study.” The organization also actively looks at new technologies to fill gaps identified in its collaborative benchmarking practices. Arrow constantly monitors the market for emerging technologies and innovations that can enhance the company’s competitive advantage at each link of the supply chain. Benchmarking has allowed Arrow to begin to examine and evaluate technologies such as voice response and RFID in the context of a similar or comparable operation. “Being able to visit a company and actually see a technology functioning in an environment similar to yours enables you to envision and evaluate the potential for your own operations much more clearly and quickly,” said Moser. Kolbus added, “We likely would have gotten to these initiatives eventually, but without benchmarking we probably would not have gotten there as quickly.” A tremendous passion for customer service and operational excellence is key to Arrow’s success. To this end, voice-of-the-customer and voice-of-the-supplier programs also have been established. The organization is continually speaking with customers and suppliers to ensure that they have a clear and complete understanding of their expectations at each stage of the supply chain—so Arrow Electronics can continue to exceed them. ©2011 APQC. ALL RIGHTS RESERVED. Page 27 Blueprint for Success: Logistics Case Study ATC Logistics & Electronics ATC Logistics & Electronics couples its continuous improvement methodology with a philosophy that balances three critical components—people, processes, and technology—to generate top-performing logistics capability and business growth. Taking in stride growth of nearly 100 percent in one year with a goal to double the business again in the next three years, ATC Logistics & Electronics (ATCLE) maintains exemplary levels of logistics operational performance. As a provider of multi-layered logistics services to Fortune 100 organizations and large corporations such as Motorola, Nokia, T-Mobile, Ford, Sony Ericsson, Visteon, and Thales, the organization is an expert at high-quality logistics execution customized to each of its customers’ needs. Art Smuck, ATCLE’s vice president of operations, says that the organization’s successful philosophy revolves around a balance of key ideals that support and drive each other: recruit, train, and retain good people; celebrate wins, but never lose track of processes and continuous improvement; stay on the leading edge of technology to support what the people and processes are trying to accomplish; and provide what the customer needs when they need it. “People, processes, and technology make up the business,” Smuck said. Smuck said that the trick in understanding the relative balance of the organization’s ideals is that no one can sit on a two-legged stool: If one leg is broken, the effectiveness of the other two is compromised. The ATCLE approach is to constantly try to improve all three. Knowing which metrics to use and what to do with them is critical to its continuous improvement methodology. A new look at top-performing metrics in their inverse state also provides the opportunity to drill down to failures and misses and determine root causes to target for improvement. For example, an on-time metric of 99.99 percent wasn’t offering the opportunity for improvement, so looking at an on-time failure rate of 0.01 percent allowed for a fresh look at performance. Using these key performance indicators (KPIs) reviewed at a frequency applicable to each operation, the organization continuously reexamines processes and practices, looking for what works and what doesn’t. While most organizations assess performance no more than daily, the high-volume, high-velocity processes at ATCLE need to be monitored more often. “At some of the velocities our business operates at, if you have issues of production or quality, you lose it. And you lose it fast,” Smuck said. ©2011 APQC. ALL RIGHTS RESERVED. Page 28 Blueprint for Success: Logistics Metrics are always available, but based on the critical performance parameters of each operation, metrics are extracted at an applicable frequency. This practice allows the organization to quickly pinpoint where processes, tools, or worker practices are slowing down or compromising the quality of an operation. An even more proactive benefit is that this practice also helps the organization identify over-performance, situations when effective processes, tools, or worker practices can be shared to improve other parts of the organization. Effective practices are integrated into the training and certification program to make sure all associates have the opportunity to work effectively. Although continuous improvement methodologies like Lean principles and Kaizen events are embedded in the tool kit, people own the process for performance and improvement. Incentive programs support employee performance and contribution. Employees are recognized monthly by monetary incentives for production (with quality as the qualifier) to ensure a balance in overall performance for the customer. But when it comes to people in a continuous improvement setting, attitude, not aptitude, is important to ATCLE. The organization believes that all associates should have the opportunity to affect productivity, efficiency, cost effectiveness, safety, and quality. A preventive corrective action request (PCAR) system was implemented to generate suggestions in a formal, controlled communications and implementation process that is monitored and facilitated by the quality group. All employees have access to the system, which generates an automated response chain. Once an idea is submitted, an automated timetable is set and an e-mail detailing the idea is routed to the applicable department head. The department head has 48 hours to make written contact with the person who submitted the idea. A root cause analysis is mandatory in every case and the department head has seven days to respond with either an action plan to implement the idea or an explanation as to why the idea cannot be implemented. The system processes 2,000 ideas a year from employees encouraged by a proactive and positive-attitude environment. To support people and processes, the organization values leading-edge technology. It has implemented fully integrated enterprise resource planning and warehouse management systems, providing order management and inventory functionality as well as full radio frequency directed work and multi-format barcode processing capabilities. Specializing in application integration, it strives to meet customers’ complex interface requirements for both legacy and commercial systems, providing rapid, stable, highly scalable interfaces to meet business needs. This balanced approach to people, processes, and technology provides a scalable structure to sustain and improve performance through major client implementations and extreme growth. During a year of extreme growth, change, and challenging implementations, ATCLE increased productivity by up to 40 percent in some areas. Key performance indicators in cost, productivity, fill rates, and inventory accuracy, cycle