Though the current recession will undoubtedly bite deeper than those of the recent decades, recovery will come, and those businesses that have managed best during the recession will be best placed to take advantage of the upturn, when it arrives, says Bob Williams of LPC International.
The logistics sector will undoubtedly be hard-hit as consumer demand falls, and the demand for warehousing space and transport services declines. The decline in demand will be difficult in an industry which, by tradition, is very competitive, provides high levels of customer service and works on tight profit margins. Downturns inevitably affects those margins, and customers – who themselves suffer similar economic pressures – inevitably look to their service providers to take a share, and sometimes more than a fair share, of the “pain” of dealing with the situation.
What then, can de done to address the problem? Unless you are have sufficient resources and are confident enough to invest capital in the development of new facilities and infrastructure for the future, then planning for recession is essentially about introducing measures to drive costs out of the business in order to become “leaner and meaner” while still maintaining a healthy customer base.
Aside from the administrative processes in the business there are three fundamental areas in a logistics business where appropriate, and relatively straightforward, initiatives can be introduced, namely, Inventory Management, Warehousing Operations and, Transport Resource Planning. Potential opportunities to make each “recession-proof” are outlined below. While not all businesses can implement all measures, it is well worthwhile exploring all opportunities to achieve all-important cost reductions, and improve the “bottom line” of the balance sheet.
Inventory Management
At times of recession the challenge of inventory reduction comes to the fore. Inventory reduction has a dual benefit in that it not only saves on the “direct” costs associated with inventory ownership, but can also result in lower warehousing costs, due to the need for less warehousing space. In the quest to reduce inventory the disposal of obsolete stock is the most obvious starting point. Though obsolete stock is often easily recognised, refusal to get rid of it is often driven by unwillingness to “writeoff” the stock, yet without recognition of the warehousing costs that are incurred in continuing to hold it. An easy way to identify such items is to produce exception stock reports which identify those items that haven’t moved during the previous order cycle. Review the reasons as to why there has been no movement and, unless there are good reasons to keep them, then dispose of the stock. Even if there is limited movement of a stock keeping unit (SKU) it may be the case that it is becoming obsolescent and therefore opportunity to reduce the stock level to something which is representative of future demand, rather than continuing to carry larger stocks than necessary.
It is important too, to review purchase order quantities and order frequency. Though purchasing large quantities of a SKU may result in a lower unit cost of purchase, the potential costs of obsolescence (particularly of products such as consumer durables and electronic goods, which have relatively short life cycles) and warehousing must be considered. Purchasing less, but more frequently, must be the maxim during recessionary times, particularly as purchase prices can be more competitive, and stock more readily available from suppliers, than when times are good.
Action should also be taken to reduce the number of SKU’s that are stocked. Rather than hold stock of all SKU’s, establish whether it is possible to buy from your suppliers less popular items, directly against customer orders, and then cross-dock the order to the customer when the goods arrive. While this may lead to increased delivery lead times, customers are, more often than not, prepared to accept a longer delivery time, provided the delivery promise is reliable.
The lowering of customer service levels, while not always acceptable, does also present the opportunity to consolidate customer deliveries, and through careful vehicle routeing and scheduling, to improve transport drop densities and thereby reduce delivery costs.
The centralisation of stocks also assists in cost reduction. By centralising all stock of a SKU at a single stockholding point it is possible to guarantee a level of availability that is greater than can be achieved if the same amount of stock is distributed amongst multiple stockholding points. This is known as Maister’s Law, which essentially states that the amount of safety stock required to support a network varies according to the inverse square root of the number of stock holding points. By way of example, if you hold stock at one location instead of four, the amount of safety stock required to support a given service level will halve, a saving well worth having.
Warehousing Initiatives
Centralisation of stock also has other advantages, notably in terms of warehousing costs. It is well known that economies of scale apply, and that the cost per unit of throughput from a single large warehouse, can be several times less than the unit cost of a unit of throughput from one of a network of several smaller warehouses of the same combined capacity as the larger warehouse. Some of the reasons are self evident, such as the combining and rationalisation of order processing, inventory control, administrative, security and managerial resources. Other cost benefits can include creating opportunity to introduce more advanced storage and materials handling systems than would be economically feasible across a network of small warehouses.
While investment in such equipment might sound irrational during a recession the fact is that, for many warehouse operators something of the order of 40 – 45% of the total warehousing cost per unit of throughput is “space” or property related, some 35 – 40% relates to “direct labour”, and only 15 – 25% relates to the depreciation, running, and maintenance cost of storage and handling equipment. Prudent investment in the appropriate types of storage and handling equipment can much improve productivity levels, particularly in warehouses where customer orders are picked in “unit” quantities, rather than as full pallets, and where there is opportunity to “sweat the property asset” through the use of “high density” storage equipment to, for instance make better use of available height, or reduce aisle widths. At the extreme the old adage that block storage without any form of racking is the cheapest form of storage simply doesn’t apply. When property-related costs and labour costs associated with locating and moving stock are also included it can become patently obvious that the use of appropriate storage and handling equipment offers a much more economic solution.
