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Creating Shareholder Value Through Integrated Logistics Management (ILM)
Heres how to make it easier and more profitable to do business with your company, and create greater shareholder value.
By Greg Slawson
Organizations with large and complex supply chains that span products, geographies, channels, and business units have the potential to transform those supply chains into competitive weapons. In order to drive improvements while cutting costs, most organizations evaluate new products or processes to enhance their operations based on traditional return on investment (ROI) models. Although this practice is not incorrect, it is limiting in that it focuses on step-by-step improvements in isolated portions of a business. Taking a broader view of the way organizations move goods from their suppliers suppliers to customers customers, outside of traditional functional silos and outside of traditional metrics, can increase shareholder value substantially.
Thinking of new ways to drive down cost, improve service levels, shorten cycle times, and reduce inventories are important objectives; however, to transform a supply chain into a competitive weapon requires considering other objectives as well. These other objectives drive practices that transform supply chains from just a means of getting the right product to the right place at the right time to winning new business and blocking competition through continuously improving flexibility and responsiveness - in other words, making it easier and more profitable to do business with you than with your competitors.
Improving flexibility and responsiveness requires looking beyond the current functional silos, irrespective of whether they are by product, geography, channel or business unit, and broadening the definition of simple ROI to incorporate the concept of increasing shareholder value. Although cutting costs while improving service may temporarily increase shareholder value, those actions can typically be matched, and sometimes surpassed, by your competitors, which brings the value of your organization back into parity with your competitors. For organizations that compete across channels, geographies, business units, and product lines, the key to transforming the supply chain into a competitive weapon that generates sustainable advantage, and thus creates more shareholder value, is integrated logistics management (ILM).
While implementing ILM may involve an application or software, it is best thought of as a pursuit similar to the concepts of Lean and Six Sigma. ILM focuses on the goal of making and executing supply chain decisions (transportation, replenishment, fulfillment, inventory policies, etc) based on the real capabilities of the entire network as well as the real and anticipated demands placed on that network. This approach differs from integrated planning because the planning functionality in an ILM supply chain is an integrated part of execution, not simply a suite of applications feeding the supply chain.
The core concept behind ILM is that large organizations can leverage their mass, network, relationships and distributed skills to create a sustainable competitive advantage. Historically, this type of leveraging has been impossible because the technology that could be scaled to incorporate the volumes and complexities of a large organization without forcing each channel, geography, business unit, or product line into severely limiting constraints in terms of language, business rules, business model, etc., was not available. However, now that the ubiquitous nature of the Internet and advances in software technology have made ILM viable for mainstream organizations, it is time for large organizations to embrace this new concept and work on aligning their business to take advantage of it.
ILM enables organizations to use logistics as a weapon in ten fundamental ways.
- Multi-, Multi-, Multi-, Execution. First, and most importantly, ILM incorporates execution across all business units, channels, modes of transportation, geographies, product lines, and trading partners. This capability is foundational because without a single data model providing the portfolio of real executable options across all modes, the planning, exception handling, and collaboration required for ILM is not possible.
- Streaming optimization. In traditional silo-based optimization models, orders are collected in a bucket. When a predetermined time signal starts the engine, the orders in the bucket are executed. With streaming optimization, orders are planned and optimized according to flexible workflows embedded in the execution process, so an order does not necessarily have to wait in a bucket until an arbitrarily set time passes. In addition, streaming optimization allows multiple order types to be planned and optimized together or separately according to business logic or the current state of the overall network. For example, some product types may be considered in a pool solving for continuous moves, whereas others are kept separate based on product incompatibilities.
- Workflow and Automation. ILM workflow and automation capabilities drive the rules for which types of orders are directly executed, and which types require different modes of planning and different timing. If the workflow and automation capabilities are native to an ILM application, they can take advantage of all the planning and execution capabilities without requiring new integrations each time a rule needs to be changed. It is also critical that these capabilities be a part of the ILM application so that when exceptions arise, they are automatically dealt with appropriately, appropriate either through updated execution, planning, human interaction, or some combination of the three.
- Supply Chain Visibility and Event Management. Full visibility applies to all inventories, orders, shipments, and assets in the right context for each supply chain professional. Event management capabilities allow supply chain professionals to prioritize activity based on the importance of exceptions that occur in an execution or the supply chain conditions driving that execution. Full visibility is a key capability that enables automation in the supply chain. Without the capability to quickly identify and resolve exceptions, tasks that are automated tend to drift back into manual modes because of the pain of unrecognized process failures that lead to missed orders and a lower level of service. With full visibility and event management, processes are easier to automate and change to keep pace with changing conditions.
- Constraint flexing. Most organizations manage inventory, orders, and transportation in separate applications. Since inventory is fundamentally a hedge against uncertainty on both the supply side and the demand side, better inventory deployment decision making requires balancing, in real time, supply side capabilitiesincluding current inventory positions, transportation resources, and warehouse capacities against demand forecasts, forecast accuracies, and real orders. ILM simultaneously optimizes the movement of goods and inventory levels throughout the network based on the actual data generated by goods flowing through the network. Constraint flexing enables organizations to analyze trade-offs in ship times, inventory levels, and fulfillment lead times in real time, providing lower-cost options to move goods through a supply chain while meeting or exceeding customer delivery expectations.