times, on-time delivery, and perfect order performance continue to appear in ©2011 APQC. ALL RIGHTS RESERVED. Page 29 Blueprint for Success: Logistics the top performance quartiles when benchmarked against logistics organizations across all industries. When it comes to benchmarking metrics and practices for continuous improvement, ATCLE is serious. The operations management team visits several organizations per year seeking new ideas and better practices. Management team members are responsible for networking to find opportunities to reciprocate learnings with other organizations. They do so through industry associations, conferences, and ad hoc meetings. The results are significant, especially when the organization takes the nontraditional approach of looking outside of its industry and comfort zone to gain new ideas and different ways to think about old problems. Critical operational improvements occurred when ATCLE implemented time-sensitive metric reviews based on ideas learned from a site visit with an organization in a totally different business. These benchmarking visits and idea exchanges are kept informal; the team feels that if they over-formalize this practice, they will jeopardize its effectiveness. Going forward, the organization intends to continue to expand to adjacent and new virtual business while maintaining current operations. To meet business development goals, ATCLE’s solutions development team constantly maps and gaps their current capabilities against what target clients need. Staying in line with continuous improvement efforts, the organization strives to build its capabilities. Celebrated discontent remains the theme of ATCLE’s future. “OK, we’re great, what needs to be improved next?” Smuck said. The organization seeks the ability to grow with even better control. According to Smuck, the organization has had “real moments of genius” and “real moments with [its] wheels off.” In some cases, all the right resources were not deployed for client implementations, and in other cases, they didn’t fully understand client requirements on implementations. The organization leverages those tough lessons to improve effectiveness for the next initiative or implementation. ATCLE will continue to leverage its people, processes, and technology as it seeks new business opportunities and continues to improve performance in each area through measurement and benchmarking. ©2011 APQC. ALL RIGHTS RESERVED. Page 30 Blueprint for Success: Logistics Case Study Office Depot Office Depot’s diversified business relies on a customerfocused, total supply chain optimization approach. Office Depot Inc., founded in 1986, is one of the world’s largest sellers of office products and an industry leader in every distribution channel, including stores, direct mail, contract delivery, the Internet, and business-to-business electronic commerce. Driving the evolution of Office Depot’s supply chain is the continuing improvement of the organization. The organization began as a classic big-box specialty retailer: 25,000–40,000 square feet of retail space per store to display large quantities of inventory before the customers’ eyes. This format was a successful approach during the organization’s rapid growth, but began to change with the organization’s diversification into other segments of the office supply distribution business. Today, the $12 billion organization is a diversified, global presence across retail, contract, catalog, and Internet sales in the office supply segment. “Although most [people] think of us as a retailer, we are a diversified company with a very diverse customer segment,” said Director of Supply Chain Vendor Integration Mark Yoshimura. This diversity has driven a diverse supply chain, which required a change in supply chain optimization strategy, Yoshimura said. Office Depot’s diversification of its business has resulted in two customer segments with unique service needs. The organization has structured itself and aligned teams to best meet those needs. Different customers and service needs drove the evolution of customer-focused distribution centers; a cross dock distribution model is in place for retail stores, and a customer service center (CSC) distribution model is used for the business segment. When Office Depot operated its first 100 retail stores, it worked directly with the vendor committee that supplied the finished goods displayed in stores. The organization cut purchase orders and vendors delivered the goods straight to stores. Yoshimura said that as Office Depot grew, it realized better distribution models were needed to address complexities. Asking vendors to pick hundreds of store orders each week and deliver those via UPS or less-than-truckload (LTL) shipments to each store was laborious for vendors and the receiving store. The model evolved to one of cross docks, which simplified logistics for retail store distribution. Today, the organization has 10 cross docks that serve as flow-through centers. Office Depot cuts a weekly purchase order to vendors that meets the aggregate need ©2011 APQC. ALL RIGHTS RESERVED. Page 31 Blueprint for Success: Logistics of its stores; purchase orders are cut at the cross dock level, segmenting the order by cross dock destination, and then delivered at various lead times to each of the cross docks. At each of its 10 cross docks, Office Depot then divides the vendor deliveries to meet individual store needs and pushes them to stores later that day. The organization makes daily deliveries to stores from the cross docks, but this push model has been modified as well. Both push and pull models are utilized for store inventory. The majority of the lower-value supplies goods are pushed through the cross docks, while higher-value technology goods are warehoused upstream at the cross docks in order to minimize the inventory investment at more than 1,000 stores. For its business-to-business distribution channel (i.e., contract, commercial, and Internet group), Office Depot has 22 customer service centers (CSC) to meet the different service needs, such as next-day delivery (free for purchases of $50 or more) for orders purchased by 5 p.m. This is a nationwide policy that excludes a few outlying, difficult-to-reach areas. The customer service centers act as warehouse/distribution centers, located geographically to fulfill next-day delivery expectations. Most CSC inventory is received directly from vendors, but occasionally the cross docks service the CSC, as well. The organization does not isolate processes and practices, but instead seeks to optimize the whole supply chain. Teamwork and alignment are critical to the core supply chain team, which engages in extensive communication, Yoshimura said. The ideas start in merchandising, and those decisions affect the downstream supply chain and, eventually, each store. “Unless we have an extensive amount of communication going through there, when you start talking about 1,000 different stores, all the different planograms we handle on a daily basis, and 8,000 SKUs we have in our stores, there is an opportunity for execution