Ideas for Leadership in Logistics
LQ
™LQ
™LogisticsQuarterly.com
The Official Magazine of The Logistics Institute
Volume 9, Issue 3/4, Winter 2003-04
$2.75
Creating Value
Through
Reverse
Logistics
page
20
INSIDE:
LQ’s New Team –
11
What Doesn’t
Kill You Makes
You Stronger –
33
Leadership in
Logistics –
37
What Every CFO
Should Know
About Logistics –
39
Making an Investment
in Learning –
43
Perspectives and ideas
for transforming business
though logistics and supply
chain management from
American and Canadian
leaders in the field:
Mike Bernos
,
Senior Manager,
TNT Logistics
North America;
Jim Ellis
,
Practice Director –
Supply Chain Management,
BearingPoint LP;
Matthew Meyers
,
Associate Professor,
University of Tennessee;
Tom Nightingale
,
Vice President,
Schneider National;
Dale Ross
,
Vice President,
Effem Inc.,
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Logistics.The driving force of human achievement.
Editorial
7
Contributors
9
Announcements
11
12
How Can You Reduce Costs and Grow Revenue
in North America’s Utility Sector?
The practice of supply chain management hasn’t been embraced as a discipline in these capital intensive, serviced-based conglomerates. But here’s the secret to more profitable and efficient utilities in North America.
17
Making Sense of the New Hours of Service
Regulations
Nearly every aspect of the supply chain is impacted by driver productivity and it’s about to be strained like never before. On January 4, 2004, the revised Hours-of-Service (HOS) regulations go into effect in the United States. How will this step impact your business in America and Canada?
20
Creating Value Through Reverse Logistics
Are you interested in producing a better return on your assets and creating share-holder value while keeping ahead of environmental legislation? Learn how getting products back and pushing them up through the supply chain to be reused, sold or properly disposed of creates value.
26
Customer Driven Global Supply Chain Designs
Within supply chains, logistics services have become a key source of competitive differentiation between firms. Yet significant challenges exist relative to developing supply chain service offerings for global business customers.
33
What Doesn’t Kill You Makes You Stronger
This account of an online auction involving one of the world’s largest manufacturers shows today’s ven-dors face inherent and unprecedented risks in this new way of conducting business. Even a momentary lapse in judgment can significantly damage a company’s business. Here is a look at lessons learned from internet auctions.
36
Hiring Time
When it comes time to make the leap to a new job, will you and the company be ready? In this article the importance of timing is identified as one of the critical components in the process.
37
Leadership in Logistics
How does an organization respond to the speed of today’s ever changing market conditions and customer requirements? Here’s how leaders can manage with the speed and agility required for an organization to be successful.
39
What Every CFO Should Know
Here’s a fictional account of how the use of budgets as the primary management tool for supply chain management creates long term pitfalls for success at an automotive manufacturer. This article offers a glimpse into new ways a CFO can help logisticians to get a leg up on the competition.
41
Supply Chain Analyses Versus Synthesis
Many managers believe an integrated service offering exists only in utopia. But some companies are distinguishing themselves by orchestrating a new vision for the future instead of adhering to traditional roles as resource providers.
42
New Professional Logisticians
43
Making An Investment in Learning
More companies are looking to create value by their investments in the supply chain. Value and performance in a company should go beyond an analysis and measure of elements such as cash flow and take stock of one of its greatest resources, namely, its people.
45
A Commentary: Changing the Landscape in
Education and Professional Development
The corporate integration of functions from production scheduling to inventory control, customer service and distribution hasn’t been mirrored by Canada’s educational institutions – a situation that could imperil Canada’s competitive position.
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9 0 5
•2 3 8
•3 4 4 4
w w w . b c g l o g i s t i c s . c o m
At the beginning of this year I began to meet with members of LQ’s Advisory Board to talk about what was required to make an important move - to plan a promising transborder publish-ing venture. The result was an LQ business plan and this inau-gural International Edition of LQ, comprised of an equal mix of editorial written by U.S. and Canadian logistics practitioners.
This International edition LQ continues to build on its tradi-tion of professionals writing for professionals, but with an enhanced transborder and interdisciplinary focus to ref lect our Board’s perspective and direction.
LQ’s Board, comprised of professionals from different sec-tors, organizations and regions, have worked together and helped us to strike out in new directions to reap tremendous gains that are, ultimately, for our readership. I would like to take this opportunity to extend my appreciation to LQ’s Board mem-bers who have helped us to grow. In addition, this year we are honored to have several new members join LQ’s Board. (Page 11). Clearly, there are unparalleled opportunities for business leadership in today’s transborder and international trade envi-ronment. Global sourcing, procurement and manufacturing, the expansion of brands from country to regions, to honing global logistics practices, are only a few of these many oppor-tunities. LQ’s publishing and editorial strategies are designed to mirror these realities and provide you with the information you require, prepared by your peers in this exciting f ield.
The importance of such an international perspective was also evidenced and emphasized during the Council of Logistics Management’s (CLM) Annual Conference held in 2003 in Chicago in several sessions that I attended. In particular, the importance and call for the highest caliber of global logistics was highlighted by Phillip Diniz, director of Export Business Support and Demand Planning, Kraft Foods International. After all, Kraft has international sales to 150 countries, and global councils involving logistics and manufacturing executives play vital roles at the boardroom tables in the quest to contin-ue to build brand equity, globally.
We begin this special edition with a cover feature that should be of particular interest to logistics practitioners and CFOs alike, irrespective of their place of domicile this holiday season, entitled: “Creating Value Through Reverse Logistics, written by Associate Proffessor Diane Mollenkopf of Michigan State University and Howard Weathersby, Senior Vice President, Logistics Services for TrenStar, Inc.
We are pleased to have other senior level American contribu-tors, such as Mike Bernos, senior manager of corporate com-munications, TNT Logistics North America, whose article “Supply Chain Analyses Versus Synthesis,” offers an insightful perspective and approach that is distinguishing practitioners
and companies in our global village. Rebecca Jasper, president of JASPERsolutions LLC, writes about a hypothetical dilemma involving an automotive company based in the United States. “What Every CFO Should Know,” ref lects the interdisciplinary character coloring the practice of supply chain management and shows how conventional approaches to logistics can imper-il a company’s global position. We also welcome Dr. Matthew Myers, University of Tennessee, who takes stock of how Logistics Service Quality components can reduce costs and bol-ster revenues in a global logistics practice.
On the cusp of a new year of transborder trade, it’s timely and helpful that Tom Nightingale, vice president, Schneider National, shows us the pros and cons of new hours of service legislation likely to be impactful to transportation practices on both sides of the 49th parallel.