- Stochastic Optimization. Stochastic optimization leverages the actual data generated by goods flowing through the network to understand the inherent stochastic variability of the network. This understanding enables the application supporting ILM to continuously generate and update the supply chain constraints used to ensure the optimal balance of goods in motion and goods at rest. Instead of using simple models, averages, and assumptions to make planning recommendations, ILM leverages the inherent stochastic variability of the network along with current positions and capabilities to make trade-off decisions between transportation alternatives and inventory position. This provides a huge advantage as ILM continuously generates and updates the supply chain constraints used to ensure the optimal balance of goods in motion and goods at rest.
- Global, Local, and Central Management. The ILM model puts the benefits associated with centralized as well as decentralized business models into supply chain operations. It incorporates all the information required to make the best network decisions and execute them across all of the business units, channels, modes of transportation, geographies, product lines, and trading partners (global management). At the same time, it allows supply chain professionals from the different business units, geographies, channels, etc. to incorporate their knowledge into action the ILM processes and tools (local management). Doing so means that the ILM model includes access and localization capabilities that inherently and seamlessly incorporate multiple languages, currencies, and other units of measure in the applications and processes. All of the data required to operate the ILM infrastructure is maintained in one place on a single data model (central management). In order to offer these capabilities on any scale, the ILM infrastructure needs to be web native so that the information can be centrally maintained (making it less expensive to maintain, while ensuring that the information is up-to-date, and accurate), yet easily accessible to supply chain professionals regardless of their location.
- Rapid Continuous Improvement. The cycle of continuous improvement is (1) identify opportunities, (2) validate the opportunities, (3) design new process, (4) test new process, (5) sell the concept of the new process into the business, and (6) impliment the new process. ILM can provide the means to greatly reduce the cycle time it takes to perform these steps. If data used to run a logistics network is centralized, accurate, and accessible and includes solid analytics capabilities, the task of identifying and prioritizing potential opportunities is greatly enhanced. Since ILM includes all of the information required to operate a logistics network joined with strong planning capabilities, validating opportunities as well as designing and modeling new processes is much easier and more accurate. Building a strong case for new opportunities to sell into the business is also easier with ILM because the data generated to support new process designs is based on real operating parameters and historical data. Finally, implementing new processes is faster because of ILMs ability to rapidly add or change workflows and automation, and change is less traumatic because event management effectively identifies where new processes need refinement to work.
- Rapid Network Reconfiguration. When supply chain operating conditions change, or when business requires change, having a native workflow and automation engine in the logistics platform makes the changes easier to implement, execute, monitor, and refine.
- Native Procurement, Planning, and Execution. The power of building procurement capabilities off of a broad logistics execution platform has advantages over the traditional procurement alternatives. Because the data within the ILM structure is complete and very finely grained, building a bid package is much faster and more accurate. Because the data is complete across all modes and spans all logistical aspects of the business, it is possible to gain higher volume leverage when asking carriers to bid on lanes. Finally, it is much faster and easier to implement awarded packages because the bids from the carriers are automatically and directly fed back into the execution and planning environment.
Other Factors to Consider When Calculating ILMs Business Benefit
In addition to the traditional methods for calculating ROI, such as reduced inventories, reduced freight costs, and labor productivity, here are other factors that should be considered when determining how ILM will increase shareholder value by creating a competitive advantage.
- Rapid Deployment. With an ILM platform, it is much faster and easier to turn an idea into execution.
- Market Share Growth. ILM enables organizations to increase their market share through lower pricing, better service and more flexibility. By leveraging the mass and inherent flexibility built into an ILM network, it is easier to rapidly respond to competitive pressures through price reductions, service level increases, and new services.
- Contracting Carrier Capacity. The transportation market has changed. Volume leverage alone is no longer enough to secure the best carriers at the lowest cost. By leveraging mass and network through ILM, organizations can more easily provide attractive lanes and incorporate unattractive lanes into continuous closed-loop trips for carriers.
- Customer Satisfaction and Intimacy. By providing end-to-end visibility and collaborative capabilities, ILM lets you tell customers what has happened, is happening, and will happen within a supply chain. Having up-to-the-minute information available makes dealing with customers much less contentious than it otherwise might be.
- Supplier Satisfaction. In todays world, organizations must compete for supplier capacity as well as for customers. ILMs inherent flexibility gives you more leverage with your supply base.
- Centralized Data Management. By centralizing the planning and execution functionality required to drive your organizations logistics, you lessen your dependencies on third-party logistics services (3PLs) for information. Having a centralized ILM platform lets you integrate the 3PL planning and execution capabilities into your system.
- Flexibility of Asset Base. When business conditions change, the companies that can respond most rapidly and execute to take advantage of the changes will gain market share at the expense of their competitors.
- Platform for Rapid Continuous Improvement. While all successful organizations strive for continuous improvement, an organization that has adopted ILM can drive more continuous improvement initiatives more successfully with less human effort.
For organizations with large and complex supply chains, ILM can create a sustainable competitive advantage. For a business to fully achieve the benefits of ILM they must take a much broader view of the supply chain as well as an expanded view of ROI. In addition to traditional ROI analysis, organizations will need to view the strategic competitive advantages ILM provides over a long term and by measuring increased shareholder value.