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DEVELOPPING A LOGISTICS PERFORMANCE ASSESSMENT TOOL

FOR SMEs: A Closer Look at Logistics Costs…

Ruth Banomyong

Centre for Logistics Research

Thammasat University, Thailand

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Agenda

• Background• Framework Development• Methodology• Findings• Some Comments...• A closer look at logistics costs...

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Background• Logistics management is recognised as a

key opportunity to improve profitability and firms’ competitive performance (Lambert et al., 1998).

• However, It is important for firms to be able to assess their own logistics performance as a starting reference.

• Current assessment tools are not user friendly.

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Background

• The purpose of this presentation is to introduce a logistics performance assessment tool (LPAT).

• The objective of the LPAT is to measure the performance of a firm’s key logistics activities under different performance dimensions.

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Background• The literature on the subject of performance measurement

in logistics had common theme (Bowersox et al., 1989; Byrne & Markham 1991; Keebler et al,. 1999; Griffis et al.,

2004): – Most firms do not comprehensively measure logistics performance,– Even the best performing firms fail to realise their productivity and

service potential available from logistics performance measurement, and;

– Logistics competency will increasingly be viewed as a competitive differentiator and a key strategic resource for the firm.

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Framework: 9 Key Logistics Activities• Order processing & Logistics communications• Customer service & support• Demand forecasting & planning• Purchasing & procurement• Material handling & packaging• Inventory management• Transportation• Facilities site selection, warehousing & storage• Return goods handling and reverse logistics

Source: Grant et al., 2006

Framework: Performance Measurement Dimensions

Source Effectiveness

Efficiency

Productivity

Profitability

Equity

Adaptability

Rossenbloom (1983) Magreth and Hardy (1987)

Stern and El Ansary (1996)

Coelho, Easingwood,and Coelho (2003)

American Marketing Association (2005)

Framework Development

9 Logistics Activities

Time Dimension

Cost DimensionReliability

Dimension

Logistics Activities Development Framework

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Logistics Activity Cost KPIs Time KPIs Reliability KPIsCustomer service &

supportCustomer service

cost/saleAverage order cycle

timeDelivery in Full

& on TimeDemand forecasting &

planningForecasting &

planning cost/saleAverage forecast

periodForecast Accuracy

Purchasing & Procurement

Procurement cost/sale

Average procurement cycle time

Supplier in Full & on Time

Inventory management Inventory cost/sale Average inventory days

Out of Stock rate

Order processing & logistics

communications

Order processing cost/sale

Average order processing cycle time

Order accuracy rate

Material handling & packaging

Value of damaged goods/sale

Average material handling & packaging

time

Damage rate

Transportation Transport cost/sale Average delivery cycle time

Delivery in Full & on Time

Facilities site selection, warehousing & storage

Facility cost/sale Average inventory cycle time

Inventory Accuracy

Return goods handling & reverse logistics

Return goods value/sale

Average cycle time for customer return

Rate of returned goods

Methodology• A questionnaire was developed based on the

logistics activities performance framework. • 25 SMEs respondents were selected to answer

the questionnaire while one Thai multinational was also requested to answer the assessment questionnaire.

• The 25 SMEs were composed of firms in the automotive sector, electronic, jewelry, furniture, and rubber industry.

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Methodology

• Respondents understood data requirement well. However only 2 were able to fill the whole questionnaire.

• Cost data was the most difficult to complete. Respondents with ISO have more available data.

• Data provided by Thai MNE could serve as a reference point.

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Findings

• The data collected was compared with an existing logistics and supply chain benchmarking database

http://www.benchmarkingsuccess.com• The logistics performance out put based

on the 3 performance dimensions are illustrated in the following slides…

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Cost KPIs PerformanceCustomer service

cost per sale

Procurement cost per sale

Info processing cost per sale

Disadvantage Parity Advantage

WORLD

CLASS

Transportation cost per sale

Warehousing cost per sale

Forecasting cost per sale

Inv holding cost per sale

Value damageper sale

Returned goods cost per sale

> 10 % 1 – 10 % < 1 %

> 5 % 0 . 5 - 5 % < 0 . 5 %

> 8 % 0 . 5 - 8 % < 0 . 5 %

> 5 % 0 . 5 - 5 % < 0 . 5 %

> 5 % 0 . 5 - 5 % < 0 . 5 %

> 3 % 0 . 1 – 3 % < 0 . 1 %

> 3 % 0 . 5 - 3 % < 0. 5 %

< 0. 5 % 0 . 5 – 5 % > 5 %

> 5 % 0 . 5 - 5 % < 0. 5 %

= Group Average = �Top Thai company

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Time KPIs PerformanceAvg order cycle

time

Avg procurement cycle time

Avg order processing cycle time

Disadvantage Parity Advantage

Avg delivery cycle time

Avg inventory cycle time

Avg forecast period

Avg inventory day

Avg material handling and

packaging cycle time

Avg cycle time for customer return

> 10 days 7 – 10 days < 7 days

> 18 days 13 – 18 days < 13 days

> 2 days 1 – 2 days < 1 days

> 3 days 1 – 3 days < 1 days

> 2 days 6 hr – 2 days < 6 hours

N. A . N . A . N. A .

> 40 days 10 – 40 d < 10 days

> 7 days 1 – 7 days < 1 days

> 3 days 1 – 3 days < 1 days

WORLD

CLASS

= �Group Average = Top Thai Company

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ReliabilityKPIs PerformanceDIFOT

