Today's transportation and logistics professionals must be attuned to the increasing demands of customers. Otherwise, they face the consequences of invoice deductions, lost sales and even lost customers if customer expectations are not met.
On the other side of the coin, as buyers of goods and services, logistics professionals place tough demands on their suppliers. Being a sound and reliable risk manager is now part of the job description.
What business risks must logistics professionals satisfy? What are the rights of customers as related to supplier performance that must be put on the table in the negotiations and sale of goods? As shown at left, logistics professionals must address and come to terms with suppliers, customers and transportation providers as to who assumes the risks of fulfilling the 8Rs of logistics performance.
An additional challenge is to source relevant data from various disparate, legacy or organizational enterprise resource planning (ERP) systems to manage the tracing and tracking of shipments to determine if the order is being satisfied perfectly. The attainment of perfect orders and shipments is taking on more precedence as strong relationships are being established and as new information technologies enable the realization of perfect compliance to requirements.
The Customer's Bill of Rights portrays a checklist of performance requirements, illustrating that logistics professionals play a major role determining what services their companies agree to provide their customers. The Rights are converted to performance metrics leading to periodic measurements of performance. Once the measures are agreed upon between buyers, sellers and other facilitating intermediaries, the results are compared to performance goals for recognition of results.
In today's environments, if the party who is responsible for meeting the performance requirements of an "R" does not meet targeted performance, the non-performing party may be saddled with a penalty or deduction from invoices or be subjected to highly aged, outstanding dollar balances. Cash flow between the parties becomes the big game in town.
Following is a discussion of each of the 8 Rights, and what they mean to logistics performance:
1. Right Product
Customers are demanding products that meet tough performance specifications. They're in the front lines dealing with end users and consumers, so they have the feedback and knowledge of what's working and not working.
Suppliers must work with customers to develop and deliver the right product that meets buyer performance specifications. What this means is that manufacturers are working with dealers and distributors or, in the case of industrial durables, OEMs who want the best and most technologically developed products to meet user needs. Whether they participate in designing products or just in ordering products, they want the correct products delivered.
A complicating factor for logistics professionals is meeting the needs of customers who are ordering multiple items, kits and assemblies for use or installation. Allowing product substitutions to fill out orders must be negotiated to spell out exactly what the requirements of delivering the "right product" are.
2. Right Quantity
Quantity can have several meanings related to the right number of items per line, the right volume per item (such as pounds or gallons), and the right quantity per case or unit of shipment (such as two quart items per SKU, six SKUs per case and 60 cases per pallet). Some customers are demanding "rainbow" pallets of mixed items with the correct counts for each item so that customers can crossdock these items to their trucks for delivery to a store pallet location for sale.
The right amount of goods delivered for each individual SKU, items per case pack, cases per pallet, pallets per conveyance (trailer or container) all must be negotiated.
3. Right Source
Sourcing policies by customers can be geographically based upon local, national and/or global sourcing depending upon the commodity. Customers are working with suppliers to help them determine the lowest total cost of ownership (TCO) when considering alternative supplier/sourcing locations. From a sourcing perspective, many suppliers have multiple plants, distribution centers and sourcing locations from which customers can work with suppliers in balancing-transportation outbound and inboundlanes as well as facilitating continuous-and consortium moves among collaborative buyers and sellers.
In some industries, "swaps of shipments" occur among competitors of similar commodities. What does this mean in today's environment? Sourcing location based upon closest distance may not be the lowest cost source. The right source as determined by buyer, seller and thirdparty logistics service providers (3PLs) must be a negotiated item of service.
To gain low-cost solutions, routing of orders for shipment is a transportation management system (TMS) function in which buyers, sellers and 3PLs must work together for mutual benefit and gain. Pre-shipment planning among supplier salespeople, customer buyers and operations planners under the guidance of logistics professionals will lead to the best TCO routing decisions.
4. Right Destination
In today's world, the customer may specify locations that are not ultimate points of sale or use. As firms work on order and shipment consolidations among supplier locations, buyers may buy at the receiving dock of the "assembly" thirdparty provider.
Legal delivery may take place at the designated supplier's dock. In other cases, buyers want their product not only delivered to the right facility within a complex of facilities at a certain location, but they also want it delivered at point of use, point of sale, or even point of installation.
Adding to the complications are the so-called "gray" markets in which products are diverted to locations other than originally specified delivery locations.
