 NEED FOR PERFORMANCE MANAGEMENT

When describing the performance system, it is best compared with the control panel
on the machine or the dash board of a vehicle. Just as a control panel or dash board gives
vital information about the machines or vehicles, the performance measurement system
gives insights into the financial and non-financial measures taken by the firm. However, it
requires multiple measures to direct logistics operations for efficiency and effectiveness.

System performance is judged by its output with respect to the inputs. A higher
output to input ratio is a measure of the system’s efficiency and effectiveness. However, the
above ratio is also to be reviewed with respect to the time period. In today’s dynamic
business environment, business firms are striving for gaining competitive advantage, not for
growth alone but for their survival. Any system operations will deploy resources
irrespectively of its application in functional areas of marketing, procurement,
manufacturing, or logistics.

In today’s competitive environment, industries are being forced to focus on the

effectiveness and efficient use of scarce resources. Manufacturing and trading industries
have to deploy a lot of resources in logistical operations for the movement of goods and
information across the supply chain of the firm. Hence, it has become necessary to monitor,
control, and improve the performance of the logistical operation so as to attain the set goals
of cost reduction and customer satisfaction. The performance measurement system neither
helps in reducing or eliminating non-value-added activities from the system.

In today’s competitive business scenario, the importance of accurately measuring and

controlling logistical performance cannot be denied as logistical competency has become
more critical in enhancing the competitiveness of the business process.
  PERFORMANCE MASUREMENT SYSTEM OBJECTIVES

Any performance measurement system shall have the following objectives:-

• MONITORING:-

Monitoring focuses on reporting the current status of operations. The information

may be monitored on a daily, weekly or monthly basis depending on the volume and
criticality.

For example: a financial monitoring system will report, to the management, the total funds
outflow and inflow on a daily basis. Similarly, the marketing monitoring system will report
on the order booked, orders cancelled and orders completed.

• CONTROLLING:-

Controlling measures compare the actual performance with the set standards or
objectives. It reports deviation from set goals. The decrease in warehouse productivity shall
help in identifying the cause and help in improving storage layout, and material handling
method.

For example: the control system will report on the current order fill rate in a warehouse as
60% and will indicate a deviation of 40% from the set standards of 100% so that corrective
action can be initiated for inventory replenishment.

• DIRECTING:-

The objective of the performance measurement system is to motivate the individual

in the system to enhance individual performance, resulting in improvement in overall
system performance system. The performance measurement system will help the
management system to evolve and incentive scheme for operations employees to cross the
targeted productivity level.

For example: The warehousing work force engaged in material handling may be motivated
through rewards for crossing the targeted tonnage of goods dispatches in the specified time
frame.
  LOGISTICS AUDIT

• What is logistics audit?

For enhancing the performance of logistics system, it is necessary to take stock of

the efficiency & effectiveness status of the various sub-system of the logistical chain. This
process is called Logistics audit.

Logistics audit examines & tests the operations of logistics process in terms of
quality, technology, productivity & external factors.

The auditing process reveals weakness if any in the logistics system of the company.
The test results can help in offering proposals to the firm for improvement by investing in
the system, equipment or in new technology.

• Following are the areas of logistics audit

 QUALITY

The audit identifies the quality of the logistical service. The errors, constraints are
identified, to which causes of the current situation can be attributed. The audit checks
existing standards of stock level so as to suggest improvement.

 PRODUCTIVITY

Audit notes the output of the system. It analyses the productivity of assets,
equipments & Labour force employed, with respect to time & cost.

 PACKAGING SYSTEM

The audit indicates the adequacy of present packaging system, in terms of capacity
technology & cost economy.
  WAREHOUSE CAPACITY

Audit will spell out whether the warehouse is underutilized for the existing capacity
or there is a need for hiring or constructing an additional storage space based on the level of
order.

 TECHNOLOGY
Technology audit may include equipment reliability, speed of information and material
flow, warehouse management system (storage, packaging, sorting, picking and loading) and
transaction system. The audit will compare the critical subsystems: with state of the art
systems and subsystems

 EXTERNAL FACTORS

Logistical audit will bring out facts on the changes between buyer & supplier
relations, Transportation conditions, and customer services in logistics. This will help in
taking corrective actions.

