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Better Planning With Your Lead Logistics Provide
With many manufacturers relying on outside logistics providers for a broader mix of services, it is also important to consider delegating planning responsibilities. Here, we explore when and where the outsourcing of planning begets the best results.
By Jeff Schutt, Ph.D.
What is Supply Chain Planning?
Supply chain planning is the set of processes through which an enterprise plans the flow of goods from source to customer while minimizing required resources. Supply chain planning and supply chain execution combine to enable complete supply chain management. Planning is often segmented into three parts:
• Strategic planning, such as the design and redesign of supply chain structure, such as sourcing, plant location, and distribution center location;
• Tactical planning, such as sales and operations planning, which focuses on week-to-week production and product allocation decisions; and
• Operational planning, such as determining the best source to fulfill a customer order or “trip planning” to identify the best carrier and route for a specific shipment.
Planning processes can be characterized by placing them on a matrix relative to the time horizon to which they apply (strategic, tactical, operational) versus the stage of the supply chain that they plan (receive, move, store, deliver, etc).
Why Planning is Important
If supply chains and the required resources were infinitely flexible to create and deliver product when and wherever needed, there would be no need for supply chain planning. If the distribution network was always optimal for current business requirements, if there was automatically the right number of warehousemen arriving for work each day, and if product was somehow always available when needed to fill customers’ orders, there would be no need to plan. The reality is today’s companies need to create plans, make decisions based on those plans and manage product flow to the best of their ability.
Planning product flow is not optional. If an enterprise conducts operations with physical goods, it must, one way or another, make decisions regarding product flow to satisfy customer requirements within the firm’s capacity constraints. The choice the organization can make is: Will it plan poorly or well? Does the organization want to take planning seriously enough to think through how it will plan and who will have responsibility for managing each part of the plan’s development?
There are significant incentives for planning excellence. Planning is a high-leverage activity; doing it better results in large, quantifiable operational gains. For example, in five months a soft drink bottler with three bottling plants and approximately $500 million in annual sales was able to increase the customer case fill rate from 96 percent to over 99 percent fill a substantial gain while simultaneously reducing material inventory by 36 percent, finished goods inventory from 11 days to 9.5 days, and overtime expense by $150,000 all due to better planning.
It’s also noteworthy that the bottling business is difficult to plan due to:
• Extreme seasonal, holiday, and promotion-driven sales peaks and valleys;
• Short-cycle nature of operations; typically finished goods inventory is no more than 10 days of sales while many bottlers are dealing with hundreds of stock-keeping units; and
• High resource utilization expected for production, transportation, and storage.
The incremental planning effort required three relatively inexpensive staff members, three personal computers connected with a local area network, and some moderately priced planning software interfaced to business transaction systems to obtain a few key types of daily operating data. For this bottling example, the focus is on key short- to intermediate-range decision-making for operations what product should be made and how much should be sent to each distribution center each day. Does it not make sense that performing planning well, rather than poorly, will reap big rewards?
What is a Lead Logistics Provider?
When logistics outsourcing first became popular in the 1980’s, there was a widespread expectation that many manufacturers would turn over their complete distribution system to Third Party Logistics providers (3PLs). In fact, many organizations proceeded incrementally with outsourcing individual logistics locations, and outsourcing of transportation management with limited geographic and modal scope. Consequently, many 3PL relationships that evolved during the 1990s were in fact isolated “islands of outsourcing” instead of being a comprehensive delegation of logistics responsibilities.
But the 1990s also saw the growth of Fourth Party Logistics (4PL) management. In a 4PL arrangement the client organization turns over responsibility for logistics management to an outside organization that is charged with managing logistics, not executing logistics. The 4PL typically develops contracts with several 3PLs and transportation providers to perform logistics operations. For example, Vector Supply Chain Management, jointly owned by Menlo Worldwide and General Motors, has comprehensive responsibility for GM’s logistics operations, including:
• Recommending changes in the physical network through which materials are brought to GM plants;
• Operating systems which provide visibility and control of material and finished goods flow through GM’s supply chain;
• Selecting, monitoring, and reporting on the performance of transportation providers; and
• Planning changes in the logistics system to reach the next level of efficiency.