failures if we don’t communicate and collaborate very effectively,” Yoshimura said. The senior vice president of distribution is responsible for making sure that all cross docks and CSCs are meeting performance targets to service customers in line with organizational expectations. This includes ensuring that the expense structure meets its goals. His support team plays a liaison role between the field operators and corporate. For example, if the corporate inventory management team makes a decision to expedite freight through the distribution network, it coordinates with the corporate distribution team, which then disseminates that information to the field so the execution can be synchronized. Within transportation, organization-wide strategy is set at the corporate level and then pushed to the field operators for execution. Field operators route freight from distribution centers (cross docks and CSCs) on a daily basis. The corporate transportation group is responsible for transportation strategy and improvement project ideas. ©2011 APQC. ALL RIGHTS RESERVED. Page 32 Blueprint for Success: Logistics Network and strategy is the group that focuses on supply chain and network optimization analysis. For example, much of its analysis focuses on throughput and volume moving through the distribution network to service retail and business-tobusiness customers. It scrutinizes holding capacity, throughput capacity based on projected business growth, and overall distribution infrastructure to determine the optimal network. Inventory management’s 60-person team comprises mostly inventory planners who work closely with the 20 merchandising buyers in their product classifications on the daily execution of placing purchase orders with vendors and ensuring on-time delivery to cross docks and CSCs. The inventory planners are accountable for forecast accuracy, capacity planning, service levels, and inventory turnover. Inventory planners are responsible for all inventory from both channels and are assigned to a specific category of merchandise. The organization is evaluating its future supply chain and building design so that only one transfer takes place to stores and business customers. The ideal is a dualpurpose building serving both stores and business customers. This vision of future distribution buildings combines the best of both worlds. It would have the warehousing capability of CSCs as well as the flow processes of cross docks. This will give the organization more flexibility in inventory strategies, Yoshimura said. Since its inception, the organization has not reconfigured its network to any great degree. It plans to redesign the network to leverage processes and inventory to a greater extent than the current model (cross docks to stores and CSCs to customers). For the optimized network, Office Depot plans to: evaluate buildings based on new distribution and inventory management strategies; build dual-purpose buildings with the space and system capabilities to service both channels; streamline to one purchase order for both retail and customers; and leverage processes, people, overhead, inventory, and service. Consolidation of buildings will create inventory savings opportunities through the aggregation of inventory and increased ability to reduce lead times through multiple purchase orders per week. More volume in the market and more truckload opportunities allow more opportunity for Office Depot to create multiple purchase orders within a vendor’s cycle. ©2011 APQC. ALL RIGHTS RESERVED. Page 33 Blueprint for Success: Logistics Case Study Carolina Logistics Services Carolina Logistics develops reverse logistics programs, returns management, and returns prevention processes. Carolina Logistics Services (CLS) has been in the reverse logistics business for more than 20 years. This case study looks at best practices CLS has used to deliver value for its customers. The best practices described in this case study are a combination of physical returns management practices and supply chain analysis returns prevention studies. CLS looked at clients whose reverse logistics programs have achieved high levels of success. The initial catalysts for these programs often involved increases in the rate of returns and the associated costs. Because the organizations’ returns processes were decentralized, inconsistency and inefficiency abounded. Distribution centers were experiencing space constraints, and returns sometimes bled over into plant and manufacturing space. The organizations were unable to validate their returns or issue credits to customers in a timely manner, which led to overpayment, deductions, or chargebacks. In addition, ever-changing regulatory requirements were making it increasingly important to minimize risks and control disposition. Recognizing the need to streamline their processes, the organizations turned to outsourcing because managing returns was not their core business, and they did not want to invest in it. The reverse logistics program at a typical CLS client originates with an advocate. For retailers, the recommender often comes from distribution, supply chain, or inventory management. For manufacturers, the initiative is usually driven by the group that is experiencing the most “pain” from an inefficient returns process—for example, the distribution and manufacturing teams whose warehouse space is overflowing, or the finance group that sees an increase in returns. The organization takes action by forming an approval team made up of the various organizational functions affected by returns. Final approval for the reverse logistics program usually comes either from a vice president of a division or jointly from the vice presidents of operations and sales. Each client presents a business case that addresses the full range of costs and savings associated with a reverse logistics program, including cost to implement, cost to maintain, and payback. The timeline for program payback ranges from three months (if, for example, the organization simply wants policy compliance) to three years (if, for example, the organization becomes involved in packaging changes or returns avoidance). ©2011 APQC. ALL RIGHTS RESERVED. Page 34 Blueprint for Success: Logistics Some clients opt to conduct pilot programs with limited scope in order to validate assumptions before making significant investments. However, pilots are not practical in every situation; they work best in manufacturing environments. Because retail chains rely on economies of scale, only a full-fledged program can demonstrate optimum results. Using Data to Break Down Silos Every CLS client has silos, i.e., various departments and areas that are tactically separated. Common challenges exist across the silos, but the separations prevent employees from collectively recognizing and addressing those challenges. Although CLS clients find it difficult to break down walls and implement reverse logistics solutions, a few best-practice organizations—those with strong project leaders— have been relatively successful. These organizations begin by establishing crossfunctional design and