 STRATEGIC LOGISTICS PLANNING

Even though the main purpose of logistics audit is to concentrate on process details,
it also draws conclusions and helps in preparing strategic plans to bring efficiency &
effectiveness into the entire system.
Perspective
The appropriate management perspective must be evaluated and determined. The
continuum of possibilities ranges from all activity based measures to entirely process based
measures.

 Activity based measures

Focus on individual tasks required to process and ship orders. Examples include customer
orders entered, cases received from suppliers, cases shipped to customers. These measures
record the level of activity and in some instances the level of productivity.
While activity based measures focus on the efficiency and effectiveness of primary work
efforts they do not usually measure the performance of the overall process of satisfying
customers. For example order takers who are judged on the number of calls per hour may
be rated high with respect to activity based measurement may do poorly in the overall
satisfaction process because they fail to take the time to listen carefully to customers. For
this reason it is important that some performance measures taken an overall process
perspective

 Process based measures

Consider the customer satisfaction delivered by the entire supply chain. They examine total
performance cycle time or total service quality, both of which measure the collective
effectiveness of all activities required to satisfy customers. Today’s firms are paying more
attention on process measures while trying not to sub optimize individual activities. The
Perfect Order is an increasingly common process measure.

 LOGISTICS PERFORMANCE LEVELS

There are two levels of performance measures. The first one is internal measure and the
second one is external measure. The firm must strike a balance between external measures
such as customer satisfaction and internal measures such as productivity, cost quality and
asset management, because companies normally ignore external results in the belief that
internal measures are enough, or they sacrifice internal development for external results.

Performance measures must be evaluated from various perspectives before they are
implemented. In general, the performance measure may be viewed through four
perspectives such as financial, no financial, internal and external perspectives.
The information may be monitored on a daily, weekly or monthly basis depending on the
volume and criticality.

Performance
Measurement
Perspectives

Internal External
Measures Measures

C Customer
Non-Financial Perceptions
Financial Productivity
Service Quality
Innovations
Operating Cost Asset Management Best Practices In
Reliability
ROI Order Fulfillment Industry
Responsiveness
Quality
Relationship

Performance Measurement Perspectives

• Financial Measures
  Operating cost

The operating cost is the most important performance measure that reflects the efficiency
and effectiveness of the logistics system. The operating cost element covers warehousing
cost, freight, material handling equipment running and maintenance cost, labor cost, cost of
return goods and inventory carrying cost. Cost is measured in terms of percentage of total
sales or per unit volume. The typical logistics cost performance measures are:

• Warehousing cost per unit of throughput.

• Freight cost per unit of material transported
• Labor cost
• Cost of goods damaged during transportation
• Logistical packaging cost
• Order processing cost.
• Per unit cost in the warehousing
• Administration cost

 Return on investment

Return on investment (ROI) has both financial and non financial perspectives. This is an
important financial performance measures that indicates whether the investment made in
logistical assets such as warehouse, equipment, storage systems and transportation vehicles
is paying the company dividends by way of profit enhancement through cost reductions.
The numerator in the ratio is the income and the denominator is the investment. It also
indicates whether the investment is properly utilized so that it generates the desired
revenue.
 • Non Financial Measures

 Productivity

Productivity is another measure of organization performance. Productivity is a relation

between output produced and quantities of inputs utilized by the system to produce that
output. Productivity is thus a very simple concept.

Conceptually, there are three types of productivity measure static, dynamic and surrogate. If
all the output and input in a given system are included in the productivity equation, it would
be a total factor static productivity ratio. The ratio is considered static because it is based on
only one measurement.
A dynamic measure, on the other hand, is completed across time. If output and inputs in a
system compare static productivity ratio from one period to another the result is a dynamic
productivity index for e.g.