LQ has an equally impressive roster of Canadian executives contributing to this edition. Heather Cartwright, CEO of Logixsource Consulting Ltd., writes on behalf of the Logistics Institute, providing a personalized account of leadership in logistics. Jim Davidson, president, iWheels Dedicated Logistics, has written an insightful review of online auctions in the auto-motive sector, with his aptly entitled article: “What Doesn’t Kill You Makes You Stronger.” Jim Ellis, practice director, Supply Chain Management, BearingPoint LP, takes stock of an industry that has often been in the media spotlight across North America and, in this case, is exemplary in its focus on a problem that’s prevalent in other economic sectors. Jim’s article, enti-tled, “How Can You Reduce Costs and Grow Revenue in North America’s Utility Sector?,” is the f irst of a f ive-part series. Dale Ross, vice president Logistics for Effem Inc., the Canadian divi-sion of Mars Inc., has written an editorial that focuses on the underlying rationale for an exciting new initiative to develop a Canadian Ph.D. program in supply chain management.
In the future you can look forward to f inding more stimulat-ing ideas in LQ, more often; LQ will be published with an increased frequency in 2004 and, in tandem with this, LQ has dramatically increased its transborder subscribers and reader-ship. In conclusion, I am particularly appreciative of the direc-tion and comments provided by Nicholas Seiersen, to ensure the editorial quality of this special transborder edition, and Martin White for his insights and direction. Promoting innova-tion and growth also involves presentainnova-tion and in this ediinnova-tion you can see our new Creative Director, Allan Craig, has afford-ed our afford-editorial environment with a richer and more sophisti-cated presentation.
Peace and Prosperity,
Fred Moody, Editor and Co-Publisher
EDITORIAL
JIM ELLIS
B.Sc., P.Log., FCAM, CM is Practice Director Supply Chain Management, BearingPoint LP, Toronto. Mr. Ellis has been a participant and contributor within the communications, utilities and energy services industry for in excess of thirty years with specialization in supply chain management. Prior to joining BearingPoint in 2001, Mr. Ellis was employed by a global manufacturer and distribu-tor of HVAC equipment as Vice President of National Operations. He was also employed by Canada's largest gas utility/energy services company in a number of senior posi-tions both within the utility as well as within the energy services divisions of the enterprise throughout a 25 year tenure.He holds a Bachelors degree in Science from Trinity University (B.Sc.), a Professional Logisticians (P.Log) desig-nation from the Canadian Professional Logistics Institute and holds other designations within administrative man-agement including a fellowship with the Canadian Institute of Certif ied Administrative Managers (FCAM), a Certif ied Administative Management (CAM) designation from the Association of Certif ied Professional Managers as well as Certif ied Manager appelation (CM) from the Institute of Certif ied Administrative Management. He has also com-pleted the Executive Management program at Queen's University in Kingston, Ontario and numerous executive programs within the f ield of supply chain and logistics management.
TOM NIGHTINGALE
is the Vice President, Corporate Marketing at Schneider National, Inc. In this capacity, he leads enterprise-wide, global branding and marketing of North America’s leading provider of premium truckload, intermodal, and logistics solutions. Schneider National serves more than two-thirds of the Fortune 500 companies, offering the broadest portfolio of services in the industry.Mr. Nightingale and his team manage the strategy process, market research, marketing communications, employment marketing, internal communications, and event marketing at Schneider.
DR. DIANE MOLLENKOPF
is an Assistant Professor of Logistics at Michigan State University, in the Department of Marketing and Supply Chain Management. Her interest inreverse logistics developed while living in New Zealand, where "reduce, reuse, recycle" is a part of everyday life for individuals and organizations alike. Her research interests focus on logistics integration and environmentally respon-sible logistics practices; she has published in several leading academic journals.
MATTHEW B. MYERS
is an Assistant Professor in the Department of Marketing, Logistics, and Transportation, University of Tennessee, where he teaches global marketing and business strategy at the undergraduate, MBA, Executive, and doctoral levels.Dr. Myers earned his Ph.D. in business from the Eli Broad Graduate School of Management, Michigan State University. His primary areas of research are in global dis-tribution networks, foreign market entry strategies, and comparative marketing systems. His research has been pub-lished or is forthcoming in a number of academic outlets including the Journal of Marketing, Journal of Retailing, the Journal of International Business Studies, the Journal of International Marketing, the Journal of Business Logistics, the Journal of World Business, the Journal of Business Research, the International Journal of Physical Distribution and Logistics Management, Business Horizons and Internationales Preismanagement. He is also a member of the editorial review boards of the Journal of International Business Studies, the Journal of World Business, and the Journal of International Management.
MR. HOWARD WEATHERSBY
is Senior Vice President, Logistics Ser vices for TrenStar, Inc. of Englewood, Colorado. He has worked in reverse logistics for most of his 18-year career with companies such as Frito Lay, Chep and Hoover Materials Handling Group in applications ranging from direct store and consumer delivery to wholesale chem-ical. In recent years, his focus has been on non-traditional uses of technology and decision support tools to enable rapid operational responses to market dynamics.JIM DAVIDSON
, President, iWheels Dedicated Logistics, began his career in logistics at The Ford Motor Company in 1963 working in all aspects of logistics for 17 years. Mr. Davidson joined TNT in 1983 and held various management WINTER CONTRIBUTORSAs LQ approaches its tenth anniversary, we are dedicating this newly redesigned issue to
encompass the many facets of leadership in logistics from an
international perspective. LQ's ongoing mandate to provide
“Ideas for Leadership in Logistics,” is clearly evidenced this issue with articles written by
professionals and logisticians from America and Canada who are leading and transforming
business by creating new roadmaps and definitions for leadership in this exciting field
.
OUR CONTRIBUTORS
10 LQ™winter 2003/2004
rolls including roles in operations, staff, administration and general management for a number of differ-ent divisions. He also served as the TNT board member representing North America at their European-based board meetings. He has served on the executive of the Canadian General Motors Supplier Council as well as Executive Vice President of the ATA Council of Logistics located in Alexandria, Va.
ROSS REIMER
, founder of Reimer Associates Inc., a f irm that provides services in management consulting, mergers and acquisitions, and execu-tive search and recruiting, has exten-sive experience in all areas of opera-tions and supply chain management. Mr. Reimer founded Reimer Associates, Inc., after more than 20 years of senior-level experience in logistics.DR. LYNN FERGUSON
is a recruit-ing and communications specialist with Reimer Associates, Inc. She has spent more than 15 years helping clients to clarify their corporate mes-sage and communicate it effectively to their customers. Dr. Ferguson holds a Ph.D. from the University of Toronto.HEATHER CART WRIGHT
is theCEO of Logixsource Consulting Ltd. Founded in 2001, Logixsource works with clients to plan, implement and support value chain strategies and solutions to create competitive advan-tage and increase shareholder value.