implementation teams with representatives from sales, customer operations, distribution, legal, environmental and regulatory, logistics, manufacturing, packaging, and quality. The best teams are able to translate benefits into dollar amounts to justify the project to executives and secure project funding. A cross-functional team is also a helpful forum for “trade-off discussions,” says Sharon Joyner-Payne, vice president of marketing at CLS. “Whenever someone has a great idea about how you want to handle a situation, the idea will have an impact on someone else. The person with the idea sometimes does not understand that.” For example, a member of the packaging sourcing group might suggest a way to reduce packaging costs without realizing that the proposed change could result in higher amounts of damaged product. The cross-functional team is responsible for calling attention to and working around these kinds of cross-functional impacts. Effective teams meet frequently. Usually, they begin with weekly sessions and later adopt a less frequent monthly schedule. The most successful organizations keep the teams in place even after implementation to facilitate process improvement. A common theme in overcoming resistance is data availability. When sales, marketing, warehousing, and manufacturing are given access to Web-based data, they no longer feel powerless and are able to continually improve their processes. In working with many clients, CLS has found that certain actions may benefit employees and processes in one silo while negatively affecting the organization as a whole. However, when data is shared across functional areas, leaders are able to reach a consensus about which practices are best for the entire organization. One example of best practice involves a CLS manufacturer client that initiated its reverse logistics program because it lacked knowledge about deduction amounts and their validity. CLS analyzed data from the manufacturer’s enhanced reason codes and created a summary of retailer-level differences between the deduction amounts and the actual returned product amounts; the manufacturer then used this summary to identify customers with especially high numbers of returns. CLS worked with the manufacturer to match the products with the returns, helping the manufacturer ©2011 APQC. ALL RIGHTS RESERVED. Page 35 Blueprint for Success: Logistics understand what was driving the returns. This enabled the manufacturer to design customer-specific buying and returns programs that, over a five-year period, reduced returns from customers by 60 percent. Another retail client improved its process by examining summary level physical count differences between store-claimed amounts and actual returned-product amounts. This client was able to design a real-time reconciliation program that rapidly identified spikes or anomalies requiring research. By spotting problems quickly, the client could make corrections while the product was still in the pipeline. The retailer reduced returns errors by 15 percent through retraining and reinforcement of policy in the forward supply chain (the stores). A third successful client uses information on the ages of returned component parts to determine whether the parts are usable products. The organization feeds component information into the inventory system, enabling viable returned components to be used in place of new products. This has reduced the client’s need for raw materials by 20 percent. A fourth best-practice example concerns a client’s ability to adapt to industry changes. Standards in the client’s industry were moving away from closed-code dating systems (in which only the manufacturer can decipher a product’s expiration date) toward open-code dating (in which expiration data is clearly readable by the consumer). As the organization was transitioning to open coding, supply chain analysis and reason code data collected through the returns process helped the packaging department realize that the product had an insufficient shelf life to survive the normal velocity of the supply chain. Packaging addressed the problem by working with the quality group to change the product’s formula and extend its shelf life. As a result, returns of expired product did not increase when open-code dating was implemented. Through its reverse logistics program (which included other initiatives in addition to the example above), the client was able to reduce damages by 75 percent over a five-year period. CLS has also experienced success in using returns information to address clients’ packaging problems. By analyzing returns information related to packaging types, a client was able to determine that, no matter what type of glue was used to affix paper labels to its bottles, damage occurred. This motivated the client to convert to plastic labels, which reduced the number of damaged products by 91 percent. A final example of best practice involves analyzing returns to evaluate manufacturer promotions. Most manufacturers have promotional periods, during which they push a product into the retail environment for a certain period of time. Through the returns process, CLS has been able to uncover numerous instances in which the manufacturer or retailer conducted back-to-back promotions that pushed inventory into the pipeline when it did not have as much as 50 percent sell-through of the original promotion. Too much inventory in the pipeline can lead to physical damage and, for dated products, expiration risks. However, by analyzing returns data, CLS helps clients make better promotional decisions. ©2011 APQC. ALL RIGHTS RESERVED. Page 36 Blueprint for Success: Logistics Appendix 1 - PCF Section 4.0 The current version of APQC’s Process Classification Framework is available at www.apqc.org/pcf. 4.0 Deliver Products and Services 4.1 Plan for and acquire necessary resources (Supply Chain Planning) (10215) 4.1.1 Develop production and materials strategies (10221) 4.1.1.1 Define manufacturing goals (10229) 4.1.1.2 Define labor and materials policies (10230) 4.1.1.3 Define outsourcing policies (10231) 4.1.1.4 Define manufacturing capital expense policies (10232) 4.1.1.5 Define capacities (10233) 4.1.1.6 Define production network and supply constraints (10234) 4.1.1.7 Define production process (14193) 4.1.1.8 Define production workplace layout and infrastructure (14194) 4.1.2 Manage demand for products and services (10222) 4.1.2.1 Develop baseline forecasts (10235) 4.1.2.2 Collaborate with customers (10236) 4.1.2.3 Develop consensus forecast (10237) 4.1.2.4 Allocate available to promise (10238) 4.1.2.5 Monitor activity against forecast and revise forecast (10239) 4.1.2.6 Evaluate and revise forecasting approach (10240) 4.1.2.7 Measure forecast accuracy (10241) 4.1.3 Create materials plan (10223) 4.1.3.1 Create unconstrained plan (10242) 4.1.3.2 Collaborate with supplier and contract manufacturers (10243) 4.1.3.3 Identify critical materials and supplier capacity (10244) 4.1.3.4 Monitor material specifications (10245) 4.1.3.5 Generate constrained plan (10246) 4.1.3.6 Define production balance and control (14196) 4.1.4 Create