If you haven't improved your logistics network for a while, it might be time for an examination. Here's a five-step method that can cut logistics costs by 10 to 20 percent.
If your company has not made substantial changes
to its logistics functions in several years, it may be
time for a checkup. Given today's dynamic business
environment, it is more important than ever to periodically
re-evaluate a company's network by comparing
its services and performance to the requirements
of customers and markets.
This evaluation—known as a "logistics audit" or
"potential analysis"—examines the capabilities and
capacities of operating locations, logistics processes,
and the structure of the entire logistics network.
Figure 1 shows one example of the locations, services,
and relationships that could be subject to this type
of audit.
Article Figures
[Figure 1] Possible areas of improvement in a consumer goods logistics networkEnlarge this image
to discover the areas that provide the greatest
opportunities for improvement,
to identify the weak points and potential ways to
address them, and
to assess the economic value of improvements,
including cost savings.
Depending on the company's current situation, an
audit can produce potential savings of between 10
and 20 percent of its total logistics costs. In specific
areas and under certain circumstances, the potential
savings can be even higher. Even a savings of 10 percent
can have a notable impact on profits. Consider:
For a company with an operating margin of 2 percent,
where logistics represents 10 percent of the total
costs, a 10-percent reduction in its total logistics costs
will result in a profit improvement of 50 percent. This
level of savings is always welcome, but in times of
financial crisis it is likely to be especially attractive to
top management.
This article, which is adapted from our book,
Comprehensive Logistics,1 will explain how to conduct
a logistics audit by completing the following five
steps:
requirement analysis
performance analysis
process analysis
structure analysis
benchmarking
Depending on the size of the company, these steps
can take between four weeks and three months to
carry out. Thanks to the resulting cost savings and
increased profits, companies generally can expect to
achieve a return on investment in less than one year.
Step 1: Requirement analysis
The first step is a critical assessment of the logistics
services and performance levels required by customers,
markets, and internal departments such as
sales and marketing. The audit team should answer
the following questions:
Are the current requirements for logistics performance
necessary, given the overall service goals of the
company? For instance, is it necessary to offer 24-hour
delivery if only a few customers require this level of service?
Another example: Is it necessary to permanently
offer the highest level of production capacity and stock
availability if it is only required during peak times?
Do the benefits of fulfilling those requirements
outweigh the costs?
Are you prioritizing correctly? Are you providing
sufficient service to your most important market segments?
Do the most profitable customer segments get
the best service?
Are the current assortment of articles—parts,
products, or merchandise—and the range of services
adequate? Are they too diversified? Does the assortment
include unprofitable articles or services that
could be eliminated without affecting the company's
competitive position?
To what extent could logistics services and quality
be reduced, and what would be the consequences of
such a reduction?
When analyzing your requirements, it can be helpful
to keep in mind the adequacy principle:
The cost of providing any service improvement
must be measured against the additional sales and profit that can be achieved as a
result of that improvement.
For example, it may not be worth the expense to
offer 24-hour delivery to every customer, or customers
may demand higher reliability levels than you can
provide at costs that are acceptable to you.
By revealing the costs and benefits of various logistics
service levels, the requirement analysis can help
you address one of the major conflicts within a company:
What the sales organization promises versus
what operations can actually do. If salespeople are
ignorant of the costs to provide a logistics service, it
will be tempting for them to set a goal of 100-percent
delivery availability, even though an average availability
of 98 percent may be good enough. For example,
if you make the costs of providing special services
clear to the customer, perhaps by explicitly charging
an express surcharge or a packaging fee, you may
find that many customers will decline those services,
and you can adjust service requirements accordingly.
After examining the requirements, the audit team
can recommend a balanced assortment of articles and
services, establish what service levels are adequate,
and develop differentiated quality standards.
Step 2: Performance analysis
In the next step, the auditors examine how well the
operative and administrative "stations" and "performance
chains" of the logistics network—including
procurement, production, distribution, and sales—fulfill
those requirements, and at what cost. A "station"
can be a single physical location, such as a warehouse
or distribution center, transshipment point, manufacturing
plant, or sales office, where orders, materials,
and resources enter as inputs and products or services
leave as outputs. A "performance chain" is a series of
linked stations that executes specific functions.
For each station, the team should determine the
performance limit—that is, the maximum possible
throughout or output; the operating, processing, and
throughput times; the available size and space; the
location of resources, facilities, and stocks; and the
buffer and storage capacities. By conducting an inputoutput
analysis of the stations, or locations, it is possible
to see what resources are required and what it
costs to fulfill an order. Through this analysis, the
team can identify which locations are not performing
in an optimal manner; they can then develop initial
ideas for improving, strengthening, or even eliminating
these weak points.
