Strategic Important of Logistics in Supply Chain Management

Logistics has been defined as the Planning, execution, and control of the procurement, movement, and stationing of personnel, material, and other resources to achieve the objectives of a campaign, plan, project, or strategy. It may be defined as the 'management of inventory in motion and at rest.‘

And if we look at the definition of Supply Chain, it has been defined as:- 

The continuous planning, developing, controlling, informing and monitoring of action in order to 

have an integrated supply chain process which will meet the objectives and goal of the company.

Thus, need to emphasis here that, the logistics operation is one of the most important function in 

supply chain activities.

The logistics responsibility to managing traffic management, warehousing, order fulfillment

inventory control, order entry and planning material movement is the the key for any successful 

supply chain operation. Without effective management of these key function,  any plan toward 

supply chain efficiency will run aground.

Why we need Procurement in Business?

All businesses are set up for one single purpose, i.e to make plenty of money for the shareholders. In order to do so, two thing need to happen quickly;

a) Increase the sales order by capturing more market share
b) Reduce the overall cost of operation to stay efficient

To increase the sales and capture more shares in the market place, the company need to have a quality product which is also competitive. Without these two value, it will be extremely difficult to generate more income for the company business.

In order to generate more sales, the company will need efficient output. To achieve this, the production department need to increase productivity either through efficient labor workforce or through investment of new technology. Beside this, the quality department has to play it part to ensure all operation under control to achieve the specification.

Having done that, efficient costing will not be achieve without having a quality supply with good pricing from suppliers,

Cost of material in certain industry can be from 45% to almost 60% of total product cost, which meant, material cost percentage in the total product cost is very high. And the greatest saving of cost to ensure company stay competitive is from the procurement function.

Beside lowering down of cost to ensure business stay competitive, is the fact that, managing disruption is also part of the objective of procurement.

There are few type of disruption in business operation which need to be managed from procurement perspective.

a) Quality issue from raw material supply by supplier
b) Disruption to supply due to delivery issue or event which need to be overcome through risk profiling
c) Poor performance by business partner which supply raw material and accessories to the company.

In the end, the real need of Procurement in business is very important and the role is extremely critical and strategically, the strength of the company rely on few area of operation and one of the most major area is procurement.

Strategic Procurement Activities

Procurement management is a strategic role and the key objective is to meet the business goal of the company.

In order to achieve the demand placed on the operation, the procurement function by itself must able to play the part effectively and to do so, there are certain number of area which need to be focus
upon.

These parameter which need to be review and evaluated are as per diagram below.

Internal Analysis -  the need to review all current business needs and internal operational issue. What are the strength and weakness adherent to the current business structure need to be identified. For example, where is the company position in term of marker share? Is the company cost of operation is at the best optimum level or need to improve? What the contribution factor which causes the company business to be at the undesirable level? Is the company need to refocus onto more strategic plan for sourcing to reduce cost or to be in better position to negotiate? Are there suppliers whose performance is below average and contribute to the company weakness?

Supplier Management -  what type of strategy need to be in place to have better control over supplier performances? Is the Supplier Relationship and Performance Management need to be further strengthened? Is the company practicing a reactive supplier management system instead of to be more proactive? What are the percentage of supplier who is actually performing to the level desired? Pareto law indicated that, normally, 20% of root causes is helping to create 80% of the overall problem. Does the company procurement chief operating officer need to reevaluate this area and arrange a strategic strategy to ensure company goal are met?

Market Intelligence -  Strategically, one of the most critical influence which can contribute to a business growth or decline will be the external environment condition. The need to gather information and run a risk profile on a number of key issue is a necessity to ensure procurement strategic strategy can be achieve. Taking step to overcome future potential issue is a pre condition to overcome many business issue.

Sourcing Strategy - Depending on the analysis done, confidence level on the supplier performance and output gathered from the market intelligence, a sourcing strategy can be put into place to determine the objective to be met.

Overall cost leadership – sourcing to provide best optimum cost to the customer or company. Review supplier with high costing and look for cheaper alternative.

Differentiation strategy -  sourcing for new source which offer a different level of services and product. This to act as alternative offer  to the marketing of new niche range or provide a different more efficient process for production to be more efficiency.

