Recently, a big ad campaign from UPS featured the word, “logistics.” The catchy tune and cute lyrics like “we love logistics” got at least one thing right: fulfillment of orders and timely delivery has become as important as any manufacturing issue that can plague factory sales teams. The retail world has become an instant order/instant gratification environment. Online ordering multiplies every year. Small package businesses thrive on next-day shipping fees. It’s possible that small packages are the only thing keeping the United States Postal Service afloat these days.
What most people don’t realize is that the business of logistics and fulfillment between companies is even bigger. Factories, offices and retailers routinely spend money daily on next-day delivery of everything from payroll checks to plumbing fixtures. The key here is that most of these overnight shipments are unnecessary, or at least overdone.
The purpose of supply chain management is, in part, to reduce these costs through better forecasting and contingency planning. For example, routine maintenance parts should be included in all plant maintenance storage areas. Parts like fasteners should be located in several areas near the places they are used the most. Every emergency, next-day delivery of items like this does more than raise costs. In some cases, it disrupts the flow of work, which has a broken chain effect all the way down the production line.
Logistics can be taken as a supply chain in itself. If analyzed this way, it is easier to foresee problems and build in redundancy. Products are made just in time or warehoused; an order is released; the items are pulled and packed; a shipper is contacted or arrives on a regular basis for packages; and the items are out the door, or “fulfilled.”
We have discussed costs in supply chains caused by poor forecasting and manufacturing errors, or waste. Errors in shipping, receiving and warehousing are just as devastating to the bottom line. If short delays – minutes or second in the production line — are costly, imagine the cost of waiting for parts to be made or shipped, for days or weeks. We know of an instance where the lack of one large grinding wheel shut down a million-dollar production line for a week – not just once but several times over several years.
The reason given at the time was a disruption in the grinding wheel company’s production capability of the wheel. As the buck passes on a problem like this, costs rise and disruptions multiply.
Warehousing of critical parts and supplies, while increasingly expensive, is one way to insure against huge breakdowns. Every supply chain manager is tasked with analyzing these tradeoffs. Is it better to buy critical parts and hold some close to production lines, or try to keep just-in-time deliveries intact? The answer is probably a mix of both. If an item has a history of causing problems, the analysis will show it. This is probably a good item to have on the shelf.
The final piece of the logistics puzzle is returns. Reverse logistics involve sending back unsatisfactory items and receiving those into the plant at the other end. Like a check that bounces at a bank, reverse logistics goes against the flow of traffic and is expensive. Banks charge big fees for bounced checks for that reason. Items that are returned because of ordering errors will usually cost the returning business for return to stock charges. On the other hand, if the shipping error was the manufacturer’s fault, the cost will fall on the factory. Obviously, if the item is special for the customer and can’t be restocked, it is far costlier for the plant where the error occurred.
Logistics mistakes and delays are expensive for several reasons, as we discussed today. Other supply chain risks can be even greater, and we’ll discuss those in this later story located here, in our Inside Operations Section.