The following are some common types of problem
areas that can cause process delays and increase performance
costs:
Bottlenecks are stations with insufficient capacity,
which operate in peak times above 95 percent of
their performance limit. They cause long queues and
waiting times for incoming orders, material, and/or
logistics units, such as parcels or pallets. This can
limit the output of a system, network, or even the
whole company.
Excess-capacity stations operate for long periods
below 70 percent of their maximum throughput or
output. Even in peak times they do not reach capacity. Often they are overstaffed
and drive up costs without generating value.
Failure points have an availability level far below
90 percent. They cause frequent or long-lasting interruptions
that block upstream stations in the supply
chain. They also cause downstream locations to be
underutilized and can be the source of severe delivery
delays and missed deadlines.
Redundancy stations that duplicate the functions
performed at one or more other locations in the network
are generally necessary in order to have alternatives
if a breakdown should occur. However, companies
should assess whether the existing degree of
redundancy is really necessary.
Delay points greatly exceed required throughput
times and completion dates. They are often bottlenecks
or failure points that put promised delivery
dates at risk and cause additional costs downstream as
the supply chain tries to make up for lost time.
Fault points cause serious errors with unacceptable
frequency. They negatively affect performance and
costs by causing delays, disturbances, inefficiencies,
rework, and extra effort at subsequent stations in the
supply chains.
Main cost areas generate the greatest share of the
total logistics costs. These areas offer the largest
potential savings, which can be achieved by reengineering,
improved organization, rationalization,
mechanization and automation, and/or advanced
information technology.
Step 3: Process analysis
Companies must assess not only the performance
within the various stations of the supply network but
also the flow of orders and material between those
points. To assess the end-to-end flow of orders and
material, it is necessary to document and review the
existing order, logistics, and performance processes.
The process analysis begins with order acceptance,
followed by order scheduling, procurement, production,
and distribution. The last step involves delivering
the product or service to the customer. However,
when assessing logistics processes, it is advisable to
apply the following rule:
Scrutinize the order processes by following the
order flow, but analyze the logistics processes
against the flow of goods.
Starting the analysis of order processes with the customer
ensures that the analysis will assess the real
value contribution and customer orientation of each
of the stations that will be involved. Analyzing the
flow of the logistics units (the shipments, load units,
or individual items) upstream, from their destinations
to their sources, helps to reveal the goal orientation of
the individual process steps within the supply chain.
Figure 2 presents a checklist of the most important
subject areas and questions to be asked during the
process analysis. (For more questions, precise definitions
of the terms, and detailed explanations, please
consult our book, Comprehensive Logistics.)
The process analysis results in recommendations for
process optimization and more efficient use of
resources as well as outsourcing decisions. It also is a
useful means of estimating the economic value of
potential changes.
Step 4: Structure analysis
After analyzing logistics requirements, performances,
and processes, the audit team next should examine
whether the current structure of the logistics network
satisfies present and future demands. For this purpose,
the team must map out the company's network and all
subsystems of interest. (See Figure 1 for an example.)
During the structure analysis, the following questions
need to be answered:
What is the optimal number of plants, storage
locations, logistics centers, delivery points, and sales
outlets?
Are the plants, storage locations, logistics centers,
transshipment points, and delivery points optimally
located?
Are the functions, tasks, and inventories correctly
allocated among plants, logistics centers, and trans–shipment
points?
Which functions should be executed centrally,and which should be executed
locally?
How would consolidating local inventories and functions at a logistics center
reduce costs and improve performance?
What is the optimal number of stages for procurement
and distribution?
Are there avoidable handling or transfer activities?
Are the right criteria applied for choosing direct
delivery or delivery via transshipment points and
logistics centers?
The structure analysis may produce suggestions for
improving or redesigning parts of the network or even
the entire logistics network. It also offers proposals for
centralization or localization of various functions and
inventories. The analysis should give you an idea of
how the proposed recommendations will improve
costs, service, performance, and competitiveness.
Step 5: Benchmarking
Benchmarking is the final step in the audit process.
By benchmarking, we mean the comparison of costs,
performance, quality, and other key performance indicators
among several companies, business units, or
supply chain stations with similar activities and functions.
It can also include a comparison of operational methods, organization, and
strategies.