and manage master production schedule (10224) 4.1.4.1 Generate site-level plan (10247) 4.1.4.2 Manage work-in-progress inventory (10248) 4.1.4.3 Collaborate with suppliers (10249) 4.1.4.4 Generate and execute site schedule (10250) 4.1.5 Plan distribution requirements (10225) 4.1.5.1 Allocate available to promise (10251) 4.1.5.2 Maintain master data (10252) 4.1.5.3 Determine finished goods inventory requirements at destination (10253) 4.1.5.4 Calculate requirements at destination (10254) 4.1.5.5 Calculate consolidation at source (10255) Continued on next page ©2011 APQC. ALL RIGHTS RESERVED. Page 37 Blueprint for Success: Logistics 4.1.5.6 Manage collaborative replenishment planning (10256) 4.1.5.7 Manage requirements for partners (10257) 4.1.5.8 Calculate destination dispatch plan (10258) 4.1.5.9 Manage dispatch plan attainment (10259) 4.1.5.10 Calculate destination load plans (10260) 4.1.5.11 Manage partner load plan (10261) 4.1.5.12 Manage cost of supply (10262) 4.1.5.13 Manage capacity utilization (10263) 4.1.6 Establish distribution planning constraints (10226) 4.1.6.1 Establish distribution center layout constraints (10267) 4.1.6.2 Establish inventory management constraints (10268) 4.1.6.3 Establish transportation management constraints (10269) 4.1.7 Review distribution planning policies (10227) 4.1.7.1 Review distribution network (10264) 4.1.7.2 Establish sourcing relationships (10265) 4.1.7.3 Establish dynamic deployment policies (10266) 4.1.8 Assess distribution planning performance (10228) 4.1.8.1 Establish appropriate performance indicators (metrics) (10270) 4.1.8.2 Establish monitoring frequency (10271) 4.1.8.3 Calculate performance measures (10272) 4.1.8.4 Identify performance trends (10273) 4.1.8.5 Analyze performance benchmark gaps (10274) 4.1.8.6 Prepare appropriate reports (10275) 4.1.8.7 Develop performance improvement plan (10276) 4.1.9 Develop quality standards and procedures (10368) 4.1.9.1 Establish quality targets (10371) 4.1.9.2 Develop standard testing procedures (10372) 4.1.9.3 Communicate quality specifications (10373) 4.2 Procure materials and services (10216) 4.2.1 Develop sourcing strategies (10277) 4.2.1.1 Develop procurement plan (10281) 4.2.1.2 Clarify purchasing requirements (10282) 4.2.1.3 Develop inventory strategy (10283) 4.2.1.4 Match needs to supply capabilities (10284) 4.2.1.5 Analyze company’s spend profile (10285) 4.2.1.6 Seek opportunities to improve efficiency and value (10286) 4.2.1.7 Collaborate with suppliers to identify sourcing opportunities (10287) 4.2.2 Select suppliers and develop/maintain contracts (10278) 4.2.2.1 Select suppliers (10288) 4.2.2.2 Certify and validate suppliers (10289) 4.2.2.3 Negotiate contracts (10290) 4.2.2.4 Manage contracts (10291) 4.2.3 Order materials and services (10279) 4.2.3.1 Process/Review requisitions (10292) 4.2.3.2 Approve requisitions (10293) Continued on next page ©2011 APQC. ALL RIGHTS RESERVED. Page 38 Blueprint for Success: Logistics 4.2.3.3 Solicit/Track vendor quotes (10294) 4.2.3.4 Create/Distribute purchase orders (10295) 4.2.3.5 Expedite orders and satisfy inquiries (10296) 4.2.3.6 Record receipt of goods (10297) 4.2.3.7 Research/Resolve exceptions (10298) 4.2.4 Appraise and develop suppliers (10280) 4.2.4.1 Monitor/Manage supplier information (10299) 4.2.4.2 Prepare/Analyze procurement and vendor performance (10300) 4.2.4.3 Support inventory and production processes (10301) 4.2.4.4 Monitor quality of product delivered (10302) 4.3 Produce/Manufacture/Deliver product (10217) 4.3.1 Schedule production (10303) 4.3.1.1 Generate line level plan (10306) 4.3.1.2 Generate detailed schedule (10307) 4.3.1.3 Schedule production orders and create lots (10308) 4.3.1.4 Release production orders and create lots (10309) 4.3.2 Produce product (10304) 4.3.2.1 Manage raw material inventory (10310) 4.3.2.2 Execute detailed line schedule (10311) 4.3.2.3 Rerun defective items (10313) 4.3.2.4 Assess production performance (10314) 4.3.3 Schedule and perform maintenance (10305) 4.3.3.1 Determine process for preventive (planned) maintenance (Preventive Maintenance Orders) (10315) 4.3.3.2 Determine process for requested (unplanned) maintenance (Work Order Cycle) (10316) 4.3.3.3 Execute maintenance (10317) 4.3.3.4 Calibrate test equipment (10318) 4.3.3.5 Report maintenance issues (10319) 4.3.4 Perform quality testing (10369) 4.3.4.1 Perform testing using the standard testing procedure (10374) 4.3.4.2 Record test results (10375) 4.3.5 Maintain production records and manage lot traceability (10370) 4.3.5.1 Determine lot numbering system (10376) 4.3.5.2 Determine lot usage (10377) 4.4 Deliver service to customer (10218) 4.4.1 Confirm specific service requirements for individual customer (10320) 4.4.1.1 Process customer request (10324) 4.4.1.2 Create customer profile (10325) 4.4.1.3 Generate service order (10326) 4.4.2 Identify and schedule resources to meet service requirements (10321) 4.4.2.1 Create resourcing plan and schedule (10327) 4.4.2.2 Create service order fulfillment schedule (10328) 4.4.2.3 Develop service order (10329) 4.4.3 Provide service to specific customers (10322) Continued on next page ©2011 APQC. ALL RIGHTS RESERVED. Page 39 Blueprint for Success: Logistics 4.4.3.1 Organize daily service order fulfillment schedule (10330) 4.4.3.2 Dispatch resources (10331) 4.4.3.3 Manage order fulfillment progress (10332) 4.4.3.4 Validate order fulfillment block completion (10333) 4.4.4 Ensure quality of service (10323) 4.4.4.1 Identify completed orders for feedback (10334) 4.4.4.2 Identify incomplete orders and service failures (10335) 4.4.4.3 Solicit customer feedback on services delivered (10336) 4.4.4.4 Process customer feedback on services delivered (10337) 4.5 Manage logistics and warehousing (10219) 4.5.1 Define logistics strategy (10338) 4.5.1.1 Translate customer service requirements into logistics requirements (10343) 4.5.1.2 Design logistics network (10344) 4.5.1.3 Communicate outsourcing needs (10345) 4.5.1.4 Develop and maintain delivery service policy (10346) 4.5.1.5 Optimize transportation schedules and costs (10347) 4.5.1.6 Define key performance measures (10348) 4.5.2 Plan and manage inbound material flow (10339) 4.5.2.1 Plan inbound material receipts (10349) 4.5.2.2 Manage inbound material flow (10350) 4.5.2.3 Monitor inbound delivery performance (10351) 4.5.2.4 Manage flow of returned products (10352) 4.5.3 Operate warehousing (10340) 4.5.3.1 Track inventory deployment (10353) 4.5.3.2 Receive, inspect, and store inbound deliveries (10354) 4.5.3.3 Track product availability (10355) 4.5.3.4 Pick, pack, and ship product for delivery (10356) 4.5.3.5 Track inventory accuracy (10357) 4.5.3.6 Track third-party logistics storage and shipping performance (10358) 4.5.3.7 Manage physical finished goods inventory (10359) 4.5.4 Operate outbound transportation (10341) 4.5.4.1 Plan, transport, and deliver outbound product (10360) 4.5.4.2 Track carrier delivery performance (10361) 4.5.4.3 Manage transportation fleet (10362) 4.5.4.4 Process and audit carrier invoices and documents (10363) 4.5.5 Manage returns; manage reverse logistics (10342) 4.5.5.1 Authorize