The Lead Logistics Provider (LLP) approach has been adopted by a significant number of manufacturers in the last several years. It represents something of a hybrid between the reality of often-narrow 3PL operations and the 4PL’s management-only responsibility. The client contractually tells the LLP: “OK Mr. LLP, you are given this broad (but specific) scope of responsibility for logistics management and execution. You are expected to manage the totality of this scope, to execute the appropriate part of it with your own resources, and to contract with other providers to execute other portions which you are not as well equipped to cost-effectively perform.”
The LLP approach attempts to achieve the “best of both worlds” results by:
• Reducing management overhead the contracting client can reduce logistics overhead, and the LLP does not usually need to add to its management cost as it is sharing management resources across several clients;
• Recognizing that no one provider of logistics execution services is the best source of all the services needed, and that the LLP must (sub-) contract out for some things either because they specifically agreed to do that in the client-LLP contract, or because they recognize that that is the best way to meet their obligations to their client; and
• Concentrating logistics performance responsibility in the hands of one outside organization that has maximum incentive to provide high service at low cost, and represents the proverbial “one-neck-to-choke” if things do not go as well as expected.
With LLPs taking on broad operations responsibility, manufacturers have found it appropriate to consider delegating some planning responsibility as well. Here’s a look at how that happens.
Planning with your LLP
The traditional 3PL often just provided “arms and legs” for the client manufacturing organization. The 3PL received the product from a manufacturer, stored it, picked the orders that were provided, and shipped them on the carriers specified. Planning responsibility was strictly focused on warehouse operations, including storage locations, picking strategy, and labor planning.
On the other hand, many organizations contracting for LLP services are comfortable with delegating significant decisions regarding logistics, including:
• How product will be routed from source to destination, including responsibility for export documentation and customs clearance;
• Which carriers will be used for what transport lanes; and
• Planning volumes of traffic for transportation providers and volumes of throughput and storage for warehouse providers.
When the LLP maintains its own distribution facilities, it will typically consider how a client’s materials can most effectively flow through that network. When it operates facilities controlled by the client, it will often recommend changes in that network to optimize its performance.
Most client organizations are reluctant to cede total product flow planning to an outside organization. Specifically, decisions regarding: 1) how much product to acquire or manufacture; 2) how much product to keep in inventory at each location; and 3) where to source customer orders, are often made by client organizations. Most firms seem to feel these decisions are too core to trust to an outsider, represent too much financial responsibility related to inventory investment, and have too many opportunities for service failure.
There are precedents for outsourcing some of these decisions, particularly when manufacturing is outsourced. The contract manufacturer likely has responsibility for precisely when product will be made (because the manufacturer maintains its own schedule), and for materials inventories although usually subject to strict contractual limitations on which party is responsible for how much inventory.
Responsibility for LLP operations are sometimes analogous to the contract manufacturing situation. For example, where the LLP has responsibility for configuring or packaging finished goods prior to delivery to customers, the LLP may also have responsibility for scheduling, accessory inventory management, and determining where configuration will occur.
To guide decisions on planning
responsibility, our experience has
identified two helpful principles.
Principle 1: Planning belongs close to execution. There are good reasons to plan near where execution occurs, both on physical and organizational levels. High quality planning depends on deep knowledge, and that kind of knowledge is typically better found near daily management processes. In addition, plans generated nearby operations are typically better “internalized” by those who must execute them. Operating management and staff are more enthusiastic about doing what the plan specifies, and produce better operating results as a consequence. When planning is closer to execution, it is also easier to construct metrics, Key Performance Indicators (KPIs), which measure both planning and execution, making it possible to hold a team more fully accountable for results.