But benchmarking can be tricky. It is essential that
the business units being compared have similar tasks,
functions, and key performance indicators, as relatively
small differences between companies, plants, or
even single operative stations can lead to quite different
key performance indicators (KPIs).
External benchmarking compares the key indicators of different companies'
performance units. It is difficult, however, to ensure that they are
truly comparable. For example, benchmarking against another
company's reported logistics costs
as a percentage of revenue can be
misleading, as companies define
and record those costs differently.
Moreover, due to differences in
products' size and value, logistics
costs that relate to the value of the goods on a pallet
or other load unit can differ by a factor of 10 or more,
even when the logistics costs per load unit are equal.
In addition, the results of external interviews or
trend surveys can be misleading because they do not
necessarily reveal the specific circumstances and goals
of the other companies. The answers you get, of
course, reflect the opinions, competence, and intentions
of the people who participated in the interviews
or filled out the questionnaires; they are unlikely to
give deeper insight into their companies' performance
and strategies. Even if all participants answer honestly
and in-depth, the value of external benchmarking
remains debatable. Companies that only follow trends
and other companies' examples will be simply average
and inevitably will make the same mistakes as others.
In order to become the best in class and to have a lead
over competitors, a company has to develop its own,
unique strategies.
Internal benchmarking within the same company
compares the key performance indicators of operations
and administrative offices that have similar
tasks and functions. For this reason, it can only be
carried out in larger companies that have several
operative stations of the same kind. The advantage of
internal benchmarking is that it allows you to assess
whether the stations' goals, assigned tasks, and functions
are sufficiently similar. It also allows you to
make sure that the KPIs are defined and measured
throughout the company in the same manner. In
short, internal benchmarking shows how well the
compared plants, storage locations, or logistics centers
fulfill their jobs and the degree to which they differ
in costs and performance.
An even better approach may be analytical benchmarking,
which compares the key performance indicators of an existing business unit
with those of an optimally planned and organized unit—in other
words, comparing current performance against the
ideal. Analytical benchmarking allows companies to
recognize their options, assess the changes that will be
needed to make improvements, calculate the costs
and investments required, and identify the necessary
actions needed to achieve the options that have been
identified. It requires companies to develop their own strategies
and company-specific solutions.
From a medium-term perspective,
analytical benchmarking helps companies see how they can
improve their current performance. It can also help them beat
external competitors and achieve sustainable competitive advantage
by leaving the common path of following a "me too" philosophy or industry "best
practices" without assessing whether they are suitable
for their own operations or goals.
Closing the gap
There continues to be a gap between logistics theory
and business practice in terms of knowledge and execution.
Accordingly, logistics practices at most companies
still offer a great deal of room for improvement.
A logistics audit, such as the five-step approach
described in this article, provides a method for discovering
those possibilities.
However, it is important to remember that the
logistics audit by itself does not offer solutions. Only
strategies, which are procedures for reaching a certain
goal, can help to find the optimal solution. Once an
audit has been completed, companies can realize the
potential improvements they discovered during the
logistics audit by implementing solutions with the
help of rules and tools designed to optimize their
logistics performance.
Endnote:
1. This article is based on Chapter 4 of
Comprehensive Logistics, by Timm Gudehus and
Herbert Kotzab. The 891-page book (ISBN: 978-3540-
30722-8), published by Springer in 2009,
includes 282 illustrations.
Companies in every sector are converting assets from fossil fuel to electric power in their push to reach net-zero energy targets and to reduce costs along the way, but to truly accelerate those efforts, they also need to improve electric energy efficiency, according to a study from technology consulting firm ABI Research.
In fact, boosting that efficiency could contribute fully 25% of the emissions reductions needed to reach net zero. And the pursuit of that goal will drive aggregated global investments in energy efficiency technologies to grow from $106 Billion in 2024 to $153 Billion in 2030, ABI said today in a report titled “The Role of Energy Efficiency in Reaching Net Zero Targets for Enterprises and Industries.”
ABI’s report divided the range of energy-efficiency-enhancing technologies and equipment into three industrial categories:
Commercial Buildings – Network Lighting Control (NLC) and occupancy sensing for automated lighting and heating; Artificial Intelligence (AI)-based energy management; heat-pumps and energy-efficient HVAC equipment; insulation technologies
Manufacturing Plants – Energy digital twins, factory automation, manufacturing process design and optimization software (PLM, MES, simulation); Electric Arc Furnaces (EAFs); energy efficient electric motors (compressors, fans, pumps)
“Both the International Energy Agency (IEA) and the United Nations Climate Change Conference (COP) continue to insist on the importance of energy efficiency,” Dominique Bonte, VP of End Markets and Verticals at ABI Research, said in a release. “At COP 29 in Dubai, it was agreed to commit to collectively double the global average annual rate of energy efficiency improvements from around 2% to over 4% every year until 2030, following recommendations from the IEA. This complements the EU’s Energy Efficiency First (EE1) Framework and the U.S. 2022 Inflation Reduction Act in which US$86 billion was earmarked for energy efficiency actions.”