and process returns (10364) 4.5.5.2 Perform reverse logistics (10365) 4.5.5.3 Perform salvage activities (10366) 4.5.5.4 Manage and process warranty claims (10367) 4.5.5.5 Manage repair/refurbishment and return to customer/stock (14195) ©2011 APQC. ALL RIGHTS RESERVED. Page 40 Blueprint for Success: Logistics Appendix 2 Summary of Open Standards Benchmarking Measures The following pages list the standard performance measures that APQC captures for supply chain functions and processes for the Open Standards Benchmarking database. These measures coordinate with categories 4.0 Deliver Products and Services and 2.0 Develop and Manage Products and Services in the APQC Process Classification FrameworkSM (PCF), the high-level enterprise model that allows organizations to see activities from a cross-industry viewpoint. In addition to supply chain and product development, APQC collects measures and benchmarks in financial management, human capital management, information technology, and many other categories and processes in the PCF. For additional information on these measures or access to Open Standards Benchmarking, you can contact APQC at (800) 776-9676, outside the United States at 1 (713) 681-4020, or via e-mail at [email protected]. APQC collects key performance indicators, other quantitative performance measures, and qualitative information in each area listed below. This appendix highlights only the key performance indicators. Comprehensive lists are also available from APQC. SUPPLY CHAIN PLANNING KEY PERFORMANCE INDICATORS (PCF 4.1) Metric Name Metric Category Demand/supply planning costs per $1,000 revenue Cost Effectiveness Inventory carrying cost as a percentage of average annual inventory value Cost Effectiveness Supply chain management costs per $1,000 revenue Cost Effectiveness Cash-to-cash cycle time in days Cycle Time Number of FTEs for the supply chain planning function per $1 billion revenue Process Efficiency ©2011 APQC. ALL RIGHTS RESERVED. Page 41 Blueprint for Success: Logistics PROCUREMENT KEY PERFORMANCE INDICATORS (PCF 4.2) Metric Name Metric Category Total cost of the process “develop sourcing strategies” per $1,000 revenue Cost Effectiveness Total cost of the process “develop sourcing strategies” per $1,000 purchases Cost Effectiveness Total cost of the process “select suppliers and develop and maintain contracts” per $1,000 revenue Cost Effectiveness Total cost of the process “select suppliers & develop/maintain contracts” per $1,000 purchases Cost Effectiveness Total cost of the process “order materials/services” per $1,000 revenue Cost Effectiveness Total cost of the process “order materials/services” per $1,000 purchases Cost Effectiveness Total cost of the process “appraise and develop suppliers” per $1,000 revenue Cost Effectiveness Total cost of the process “appraise and develop suppliers” per $1,000 purchases Cost Effectiveness Total cost of the procurement cycle per purchase order Cost Effectiveness Total cost of the procurement cycle per procurement cycle FTE Cost Effectiveness Total cost of the procurement cycle per $1,000 revenue Cost Effectiveness Total cost of the procurement cycle per $1,000 purchases Cost Effectiveness Total cost of the procurement cycle as a percentage of revenue Cost Effectiveness Cycle time in hours to place purchase order Cycle Time Average supplier lead time on purchased materials Cycle Time Number of FTEs for the process “develop sourcing strategies” per $1 billion purchases Process Efficiency Number of FTEs for the process “select suppliers develop/maintain contracts” per $1 billion purchases Process Efficiency and Percentage of purchase orders approved electronically Process Efficiency Number of FTEs for the process “order materials/services” per $1 billion purchases Process Efficiency Number of FTEs for the process “appraise and develop suppliers” per $1 billion purchases Process Efficiency Number of FTEs for the procurement cycle per $1 billion purchases Process Efficiency Number of purchase orders processed per “order materials/services” FTE Staff Productivity Number of purchase order line items processed per “order materials/services” FTE Staff Productivity Total number of purchase orders processed per procurement FTE Staff Productivity ©2011 APQC. ALL RIGHTS RESERVED. Page 42 Blueprint for Success: Logistics MANUFACTURING KEY PERFORMANCE INDICATORS PCF (4.3) Metric Name Metric Category Warranty costs (repair and replacement) as a percentage of sales Cost Effectiveness Scrap and rework costs as a percentage of sales Cost Effectiveness Manufacturing controllable cost as a percentage of revenue Cost Effectiveness Total cost to manufacture per $1,000 revenue Cost Effectiveness Manufacturing cycle time in hours Cycle Time Finished goods inventory turn rate Process Efficiency Finished product, first pass quality yield Process Efficiency Unplanned machine downtime as a percentage of scheduled run time Process Efficiency Actual production rate as a percentage of the maximum capable production rate Process Efficiency Production material handling damage as a percentage of total material cost Process Efficiency LOGISTICS KEY PERFORMANCE INDICAT ORS (PCF 4.5) Metric Name Metric Category Total cost of the process “define logistics strategy” per $1,000 revenue Cost Effectiveness Total cost of the process “plan inbound material flow” per $1,000 revenue Cost Effectiveness Total cost of the process “operate warehousing” per $1,000 revenue Cost Effectiveness Total cost of the process “operate outbound transportation” per $1,000 revenue Cost Effectiveness Total cost of logistics per $1,000 revenue Cost Effectiveness Total cost of logistics per logistics FTE Cost Effectiveness Total cost of logistics per sales order shipped Cost Effectiveness Customer order cycle time in days Cycle Time Return processing cycle time in days Cycle Time Dock-to-stock cycle time for supplier deliveries in hours Cycle Time Pick-to-ship cycle time in hours Cycle Time Number of FTEs in the process “define logistics strategy” per $1 billion revenue Process Efficiency Number of FTEs in the process “plan inbound material flow” per $1 billion revenue Process Efficiency Number of FTEs in the process “operate warehousing” per $1 billion revenue Process Efficiency Inventory accuracy Process Efficiency Order fill rate Process Efficiency ©2011 APQC. ALL RIGHTS RESERVED. Page 43 Blueprint for Success: Logistics Metric Name Metric Category Number of FTEs in the process “operate outbound transportation” per $1 billion revenue Process Efficiency Number of FTEs in the logistics function per $1 billion revenue Process Efficiency Perfect order performance Process Efficiency Number of annual sales orders filled per “operate warehousing” FTE Staff Productivity PRODUCT DEVELOPMENT KEY PERFORMANCE INDICATORS (PCF 2.0) Metric Name Metric Category Total cost of the product development function per $1,000 revenue Cost Effectiveness Total cost of the process "generate new product/service ideas" per $1,000 revenue Cost Effectiveness Total cost of the process "design, build and evaluate product/service" per $1,000 revenue