REBECCA S. JASPER, CPIM
, MBA, is currently President of JASPERsolutions LLC, a supply chain consultancy f irm. She has 13 years of management, con-sulting and supply chain experience working in the steel, ferrous products, aluminum, health, chemical, oil & gas, e-commerce, linen supply, enter-tainment, fast food and utilities industries. She has consulted in the USA as well as in Japan, France and in the Congo.Rebecca Jasper is f luent in Japanese and French. She has a BBA in International Business from St. Mary's College and a second major in Japanese from the University of Notre Dame. She received her MBA in Supply Chain Management at the University of Tennessee, Knoxville.
MIKE BERNOS
is senior manager of corporate communications for TNT Logistics North America. He has written for Gannett News Ser vice and USA TODAY, as well as ser ved as editor for several leading trade pub-lications. Mr. Bernos is a member of the Transportation Marketing and Communications Association and is a graduate of Springhill College.DALE ROSS
is the Vice President Logistics for Ef fem Inc. the Canadian division of Mars Inc. Dale has over 25 years experience as a practitioner in distribution, pur-chasing, inventor y control, ware-housing, transportation, forecasting and customer ser vice. He has held senior positions in major interna-tional corporations.Mr. Ross has an Honors degree in Economics and an M.B.A. from Wilfrid Laurier University and has taught material management courses at local community colleges. He is a member of Supply Chain & Logistics Canada and the Council of Logistics Management.
PAUL RAGAN has been involved in the North American logistics industry for over 25 years. From his roots in Western Canada to responsibility for distribution and transportation for one of Canada's leading retailers. He also held executive positions in the 3PL sector withLivingston and as the President of Burnham and Nadiscorp Logistics. In 2002 Mr. Ragan founded Ragan Enterprises Inc. a consulting f irm specializing in mergers and acquisitions in the logistics and trans-portation marketplace.
LQ™ ADVISORY BOARD
Mike Bernos Senior Manager, Corporate Communications, TNT Logistics North America David J. Closs
Department of Marketing and Supply Chain Management, Michigan State University Jim Davidson Vice President, iWheels Logistics Russ J. Doak
Director of Global Warehousing, CREO Jim Ellis Senior Manager, BearingPoint LP. David Faoro Director Transportation, Unisource Canada Inc. John Ferguson Vice President, Sales and Marketing, PBB
Sarah Friesen Director, Supply Chain Services and Biomedical Engineering, Sunnybrook & Women’s College Health Sciences Centre Benjamin Gordon Managing Director, BG Strategic Advisors Joe Grubic Senior Manager, Alliance/Network Management, Nortel Networks Global Logistics Rob Hamilton
Planning, Timing & Control Manager, DaimlerChrysler George Kuhn Executive Director, CIFFA Pierre Massicotte Vice President Supply Chain, L’Oréal
Mark Morrison, Senior Vice President of Business Development, TNT North America Tom Nightingale
Vice President, Corporate Marketing, Schneider National, Inc.
Robert Novack Associate Professor of Business Logistics, Department of Business Logistics, Penn State University Stuart Penman Vice President of Logistics Acklands-Grainger Inc. Jason Read Partner, 3PL Links Inc. Eric Dewey Vice President Schenker of Canada Ltd. Kurt M. Ritcey Partner, Deloitte Consulting Larry Rodo Senior Vice President, Sales and Marketing, Nadiscorp Logistics Inc. Nicholas Seiersen Senior Manager, BearingPoint LP. Michael Snedden Manager of Distribution Operations, IBM-Canada Ltd. Volume 9 Issue 3/4
CO-PUBLISHER & EDITOR Fred Moody
[email protected] PUBLISHER
Martin White
[email protected] CPLI PRESIDENT & EDITORIAL DIRECTOR Victor Deyglio [email protected] CREATIVE DIRECTOR Craig Allen [email protected] SALES & MARKETING Chris Kastein Sales Manager
[email protected] (416) 407-3856
CIRCULATION
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STATEMENT OF OWNERSHIP, MANAGEMENT AND CIRCULATION
EDITORIAL POLICY The opinions expressed in this publication do not necessarily reflect the policy of The Logistics Institute or Elefant Enterprise Communications Inc.™ (EECI). The editors reserve the right to select and edit material submitted for publication. Not responsible for unsolicited material. EECI is a Toronto-based corporation and publisher. LQ™ is wholly owned and operated by EECI. All rights reserved © by Elefant Enterprise Communications Inc.™ 2003. Reproduction without written permission of the publisher is forbidden. LQ™ welcomes your comments, letters to the editor, or written submissions for consideration. (LQ™ is available on-line at: www.LogisticsQuarterly.com)
Ideas for Leadership in Logistics
LQ
™2004 Executive Editors
MIKE BERNOS, Executive Editor, is senior manager of corporate communications for TNT Logistics North America based in Jacksonville, FL. Before working in the logistics industry, he served as a media relations con-sultant to Sears and Sprint. Mr. Bernos was also journalist for Gannett News Service and USA Today. He is a member of the Transportation Marketing and Communications Association and is a graduate of Springhill College.
DAVID J. CLOSS, Executive Editor: Dr. Closs is the John H. McConnell Chaired Professor of the Eli Broad College of Business, Depart. of Marketing and Supply Chain Management, Michigan State University. He has consulted with more than 100 of the world’s Fortune 500 corpora-tions regarding logistics strategies and systems. He is an active member of CLM.
NICHOLAS SEIERSEN Canadian Executive Editor: Mr. Seiersen is a Senior Manager at BearingPoint in Toronto, ON. He has written numerous articles in English and in French, and has taught several courses in top European and Canadian Universities. He is Past President of the Toronto CLM Roundtable, Vice President of French Logistics Association ASLOG.
Sales and Marketing
CHRIS KASTEIN, Sales Manager: Mr. Kastein has 13 years of sales experience and has a background in strategic consulting and research. Mr. Kastein has a Bachelor of Commerce degree from McMaster University in Hamilton, ON.
MARTIN WHITE, Publisher: Mr. White is a principal of Canada’s first media consultancy, Asylum think group Inc. Mr. White was the Vice President and Publisher of Time Canada Ltd. (1998-2002) and the former associate publisher of Toronto Life Magazine (1994-1998). Mr. White’s MBA is from the Richard Ivey School of Business, based in London, ON.
LQ’s 2004 Advisory Board
We are honored to announce the following new participants on have accepted LQ’s invitation to join its Editorial Advisory Board.
ERIC DEWEY, Vice President, Schenker. Mr. Dewey has been with the Schenker of Canada since 1979. Through the 80s and early 90s, his positions in Schenker's Canadian warehousing and distribution division have included Administration Manager, Operations Manager, and General Manager. In 1999, he joined Schenker of Canada's senior management team first as Vice President, Logistics and subsequent-ly as Executive Vice President, Corporate Development in 2002.