5. Right Condition
Customers want their products ready for use or sale with no loss or damage, no moisture, and no overages with the right identification (such as bar coding or RFID tags on cases and pallets). As described above, many customers want the right pallet configurations or right returnable containers to provide quick acceptance and positioning of the product for use or sale.
Does the shipment being delivered meet the buyer's performance requirements as to use or crossdocking or quick transfer to floor sale or use? Are specific requirements as to bar coding, RFID, or other data capture technologies plus other packaging/unitization being met? Are products properly protected so as to be received without tampering? These are some of the questions that must be addressed by negotiating teams.
6. Right Time
In an environment of just-in-time or time-definite deliveries, the right time must be set by buyer, seller and 3PLs to meet the schedules for use or sale. Guaranteed freight delivery times have become very prevalent. However, not all items need to be delivered as fast as possible. Many customers are perfectly happy with weekly delivery schedules to meet restocking or usage needs.
Low TCO solutions when considering transportation, planning and ordering, inventory carrying, warehousing, and cash transfer costs should be cooperatively developed by users, buyers, sellers and providers to meet time-definite delivery requirements. More customers are sharing plans and operations schedule. Customers are sharing product sales and usage data so providers are not blind-sided as to what is really going on in the front lines. Sharing information is crucial in timing the flow of orders and shipments as orders progress from needs conception to point of use or sale and ultimately to cash settlements.
Pickup and delivery times established on time-definite requirements are especially critical with today's Hours of Service regulations. Another important aspect of shipment timing is associated with order and shipment security. Many times, shipments are delayed because of required government or business inspections or security breaches. Shipment track and trace execution systems are a necessity in a global economy.
7. Right Documentation
With the demanding Rights described above, documenting and communicating clean, reliable and timely information is crucial among parties. Besides meeting security requirements by ensuring that information is not getting into the wrong hands or to meet government requirements, all parties must cooperate in making sure that perfect information is passed among parties securely. If bad or unreliable order information is passed along initially, then there is a high probability that imperfect shipments are going to occur.
The quality of transportation and logistics fulfillment is necessarily tied to obtaining good, clean order information. Many firms are now separating "perfect orders" from "perfect shipments."
Perfect orders relate to getting all of the performance specifications agreed upon before the shipment is prepared and tendered to 3PLs.
Are all required documents — paper or electronic — prepared and correctly filled out to satisfy business and regulatory requirements? Once shipments are made, are clean Advance Shipping Notices (ASNs) communicated to buyers on a timely basis? Is payment for goods received with proper documentation and instructions as goods are turned over to buyer from seller? If an OS&D (over, short & damaged report) to the shipment occurs, do receivers and 3PLs document the damages quickly and correctly? All of these questions relate to the information surrounding the flow of materials.
8. Right Cost
Finally, the preceding 7Rs illustrate that transportation charges and prices are only part of the Cost formula. We refer to "Right Cost" rather than "Right Price" because total costs of ownership go beyond cost of goods or merchandise to include ancillary charges leading to delivered cost as well as inventory, procurement and logistics costs. The lowest delivered cost includes product costs, order and shipment documentation preparation, possible inspections, and transportation from initial origin to ultimate destination between buyers and sellers. When considering the costs of intransit, stationary and safety inventories plus warehousing, TCO analyses must be performed.
Ultimately, supply chain economics necessitates that inter-enterprise, crossfunctional costs are considered that cut across suppliers, intermediaries, 3PLs and buyers in more complex, strategic sourcing decisions and operations. Getting back to the basics: Are the right charges assessed for order shipment, including product costs, trade discounts and allowances? Are special damages assessed if guarantees of deliveries not met? Are consequential damages for lost sales or shut down production/operations assessed when sellers, carriers/3PLs and receivers do not meet agreed-upon performance requirements?
Logistics professionals must work with customers and other functional colleagues in their organizations to determine the performance specifications for the above rights. Metrics must be determined along with glossaries, which can be attached to purchase and transportation contracts.
Dr. Edward J. Marien is a professor and director of transportation and logistics management programs in the School of Business, Executive Education, at the University of Wisconsin-Madison (www.uwexeced.com). He can be reached at [email protected]. This article is based in part on Practitioner Guide to 101+ Actions to Improve Logistics Performance (Pigwick Papers), by Edward Marien and Lee Cisneros.