Output 1994/input 1994

Output 1990/input 1990

The third type is a surrogate productivity measure. This represents factor that are not
typically included in the concept of productivity but are highly correlated with it customer
satisfaction, profit, effectiveness, quality.

 ASSET MANAGEMENT

Asset utilization means the utilization of the capital invested in assets such as warehouse
building, storage system, and material handling equipment, and also funds tied up in
inventories. The utility of the investment is measured through the inventory turnover ratio,
returns on investment, and inventory stock levels in a particular number of days.

Inventory turnover ratio indicates the rotation of the given value of inventory with respect
to the value of sales in a set timeframe. Normally the timeframe is one year. Higher
turnover ratio indicates faster cash rotation in the business cycle and higher utilisation of
assets. This ratio has both financial and non-financial perspectives.
  ORDER FULFILLMENT

This is an important criteria to judge the level of customer service of the firm. This is the
relative ability of the firm to satisfy the customer. This requires close coordination among
all the functional areas of the organization. The various sub-measures covered under the
order fulfilment are:-
• Cycle time (order processing, replenishment, procurement, manufacturing, and
distribution)
• Delivery-on time/delayed
• Fill rate (order fill, case fill, product fill)
• Stock out frequency
• Shipping errors (wrong delivery, incorrect invoice, material shortage)
For the firm to enhance its order fulfilment capability, close coordination among all the
logistics arms is a must. The system needs real time information support and exceptional
report generating and alarming capability for proactively initiating corrective steps.

 QUALITY

The perception of the logistical service quality is created through ‘near-to-perfection’ in the
order fulfilment process. This may be interpreted as error free order delivery. The
impression of quality logistics service is created through initiating and controlling the
following performance measures:

• Transit damage frequency

• Value of the total damage
• Frequency and cost of goods returned from customers (damaged/sub quality)
• Material shortages frequency
• Delivery commitment deviations-frequency and tolerance

Quality measure is basically an evaluation of the entire logistical process rather than
individual activities involved in the logistical operation. It speaks of the degree of
effectiveness of the entire order fulfillment process to deliver error free service.
 • CUSTOMER PERCEPTION MEASURES

For initiating steps to achieve competitiveness in logistical operation, the firm needs to get
regular feedback from its customers on the existing service levels and its shortfalls.
Customer feedback may give the firm a comparative analysis of the service levels and value
added service offerings of its competitors operating in the market. The feedback on delivery
performance, reliability, responsiveness, and the relationship initiatives. The firm should
regularly conduct customer surveys to get such measures for mapping customer
perceptions, for improvement in logistical service and enhancing competitiveness. These
surveys may be conducted or organized through the firm’s own marketing and service team.

• INNOVATIONS

For calibrating logistical performance measures, firms go in for innovative techniques like
excellent logistical practices in the industry. Benchmarks may be with competitors, firms in
a related or non-related industry. Benchmarking performance measures help firms to gain a
competitive edge. Typical benchmarking measures in logistics are:
• Order processing procedure
• Transportation-route, modes, freight rationalization
• Warehousing-storage, material handling system, automation
• Packaging
• Logistical productivity
• Delivery service
• Information flow and connectivity
The benchmarking may be done based on published information, alliances with the firm to
be benchmarked, or by appointing a consulting firm/expert, depending on the criticality of
the results.

 CREATING A COMPETITIVE FRAMEWORK

In today’s dynamic Business environment, competitive pressures and customer demands are
forcing majority of the firm to shift their priorities to understand the logistic chain
supply chain process in order to deliver superior value to customer. For fulfilling this
objective, logistic has left behind the old role of warehousing, transport, material
storage and handling and has assumed a new role that is much more comprehensive and
pervades the entire supply chain of the firm. There is not doubt that logistics is
imperative to the supply chain process, for its efficiency & effectiveness, to provide
superior service to the customer.

It is a powerful tool for gaining competitive edge with support from emerging
technologies. Logistic activates the physical flow of material with information support
pulled by market demand and optimizes the cost of desired service level. The operation
process of logistic today covers conceptualization, purchasing, processing, distribution,
after sales service function includes responsiveness, reliability, relationship, &
rationalization. As customers today are seeking added value, logistic strategies need to be
augmented with the above for service variable.