Focus on business need – sourcing to ensure company interest in the market place is secured by addressing the need on the market segment. Example sourcing for material or product which will add value to a particular market segment. This could be new development or revising current product by adding new material or product offering.

Inventory Management - one of the key procurement focus is inventory. This area are often ignored by procurement or purchasing professional due to misconception that inventory management is the responsibility of the logistics and warehousing team. While, this is true, but the impact of poor inventory control lead to internal bleeding of resources and lead very often to fire fighting to resolve issue. Poor inventory management lead to many other related issue which will impact procurement role. Example, poor inventory control resulting in high level of unproductive stock kept and this will lead to additional cost of operation and leading to high cost for the businesses.

Contract Management -  having a well written contract does not solve all problem if the contract is not managed effectively, Contract management include step to preempting potential issue from occurring instead of relying on the contract to challenge non performances. Best practices in contract management are broken down into 4 different area of best practices.  Control , Interact, Adapt and Planning.

Procurement main task is to manage the supply of material to the

businesses efficiently. With this in mind, the key strategic 

objective must be inline with the overall business goal.

  

What is Procurement compare to Purchasing?

The word Procurement and Purchasing has been used interchangeably by many, including those who are engaged in the profession.

What is the real difference between Purchasing and Procurement?

I will explain in this blog the differences and also the objectives of the two job description. First of all, Purchasing is the origin term use to meant "material man". It was coined by Charles Babbage in 1832 to describe the responsibility of someone in the industry who will select, purchase and arrange delivery of article required for the construction of railway track.

These term were use since then to described the arrangement of the selection, buying and delivery of material to the business need. These were described as an administrative function.

During the expansion of the industrial revolution in the early 20th century, there begin a need to run purchasing into a managerial function. The scope of the task begin to expand and it take up a strategic role in businesses.

Thus, we need to break up the responsibility of each of the respective role as following:-

Purchasing - is the tactical role in business organization where it function as the executioner of the task of sourcing, selecting, issue purchase order and resolve immediate operational issue to ensure the material are supply on schedule to the business.

Example of tactical role in purchasing will be to resolve supply problem which impact production or business needs and organize the sourcing of new supply.

These are tactical role to ensure the business operate smoothly. The objective of the purchasing function is such that, the ultimate aim is to meet the procurement goal which are strategic to the business.

Procurement -  is the managing of the full spectrum of material supply to the business and it function by setting long term strategies to support business goal.

Example of strategic objective of procurement is to plan strategies in order to meet business goal and these objective ranging from developing supplier management strategies, planning long term cost reduction in order to stay efficient, set up strategic objective to achieve in sourcing, planning, inventory management and other task relevant to ensure business goal are achieve,

In summary, we can conclude, purchasing ultimate agenda is to meet the objective set by the procurement management while procurement set the objective to achieve business goal.

It is a Tactical strategy (short term and immediate needs) versus Strategic strategy (long term plan)

Procurement Contract not the single solution to all ill of supply chain

One remark put to me recently as following, "I am getting fed up with the project engineers handling the package as there were too many issues and I need a proper contract to enforce it!"

First of all, the purpose of a contract, especially in managing supply chain operation or project is to put into writing the following parameter:-

a) Quantity of supply in purchase or to build for a project b) Value of the contract
c) Quality specification
d) Duration of the contract
e) Term of payment
f) Claim clause, including penalty for non performance
g) Lead time to supply or date to complete the job
h) Delivery method for supply of material
i) Safety and Health matter in project
j) Under which legislation or law this contract is covered under, especially if this is an international procurement contract
k) Copyright issue
l) Variation job which was not included in the job scope for project
m) Various processes which need to be adhere to for any abnormalities or decision to be made

So back to the comment put to me, my next question to him was, " Actually what the problem?"

The reply given to me was that, there is always claim made by the supplier or contractor which was not specify in the contract and this create too many following up, questions to be answered and decision to be made if those claim can be pay or otherwise.