Principle 2: The scope of planning should be aligned with scope of management responsibility. Allocation of planning between manufacturer and LLP should generally align with the party with managerial control of activities on a week-to-week basis.
However, better planning is sometimes more “globally optimal” planning, which tends to pull planning processes away from execution (and away from Principle 1) and this complicates the application of Principle 2.
Figure 2 illustrates a short-range inventory planning example that demonstrates these concepts. Suppose that a 3PL operates a distribution center that inventories goods for retail distribution. If inventory is replenished at that distribution center (that is, product going into that distribution center) using traditional reorder-point logic, there is no reason the 3PL can’t assume responsibility for replenishment planning even though their actions may commit their client to more (or less) inventory investment. If the 3PL doesn’t have the products required to fill orders, the 3PL shipping supervisor can walk down the aisle to the planner’s office and communicate his displeasure.
Suppose the client organization realizes that they could improve overall inventory performance by moving to an intelligent inventory deployment process in which central planners (and some very powerful planning software) determine how much product to move to a location on any given day across the world, based on regional sales forecasts, current inventory and in-transit levels, and scheduled near-term production including occasionally re-balancing inventory that is misaligned with demand by cross-shipping product between distribution centers. It no longer makes sense for a local 3PL to manage one location’s inventory under this philosophy, but it would be appropriate for a LLP with global operations capability and responsibility to do that kind of global planning. That LLP then has broad responsibility to fill customer orders, and have the product available to fill them. While having the LLP take global planning responsibility may make sense, some manufacturers may decide that this is more responsibility than they feel they should delegate, and pull that global inventory management responsibility back in-house (in-source).
Sometimes software availability makes the difference. If the global LLP can offer sophisticated planning capabilities based on software that they maintain, the client may be willing to cede responsibility because they know the LLP has already invested in a software license or development, or perhaps more importantly, the training and staff skills necessary to do the more advanced types of planning.
A similar example exists around visibility, alerts and event management. When an LLP has responsibility for systems that provide visibility of shipments, orders, and inventory, the LLP should have responsibility for monitoring and responding to the alerts that such visibility systems produce when operations deviate from plan. The LLP should also then be given responsibility for short-cycle re-planning, for example, re-routing shipments currently in transit even if that may involve changing which customers get product first.
Achieving Better Planning in an Outsourced Environment
For higher-level product flow planning to be successfully outsourced to an LLP, certain other elements need to be put in place as well. Let’s conclude by reviewing some of them.
Trust. Delegating supply chain planning requires that the client trust the LLP, and that the LLP be worthy of that trust. Trust requires a true partnership relationship, not just a transactional relationship based on the lowest possible price. You can’t outsource planning to “arms and legs.” You must hire brains, too.
Systems integration. Good planning requires lots of timely and consistent data, which in turn means that the client systems and LLP systems must be appropriately integrated. Even with today’s common use of Electronic Data Interchange (EDI), messaging-based integration software, and emerging Web Services interfaces, it takes some time and some investment to achieve that integration.
Comfortable exchange of information. With trust and good systems integration, it should be possible to freely exchange information. For example, an LLP responsible for global inventory deployment needs to be working from the same sales forecasts, global inventory records and master production schedules as the client. The client needs to be able to reach into LLP information at any time, whether for current inventory details, customer order processing status, or performance metrics.
Involvement by planning management. Planning managers should be involved in outsourcing deals, not just procurement and operations people. Planners need to have up front input regarding who will perform what functions, and need to be “signed up” emotionally for the deal if changes in planning responsibility are going to be successful.
To summarize, it is appropriate for LLPs to take on planning responsibilities that align with the scope of their management responsibilities, thus keeping planning close to the managers who must deliver operating results. To make that possible, a LLP must truly become a trusted advisor to their clients, to ensure that manufacturers are comfortable with delegating the appropriate planning responsibilities.
Schutt, Jeffrey H. (2004), Directing the Flow of Product: A Guide to Improving Supply Chain Planning, Boca Raton: J. Ross Publishing