• Responsiveness

This refers to speed in responding to customer demands. Responsiveness need to be

reflected in all the various phases of transaction. In a competitive environment response to
the customer pre-sales enquiry is important as filling the customer order with in a shorter
lead time. The degree of responsiveness can be enhanced through the used of latest
information & communication technologies. The winning logistic strategy will be to supply
the material as per customer needs, in terms of lot size, frequency of delivery, & place of
delivery. In order to reduce the inventory related cost, the customer may demand frequent
deliveries with small lot sizes. Deliveries may further be required at the various assembly
centers, which are in proximity to the markets. Under such circumstances, the emphasis in
formulating a strategy will be on developing a flexible system for customized requirements
of strategic customers. The deciding factor in responsiveness strategy will be
differentiation, which can be achieved with speed, through mass customization with flexible
back end support in all the three phase of the transaction process. The responsiveness
strategy gives the firm a winning edge in competitive markets.

• Reliability
 It is the factor that decides the degree of trust the customer may have in a company s
capability to hour commitments. The supplier has to exhibit certain service characteristic
for being perceived by the customer end is based on certain assumption regarding the
reliability factor the supplier exhibits. A higher degree of reliability in material delivery will
help the customer in releasing some of his resources to be used for other productive
purpose. Consistency in on time delivery performance will help the customer to reduce
inventory levels or operate on the JIT system. Hence the prime objective of the logical
system should be reliability in meeting the customer service needs, as per the assumptions
in the planning exercise for resource allocation and risk bearing

Rationalisation
Many leading companies across the world are adopting the rationalization approach in
logistics to reduce cost and enhance customer service. This means reducing the supplier
base and working in partnership with select suppliers .the buyer treats the supplier’s
facility as an extension of its own facility and shares information, experience, and
resources for mutual benefit s. the rationalization approach reduces the transaction cost
and allows the buyer to operate on the JIT system so as to take inventory related cost
out of the supply chain. With better control on material movement; customer service
capability is enhanced, which is leveraged for competitiveness.

In competitive markets, wherein the products are at the maturity stage in the life
cycle, leading firms resort to the strategy of mass customization. However, this strategy
works well only when product deigns are rationalized to have minimum standard
components or parts to offer variety in the product or service. With the existing logistics
product portfolio the service provider may cater to different logistics service needs of a
variety of customers, but certainly not all segment of the customers. The logistical strategy
will be to rationalize and organize the service modules in such a way that with simple
permutations and combinations the specific logistical needs of a large number of customers
is met and wider coverage is possible.

• Relationship
 In the competitive environment, organizations are trying to reduce their supplier’s
base and develop partnership with few suppliers who are reliable and ready to share the
benefits. The firms are spending huge amounts in Customer Relationship Management
(CRM) programmes to retain customers, develop long term relationship for customer
retention, and reduce the risk element in demand management. A partnership with right
supplier, wherein the firm considers the supplier’s operations as the extension of its own,
will help in enhancing supply chain efficiency and effectiveness. A relationship based on
mutual trust will help in sharing information, knowledge, and resources for mutual gains of
cost reduction, which may be leveraged for competitiveness. Leading business firms across
the world are finding logistics the best route to form partnership with suppliers, customers,
and channel members, and develop long term relationships to act as an integrated system
weaved in one thread to fight collectively on the competitive front.

 LOGISTICS STRATEGIES ACROSS PRODUCT LIFE CYCLE

(PLC)
 Traditionally logistics is conceived as a functional support system and is used as one
of the tools for extending differentiated customer service to gain competitive edge. The
logistics strategy is formulated in line with the overall business strategy of the firm to
achieve the desired business objectives. Firms try to optimize various elements of the
logistics mix to get a desired service level that supports the product market strategy.