JOHN FERGUSON, Vice President, Sales & Marketing, joined Fort Erie-based PBB in 1987 and has held several senior-level sales and marketing positions throughout his 15-year tenure. Mr. Ferguson most recently held the position of Director, Sales & Marketing at PBB. His pivotal role in PBB’s sales and marketing strategies has result-ed in PBB receiving many marketing awards. He holds a degree in business and economics and is a Certif ied Canadian Customs Specialist and is a graduate of the Waterloo, ON-based Wilfrid Laurier University’s Supply Chain Management Executive Program.
BENJAMIN GORDON is Managing Director of BG Strategic Advisors, Boston-based consulting f irm pro-viding supply chain companies with CEO-level advisory services in the areas of strategy, technology and f inance. Benjamin is responsible for leading key client engagements and setting the direction of the f irm.
Prior to BG Strategic Advisors, Benjamin founded 3PLex, the Internet solution enabling third-party logistics companies to auto-mate their business. Mr. Gordon received a Masters in Business Administration from Harvard Business School and a Bachelor of Arts degree from Yale College.
TOM NIGHTINGALEis the Vice President, Corporate Marketing at Schneider National, Inc. Mr. Nightingale leads the enterprise-wide, global branding and marketing of North America’s leading provider of premium truck-load, intermodal, and logistics solutions. Mr. Nightingale and his team manage strategy process, market research, marketing commu-nications, employment marketing, internal commucommu-nications, and event marketing. He holds and MBA from Syracuse University with a concentration in Organization and Management and a B.S. in International Marketing/Management from Siena College.
DR. THEODORE STANKis the John H. Dove Distin-guished Professor of Logistics at the University of Tennessee. Dr. Stank’s research interests focus on the strategic implications associated with integrated logistics and supply chain management concepts, specifically related to inte-gration, information exchange, and operational responsiveness. He is a co-author of 21st Century Logistics: Making Supply Chain Integration a Reality. He has worked for Abbott Laboratories, served as an officer in the United States Navy, and performed consulting and executive education services for numerous firms.
LQ’s Advisory Board performs a pivotal role in directing LQ’s business and editorial practices to ensure it remains a primary source of the best ideas for logisticians who are leading and transforming business in the fields of supply chain management and logistics. The participation of LQ’s Advisory Board members enables LQ to uphold its tradition of being a publication written by professionals for professionals in the field of logistics and supply chain management.
ANNOUNCEMENTS
New Members of LQ’s 2004
Editorial and Publishing Team
LogisticsQuarterly.com
12 LQ™winter 2003/2004
INSIDE TRACK
By Jim Ellis
B.Sc., P.Log., FCAM, CM
How Can You Reduce Costs and Grow Revenue
in North America’s Utility Sector?
The practice of supply chain management hasn’t been embraced as a discipline in these capital intensive,
serviced-based conglomerates. But here’s the secret to more profitable and efficient utilities in North America.
Backgrounders to Supply Chain
Management in Utilities
Certainly in my thirty years in the utilities sector, which I’ll define as those businesses that distribute electricity, natural gas and water to the residential, commercial and industrial stakehold-ers of our communities, I have been exposed to a culture utilities hold dear. Ironically, but for a few exceptions, nothing is more puzzling to me than how this culture of utilities is often cited as the one of the most salient of the myriad of reasons offered to explain why supply chain management has not been embraced by this capital intensive, service-based group.
This article examines why this is a prevalent condition in this sector and, more importantly, will provide those organizations embarking on a supply chain initiative with the tools of under-standing required for success.
Utility industries are as capital inten-sive as one could imagine, with wide geographical investments in wire, tow-ers, pipe, control stations, construction depots, service depots, office buildings, vehicles and heavy duty equipment. Specific to supply chain management, however, these investments contain a very large component of inventory and warehouses.
The amount of inventory capital dedicated to supply chain manage-ment in the utility industry represents one-to-two percent of revenues, which alone could justify a measured invest-ment in supply chain manageinvest-ment. But interestingly, this has not occurred.
Certainly, the performance metrics associated with asset performance should likely have been justification as well, with a 3.0 turn average overall. But again, there is a reluctance and, per-haps, disinterest despite the opportuni-ties for growth and savings.
In summary, I believe the most salient reasons for maintaining the sta-tus quo are:
1. “We’re Unique”
2. Inventory has been a good thing 3. The Materials Management Group
has not earned the confidence of the organization
4. Managing inventory means get lots…not just enough
5. Mobile or Field Inventory means “never having to say your sorry…or return”
6. Controls don’t apply to the Operations Group
7. Having lots of vendors has been a good thing
8. Warehouses and lots of storage locations have been a good thing 9. Supply Chain Management (SCM) is
not viewed as a strategic or a core-competency
Not surprisingly, supply chain profes-sionals in utilities are often frustrated due to their inability to gain traction in their companies to create the results that chain management achieves in vir-tually every other sector of the econo-my. In order to mitigate the hurdles to their success it’s important to define these nine key reasons to understand how they act as the barriers to SCM success in this sector.
We’re unique
This is a particularly paralyzing belief system, as evidenced by utility execu-tives’ comments,who traditionally would elaborate:“…due to our uniqueness as a business” and “our responsibilities to the public in terms of continuity of service, stakeholder safety and cost reasonability, some things just don’t work here.” (We will examine the reasonability of this belief in depth in second article of this five-part series.)
Inventory has been a good thing
Up until the noises of deregulation or re-regulation began in the 1990s, a formidable focus on Rate of Return made utilities view their assets as pre-mier revenue generators. Utility compa-nies earn their profits from operating their extensive network of plant and equipment through a percentage rate of return that is applied to the values and assets on their balance sheets. Consequently, a utility, which is wrestling with cost containment and the painful process of filing rate increases, often looks to capital invest-ment to bolster revenues.
Accordingly, items on the balance sheet such as inventories and the ware-housing and storage buildings that hold those inventories became a wel-come boost for the cause. Coupled with an internalized culture of continu-ity of service and stakeholder safety, field personnel has developed a justifi-cation for holding large inventory caches throughout the organization, resulting in the perception that
inven-LogisticsQuarterly.com
14 LQ™winter 2003/2004
tory is a good thing. Not surprisingly, in this environment, diligent materials managers who have attempted to opti-mize inventory levels and attempted to introduce service levels or implement returns processes have traditionally found their efforts thwarted.
Over an extended period of time this culture has engendered what could be characterized as one of utilities “materi-als anarchy,” with the user-community dictating the provision of unlimited supplies to meet whatever they per-ceive to be required, and a materials management group that has retreated into the safety of managing stationary and other office supplies.
The Materials Management
Group has not earned the
conf idence of the organization
With this culture of materials anarchy matured by the 1990s, any incumbent purchasing department, inventory department or warehousing group wit-nessed a dramatic dilution in their capacity to execute their mandates. In this culture, IT, construction and many other departments and functions took over the procurement for their own sep-arate activities to procure what they believed was required, at least with regard to expensive, big-ticket items.