Cost Effectiveness Total cost of the process "test market product/service" per $1,000 revenue Cost Effectiveness Total cost of the process "manufacture and support product/service" per $1,000 revenue Cost Effectiveness Time-to-market in days for existing product/service improvement and extension projects Cycle Time Time-to-market in days for new product/service development projects Cycle Time Average time-to-profitability in months for existing product/service improvement and extension projects Cycle Time Average time-to-profitability in months for new product/service development projects Cycle Time Number of FTEs in the product development function per $1 billion revenue Process Efficiency Percentage of existing product/service improvement and extension projects launched on time Process Efficiency Percentage of new product/service development projects launched on time Process Efficiency Percentage of existing product/service improvement and extension projects launched on budget Process Efficiency Percentage of new product/service development projects launched on budget Process Efficiency Percentage of sales due to product/services launched in the past year Process Efficiency ©2011 APQC. ALL RIGHTS RESERVED. Page 44 Blueprint for Success: Logistics Appendix 3 Glossary of Terms For additional reference, please visit CSCMP’s online Glossary of Terms: http://cscmp.org/digital/glossary/glossary.asp Advanced Planning and Scheduling (APS)—Techniques that deal with analysis and planning of logistics and manufacturing over the short, intermediate, and long terms. APS describes any computer program that uses advanced mathematical algorithms or logic to perform optimization or simulation on finite capacity scheduling, sourcing, capital planning, resource planning, forecasting, demand management, and other tasks. These techniques simultaneously consider a range of constraints and business rules to provide real-time planning and scheduling, decision support, available-to-promise capabilities, and capable-to-promise capabilities. APS often generates and evaluates multiple scenarios. Management then selects one scenario to use as the official plan. The five main components of APS systems are demand planning, production planning, production scheduling, distribution planning, and transportation planning. Benchmarking—The process of comparing performance against the practices of other leading organizations for the purpose of improving. Organizations also benchmark internally by tracking and comparing current performance with past performance. Best practice—A specific process or group of processes that have been recognized as high performing based on specific criteria and that demonstrate a best method for conducting an action. Best practices may vary by industry or geography depending on the environment being used. Best-practice methodology may be applied with respect to resources, activities, cost object, or processes. Business review—A meeting between a purchasing department and supplier to discuss supplier performance and improvement potential. Cross docking—A distribution system in which merchandise received at the warehouse or distribution center is not put away, but instead is readied for shipment to retail stores. Cross docking requires close synchronization of all inbound and outbound shipment movements. By eliminating the put-away, storage, and selection operations, it can significantly reduce distribution costs. ©2011 APQC. ALL RIGHTS RESERVED. Page 45 Blueprint for Success: Logistics Cycle time—The amount of time it takes to complete a business process. Dashboard—See scorecard. Demand planning—The process of identifying, aggregating, and prioritizing all sources of demand for the integrated supply chain of a product or service at the appropriate level, horizon, and interval. Distribution center—The warehouse facility that holds inventory from manufacturing pending distribution to the appropriate stores. Direct materials—Material that is used in the manufacturing/content of a product (i.e., purchased parts, solder, SMT glues, adhesives, mechanical parts, etc.) Enterprise resource planning (ERP)—A class of software for planning and managing enterprise-wide the resources needed to take customer orders, ship them, account for them, and replenish all needed goods according to customer orders and forecasts. Often includes electronic commerce with suppliers. Examples of ERP systems are the application suites from SAP, Oracle, PeopleSoft and others. Freight forwarder—An organization that provides logistics services as an intermediary between the shipper and the carrier, typically on international shipments. Freight forwarders provide the ability to respond quickly and efficiently to changing customer and consumer demands and international shipping (import/export) requirements. FTE—Full-time equivalent. Any employee or group of employees that work the equivalent of a full-time employee at 40 hours per week. For example, two part-time employees working 20 hours each per week would be the FTE of one employee. Key performance indicator (KPI)—A measure of strategic importance to an organization or department. For example, a supply-chain flexibility metric is supplier on-time delivery performance, which indicates the percentage of orders that are fulfilled on or before the original requested date. Indirect materials—Material that is not used in the manufacturing/content of a product (e.g., office supplies or parts used for maintenance and repair of equipment). Logistics management—As defined by the Council of Supply Chain Management Professionals (CSCMP): “Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. Logistics management activities typically include inbound and outbound transportation management, fleet management, ©2011 APQC. ALL RIGHTS RESERVED. Page 46 Blueprint for Success: Logistics warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution— strategic, operational, and tactical. Logistics management is an integrating function which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions, including marketing, sales, manufacturing, finance, and information technology.” OEM—Original equipment manufacturer. A manufacturer that buys and incorporates another supplier’s products into its own products. Also, products supplied to the original equipment manufacturer or sold as part of an assembly. For example, an engine may be sold to an OEM for use as that organization’s power source for its generator units. PCF—A high-level, industry-neutral enterprise model developed by APQC that allows organizations to see their activities from a cross-industry viewpoint. Purchase order—The purchaser’s authorization used to formalize a purchase transaction with a supplier. The physical form or electronic transaction a buyer uses when placing order for merchandise. Radio frequency (RF or RFID)—A form of wireless communications that lets users relay information via electromagnetic energy waves from a terminal to a base station that is linked in turn to a host computer. The terminals can be place at a fixed station, mounted on a forklift truck, or