The criticality of the various elements of the logistics mix varies with the product,
market and the customer service level. For example, the distribution network of FMCG
products needs more warehouse to serve a large number of customers spread across the
country through an intensive channel structure while a glass (sheets) manufacturing firm
will have no field distribution warehouse. Because of the fragile nature of the product,
shipments are directly made to the end customer or dealers. In other cases, for low unit
value products like soft drinks, distribution is done within a 100 kilometer radius of the
manufacturing plant. Here transportation route selection and vehicle scheduling is more
critical to control the transportation cost, which has a major share in the total landed cost of
the product at the customer’s end.

The other variables which influence the formulation of logistical strategy is the
adjustment across the product life cycle phases it is passing through.

Introduction Growth Maturity Decline

Sales
And Logistics Cost #
Profits Profits
Sales

Ataseach
#Logistics cost stage
of the product life cycle,
% of sales Productthe requirement
Life Stages of the logistical performance
change to suit market conditions.
  Introduction

At this stage, basic logistical support this required for making the product available at
places where product awareness is created for demand generation. Heavy promotional
expenditure made will be wasted if the product is not available when the customer wants it.
It will dilute the impact of the marketing strategy. It may even have a negative effect on
product acceptance by the perspective consumers and may lead to product failure. Here, the
primary objective is to establish consumer acceptance and market position, and the
emphasis is on the stock availability. During the introductory phase the demand pattern is
erratic and shipments size is small and hence the logistics cost as a percentage of the
revenue generated is pretty high. In a nutshell, at the introductory stage the firm needs to
organize and mobilize the elements of the logistics mix to exhibit high level of service
commitment.

 Growth

In the growth stage the emphasis shift to the creation of the logistical infrastructure.
As sales growth is witnessed, more revenue are generated and profits are assured in the
growth stage, the strategy focused is on the investment and making the back end support
stronger for gaining competitive edge. The logistical cost as a percentage of the revenue
generated plummets down because of scale economies. In the growth stage, the strategy is
to achieve logistical competency through investment in technology and network to build
market share and customer relationship through reliable and consistent generic logistical
services.

 Maturity

The maturity stage witnesses the proliferation of competition. The price war becomes
intense to gain market share in stagnant or slowly growing markets. Firms try to reach the
customer through multiple channels. In this phase, the strategy focused shifts to customized
logistical solutions with a value added services to gain competitiveness. Typically, the
profit margins come down and so does the firm’s focus on cost control. To maintain a
competitive position firms resort to alliances in logistics and adopt the strategy of service
customization. They evolve a product-market-customer specific logistical solution for
strategic clients and organize the resources to integrate it with the clients supply chains.
Logistics not being the core competency of the majority of manufacturing or trading firms,
they take a help of experts or logistics service providers to perform logistical operation
effectively and efficiently at reduced cost.

 Decline

In this phase the product volume shrinks, costs go up, margins plummet down, an
element of uncertainty creeps in and firms slowly withdraws from the market. Logistical
operations are planned on a selective basis to support marketing operations that are
performed on a restricted scale. Logistical resources are neither overcommitted nor over
stretched in the decline stage.

For example: - Hindustan Unilever limited, as they had introduced RIN bar but because of
the competition they converted Rin bar into surf excel because as surf excel is on maturity
so they wanted Rin bar to be on that path because at the same P&G introduced tide bar.

 STRATEGIC LOGISTICS PLANNING

 The importance of logistics in the supply chain has been realized by firms during the
last decade because of globalization of business activities, increasing competitive pressure,
and uncertainties in dynamic markets. This has forced business firms to reengineer or
redefine their business process so as to bring efficiency and effectiveness into their
operations. Hence, there has been continuous improvement in logistics and supply chain
operations to achieve the key goals of cost reduction, flexibility, technology adaptability,
and superior customer service through value additions to gain sustainable competitive
advantage in dynamic markets.