Interestingly, while all functions wanted their own mandate to source, negotiate and purchase materials, they did not want to provide the levels of accountability that are traditionally upheld by professionals in the disci-pline of supply chain management. This was especially true when it came to inventory management.
During this period of take-over, many utilities established what could be likened to an internal “peace-treaty” with the official Materials Management, that enabled all func-tions and departments to buy the big stuff (including items such as trans-formers, large project construction components) that were high-value individual purchases. The Materials Management Group was relegated to buying and managing those ongoing items of MRO.
While internal clients who were liaising directly with vendors on very high-value purchases, they often devel-oped inappropriately close relation-ships with them and did not benefit from the techniques and rigour of appropriate purchasing practices. On the other end of the chain, however, havoc was prevalent. Purchases were not coordinated with the inventory management group, or the warehous-ing group, which quickly became by default the most cited cause for deliv-ery failure and, as a result, these divi-sions played another role as the expe-diters and ongoing mediators or envoys to apologize to both end-users and vendors.
Finally, these failures essentially ren-dered the MRO chain ineffective. The absence of critical controls created inventory inaccuracies and lost trans-actions that incapacitated any replen-ishment service levels.
Managing inventory means get
lots…not just enough
Attempting to establish an invento-ry service level for this industinvento-ry is dif-ficult due to its culture, expectations and belief systems. I cannot remem-ber ever having a logical and mature discussion with an internal user when it came to establishing a service level, unless the value was 100 percent or higher.While supply chain profession-als understand the staggering impact of investment cost to chase service levels beyond 98 percent, utility field personnel have been sensitized to “materials are just a cost of doing business...just get it” and “don’t let those guys in the warehouse give you any hassle either.”
It is not the field personnel that should be viewed as the source of the barrier as it is truly the responsibility of line leadership to ensure employees are aware of company policy and stan-dards respecting materials in the organization. However, one must acknowledge the culture’s impact on field leadership who may not consider overall cost when making materials requests.
This article represents the f irst
of a f ive-part series of articles
on supply chain management,
specif ic to utility
organiza-tions. Part II of this series will
address what’s perceived to be
“unique” thing about Utilities,
focusing on the paralyzing
mystery about the utility
industry at large and why
supply chain management
has had such diff iculty in
gaining a foothold. In Part III,
New and Present Realities, our
readers can look forward to a
review that shows why utilities
are now beginning to explore
and consider supply chain
management as a means
of dealing directly with the
realities of revenue, cost and
growth. Part IV - High Value
Solution Areas for Utilities,
will provide insights into those
proven supply chain solutions
that elicit high value benef it to
utilities. Part V – Unleashing
the Opportunity, will offer a
roadmap to show supply chain
professionals in this sector
how they can transform their
utility company’s performance
in supply chain management
and impact overall business
Mobile or Field Inventory
“means never having to say
you’re sorry…or return”
Once inventory leaves the warm comfort of the warehouse or distribu-tion center, it is released to field employees that use fleet vehicles and, in some cases, small holding depots around key geographic areas. Curiously, once field personnel obtain their inventory, there is another cultur-al phenomenon that occurs in the util-ity sector. I usually refer to it as “pos-session without accountability.” Some utilities have stepped up to this phe-nomenon with success, but for the majority of utilities, field staff tends to accept inventory to their various loca-tions but without accepting accounta-bility for it. In many cases, this is due to an absence of control over these loca-tions as separate warehouse codes.
This absence of control tends to perpetuate the “materials are just a cost of doing business” perspective as well as poor inventory accuracy and, as one would expect, poor replenish-ment performance. This helps to culti-vate the perception that the Materials Management Group “never has what we need.” Finally, within this paradigm, typically characterized by this absence of controls and a packrat cul-ture, there is usually a poor to non-existent returns process. In some cases this absent process is due to a resist-ance to give anything back (especially since the Materials Management Group never have what we need….). Or, in many cases, because the excess stock is used for personal use or released to the black market.
Controls don’t apply to the
Field Operations Group
Herein lies the ultimate conundrum, with the absence of supply chain con-trols, the user community exercises any and all liberties associated with materi-als available, resulting in supply chain anarchy. However, in the presence of supply chain controls, the user commu-nity will engage a number of tactics to justify its need for “total flexibility” at all cost.
The call for total flexibility is largely predicated on the “uniqueness” ele-ment noted earlier. But, by and large, our observations suggest that this “flexi-bility need” is not required to deal with emergency needs or customer-restora-tion type work. It pertains more to the need to step up and manage field employees effectively.
A lot of vendors has been
a good thing
Long prior to utility companies becoming “investor-owned” or “rein-vented” in the new horizons of utilities, they were essentially a municipal serv-ice provider with responsibilities to customers, employees, and community. It was only recently that the word com-munity was replaced with shareholder as the industry redefined itself and its owners.
Accordingly,“doing your thing for the community” was being an active and generous participant in the local econ-omy you served. This responsibility often meant going out of one’s way to do business with the local economy as often as you could. As a result, many utilities have thousands of active ven-dors in their vendor databases and fre-quently engage them with purchase orders of amounts that are trivial in dol-lar value.
Warehouses and a lot of storage
locations have been a good thing
This is directly related directly to the prior heading of “Inventory has been a good thing”and, like warehouses inven-tory, is an important part of utilities’ Rate of Return on the balance sheet.
For the most part, leased facilities were somewhat of an unheard of con-cept at utilities until the 1990s.The cus-tomer perspective was, “why lease a building? We’re not moving anywhere soon, and if we own it, its in rate base for return.”
Whether it involves a stand-alone distribution facility or the justification to build a larger regional office build-ing, warehouses became a very useful tool not only to house inventories, but also as a means to contribute to
earn-ings. Service for the public and main-taining safety of the system, were mantras that easily justified multiple warehouses.
On the surface, at some utilities, there has been progress. But at those utilities where they have reduced or “rationalized” their warehouse sites in the past few years, a curious effect has arisen. While inventory levels dropped due to the site reductions,it was not the reduction anticipated. In fact, inventory has grown to reestablish itself to its pre-reduction levels. Analysis has shown that when warehouse sites are elimi-nated, the culture of the organization responds first by field personnel draw-ing a lot of stock and stashdraw-ing it in unof-ficial locations.
SCM is not viewed as strategic or
a core competency
The bottom line to these observa-tions at utilities across the globe, is that in the majority of cases, the supply chain organization within utilities are still viewed as an “evil to contend with” instead of a “strategic peer” in the organization. In fairness to the function itself – what attention and support has it received?
In many organizations, instead of providing the focus and resources on a strong supply chain management organization, we often see “multiple supply chains” operating within the organization at the cost and spite of others.