My reply to him was as following:-

a) As long as everyone follow to the content in the contract, there will be very minimum issue to be managed on ad hoc basis

b) Supplier, contractor and the managers managing the contract must follow all information stated in the contract and issue like the above complaint occurred because there are too many issue not followed to the script, for example;

• operation processes were not follow the the procedure and allow thing to bypass the system 
• self decision made without looking into the contract proper
• variation order for project or excess material supply was accepted before referring to the method of deciding as stated in the contract
• specification was waived but not communicated to the necessary level
• deadline expire and no action taken on penalty
• conflict of management as in some cases, decision was made by someone which are not supposedly make such decision and these decision not recognized

Such issue need to be resolve by having regular update or meeting and having ad hoc discussion as and when issue are created for immediate disposal of such matter.

The life cycle of the contract management is important to make sure all issue are recorded, performance updated and communication with all parties are file in system to reduce any conflict. Non recording of the issue will create unwanted conflict during the course of the contract or at the end of the job scope.

Cost Reduction Technique with ERRANT concept

Cost Saving or cost reduction management is part of the regular cycle in managing supply chain activities.  When I was the managing manager in dealing with cost reduction activities, there are few challenges faced by us.

Example as following:-

1.       Unable to proceed due to lack of technical knowledge
2.       Do not understand the processes
3.       Held up by rigid technical specification
4.       Fear of making error of judgment when switching to cheaper option
5.       Comfort zone of team members or stakeholders in the company, resulting in objection to       reduce cost unnecessarily

The key to cost reduction is always be open to ideas, review option, or solution to the problem, be objective instead of subjective to the issue on hand and most importantly, get away from the comfort zone.

People are reluctant to move away from the comfort zone due to the fear of any changes made will reflect badly on them or the refusal to be challenging that certain option to reduce cost is possible.

For example, when I was a Production Manager in a chemical plant operation, one of the biggest issues is the cost of operation.

•      High number of head count
•         Low output compare to other factories in the region
•        High wastage's

I was a newly appointed to the post of production manager and the first action we did was to review and what can be done.

We could not eliminate any of the processes or reduce the head count. Therefore, obviously, we cannot replace anyone.

However, I realize that we can reduce the cycle time to produce the product drastically with close monitoring and target setting. In addition, we proceed to introduce key performance indexes to be measure against achievement and we work slowly to reduce the cycle time of production with training, equipment upgrade, and aligning the product produced to the equipment we need to upgrade.

True enough, our productivity went up and cost reduces.  But we also reward extrinsically and intrinsically the employees who made these happen. 

The above example happened more than 25 years ago and I attempt to repeat it again with another company where, this time, I was the Procurement Manager of the company.

I use the same structure of cost reduction for material purchases and other related area and this time, over a period of 5 years of activities, we saved almost Ringgit Malaysia 6.0 million.

It goes back to the same structure of elimination process, reduction, replacement, aligning the process, work slowly for those issues, which need time to progress and target setting.

It works well!

In this article, I reproduce the cycle, which I used in the process of cost reduction as following:-

•       Eliminate – review which processes or material, which can be targeted for eliminate from the operation.  Most of us will find this is not possible, but we are looking at some task or process, which can be made redundant or combined with other process.  Example, during the process of purchasing material, we realize that we need to purchase two separate components from a particular supplier, in which we will assemble it on our production floor. What can be consider is that, what is the possibility of the supplier produce and assemble it before delivery? What will be the cost of the supplier compare to your own cost?
•       Replace – if we cannot eliminate a expensive material required for the product, can we replace it with a substitute? For example, can a material with a certain plastics be replace with a cheaper plastics but still able to maintain the same quality standard for the product to function? I manage to repeat this replace methodology numerous occasions without any reduction in quality.
•       Reduce – if the elimination and replace is not possible, then let look at the process parameter.  Where is the possibility of reducing the usages or wastages?  Alternatively, if this is a formula issue, can the material use be reduce and replace with another material also used in the formulation?
•       Align – what is the possibility to align the cost of the material or processes? It will be surprising to notice that, there are incident where the cost of an identical or almost identical part has cost variances. It can also not be the same part, but sometimes suppliers tend to play around with pricing. There could be two different parts or component with difference design but similar processes or cost, but due to pricing techniques, offer a vastly different cost to you.  As a procurement person or involve in technical evaluation of material or processes, the need to understand every single operation involve is important. Cost analysis data need to be utilized and costing technique such as Should Costing can be implemented.
•       Nibble – can you reduce the cost gradually if the above steps becoming impossible? There are suppliers who held firm to their pricing or processes, which are difficult to control. Kaizen concept (meaning continuous improvement) technique will be an asset to achieve continuous cost improvement.
•        Target – set a realistic target for the cost reduction or elimination project and each cost reduction initiative should have a measurement system in place to check the progress.