The process of logistics strategy formation and its implementation varies with each
firm’s business process, the product it is dealing with, and the industry it is operating in.
e.g.; a firm with a manufacturing plant will be concerned with inbound, in process, and
outbound logistics, which require strong IT support for the integration of a large number of
activities in sub-systems. To reap benefits of scale economics, the manufacturing firm may
go in for an alliance with a 3pl supplier.
 | Strategic logistics planning |

ENVIRONMENTAL ANALYSIS
Economic, Regulatory, Industry,
Competition

SWOT
Strength, Weakness,Opportunities
and Threats

LOGISTICS GOALS

RESOURCE IDENTIFICATIONS
(LOGISTICS MIX)

Warehousing, Transportation, Inventory,

Information

LOGISTICS STRATEGIES

RESOURCES, IMPLEMENTATION
SKILLS AND TIMING ENVIRONMENT

RESULTS
The strategic logistics
planning process Customer service and Cost Efficiency, starts with an
analysis of the Effectiveness, Productivity, external and
internal Competitiveness environment,
which will determine the
firm’s limitations, resource requirements, and barriers in extending superior service to
customers. The regulatory framework in the country or internal resource constraints may
not allow the firm to avail of certain opportunities or may create barriers in extending the
desired level of service to customers. An environment analysis will help in identifying the
company’s strengths, weaknesses, opportunities, and the threats in serving the customer.
This will help in formulating the supporting strategies and organizing the appropriate
resource (logistic mix) to achieve the logistics goals.

For the implementation of the strategy, the firm needs the structure to implement the
same. The structural elements include design of a logistics network and evolving a network
strategy. The network design is primarily concerned with planning of warehouses at
strategic locations, transportation facilities and an information flow system across the
supply chain. The network strategy may decide on the warehouse type (private, public, or
contract), transportation modes route and carrier selection, and technology selection, and
adoption for information flow. E.g. the wholesaler will prefer to have large consignment
with fewer deliveries to economize on freight cost, while the retailer will prefer smaller
consignment with frequent deliveries to save on inventory cost. Channel design is
concerned with customer service and it is extended through logistic activities. The
proximity of the warehouse to the market place, the continuous replenishment of inventory,
and reliable and consistent delivery performance are critical factors in the selection of
logistical structural elements.

The success of strategy implementation depends on the efficiency of the functional

elements in the movement of information and inventory across the supply chain. The
channel length and breadth will depend on the type of product, market size, and the market
share to be gained.

In the overall network design, the critical role of sub-system cannot be ignored. E.g.
the warehouse layout planning exercise will be incomplete without proper consideration of
material handling equipment and storage systems. An improper layout may create barriers
to free and speedy movement of inventory across the supply chain hence, storage layout,
equipment selection, and storage plan should go hand in hand.

The selection of transportation route, mode, and carrier operator is important for
offering and maintaining a reliable and consistent service level. Transportation management
is the key functional area in customer service
 In other functional area to influence strategic logistic planning is materials
procurement and management. It is a critical linkage in the supply chain wherein co-
partnership with vendors, material requirement planning, and scheduled procurement helps
in keeping the supply chain lean and cost effective.

Warehousing, transportation, and inventory management require close coordination

for the smooth flow of material movement across the supply chain. The functional aspect of
structural elements has a greater role in the success of the logistics chain in providing the
desired level of service. Technologies like automatic identification, warehouse simulation,
automated material handling and information communication helps in enhancing the
efficiency, effectiveness, and productivity of the overall system, leading to competitiveness
in delivering superior service to customers at least cost.

The last, but most important aspect of strategic logistic is the implementation of the
strategy, the success of which is dependent on the efficiency of the people, equipment, and
the interfaces involved at the operating level. The major task at the operating level is order
registration, order processing, order picking, replenishment, and dispatching. This is done
through proper policies and procedures at the operation level, use of the latest technology,
and through structuring, training, and initiating the change process at the organizational
level.

In conclusion, the strategic logistic process will enhance the responsiveness of the
organization to the customer through the deployment of both physical and information
resources.

 LOGISTICS STRATEGIES

The logistics strategies should have goal congruence with over all strategy of the business.
It should synergize with other functional domains of the organization. For Example, the
management information system, which encompasses all functional areas of the business,
has the strongest synergy with logistic operation. As it is information based activity for
inventory movement across the supply chain. The success of logistics strategies
implementation greatly depends on information sharing with internal and external
customers and some times even with logistics partners. Transparency at the transaction
level, at both ends (buyer and seller), helps in building up of the element of trust which adds
value to the customer delivery chain, making the strategy implementation task easier and
successful.