The encouraging news is, however, that utilities are now beginning to act decisively in this area and they are obtaining the rich benefits of cost sav-ings, inventory reductions, freed-up capital, productivity boosts and many more. Even the executive chambers are beginning to acknowledge the value of supply chain management with dedicated executive positions that respond on behalf of the whole organization.
In the ensuing series of articles on “The Uniqueness of Utilities and their Supply Chains,” you’ll learn how to transform this culture.
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2003 S AP A G. S AP and t he S AP logo ar e r egis ter ed tr ademar k s of S AP A G in Ger man y and se v er al o ther countr ie s.Nearly every aspect of the supply chain is impacted by driver productivity. It is a critical link that is about to be strained like never before. On January 4, 2004, the revised Hours-of-Service (HOS) reg-ulations go into effect in the United States. Unfortunately, few carriers are talking about it and fewer shippers are planning to mitigate its impact.
Background:
The revised HOS regulations affect all commercial truck drivers and due to sound science will benefit all of us from a safety standpoint. Due to its safety benefits most carriers, including Schneider National, support the changes.
While the changes may not initially astound you as revolutionary, a closer look proves that we are heading into one of the most troubling single-driver productivity environments in decades. When drivers cross the border, they are required to observe the rules of the country in which they are driving and the two sets of rules will be quite simi-lar. For the purpose of this discussion, the emphasis will be on the U.S. revised HOS since nearly all of us have some element of a supply chain that either begins or ends in the United States and connects to Canadian roadways.
Impact:
As the table illustrates, the required rest period was extended from eight hours to 10 hours and the daily limit of work hours was reduced from 15 to 14. On the positive side, the number of driv-ing hours allowed will be increased from
NEW FRONTIERS
By Tom Nightingale
Making Sense of the New
Hours of Service Regulations
Nearly every aspect of the supply chain is impacted by driver productivity and it’s about to be strained
like never before. On January 4, 2004, the revised Hours-of-Service (HOS) regulations go into effect in the
United States. How will this step impact your business in America and Canada?
Rules Prior to Jan 4, 2004
Can not exceed 10 hours of driving without an 8 consecutive hour break
15 hours on duty (but no more than 10 hours driving) before an 8 hour break
15 hours of on duty time can be broken up with periods of off-duty time
Driver may not drive after 60 hours on duty in 7 consecutive days or 70 hours on duty in 8 consecutive days
Daily hours management is needed to avoid exceeding the 7/8 day rules. Drivers can only really “reset” after a week vacation
As of Jan 4, 2004
Can not exceed 11 hours of driving without a 10 consecutive hour break
14 hours on duty (but no more than 11 hours driving) before an 10 consecutive hour break Once started, 14 hours of on duty time must be consecutive
Driver may not drive after 60 hours on duty in 7 consecutive days or 70 hours on duty in 8 consecutive days Any off duty period of at least 34 hours restarts a driver 7 or 8 day week
What it means
Any gain from the additional one-hour drive time is more than offset by the additional two hours of off-duty time Less time available for non- driving work like waiting at shippers or consignees, border crossings etc
Once the 14-hour clock starts the driver can not extend it with time for meals, rest stops, fueling etc. – this is lost flexibility
No change – but other changes described above mean less flexibility in calculating these times
This changes little – most drivers want to be home on a regular basis and very few would break on the road
LogisticsQuarterly.com
18 LQ™winter 2003/2004
10 to 11 and the weekly rule was soft-ened by allowing a driver who had rest-ed a total of 34 hours straight a clean slate. Many people thought the two points of increased restrictions and two providing more leniencies would negate each other - but careful analysis and modeling are proving that it does not.
The increased break time requires two more hours before starting to drive again, which means two more hours between each work period. Using a cur-rent driver schedule and assuming the driver works at optimum productivity, a Monday delivery would be on time, but a Tuesday delivery would be the equiv-alent of the driver oversleeping by two hours. Likewise, Wednesday is four hours later and it continues to com-pound throughout the week. Of course, many challenges impede drivers from working at optimal productivity levels.
The reduction of total work time from 15 to 14 hours seems minor on the surface, but in reality, it is the most prob-lematic. No longer is a driver’s day bro-ken up by work and off-duty time total-ing 15 hours. As of January 4, the rule states that the 14 hours are consecutive and begin when the driver starts to work and ends 14 hours later. Today, a stop at a restaurant for lunch or at a rest area to stretch does not count as work-time and does not count against the
current 15-hour maximum. Under the new HOS rules, the clock starts at the beginning of the work period and does not stop - for anything. If a driver arrives to pick up or drop off a load and the dock is not ready, the clock is running but the truck is not moving.
The total effect of the rule changes is estimated at between 4 percent and 19 percent in driver productivity depend-ing on individual freight characteristics.
Preparation:
A few shippers, consignees and carri-ers have been preparing for the revised HOS rules and are implementing a series of best practices and measures to mitigate the potential financial impact of the rules.
In addition to best practices, many shippers are seeking modal alterna-tives. There is an expected shift to greater intermodal transportation and an increase in short-haul intermodal in particular because of the revised HOS. A recent Council of Logistics Management (CLM) panel featured one of North America’s largest retailers openly pushing railroads to develop a viable service offering in the less than 800-mile range.
We are also in the early stages of an unprecedented wave of outsourcing private fleets. As private fleet owners model their networks and face
increas-ing complexity and cost, they are shift-ing to a realization that it is best to focus on their core competency and out-source transportation to the commer-cial market.
Lastly, there is an upsurge in network modeling underway. Routes and desti-nations that were once tenable are being re-examined by logistics engi-neers across many 3PLs to determine ways to revitalize the supply chain post January 4.
Conclusion:
The benefit of the revised HOS is expected to be fewer collisions and fewer fatalities due to fatigue.Of course, it will be difficult to tell the actual results, but the U.S. Department of Transportation estimates a reduction of at least 75 deaths per year. In Canada, although only 11 fatalities per year are directly attributed to fatigue, it is widely felt that these statistics are underreport-ed. Some sources suspect that fatigue could be the cause of 15 percent of annual road fatalities, while others place the number as high as 40 percent. Regardless where you place the num-ber, it’s too high and we are all hopeful the revised HOS will reduce it to zero.
Driver productivity will become a pri-ority to minimize the impact of the revised HOS on shipping costs. Any lost time from driving that is under the con-trol of shippers and receivers must be scrutinized.Those who have been using the drivers’ time to offset internal ineffi-ciencies will see the largest impact and price increases. Those who can make pick-ups and deliveries more driver-friendly will see the least.
We all share in the supply chain and we are all impacted by trucking. Whether it’s the convenience store that supplies us with chips and soda, the propane delivery, or a truckload of criti-cal parts to keep a production line run-ning – trucking touches each of us.As a result, we all have an obligation to edu-cate ourselves on the impact of the revised HOS and prepare for its affect while finding ways to minimize it. Further information is available at www.schneider.com or
http://www.fmcsa.dot.gov/hos/hos.htm.