Similarly, the use of appropriate types of storage and handling equipment for order picking, backed by a suitable warehouse computer management system, will much improve productivity, as well as contributing to more accurate order fulfilment and, again, the better use of space. In the right circumstances it is not unusual to see unit costs reduced by half, or even more.
By centralising warehousing operations, introducing the right types of equipment and operating procedures it can be possible to release warehouse space, and even whole warehouses, for sale or to let, this without any loss of potential storage or throughput capacity within the business.
It is vitally important and goes without saying, that the starting point for any exercise to reduce warehouse space and improve productivity must be prefaced by detailed study of the warehouse facilities, a review of its operational procedures, its stockholding profile and customer order demands, and its levels of productivity and performance, as well as its cost and unit cost performance. There are a number of well published methods by which warehouse performance can be “measured” using balanced scorecards and other techniques. Equipment suppliers are also always ready to help but remember, they have their own sales targets and therefore their advice might be biased. Alternatively, independent specialist consultants can also assist.
If the “down-sizing” of warehousing operations becomes an imperative then outsourcing might be considered as a means of releasing warehouse and, or, transport assets. But care is needed in the choice of 3PL partner if outsourcing is to work well. Contracts must be carefully drafted and a properly defined service level agreement put in place, together with grievance procedures and penalties for poor performance.
Network Planning And Transport Initiatives
Of course, any reduction in the number of warehouses in a network or any move towards centralisation will affect transport costs. As a norm, the more warehouses there are in a network, the greater the warehousing and inventory costs will be, and the lower the transport costs will be. It is therefore important, in any exercise to reduce the number of warehouses, to also examine the potential impact on transport costs.
There is a variety of well-established computer models available for warehouse network modelling (LPC International uses the Dips model). Many such models can be used to determine an “optimum” network, in terms of the numbers, sizes (in terms of throughput) and locations of warehouses required to serve a defined customer base or, can be used on an iterative basis, to determine the potential impact of closing one or more depots in an established network.
The most economic solution does not necessarily mean that a warehouse should close. It may be that stock should be centralised at, for instance one “national” warehouse or, perhaps, at a small number of regional warehouses (say one in the north of the country, and one in the south), with other warehouses in the former network becoming stockless and acting as cross-dock facilities, with smaller footprints and fewer staff than before centralisation. The model can also be used to define regional boundaries between warehouses to ensure that potential warehouse capacities are best used and transport operations are efficient. Those ex-warehouses which are identified as having no future use, either as stockholding points or for crossdocking or consolidation can be disposed of.
The same computer models can often be used for transport planning, to determine economic routes and schedules, and to optimise the use of available fleet(s) of vehicles. At strategic level, and at the same time as doing any warehouse network modelling, the optimum size and “mix” of fleet (numbers of vehicles of different capacities or types) can be determined.
Computerised routeing and scheduling can be strategic, whereby it is reviewed periodically or, preferably tactical, where it is used on a daily basis, to optimise each day’s transport operations and to maximise the “fill” of delivery vehicles.
Though it may initially be difficult and time-consuming to install and commission a routeing and scheduling system (you can always be sure that there is an ex-driver who now works in the despatch office who thinks he can out-think the computer) be persistent. Provided the computer package is reputable and the parameters set correctly it shouldn’t take long to see real benefits. I will always remember the Logistics Director who, after listening to a range of “excuses” from his staff as to why computer-aided routeing and scheduling would never work, took away the ignition keys to the trucks that the system said were not required for each daily run, and left the warehouse only with the number of trucks that the system said were required. It was only a day or two before all the teething problems had been identified and resolved, leaving the company with a much more efficient and costeffective transport operation, and spare trucks for disposal!
At tactical level, savings can be achieved through the introduction of telemetric systems on trucks, to monitor both driver and vehicle performance. Fuel consumption and overall vehicle performance can be improved through careful attention to driver driving habits (the “heavy right foot” syndrome) and engine condition.
Summary
Rigorous examination of inventory levels, warehousing facilities operations and transport operations is, in my view, best started by means of an audit of costs and unit cost performance across warehousing and transport operations, the audit being linked to a review of operating procedures and resources. Identify the high cost areas, particularly in relation to inventory, the use of space, labour, and vehicles. Then focus on those high costs, to find out why they are high, and to determine how they can be reduced. Don’t worry about the lesser cost areas at the preliminary stage, as the potential savings and benefits will be less. Think “outside the box” and be prepared to consider radical solutions.
LPC International can assist with the review and solution development process to enable your business not only to survive a recession but also to emerge far better equipped to deal with the future.