And we need to always remember this sad news, cost reduction management is never finish. It just like removing garbage from the stream, it never ending. People throw money away without realizing the impact until much later if there is no real cost management in a business organization.

Sacrificing H & S over increase output to deliver on time

In a very competitive business environment, many companies are hard pressed to ensure all customers order are delivered on time.

Price is not the only consideration when customers places new orders.  In many cases, well organized customers will award the order to the suppliers based on the price, available capacity and quality of the produce.

Audit will be made to cover production processes, capacity issue and manpower concern.

Nevertheless, businesses do grow from time to time and if a business entity were able to expand their share in the market by having new customers, those audit report will be rendered invalid.

How does companies deal with the increase of orders, thus, stretching the production capacity to above 100% of the rated capacity of the plant?

There are few option available:-

a) increase manpower to run the production process
b) overtime works are made frequently, including on holiday and weekend
c) expansion of production assets (machines and materials)
d) delaying deliveries to customers (last resort)
e) outsourcing works


Some companies will not be able to add new assets due to lack of space and capital constraints. On top of that, profit objectives override many of the considerations. Delaying deliveries will normally a last resort, to avoid negative records with customers.

Many will go for the easiest option, i.e. workers are asked to work longer hours.


When business profit override all other considerations, when workers are ask to increase output via overtime works, who is monitoring the welfare of the employees?

During the course of my audit and inspection of suppliers site, I have came across workers who hardly have a day rest in one month! Some of these workers are working almost 18 hours per day, 7 days per week.

I cannot stop to wonder, how these workers manage to stay alert on a daily basis.

On the workers part, monetary benefit of higher take home wages override their own well being, If you are a worker from a 3rd world country and your salary is less then USD250.00 per month, working long hours to gain more money to take home is the primary consideration.

 During one of my visits to a China factory a few years ago (understood that, workers safety has improved over there since then), workers are paid on piece rates and there is no control on how many hours a workers can work per day! The bottom consideration was actually, how much these workers want to take back per month in wages!! The factory bosses of course is happy to oblige these workers needs cause there is a hunger for cheap product out from the factory.

The question we have to ask ourselves is at what risk we are taking? What were the probability of  one worker got into an accident due to exhaustion, putting his or her life in jeopardy? Worst, the tired worker may also put their colleagues life into danger.

A tired forklift driver may drive the truck over the shipping dock with a load of material, for example. The end result, he may be killed or seriously injured.

There was an actual incident in a chemical company belonging to a large conglomerate, where a tired workers failed to observe a key process during overtime work and the mixture in the tank flare up and cause an exothermic reaction. The fire department has to be summoned to the plant to prevent a serious incident, including fire.

Normally, companies which chases monetary gains over safety and health issue resort to such practices of uncontrolled overtime works. This is not the only reason,

Other reasons could be as following:-

a) Swallow management skill in solving problem related to capacity matter
b) Lack of health and safety awareness
c) Unable to communicate effectively with customers to plan ahead orders
d) Inferior thought of losing a contract, thus pushing facility to work over the capacity
e) Lack of long term planning to forecast future business expansion
f) Placing corporate and social responsibility at the bottom of the list of priority

To solve this matter and avoid disruption to supply chain, many large organizations are now putting more effort to carry out annual surveillance audits on corporate and social responsibility of suppliers. These audit may not be fool proof as many of the audit are carry out within a day and records could be tampered with, but this is a real start.

These audit will cover, for examples, rest days to employees, controlled overtime work and other workers benefit as required under the legislation.

The key objective of carrying out such a audit is not only to enforce compliance, but also raise awareness to the suppliers and also to the employees.

There are key responsibility from both buyer and seller (customers and suppliers) to ensure profit are made with sacrifices to health and safety issue.