Shipper Best Practices:
• Use non-driver labor to count, load, and unload • Make appointments that are "by" instead of “at”
• Ensure paperwork is ready and complete when driver arrives
• Ensure paperwork is complete and accurate for cross-border shipments • Reduce live-load and unload through use of drop and hook
• Use yard jockeys to handle non-driving tasks performed by driver
• Reduce number of multi-stop shipments • Provide adequate space for drivers to park and sleep on shipper property
Consignee Best Practices:
• Use non-driver labor to count, load, and unload • Make appointments that are “by” instead of “at” • Increase use of drop and hook
• Use yard jockeys to handle non-driving tasks performed by driver
• Provide adequate space for drivers to park and sleep on shipper property
• Consider using inbound visibility software and yard management software • Communicate dock delays and congestion to the arriving carriers • Increase the hours that your docks are available
Carrier Best Practices:
• Invest in and deploy com-munications technology • Communicate the impacts of HOS to individual shippers • Do not blind-side
transportation purchasers with a double digit rate increase in January – an honest dialogue now will go a long way in the new year • Encourage Shippers to work with their consignees • Train drivers to understand the rules while on both sides of the border
• Do not cheat – penalties are stiff and lives are at risk • Prepare for additional demands on capacity – it will take more drivers to move the same amount of freight
LogisticsQuarterly.com
20 LQ™winter 2003/2004
I
t’s time for an attitude change.
Stop thinking of reverse
logis-tics as just a necessary evil, or
a cost of doing business,
some-thing that doesn’t really jibe with
your firm’s real logistics activities.
In light of increasingly strict
regu-latory measures (emanating
par-ticularly from Europe) that limit
landfill disposal and extend
pro-ducer responsibility into
post-consumption product life stages,
it’s time to start managing your
firm’s reverse logistics processes.
In doing so, you may find some
surprising benefits as well.
Traditional supply chain manage-ment focuses on delivering value to end-customers through integrated management of various processes such as procurement, order fulfillment, demand management and customer relationship management, to name just a few. Organizations are increasingly including reverse logistics in their
process-management focus. As a process, reverse logistics refers to the set of activities related to getting goods (products, materials, packaging) back from point of use to points further up the supply chain where they can be reused, refurbished, resold, or disposed of properly. These activities, as defined by Rogers and Tibben-Lembke (1999) include gatekeeping (managing the insertion of goods into the reverse sup-ply chain), collecting, sorting and grad-ing returns, developgrad-ing a network of logistics providers to transport and process returned goods, refurbishment and/or remanufacturing of selected goods, resale or reuse, and ultimately proper disposal.
You could be missing a real oppor-tunity if reverse logistics were only viewed as a cost-minimization exercise. Opportunities to recapture and create value in the supply chain should also be explored. Using a Return on Assets (ROA) approach is one way to assess value creation through the returns process. ROA is a key indicator of a
Creating
Value
Through
Reverse
Logistics
Are you interested
in producing a
better return on
your assets and
creating
share-holder value while
keeping ahead of
environmental
legislation?
Learn how getting
products back
and pushing them
up through the
supply chain to
be reused, sold or
properly disposed
of creates value.
By Diane A. Mollenkopf
and Howard Weathersby
LogisticsQuarterly.com
22 LQ™winter 2003/2004
firm’s profitability, and also a key contributor to shareholder value. Effective returns management can contribute to improved ROA in several ways. First, reclaiming products/parts that can be reutilized in the forward supply chain can dramatically reduce a firm’s cost of goods sold. Even if refurbishment or remanufacturing is required, rev-enues can ultimately be gained from essentially ‘free’ inputs where a refund is not required.The firm has already paid for the raw materials once, and doesn’t have to re-procure or totally transform them again in order to gain additional rev-enue. Appliance and electronic goods manufacturers are prime examples of organizations that are taking advantage of this type of non-traditional supply. Firms that lease their products, such as office equipment and computer manufac-turers,also focus on asset recovery initiatives to reclaim their end-of-lease products. Many of these products (or at least their parts) still have useful life that can be offered to other customers at very little up-front cost.
Second, operating expenses can be reduced through effective and innovative returns management programs. In addition to minimizing costs relative to returns processing,
customer service costs can be reduced if the return process is streamlined from a customer’s perspective. Additionally, capturing information about the reasons for returns being made can be leveraged to further improve the product, thus reducing future returns. Effective returns management and processing can also reduce a firm’s environmental compli-ance or waste disposal costs.
Third, assets in the form of obsolete inventories can be reduced if returns are managed efficiently. This means get-ting merchandise returns from dealers in a timely manner so that alternative uses can be made of the inventory before the only option is to write it off, and then dispose of the product.Managing the timing of returns is especially critical for seasonal or short life-cycle products. Merchandise returned at the end of a season has little potential for alter-native use. Making earlier decisions about stock disposition in the field can provide many opportunities to reuse inven-tory before it becomes obsolete. This means implementing channel-cleaning policies with dealers and retailers to man-age not only the quantity of returned products, but also the timing.
$
$
$
$
x
=
$
$
$
$
$
$–
$
$
$–
Logistics’ Impact• Sales increase due to better customer service
• Lower cost due to new or more efficient manufacturing facilities • Lower cost of purchased materials • Reduced order management costs • Fewer last minute production changes • Fewer LTL shipments
• Fewer freight claims • Lower freight costs • Lower costs for: Insurance • Taxes Variable Storage costs Inventory risk costs • Fewer employees required • Lower third-party warehousing Reduced IS costs
Reduced cost of supervision Reduced inventory investment Reduced due to more promptly paying customers (reduced errors) Less warehouse space required Increase investment in modernized production facilities
Source: Lambert, Douglas M. and Renan Burduroglu (2000). “Measuring and Selling the Value of Logistics”
The International Journal of Logistics Management, 11(1), 1-17.
Lot Quantity Costs Transportation Costs Inventory Carrying Costs Warehousing Costs Information Systems General and Administrative Inventory
+
Accounts Receivable+
Other Current AssetsFigure 1. The General Strategic Profit Model
Return Net Financial Leverage Return on Assets Net profit Net worth
( )
Total assets Net worth( )
Net profit Total assets( )
Net Profit Margin Net profit Net sales( )
Net Profit Sales Gross Margin Total Expenses Sales Cost of Godds Sold Variable Expenses Asset Turnover Net sales Total assets( )
Sales Total Assets Current Assets Fixed AssetsThe ROA Approach
Prof itability analysis is an important means of assessing logistics activities and proposed changes to a f irm’s logisti-cal systems. Prof itability analysis goes beyond total cost analysis by incorporating the revenue impact of logistilogisti-cal activities. For example, an improved level of ser vice may bring about increased revenue as your customers respond to your higher levels of ser vice. Such changes must be built into logistical system analysis. Additionally, the impact of assets such as inventory levels, accounts receivable and f ixed logistical assets should be incorporated into a compre-hensive prof itability analysis approach.