( CS and Support ) < 80 % 80 - 95 %

Disadvantage Parity Advantage

WORLD

CLASS

Supplier In Full and On - Time Rate

Order Accuracy Rate

DIFOT( Transportation )

Inventory Accuracy

Forecast Accuracy Rate

Inventory Out of Stock Rate

Damage Rate

Rate of Returned Goods

< 80 % 80 - 95 % > 95 %

< 80 % 80 - 95 % > 95 %

< 90 % 90 - 98 % > 98 %

< 90 % 90 – 99 % > 99 %

< 60 % 60 - 90 % > 90 %

< 2 %2 - 10 %> 10 %

< 1 %1 - 5 %> 5 %

< 0 . 1 %0 . 1 – 5 %> 5 %

> 95 %

= �Group Average = �Top Thai Company

Some Comments...

• The LPAT tool could still be further simplified to make data collection easier.

• Key logistics activities are not equal in importance

• Further refinement of the logistics activities performance framework is needed…

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Some Comments...• The objective would be to identify maybe

not more than 2 or 3 key logistics KPIs per performance dimension that could illustrate firms’ overall logistics performance.

• A composite performance metrics is currently under consideration.

• The development of this tool is an ongoing process. 18

A Closer Look at Logistics Cost...• Difficult to identify all logistics activity cost. • ABC can support the identification of cost of

each logistics costing. However, difficult to implement.

• Logistics cost ratio per sales is the most common indicator...

• National Logistics cost?• C2C metric to reflect supply chain

performance? An example. 19

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I nvento ry carrying costs invento ry m anagem ent packaging reverse logistics

P lace/ custom er service level custom er service parts and service support return goods handling

O rder processing and info rm ation costs order processing logistics com m unications dem and forecasting/planning

Lot quantity costs m aterial handling procurem ent

T ransportation costs traffi c and transportation

W arehousing costs w arehousing and sto rage plant and w arehouse site

selection

Logistics costs relationship

Ratio of selected export logistics cost (FOB) in ASEAN

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IndustrySourcing

Cost

Inventory Holding

Cost Warehouse

CostsTransport

Cost

Export Process

Cost

Total Export

Logistics Cost

Food 0.3% 0.2% 0.5% 2% 2% 5%Textiles 4% 2% 2% 6% 3% 17%Wood 3% 3% 2% 5% 11% 24%Auto 2% 1% 2% 5% 6% 16%

Electrical goods 3% 1% 2% 2% 2% 10%

Average cost 2.5% 1.4% 1.7% 4% 4.8% 14.4%

Source: (USAID, 2006)

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Transport

31%

Export

45%

Procurement13%

Inventory4%

Warehousing7%

Export Logistics costs component / Total Logistics costs

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Macro Logistics Costs Framework

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National Logistics Cost Framework

Thailand Logistics Costs/GDPNominal TRAN. CARRYING ADMIN. LOGISTICS LOGISTICSGDP AS A % AS A % AS A % COST AS A COST INDEX

Year ฿ BILLIONOF GDP OF GDP OF GDP % OF GDP GDP 2000 BASE2000 5221 9.5 10.3 2.0 21.8 1002001 5444 9.2 9.4 1.9 20.5 952002 5770 7.8 8.8 1.7 18.3 862003 6289 7.6 7.5 1.5 16.6 792004 6974 7.1 6.9 1.4 15.4 752005 7534 10.3 7.3 1.8 19.4 902006 8289 13.1 9.0 2.2 24.3 1112007p 8705 13.2 9.2 2.2 24.6 112

Source: Ruth Banomyong (2007)

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Some Future trends...• Macro Logistics cost is increasing

– Transport cost – Inventory carrying cost

• Thammasat Annual Logistics Index (3rd quarter)

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The C2C cycle in the supply chain:Thai shrimp export to the US

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C2C definitionsSource Definition

Stewart (1995) A composite metric describing the average days required to turn a dollar invested in raw material into a dollar collected from a customer

Moss and Stine (1993)

Days between accounts payable and accounts receivable

Gallinger (1997) The cash conversion cycle measures the number of days the firm’s operating cycle requires costly financing to support it.

Lancaster et al. (1998)MDM (2000)Schilling (1996)Soenen (1993)

Inventory days of supply + accounts receivable – accounts payable

Source: Farris II and Hutchison (2001)

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C2C time (days) in the USBest-in-class Median

Computers and electronics 25 106

Consumer packaged goods 45 88

Defense and industrial 17 70

Pharmaceuticals and chemicals

25 59

Telecommunications 46 127

Source: MDM (2000))

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The shrimp export supply chain

Customer 2

US. Importer

Thai Exporter

Supplier 1 Supplier 3 Supplier 2 Suppliers - Thailand

Customers - USA

Importer - USA

Trader/ Exporter -

Thailand

Customer 1 Customer 3

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Summary of C2C

Thai shrimp suppliers

Thai exporter

US importer

Customers

Cash-to-cash cycle

+ 108 days + 120 days - 50 days + 18 days

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Thank you for your attention

Questions

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Answers