Show me the money. How small changes in logistics procedures can make big changes on profitability

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For thousands of years, people won wars because of superior logistics thinking.

Today, companies use logistics to fight their wars on cost, often by spending large amounts of money on new processes and equipment. However, by concentrating on a few simple areas, companies can make huge improvements to their bottom line.

Three areas that most people know they should be looking at, but often don't are:

  • The position of goods in the supply chain
  • Looking at logistics as a profit centre rather than a cost centre
  • Effective customer management

Location, location, location.
This sounds rather obvious, but one easy way to save lots of money is to put fast moving goods where they can move even faster. A simple analysis of warehouse flows and customer orders will tell you what goods move in and out of the warehouse fastest. By streamlining the placement of goods throughout the whole process of receiving, put away, picking and dispatch, companies can save large amounts of money on goods, storage costs and personnel efficiencies.

"It doesn't just stop there." says Joakim, Gustafsson, Senior Consultant at Consafe Logistics, who stretches location to cover the wider area of how we think about distribution. A distribution strategy best describes the method of delivering products to customers according to current circumstances. Companies should choose the optimal distribution channel and goods placement according to market conditions and logistics facts.

"By reviewing and developing distribution structures and distribution strategies, companies can increase delivery service, shorten lead times and provide better information to customers. At the same time, the total costs of logistics such as warehouse management, capital tie-up and obsolescence decreases." In other words, just like in the property business, it's often where you invest rather than what you invest in that saves you most money.

View logistics as a profit, not as a cost
Another area that's gaining more attention lately is the way in which organisations view logistics. Most companies see logistics as a cost centre, in other words, how to continually drive down costs in the organisation. But the problem is that there is only so much efficiency to be made. What happens when you've got as cost efficient as you can be?

One way is to see logistics as a profit contributor. In other words, instead of looking at minimizing the cost to deliver order x, look at the profitability of managing customer orders across multiple channels and track the profitability of different customers and even of individual orders.

This thinking means looking at new metrics and different ways of managing logistics. It also means stronger involvement with the sales and marketing organizations within the company, and logistics managers becoming more customer focused than process focused. It would also have a bearing on the KPIs for logistics departments. Instead of looking at the costs of shipping to customers, KPIs could focus on the profits gained from specific customers and the whole company's activities are then finely tuned to that one aim, maximizing and building on growth and profit.

Several companies, particularly in the IT space, have seen the benefit of planning for returns. This planning encompasses activities that include overproduction, demo machines and buy back policies to benefit large and important customers. "This is a very lucrative business for us." says Mathias Wessln, Business Manager, Equipment Management & Remarketing, for Hewlett Packard Scandinavia." Our activities in this space generate a revenue of over 500 million US dollars globally, and around 70 million SEK in Scandinavia. By thinking in a profit oriented way we have turned a service function from a cost centre to a lucrative profit driver, while at the same time giving our major customers extra value".

Sell your expertise
A more obvious way of profiting from logistics is purely to sell on your knowledge and experience. You've saved millions through the strategic implementation of logistics systems, so why not coach others to do the same thing, and make money in the process? There are examples of this in both the USA and the Far East. Imagine the revenues a company like IKEA could make if it teamed up with a logistics expert to sell its proven systems to other companies in similar fields.


Manage customers effectively
Another easy way of saving money is to analyse just where your profitability comes from. We all know that one of the classics for logistics management is Pereto's law. But once we've looked at which 20% of our customers account for which 80% of our sales, we then should stop to consider that maybe 30% of our customers are downright loss makers.

A profitability analysis would give companies the answers to which customers and products are profitable, and which are not. Armed with this knowledge, companies can then implement relevant money-saving strategies.

The problem is that many companies see customer profitability analyses as a marketing/CRM function rather than a logistics function and seldom take into account the cost of transport, warehousing and delivery in their calculations.

"What companies need is a clear analysis of the total cost of servicing a specific customer or product". says Joakim Gustafsson from Consafe Logistics. "It's not just the contribution customers and products make to the company's results that need to be measured. When we perform a profitability analysis together with a company, we look at the whole picture including cost, capital and pricing structures, together with purchase and delivery plans. In this way we can arrive at a real cost saving that is between 85 and 95% accurate compared with our initial analysis"

Information already available
Most of the information for performing profitability analysis is often already available from the ERP system. Examples are invoice records, customer records, product records, accounts receivable, warehouse records, etc.

KISS - Keep it simple in the supply chain
Sorry to steal an overused acronym, but by looking for simple solutions to logistics dilemmas, and by looking for the profit potential in logistics, companies can save themselves an awful lot of money without investing in any machinery or computer-related system. Make a simple investment in strategic thought and you can kiss goodbye to many areas of potential unprofitability.

By Paul Steele

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