Why Logistics Efficiency is More Important Than Ever for Manufacturers
According to the IDC Manufacturing Insights Report for 2014, the two main things manufacturers need to focus on over the next year is technology and operations. Those two words loud and clear state the real focus for manufacturers is efficiency. One of these efficiencies manufacturers need to focus on, since it makes up for the average company are. 7.87% of sales and $56.69 per hundredweight, is logistics efficiency. Furthermore, US manufacturers are targeting an aggressive 1.5 percent reduction in cost of goods sold (COGS) for the future in an effort to drive margin growth, according to a new study from The Hackett Group, Inc.
If you are a part of the supply chain, logistics, transportation, distribution, and of course the manufacturing industries, you have surely read your share of recent articles abound about the resurgence/revival/renaissance/recovery of the manufacturing base in North America. If not, here are some recent headlines:
- The death of manufacturing is greatly exaggerated
- Why Manufacturing Is Heading Back to the U.S.
- Early Signs of a U.S. Manufacturing Resurgence
- 3 Macro Drivers of the US Manufacturing Recovery
Logistics Efficiency is at the Forefront of Total Cost Reduction....Right?!
With reports and coverage all around saying manufacturing is recovering, and that companies will sustain and survive long term by investing in technology and improved operations, surely the days of viewing freight services and logistics costs as a fixed cost are behind us right?
Key corporate decision makers who are tasked with the measurement and management of all line item expenses surely understand the impact of and cost reduction opportunities represented by logistics efficiency and logistics related expenses, don't they?
Believe it or not, even in the midst of a Manufacturing "revival" with a focus on total cost reduction, most companies miss the boat completely on logistics efficiency, a critical area for improving corporate profitability. Many key financial players at the "C" and "V" level assume their companies are doing all they can to directly reduce and control the hard and soft costs (read: resources) associated with delivering their product to market (outbound logistics) and sourcing and delivering materials (inbound logistics) used in manufacturing their products. Having asked, "so what do you spend per year on transportation services?" countless times of the person or persons within a company who is/are charged with buying transportation services, the usual answer is " I don't know". The old, but spot on adage in our business is, "if you're not measuring it, you're not managing it".
Transportation and logistics related costs as a percentage of sales range from 9% to 14% depending on industry sector for companies who do not adopt a logistics efficiency management approach. According to the "State of Logistics" report for 2013, the logistics cost percentages of the GDP were 8.5% in 2012. These percentage ranges include all logistics related expenses such as warehousing, dedicated personnel, and transportation expense. Transportation costs alone comprise the vast majority of this expense for most companies.
Focusing on These Three Areas for Logistics Efficiency to Drive Down Total Costs of Transportation as Percentage of Sales
By adopting a logistics efficiency management approach, logistics related costs as a percentage of sales drops to 4% to 7% depending on industry sector. That's a delta of 5% to 7%. For a company with sales of $10,000,000, that's a contribution to corporate profitability of $500,000 to $700,000. How many widgets do you have to sell to net that kind of return?
As manufacturers continue to increase profitability and increase their share of the overall GDP, in order to sustain and survive long-term, they need to focus on these key areas for logistics efficiency:
- Use Readily and Easily Deployed Transportation and Freight Technology: A survey by ARC revealed that 23 percent of respondents using a transportation management system would see a 10 percent increase in total freight costs if they stopped using the system, the source reported. The source pointed to several trends that are encouraging the adoption of TMS, including better control of data, more comprehensive analysis and the need to support omni-channel supply chains.
- Employ Freight Accounting: Freight accounting includes such functions as freight bill auditing, freight payment, freight invoice consolidation (where you receive only 1 invoice per week no matter how many shipments you make), will not only allow you to uncover all the areas where you can easily recover money, such as in variances between what the shipping quote was versus the actual freight bill, but also time spent on accounting around freight and transportation, and the ability to speed up cash flow. By employing proper freight accounting, through freight payment, auditing, and consolidation services, within a TMS solution, a shipper can go from paying $11 per freight invoice, all the way down to only 5 to 10% of the $11, according to Inbound Logistics magazine. Additionally, by employing an outsourced provide of freight accounting services, a company can save 2 percent to 5 percent of their total freight bill by catching inaccurate charges or duplicate payments.
- Use a Third Party Logistics Company: A prominent report supports the rising using of 3PLs as a way for shippers to take a competitive advantage. Inform yourself on these trends by downloading the Capgemini/Penn State/Panalpnia 2013 18th Annual 3PL Study. And we have also written a comprehensive guide to why you should outsource to a third party logistics company. But, the bottom line is that when you outsource to an expert logistics provider, you will realize logistics efficiency, and thus total costs savings. This includes both soft costs savings such as labor as you grow as a company, to better visibility into your transportation activity and spend so you can make better future business decisions based on data, and not guess work. These total costs also include hard costs such as the freight rates negotiated with carriers at an expert level through the 3PLs carrier relations team.
Logistics efficiency for manufacturers is more important than ever. It is not the quest for cutting costs that will sustain our manufacturing base, but the investment in efficiency by the use of technology and improved operations. Now is the time to remain efficient, while we are slowly growing and coming into a manufacturing growth period. In order to stop the next slide, we must invest now. What do you think? Let us know in the comment section below!