carried in the worker’s hand. The base station contains a transmitter and receiver for communication with the terminals. RF systems use either narrow-band or spread-spectrum transmissions. Narrow-band data transmissions move along a single, limited radio frequency, while spread-spectrum transmissions move across several different frequencies. When combined with a bar-code system for identifying inventory items, a radio-frequency system can relay data instantly, updating inventory records in real time. Reverse logistics—A specialized segment of logistics focusing on the movement and management of products and resources after the sale and after delivery to the customer. Includes product returns for repair and/or credit. Return material authorization or return merchandise authorization (RMA)—A number usually produced to recognize and give authority for a faulty good to be returned to a distribution center or manufacturer. A form is generally required with a warranty/return, which helps the organization identify the original product and the reason for return. The RPA number often acts as ©2011 APQC. ALL RIGHTS RESERVED. Page 47 Blueprint for Success: Logistics an order form for the work required in repair situations or as a reference for credit approval. Scorecard—A performance measurement tool used to capture a summary of the key performance indicators (KPIs) or metrics of an organization. Metrics scorecards (dashboards) should be easy to read and usually have red, yellow, and green indicators to flag when the organization is not meeting its targets for its metrics. Ideally, a dashboard/ scorecard should be cross-functional in nature and include both financial and non-financial measures. In addition, scorecards should be reviewed regularly, at least on a monthly basis and weekly in key functions such as manufacturing and distribution, where activities are critical to the success of a organization. The dashboard/scorecard philosophy can also be applied to external supply-chain partners such as suppliers to ensure that suppliers’ objectives and practices align. Synonym: dashboard. Stock keeping unit (SKU)—A category of unit with a unique combination of form, fit, and function (i.e., unique components held in stock). To illustrate: If two items are indistinguishable to the customer or if any distinguishing characteristics visible to the customer are not important to the customer so that the customer believes the two items to be the same, these two items are part of the same SKU. Supply chain—Starting with unprocessed raw materials and ending with the final customer using the finished goods, the supply chain links many organizations together. Also, the material and informational interchanges in the logistical process stretching from the acquisition of raw materials to the delivery of finished products to the end user. All suppliers, service providers, and customers are links in the supply chain. Third-party logistics (3PL)—Outsourcing all or much of an organization’s logistics operations to a specialized organization. Warehousing—The storing or holding of goods. Warehouse management system (WMS)—The systems used in effectively managing warehouse business processes and direct warehouse activities, including receiving, put-away, picking, shipping, and inventory cycle counts. Also includes support of radio-frequency communications, allowing real-time data transfer between the system and warehouse personnel and maximizes space and minimizes material handling by automating put-away processes. ©2011 APQC. ALL RIGHTS RESERVED. Page 48 Blueprint for Success: Logistics Endnotes 1 Bley, Doug. “Improving Logistics.” Strategic Finance. October 2004. 2 “Best Practices in Reverse Logistics Can Ease the Pain of Product Returns” Supply Chain Brain. Oct. 2007. 3 Manrodt, Karl B., Tillman, Joseph M., and Vitasek, Kate L. “DC Measures 2010.” WERC Watch. May 2010. 4 “Best Practices in Reverse Logistics Can Ease the Pain of Product Returns” Supply Chain Brain. Oct. 2007. 5 Bley, Doug. “Improving Logistics.” Strategic Finance. October 2004. 6 Bley, Doug. “Improving Logistics.” Strategic Finance. Oct. 2004. 7 Manrodt, Karl B., Tillman, Joseph M., and Vitasek, Kate L. “DC Measures 2010.” WERC Watch. May 2010. 8 Manrodt, Karl and Kate Vitasek. “Global Process Standardization: A Case Study.” Journal of Business Logistics. Volume 25, Number 1. 2004. 9 Vitasek, Kate L. “The Five Golden Rules to Transforming Outsourcing Partnerships.” Supply Chain Europe. Volume19, Number 3, May/June 2010. 10 Vitasek, Kate L. “The Five Golden Rules to Transforming Outsourcing Partnerships.” Supply Chain Europe. Volume19, Number 3, May/June 2010. 11 Hoffman, Kurt C. “Who’s That Behind Foster Grant’s Demand Planning?” Global Logistics & Supply Chain Strategies. Volume 6, Number 6, June 2002. 12 Supply Chain Management Process Standards Handbook, 2nd Edition. Council of Supply Chain Management Professionals, 2009. 13 “Toyota Tunes Up its Distribution Network.” Logistics. March 2001. 14 Harps, Leslie Hansen. “Delta Taps a Centralized Approach to Growth.” Inbound Logistics Vol. 24, No. 3. March 2004. 15 Abbott, Jeff, Karl B. Manrodt, and Kate Vitasek. “Understanding the Lean Supply Chain: Beginning the Journey.” 2005 Report on Lean Practices in the Supply Chain. APICS, 2005. 16 Supply Chain Operations Reference Model Version 10.0. Supply-Chain Council, 2010. 17 “Leading Retail Distribution Practices.” Modern Materials Handling. Special Supplement. Vol. 60, No. 1, January 2005. 18 Schultz, John D. “The Shipper Who Thinks Like a Trucker.” Logistics Management. Vol. 45, No. 1, January 2006. ©2011 APQC. ALL RIGHTS RESERVED. Page 49 Blueprint for Success: Logistics 19 Blackstone, John H., ed. and Cox, James F, ed. APICS Dictionary. 12th edition. APICS Educational Society for Resource Management, 2008. 20 Supply Chain Management Process Standards Handbook, 2nd Edition. Council of Supply Chain Management Professionals, 2009. 21 Douglas, Merrill and Joseph O’Reilly. “Simplified Sorting.” Inbound Logistics Vol. 29, No. 7, July 2009. 22 Trebilcock, Bob. “RFID Update.” Modern Materials Handling. Vol. 65, No. 11, November 2010. 23 Hardgrave, Bill. “Item-Level RFID Applications in Retail.” CSCMP Explores. Vol. 7, Summer 2010. 24 Hardgrave, Bill. “Item-Level RFID Applications in Retail.” CSCMP Explores. Vol. 7, Summer 2010. 25 Trebilcock, Bob. “Managing Returns with WMS.” Modern Materials Handling. Vol. 59, No. 10, Oct. 2004. 26 Trebilcock, Bob. “Managing Returns with WMS.” Modern Materials Handling. Vol. 59, No. 10, Oct. 2004. 27 Riedel, Mark. “Turning Returns to Profits.” Traffic World Vol. 268, No. 26, June 2004. 28 Weinstein, Margery. “Cultivating Happier Returns.” Catalog Age. Vol. 21, No. 9, August 2004. 29 Berman, Jeff. “3PL News: Armstrong says 2009 3PL revenues down 15.1 percent.” Logistics Management, May 2010 (retrieved December 2010). 30 Foster, Thomas. “Mid-Market 3PLs, Offering Many Services, Are on the Rise.” Global Logistics & Supply, Aug. 2005. 31 Cook, James A. “Why Hercules Outsourced Its Labors.” Logistics Management. April 2004. ©2011 APQC. ALL RIGHTS RESERVED. Page 50