To understand the strategic dimensions of logistics, we can study a few generic logistics
strategies that have been successfully implemented by leading corporations across the
world.

• Cost leadership :

The basic approach to this strategy domination is through logistics cost reduction. The
map road to achieve this is as follows:

 Reduction in an inventory related cost through JIT , Cross Docking or

Postponement
 Freight consolidation , mode and route selection for reduction in
transportation cost
 Scale economics in warehouse operations
 Reduction in transportation cost by IT support
 Reduction in vendor base and co-partnership with suppliers
 System approach with IT backbone

• Differentiation :

Differentiation through superior service quality, which is beyond the reach of the
competitors, includes
 Guaranteed delivery time. For example Dell computers delivers
customized PCs at the customers’ doorstep anywhere in USA within 48 hours of order
placement.

 Customized logistics solution. For example, Ramakrishna food land, a 3PL

Service supplier manages the complete inbound logistics operations of Macdonalds in
 India through their cold chain network, across the country customized for processed
food products.

 Consignment tracking. For example, leading 3PL service supplier like

AFL, BLUE DART offers web based consignment tracking and tracing facilities to their
customers.

 Offering guaranteed delivery time and accepting penalty for deviation.

• Value addition :

3PL suppliers are providing some extra services to clients in addition to the normal
logistics services to add value to their service offering. These are :

 Cobbling: To avoid wasteful practices in transportation and storage TCI

cobbles together backhaul arrangement between different MNCs like
Nestle and HL in India for distribution in Uttaranchal.

 Payment Collection: Company offers the services of payment collection

from the consignee against the delivery of material.

 Customs Clearance: Logistics service suppliers provide customs

clearance services to their customers for import and export consignments.
This is because the majority of exporters and importers do not have
expertise in this area of logistics operations and are not conversant with
government rules and regulations.

 Packing and Labeling: 3PL operation provides this service to customers

who do not have the facilities or resources to pack the manufacturers
material or break bulked imported material. In addition the services of
attaching labels and price tag is undertaken.

 Vendor managed Inventory: To reduce the inventory related cost of

critical input in a clients product suppliers offers service of managing
inventory of that item at client place. The inventory ownership lies up with
supplier, who bills the customer for the inventory consumed. The supplier
maintained minimum inventory at the small area allocated to him in the
clients manufacturing premises.
  Outsourcing:

Manufacturing firms opt for strategic alliance with experts in logistics to reduce the cost
and simultaneously bring efficiency and effectiveness into their logistics operations by
outsourcing these services to logistics service providers who have expertise in these
functional areas. Telco Pune has completely outsourced inbound and outbound logistics to
dynamic logistics, a 3PL firm.

 Diversification:

Manufacturing firms having huge logistics operations adopt the strategy of

diversification in to logistics operations. The objective is better cost and operational control
to provide superior customer service. The TATA Group is planning to start a separate
logistics company to undertake the logistics operations of all group companies so as to
provide superior service to its customers.
  CHARACTERISTICS OF AN IDEAL MEASUREMENT SYSTEM
The ideal performance measurement system incorporates three characteristics that
provide accurate and timely direction for management cost or service reconciliation,
dynamic knowledge- based reporting, and exception-based reporting. Each is described and
illustrated.

• Cost/Service Reconciliation

Because of the difficulty in collection certain types of data and in coordination causes and
effect relationships, a majority of reports show logistics expenditure only during a specific
time. For examples, freight bills may not be received until some time after shipment is
made. This practice often causes a problem matching a freight bills with the invoice.
Similarly, it is not easy to assign the extra costs related to customer service to those order
that require additional customer effort. Typical reports fail to reflect cost/service trade-off
critical to generating revenue. It is important to identify and coordinate relevant cost and
revenues in order for managers to make meaningful logistics decision. For examples, in the
toy industries, products are typically manufactured in the spring and sold with early order
discounts to encourage purchase commitment by retailers for the holiday’s seasons. Unless
costs are appropriately sequenced with revenue, management may obtain a distorted view
of the performance effectiveness of its logistics system. An important benefit provide by an
operational plan is that activity levels are matched to projected cost level.