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
"After several years of mitigating inflation, disruption, supply shocks, conflicts, and uncertainty, we are currently in a relative period of calm," John Paitek, vice president, GEP, said in a release. "But it is very much the calm before the coming storm. This report provides procurement and supply chain leaders with a prescriptive guide to weathering the gale force headwinds of protectionism, tariffs, trade wars, regulatory pressures, uncertainty, and the AI revolution that we will face in 2025."
A report from the company released today offers predictions and strategies for the upcoming year, organized into six major predictions in GEP’s “Outlook 2025: Procurement & Supply Chain.”
Advanced AI agents will play a key role in demand forecasting, risk monitoring, and supply chain optimization, shifting procurement's mandate from tactical to strategic. Companies should invest in the technology now to to streamline processes and enhance decision-making.
Expanded value metrics will drive decisions, as success will be measured by resilience, sustainability, and compliance… not just cost efficiency. Companies should communicate value beyond cost savings to stakeholders, and develop new KPIs.
Increasing regulatory demands will necessitate heightened supply chain transparency and accountability. So companies should strengthen supplier audits, adopt ESG tracking tools, and integrate compliance into strategic procurement decisions.
Widening tariffs and trade restrictions will force companies to reassess total cost of ownership (TCO) metrics to include geopolitical and environmental risks, as nearshoring and friendshoring attempt to balance resilience with cost.
Rising energy costs and regulatory demands will accelerate the shift to sustainable operations, pushing companies to invest in renewable energy and redesign supply chains to align with ESG commitments.
New tariffs could drive prices higher, just as inflation has come under control and interest rates are returning to near-zero levels. That means companies must continue to secure cost savings as their primary responsibility.
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Freight transportation providers and maritime port operators are bracing for rough business impacts if the incoming Trump Administration follows through on its pledge to impose a 25% tariff on Mexico and Canada and an additional 10% tariff on China, analysts say.
Industry contacts say they fear that such heavy fees could prompt importers to “pull forward” a massive surge of goods before the new administration is seated on January 20, and then quickly cut back again once the hefty new fees are instituted, according to a report from TD Cowen.
As a measure of the potential economic impact of that uncertain scenario, transport company stocks were mostly trading down yesterday following Donald Trump’s social media post on Monday night announcing the proposed new policy, TD Cowen said in a note to investors.
But an alternative impact of the tariff jump could be that it doesn’t happen at all, but is merely a threat intended to force other nations to the table to strike new deals on trade, immigration, or drug smuggling. “Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people); this ‘chaos premium’ only increases his leverage in negotiations,” the firm said.
However, if that truly is the new administration’s strategy, it could backfire by sparking a tit-for-tat trade war that includes retaliatory tariffs by other countries on U.S. exports, other analysts said. “The additional tariffs on China that the incoming US administration plans to impose will add to restrictions on China-made products, driving up their prices and fueling an already-under-way surge in efforts to beat the tariffs by importing products before the inauguration,” Andrei Quinn-Barabanov, Senior Director – Supplier Risk Management solutions at Moody’s, said in a statement. “The Mexico and Canada tariffs may be an invitation to negotiations with the U.S. on immigration and other issues. If implemented, they would also be challenging to maintain, because the two nations can threaten the U.S. with significant retaliation and because of a likely pressure from the American business community that would be greatly affected by the costs and supply chain obstacles resulting from the tariffs.”
New tariffs could also damage sensitive supply chains by triggering unintended consequences, according to a report by Matt Lekstutis, Director at Efficio, a global procurement and supply chain procurement consultancy. “While ultimate tariff policy will likely be implemented to achieve specific US re-industrialization and other political objectives, the responses of various nations, companies and trading partners is not easily predicted and companies that even have little or no exposure to Mexico, China or Canada could be impacted. New tariffs may disrupt supply chains dependent on just in time deliveries as they adjust to new trade flows. This could affect all industries dependent on distribution and logistics providers and result in supply shortages,” Lekstutis said.