A critical measure of strategic success is Return on Investment, which can typically be measured by Return on Net Worth (RONW), or by Return on Assets (ROA). RONW measures the prof itability of the funds that owners have invested in the business, and is most likely of interest to shareholders and investors. ROA provides a more operational perspective by providing a view of how well managers utilize operational assets to generate prof its. Thus, ROA becomes a key managerial tool for logistics prof itability analysis.
The Strategic Prof it Model provides the framework for ROA analysis by incorporating revenues and expenses to generate net prof it margin, as well as an inclusion of assets to measure asset turnover. Net prof it margin measures the proportion of each sales dollar that is kept as prof it, while asset turnover measures the eff iciency with which assets are used to generate sales. Together, they form the basis for ROA. Figure 1 provides the general framework for understanding how logistical decisions can impact net prof it margin, asset turnover, and ultimately, ROA.
In using the ROA approach to better understand the impact of reverse logistics decisions, Figure 2 illustrates that the impact of reverse logistics goes beyond cost reductions. In fact, the impact can be broadly described in terms of: • Cost reductions that come through reduced cost of goods sold and operating expenses;
• Improved asset turnover through better inventory management; and
• Increased revenues in both the short and long terms through additional sales and full-price maintenance due to newer stock being offered.
$
$
$
$
%
$
$
$
$
$
$
$
$
$
$
$
6. Increase brand equity long-term revenues increased customer based on environmentally responsible logistics activities 4. Increase revenues selling recovered in existing or new channels 1. Reduce COGS by reclaiming reusable products/parts that re-inserted into the forward supply chain 2. Reduce operating returns management, disposal/compliance minimize future 5. Increase revenues channel cleaning; inventories and eliminates the need for markdowns old stock
3. Reduce inventories channel cleaning also reduces inventory carrying costs
Figure 2. The Impact of Reverse Logistics Activities on ROA
SALES COST OF GOODS SOLD VARIABLE FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE
+
OTHER CURRENT ASSETS GROSS TOTAL CURRENT ASSETS+
FIXED ASSETS÷
TOTAL ASSETS SALES÷
SALES NET PROFIT NET PROFIT MARGIN net profit net sales( )
net profit total( )
RETURN ON ASSETS ASSET TURNOVER net profit total assets( )
-LogisticsQuarterly.com
24 LQ™winter 2003/2004
Fourth, return products are often an overlooked source of additional revenue. Recovered product may be re-sold through existing or new channels, depending on the charac-teristics of the target markets. For example, remanufactured computer products are often resold to consumers that rep-resent a different target market than the OEM’s primary cus-tomers. Original customers might include large corporations purchasing computer equipment in large volume. Second-time-around customers may be small businesses or con-sumers who wish to purchase a certain computing power, but are unwilling or unable to pay premium prices for new equipment. In the case of multi-use packaging such as 55-gallon drums or intermediate bulk containers (IBCs), the cost of goods sold is essentially the collection freight and the reconditioning cost.Those reconditioned products often sell at a price point approaching new containers, and actu-ally have a higher gross margin. Not exploring these poten-tial new markets can really shortchange a firm’s revenue opportunities.
Fifth, another source of additional revenue comes through better inventory management. Better inventory management and channel cleaning initiatives can help pre-vent markdowns, and thus help retain higher margins on sold products.
Sixth,the market positioning power of effective returns man-agement programs should be considered. As customers and consumers become increasingly conscious of the environ-mental impact of the corporations they deal with, being able to honestly promote reverse logistics activities can help a firm gain repeat business and increase customer loyalty. Many firms are finding that significant brand equity can accrue by being an environmentally responsible corporate citizen.
In the returnable packaging arena, opportunities to create value can come about by switching from expendable to returnable containers. This not only avoids the disposal cost for expendable packaging, but returnable containers may be able to provide additional protection to products,thus reduc-ing product damage, along with the related lost sales and expenses to correct the damaged product. Of course, return-able packaging may not always be cost-justifireturn-able, so a total cost approach to analyzing the expendable versus returnable container option should always be taken. This may also involve reviewing and re-engineering packaging materials to ensure recyclable material is being used.There can be signif-icant value added in the form of market perception, particu-larly in examples like the chemical industry’s “Responsible Care” program where members have significant measurable commitments to “Reduce, Reuse, Recycle”.
On a somewhat larger scale than switching a corrugate box for a plastic tote, is the whole issue of mobile assets.
These are usually more expensive types of containers, such as beer kegs that must be returned from a restaurant or pub back to the brewery. Such containers represent a significant investment for a firm, and the movement of these assets should be carefully managed, so as to minimize shrinkage and damage to the containers, as well as to minimize cycle time as the containers rotate through the closed loop system. Managing cycle time is especially important so as to maxi-mize asset utilization, and minimaxi-mize the total number of con-tainers needed to keep the system running smoothly.A brew-ery cannot afford to run out of kegs.But it’s equally important that it should not underestimate the financial consequences of having too many kegs in the system. The chemical railcar industry provides another example of mobile asset manage-ment. Somewhat unique in the rail industry, chemical com-panies tend to own or lease their own railcars due to the spe-cialized nature of the cars. Thus, railcars are essentially bulk chemical product containers that rotate through a system from factory to customer and back again. Poor management of these assets has led chemical companies to invest in more railcars than necessary, while the utilization rate on each rail-car remains very low, because they sit idle on rail sidings or at customer plants for far too long. At approximately (US)$70,000 per car, the investment level is high, while the returns on these investments remain unnecessarily low.Thus effective asset utilization becomes an important means of improving a firm’s ROA, and ultimately its value to share-holders.
In summary, effective reverse logistics management can add significantly to a firm’s profitability and ultimately, to shareholder value.As environmental legislation continues to become increasingly strict, firms can either take the mini-malist approach by doing only what is legally necessary, or they can seek out opportunities presented by the environ-mental legislation. Contrary to conventional wisdom, envi-ronmentally responsible logistics practices can be highly profitable for firms. The key is to take a systems approach to better understand the total costs and benefits of your reverse logistics system. The ROA approach provides a systematic means to understanding the cost/benefit tradeoffs. Remember, however, that to capture potential benefits, your firm must shift its focus from viewing returns as an unwant-ed but necessary evil and instead look for opportunities to transform returns into additional revenue, profit and market “perception capital”.
References
Rogers, Dale S. and Ronald S. Tibben-Lembke (1999), Going Backwards: Reverse Logistics Trends and Practices. Reno: Reverse Logistics Executive Council.
LogisticsQuarterly.com
26 LQ™winter 2003/2004
Customer Driven
GLOBAL SUPPLY CHAIN
Designs
Within supply chains, logistics ser vices have
become a key source of competitive
d