• Dynamic Knowledge- Based Reporting

The biggest challenge in logistics reporting is to present a dynamic, rather than static,
picture of operational performance over an extended time period. In general, most logistics
operational reports provides the status of important activities such as current inventory
position, transportation cost, warehouse cost, and other measures of expenditures or activity
level for a single reporting period. Such reports provide vital statistics that can be compared
with previous operational period to determine if performance is tracking as planned. The
deficiency of static status report is a failure to provide a picture over extended past periods
and an inability to project critical trends in the future. Logistics manager require a reporting
system that can project adverse trends before they surge out of control. Ideally, the
reporting system can also query available logistics data and extract relevant information
that will guide corrective management action.
 • Exception- Based Reporting

Logistics measurement should be exception- based. The comprehensive and detailed nature
of logistics requires that managerial attention be directed to exception from anticipated
result. The existence of an exception to planned results is proof that unanticipated activity is
occurring. Therefore, an idle reporting system will assist manager in isolating activities and
processes requiring attention. Such attention may identify areas requiring problem- solving
efforts or facilitate taking a more in- depth assessment of a specific process or function.
  Logistics Performance Control

To align the objectives of logistics to that of an organisation, or directing the logistical

activities for competitiveness, a powerful control mechanism needs to be evolved and
implemented. Invariably organisations go in for the following control system:

• Budgetary control

Irrespective of the organizational reporting structure, the firm fixes up the budget for
each of the logistical activities, which are treated as cost centres. Deviations in costs are
judiciously monitored, the emphasis being cost saving rather than service to the customer.

• Structural control

Controls are exercised through proper organizational structure. Typically, an

organization having cost as its differentiation strategy will have several layers of reporting
structure to cut costs at subsequently higher levels of investment proposals. In these
organizations customer service related investment proposals take the backseat.

On the other hand, customer focused organizations will have a flat reporting structure. The
span of control is wider. The degree of authority and responsibility entrusted in each
individual is higher. Managers enjoy work freedom but are accountable for the results.
These are result oriented organizations and performance measures are used for continuously
tracking and improving the health of the supply chain to remain competitive.
  STRATEGY IMPLEMENTATION

Besides strategy formulation, its implementation is equally important. The firm

should properly evolve a framework for successful implementation of its logistics strategy.
The elements of the strategy implementation framework are controls, organization
structure, organization culture, and human resource skills.

| Strategy implementation framework |

Strategy

Controls

Financial Non-financial Behavioural

Organisational Organisational
culture structure

Complementary
human skills

Performance
 The financial dimensions of controls focus on the monetary bottom line, which is net
income, return on equity, net profits, costs, etc. The non financial control parameters are
service quality, customer satisfaction and on time delivery. The behavioural controls are
self imposed by employees and are the outcome of the organizational culture and employee
motivational programmes implemented by the organization. Invariably, higher motivational
levels with good self imposed controls in the work force are observed in the organizations
with an open culture.
Examples : IBM, Microsoft and Motorola.

A lean structure with minimum decision making levels and a wider span of control
for individuals shows a higher motivational level amongst employee to perform well. In
such organizations the success rate of strategy implementation is higher. The other critical
factor for successful strategy in the dynamic business environment. This depends on the
experience and educational background, and the ability to analyse the situation and the risk.

 Questions
1) what is Activity based costing

2) Explain the different objectives of Performance Measurement Systems in Logistics

3) What are Internal Performance Measures in Logistics

4) What are objectives of Logistics Performance Measurement? Describe the

components of Internal and External Performance Measurement

5) How is logistics management helps an organization in gaining competitive advantage

to deliver superior Customer Service

6) Explain Logistics Performance Levels( Internal and External)